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* LEGAL ASPECTS OF TRAVEL META SEARCH ENGINES
* LIMITING LIABILITY FOR PROFESSIONAL NEGLIGENCE IN ENGLAND
* LEGAL ASPECTS OF TRAVEL META SEARCH ENGINES
| Annie Tunheim | |
Internet use has pervaded a staggering percentage of the worlds population. As one would expect, this advent of new technology and commerce has brought with it problems as internet use continues to run ahead of internet regulation.
I was recently involved in a case which dealt with an airline bringing suit against a smaller airline fare aggregator website with claims of trespass and breach of contract. In this essay, I will discuss the legal aspects of travel meta search engines, including who arguably has rights to the public information available on websites.
What exactly does constitute a trespass when someone is sitting in their own home, surfing the internet? Is it possible to inadvertently be entering into contracts (and possibly then breaching them) by browsing various websites? The answers are not wholly clear, but in an attempt to explain where internet law is currently at, I will highlight a few important cases that have recently been decided.
Travel Distribution
Someone with an eye for a vacation used to call up his/her travel agent, who would access information only available to other travel agents when looking for the best prices for airline tickets, hotels, etc.
Nowadays, internet-savvy consumers access one of the many, many discount travel sites in search of the best bargain.1 Proponents of the change to travel distribution with internet technology hail the ability to aggregate and provide information to consumers as changing the experience of travel by improving systems, making processes more efficient and employing a more customer-focused approach.2
One travel distribution company describes itself as being dedicated to identifying, qualifying and delivering maximum value to its customers.3
Those opposed to travel distribution technology are most often the companies competing for business. For example, even though e-commerce has reduced costs related to booking tickets (such as e-tickets), some major airlines find that online fare aggregators are making it harder to stay afloat in todays competitive market as consumers may be more likely to go with the lowest fare rather than be loyal to certain airlines.
From my experience, the airline, in an attempt to decrease such competition, claims that certain fare aggregator sites (that they have not entered into operating agreements with) are trespassing upon their servers by accessing their sites for the latest fare and route information. In addition, they claim that the access of their websites constituted entering into a contract, whereupon a breach occurred when the fare and route information was not being used for merely personal use.
The following is a short discussion of some recent internet cases affecting the meta search travel industry.
Specht v. Netscape Communication Corporation
The Court in Specht v. Netscape Commun. Corp., 306 F.3d 17 (2d Cir. 2002) examined the issue of whether or not a party accessing a website could effectively enter into a legal, binding contract. Many websites have some form of user agreement, but the legal effect of such agreements is dependent on their form.
One type of agreement is known as a shrinkwrap or clickwrap agreement. These agreements require some act or acknowledgment of assent by the user in order to proceed past the agreement screen.
A shrinkwrap or clickwrap screen will prevent a user from proceeding into the website until such user manifests assent to the terms and conditions by clicking on a button acknowledging the user has read and agrees to the terms and conditions. Because they require demonstrations of assent, shrinkwrap and clickwrap agreements have been found to be valid and enforceable in many jurisdictions.
In contrast, many websites contain a hyperlink to terms and conditions, known as a browsewrap agreement. A browsewrap agreement does not require a website user to review or demonstrate agreement to terms and conditions before the user uses or downloads information from the website. Browsewrap agreements are generally located on pages accessible only through a hyperlink from another page on a website.
In many situations, browsewrap agreements are not conspicuous; reasonable users may not be aware of the existence of the terms in the browsewrap agreement.
Even users who are aware of the existence of a browsewrap terms and conditions page are generally not required to demonstrate their awareness of terms or manifestation of assent. Without clicking on the hyperlink, which is typically located at the bottom of the main web page, the user has no notice of the terms and conditions of website use. Without such knowledge of or assent to terms and conditions, no enforceable agreement exists.
Komet v. Graves, 40 S.W.3d at 601.
In the Netscape case, considered the seminal case in the area of browsewrap agreements, a user of the Netscape company website accessed and downloaded information in a way that Netscape claimed violated its terms and conditions.
The terms and conditions were not displayed on the page from which users used and downloaded information. Users of the Netscape web site could, but were not required to, access the terms and conditions page by clicking on a small hyperlink at the bottom of the web page. Because Netscape did not require its website users to acknowledge, agree to, or even to view, its terms and conditions page, the court found that Netscapes browsewrap agreement did not create an enforceable contract between Netscape and the users of its website. The court explained the difference between Netscapes browsewrap
agreement and clickwrap or shrinkwrap agreements as follows:
Cases in which courts have found contracts arising from Internet use do not assist defendants, because in those circumstances there was much clearer notice than in the present case that a users act would manifest assent to contract terms.
See, e.g., Hotmail Corp. v. Van Money Pie Inc., 1998 U.S. Dist. LEXIS 10729, 47 U.S.P.Q.2D (BNA) 1020, 1025 (N.D. Cal. 1998) (granting preliminary injunction based in part on breach of Terms of Service agreement, to which defendants had assented);
America Online, Inc. v. Booker, 781 So. 2d 423, 425 (Fla. Dist. Ct. App. 2001) (upholding forum selection clause in freely negotiated agreement contained in online terms of service); Caspi v. Microsoft Network, L.L.C., 323 N.J. Super. 118, 732 A.2d 528, 530, 532-33 (N.J. Super. Ct. App. Div. 1999)
(upholding forum selection clause where subscribers to online software were required to review license terms in scrollable window and to click I Agree or I Dont Agree); Barnett v. Network Solutions, Inc., 38 S.W.3d 200, 203-04 (Tex. App. 2001) (upholding forum selection clause in online contract for registering Internet domain names that required users to scroll through terms before accepting or rejecting them).
Netscape, supra, 306 F.3d at 42.
In Netscape, the U.S. Court of Appeals also stated:
It is true that [a] party cannot avoid the terms of a contract on the ground that he or she failed to read it before signing. Marin Storage & Trucking, 107 Cal.
Rptr. 2d at 651. But courts are quick to add: An exception to this general rule exists when the writing does not appear to be a contract and the terms are not called to the attention of the recipient. In such a case, no contract is formed with respect to the undisclosed term. Id.
Id. at 33.
Another Second Circuit case applied the Netscape analysis, but found the existence of a contract only because the terms and conditions were displayed to the defendant each time it accessed the plaintiffs website. The court distinguished its ruling from Netscape by noting, Netscapes posting of its terms did not compel the conclusion that its downloaders took the software subject to those terms because there was no way to determine that any downloader had seen the terms of the offer.
There was no basis for imputing to the downloaders of Netscapes software knowledge of the terms on which the software was offered.
Register.com v. Verio, Inc., 356 F.3d 393, 402 (2d Cir. 2004).
The Rhode Island Superior Court found that a hyperlink to terms and conditions placed inconspicuously at the bottom of the webpage was not sufficient to put Plaintiffs on notice of the terms and conditions of the sale of the computer. As a result, the browsewrap agreement found on [Plaintiffs] webpage cannot bind the parties . . . DeFontes v. Dell Computer Corp., 2004 R.I. Super. LEXIS 32 (2004).
eBay, Inc. v. Bidder's Edge, Incorporated
The Court in eBay, Inc. v. Bidder's Edge, Incorporated (N.D. Cal. May 25, 2000) examined a trespass to chattels theory asserted by eBay against Bidders Edge, an auction aggregation site. There, Bidders Edge refused to cease posting eBay auction listings on its site after repeated requests from Ebay that it comply with its user agreement, which prohibits the use of any robot, spider, other automatic device, or manual process to monitor or copy their web pages.
The eBay court granted the auction giants motion for a preliminary injunction preventing Bidders Edge from accessing eBays computer system. The court held that Bidders Edge intentionally and without authorization interfered with eBays possessory interest in its computer system and that Bidders Edges unauthorized use proximately resulted in damage to eBay.
Conclusion
The outcome of disputes currently in court could have broad-reaching implications for Internet commerce. Comparison shopping websites are quickly gaining popularity, as computer-savvy consumers search for airline tickets, hotel reservations, computer equipment, consumer electronics, and books. In theory, Internet search engines could be found to trespass on every site they search.
Trespass aside, the logistics and implications of imposing contractual relationships on every website user are overwhelming. Were a contract found to exist between a website and every user of its website, each company that had a website would subject itself to the possibility of contractual claims from thousands of site visitors per day.
Courts could be overrun by myriad contract disputes between parties that never communicated with each other or demonstrated mutual assent to their agreements.
Although there is no clear body of law on this issue, the regulation of the Internet has begun, with companies putting up their fences and staking their claims in various ways. Just as the U.S. frontier was an open range, people began claiming ownership by putting up fences. This is likely to be the case on the Internet frontier, with cowboys in the form of companies claiming ownership to what once was vast, uncharted territory.
How the courts regulate this fencing remains to be seen, but some regulation is necessary for the future of internet commerce.
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1 For examples of discount travel websites, see www.travelocity.com, www.expedia.com, ww.orbitz.com, www.cheaptickets.com, www.priceline.com, or www.hotfares.com.
2 Cendant: Travel Distribution, at http://www.cendant.com/about-cendant/travel-distribution/ (last
visited May 1, 2006).
3 Id.
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* LIMITING LIABILITY FOR PROFESSIONAL NEGLIGENCE IN ENGLAND
| Tim Strong Partner, Barlow Lyde & Gilbert, London tstrong@blg.co.uk | |
As parties have increasingly looked to their advisers when transactions fail or events do not turn out as expected, so the frequency and severity of claims against professionals has risen, as has the range of professionals targeted.
In turn, the price of professional indemnity insurance has increased, the availability of higher levels of cover has from time to time been threatened, and the terms of the available insurance have become more onerous.
Against this background, it is hardly surprising that the ability of professionals to limit their liability for negligence has been the subject of considerable debate in England in recent times.
This paper considers the general English law applicable to attempts by professionals to limit their liability for negligence, before looking at some particular considerations applicable to certain professions.
Finally, I will look briefly at what the future may hold in this area. In keeping with the theme, delegates will I trust forgive me for pointing out that this paper contains only a summary of what is a broad and complex area of the law and should not be relied on as legal advice!
The general legal regime
The common law
Under English common law a party seeking to rely on a provision purporting to exclude or limit liability for breach of a duty to exercise reasonable care and skill must show that on its true construction the wording of the provision applies to the liability in question.
It is settled law that in considering the meaning of such a provision the courts will construe its wording strictly, and any lack of clarity or ambiguity will be construed against the party seeking to rely on it1. It has been held that the courts will take a particularly strict approach to attempts to exclude negligence liability, because it is inherently improbable that one party to a contract ... should intend to absolve the other party from the consequences of his own negligence2.
However, the courts have held that provisions which seek to limit liability will be construed less strictly than provisions which seek to exclude liability altogether3. The justification for this different approach appears to be that a limitation of liability is more likely to represent a genuine allocation of risk between the parties to which effect should be given.
There are relatively few examples of the English courts considering the construction of exclusion and limitation clauses in contracts for professional services.
However, a fairly recent case is that of Keele University v Price Waterhouse4. There, the defendant accountancy firm (PW) were retained to advise the claimant university on a profit-related pay scheme, under which both the university and its employees were expected to pay less income tax. The scheme failed as a result of PWs admitted negligence and the university was unable to realise the expected tax savings.
One of the issues before the court was the effect of a limitation clause in PWs standard terms and conditions attached to their letter of engagement. The clause provided that PWs total liability would not exceed 1.7 million, being twice the anticipated savings from the scheme. It then dealt with what was recoverable as damages in two limbs.
The first stated that PW accepted liability to pay damages for loss and damage suffered as a direct result of them providing the services. The second said that all other liability
... in particular ... failing to realise anticipated savings or benefits... was excluded.
PW argued that this prevented the university from recovering the lost tax savings. In the High Court, at first instance, the judge rejected PWs argument. He found that the lost anticipated tax savings were suffered as a direct result of PW negligently providing the services, and that created a contradiction between the two limbs of the clause and as to whether lost anticipated savings were recoverable. He resolved the contradiction by construing the clause strictly against PW and holding that the first limb took precedence over the second.
The Court of Appeal reached the same result, but by a different route. They agreed that the lost anticipated tax savings suffered by the university fell within the first limb of the clause. However, they found that the second limb referred to other liability, which meant that it was referring to liability not within the first limb and which might, for example, include lost anticipated savings arising other than direct from PWs provision of the services. There was therefore no contradiction between the two limbs, and no need to invoke the contra proferentum rule.
The statutory regime
The enforceability of provisions seeking to exclude or limit liability for professional negligence is also regulated by legislation, principally in the form of the Unfair Contract Terms Act 1977 (UCTA).
First, section 2 of UCTA specifically addresses purported exclusions or limitations of liability for negligence. Under section 2(1), any provision seeking to exclude or limit liability for death or personal injury resulting from negligence is void5. Under section 2(2), a provision purportedly excluding or limiting liability for other loss or damage resulting from negligence must be reasonable. Section 13 provides that provisions which seek to restrict the duty to exercise reasonable care and skill from arising are equally caught by section 2.
Similarly, where parties deal on one partys written standard terms of business section 3 of UCTA provides that any term of the contract which purportedly excludes or limits liability for breach of contract (which includes breach of a contractual duty to exercise reasonable skill and care6) must be reasonable7.
Section 11 sets out the reasonableness test:
Where the provision is contained in a contract, it must be one which is fair and reasonable having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made. This is the test which will usually apply to attempts to restrict liability to clients for professional engagements. It is important to note that the test looks at the circumstances prevailing at the time the contract was made; what happens afterwards - the actual loss suffered by the client and the circumstances in which the loss occurred - is irrelevant to reasonableness.
Where the provision is contained in a notice which does not have contractual effect, it must be fair and reasonable to allow reliance on it having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen. This may be relevant where the professional is seeking to disclaim liability to a third party rather than a client, for example for an opinion letter or for providing information prepared for another party or for another purpose. This contrasts with the test for contractual restrictions; it looks at the circumstances prevailing when the liability arose, and not when the duty of care in question arose.
The question whether a restriction of liability is reasonable therefore turns on the facts of each particular case, but UCTA does set out a variety of factors which may be relevant to the determination in all cases. These are not exhaustive, and the courts have been willing to take into account additional considerations. Most of the cases examining reasonableness have concerned IT projects and the supply of goods8.
There have been relatively few cases involving professional liability. However, as far as excluding or limiting professional liability is concerned the following principles can be extracted from the case law:
The strength of the parties respective bargaining positions will be relevant9. In commercial matters, where bargaining power is broadly equal and risks are covered by insurance cover, the historical policy of the English courts was that they should not intervene and the parties should be left to agree to apportion risks as they saw fit10. In the mid to late 1990s a series of decisions rather called into question the courts adherence to that policy.
However, a number of decisions in more recent times have suggested that the courts are once again less inclined to interfere and have looked at the question of bargaining power as much as one of business sophistication and familiarity with the relevant issues as one of a simple comparison of financial standing11.
However, the position is not clear cut and of course an imbalance in bargaining power can arise in professional engagements in perhaps less immediately obvious ways.
For example, most large commercial organisations would have a wealth of choice as to who to instruct to provide professional services of most types.
They might even deliberately look to use small firms for costs reasons. In such circumstances, they will find it harder to argue against a limitation of liability on the grounds of bargaining power.
Conversely though, an imbalance may result in the professionals favour where a clients choice who to instruct is restricted because there are few professionals with the relevant specialist expertise, or due to conflicts of interest. Bear in mind too that a professional can have a distinct commercial advantage in negotiating terms of engagement where the client is facing particularly tight timescales.
A separate factor, but one which can be relevant to the question of equality of bargaining power too, is whether the client had the opportunity to engage a different professional without having to accept a similar limitation of liability12. Here, the practice of the profession in question is likely to be relevant. It will be helpful to show that other firms offering the same services routinely seek to limit their liability similarly, but evidence of this may not be easily obtained.
Where a party seeks to limit liability to a specified sum, as will often be the case in a professional services context, section 11(4) requires the courts in considering whether the provision is reasonable to have particular regard to
(a) the resources which that party could expect to be available to him for the purpose of meeting the liability should it arise and (b) how far it was open to the party to cover itself by insurance. There is some authority for the proposition that a limitation of liability to the upper level of readily available insurance cover will be reasonable13. However, there is also authority for the proposition that limiting liability to an amount below the available insurance cover will not necessarily be unreasonable14.
The courts have also frequently examined the link between the amount of the limitation and the likely level of the clients loss which was foreseeable at the time the contract was concluded. In the absence of an objective justification for the limit, whether by reference to the value of the engagement or available insurance cover, the court may be less inclined to find the limitation reasonable. One case decided in the professionals favour was Moores v Yakeley Associates15, where a limit of liability set by an architect for his engagement by reference to the total building cost for the project was held to be reasonable.
On the other hand, in at least one case the lack of rational explanation for the amount of the limitation of liability in question was an important factor in the courts decision to find the restriction unreasonable16.
Equally, a standard rather than a case by case approach to setting liability limitations will not help in trying to establish reasonableness17.
It will always assist to show that the client was specifically aware of the limitation of liability18. Ideally, the professional should draw specific attention to the provision and explain the rationale behind it, and ensure that it is agreed by senior personnel from the client.
Under section 11(5) the party arguing that the provision is reasonable has the burden of proving reasonableness. In our context, this means the professional will have to justify the exclusion or limitation of liability to the court.
I should briefly note for completeness that in certain circumstances English law gives additional protection to consumers in respect of limitations and exclusions of liability in contracts. Detailed consideration of these protections is beyond the scope of this paper. However, in very broad terms clauses 3 and 11 of UCTA apply where a party deals other than in the course of a business with a party who deals in the course of its business. Similarly, and again in very broad terms, the Unfair Terms in Consumer Contracts Regulations 1999 apply where a supplier deals with a natural person acting for purposes outside his business, trade or profession.
Other ways to limit professional liability
Before moving on to consider the position of some particular professions, I would like briefly to mention two slightly different ways in which professionals practising in England can limit their liability.
The first is by careful drafting of the scope of the engagement in the retainer letter, to make it clear precisely what it is that the professional is to do. I emphasise that this must be done carefully; as noted above the wording will be construed strictly and any ambiguity resolved against the professional. Further, if the court considers that thescope of the engagement has been restricted beyond the reasonable expectations of a client in similar circumstances it may hold the restriction to be unreasonable under
UCTA.
This is a particularly important approach however where the client has retained a number of different professionals for the engagement. For example, for an acquisition the client may retain lawyers, accountants, actuaries and financial advisers. A lawyer may need to retain foreign lawyers, experts or enquiry agents to give his advice. A construction professional may need to employ sub-contractors. This can mean there is doubt over which professional is expected to provide which services or over the extent to which each might be liable for any loss suffered by the client.
The courts are generally fairly open to upholding restrictions of liability for the fault of others, but equally they abhor a vacuum and will be happy to apportion responsibility to one professional if the division of responsibilities between professionals is not clearly defined.
The second is by incorporation of the practice as a limited company or a limited liability partnership (LLP). A detailed consideration of the issues concerning incorporation is beyond the scope of this paper. However, broadly speaking its aim of course is to limit the liability to third parties of the individual shareholders or members of the firm to their capital contributions to the company or LLP.
Historically, professionals in England practised as sole traders or in unincorporated partnerships, carrying full personal liability for the debts and liabilities of the practice (indeed, some of us still do!). Certain professions embraced incorporation as a limited company some time ago and that is now their favoured model. For accountants and lawyers, however, the position has only changed relatively recently, since LLPs became permitted under the Limited Liability Partnerships Act 2000.
There are certain regulatory requirements which some types of professionals have to satisfy to practise through an LLP and there remain tax issues for international partnerships which can militate against incorporation as an LLP. However, LLP status has in the last two or three years been enthusiastically adopted by the Big 4 and most mid-size accountancy firms and many of the top 100 English law firms have either converted or are said to have plans to do so in the near future.
A question yet to be definitively resolved is whether a negligent shareholder/member of an incorporated practice may be subject to unlimited liability even though the other shareholders/members benefit from the limited liability status of the firm. There are decisions, addressing slightly different circumstances, which go both ways19. We are aware that certain insurers now offer specific cover against this risk.
Particular professions
Having looked at the general English law regime governing the exclusion and limitation of liability, within which all professionals have to operate, I am now going briefly to look at specific considerations which apply to particular types of professionals seeking to limit their liability, with a particular focus on accountants and solicitors.
Accountants
Accountants are positively encouraged by the Institute of Chartered Accountants in England and Wales (ICAEW), where they can, to seek agreed limits to their liability to clients20. The ICAEW have also published a helpsheet21 which identifies for their members the principal issues they need to take into account when considering a limitation of liability to clients or third parties and a helpsheet22 with provides model clauses. Additionally, it has produced guidance for auditors on the use of disclaimers to avoid liability to third parties23.
Whether or not as a result of this, accountants now routinely limit their liability for many of the types of engagement they carry out and clients accept this. Limitation is usually by reference to a fixed monetary limit. Increasingly though, in matters where more than one professional is retained they seek to limit liability to that which is proportionate having regard to the respective contributions of the different professionals to the losses suffered by the client.
For certain types of work, however, accountants ability to limit or exclude their liability is restricted.
Undoubtedly the most important of these is the statutory prohibition, contained in section 310 of that Companies Act 1985, on auditors excluding or limiting liability to an audit client company for negligence, default, breach of duty or breach of trust in relation to the statutory audit of that companys annual financial statements carried out as required under section 235 of that Act24.
Under section 727 of the Act it is open to the court to relieve an auditor wholly or partially of liability in respect of a statutory audit if he acted honestly and reasonably, and ... having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused.
However, whilst this provision is routinely relied on by auditors defending claims, there has yet to be a reported decision applying it.
Following an agreement reached in 1995 between the London Investment Bankers Association and representatives of what was then the Big 6 accountancy firms, accountants do not by convention include exclusions or limitations of liability in retainers to issue public reports for the purposes of public transactions by listed companies.
In 1998 the Big 6 firms agreed with the British Venture Capital Association a formula for setting the level of limitation of their liability for due diligence investigation services and reports provided for private equity/debt finance transactions. This formula is widely accepted in the market by accountants and private equity houses. The formula fixes the level of limitation according to the value of the transaction, although increasingly for larger transactions it appears private equity houses are also willing to accept proportionate liability clauses.
Solicitors
The Guide to the Professional Conduct of Solicitors (the Guide) provides that solicitors may not seek to exclude all liability to their clients, but they may limit their liability provided the limit is not below the minimum level of insurance cover they are required to carry25. Currently, sole traders and unincorporated partnerships practicing law in England are required to have indemnity insurance cover of 2 million for each and every claim and incorporated practices such as LLPs are required to have 3 million for each and every claim26. The Guide goes on to make the perhaps obvious point that it is preferable for the clients acceptance of any limitation to be evidenced or confirmed in writing27. Finally, the Guide notes that liability for fraud and reckless disregard of professional obligations cannot be limited28, which seems to do no more than set out the likely position as a matter of law.
Solicitors are specifically prevented by statute however from limiting their liability in a contentious business agreement29. A contentious business agreement is defined as an agreement in writing with the client as to the solicitors remuneration in respect of any contentious business done or to be done by him30. Contentious business is defined as business done ... in or for the purposes of proceedings begun before a court or before an arbitrator31.
The rationale for this restriction appears to have become lost in time and it is widely regarded as unjustified. Most commentators consider that it prevents solicitors from limiting their liability for all contentious work, but on a literal reading the reference to proceedings begun would not appear to exclude work done before proceedings are commenced, for example to investigate and formulate a claim or the defence of a claim, or to try and resolve the claim without the need for proceedings.
A more difficult question to answer clearly is whether English solicitors are in practice agreeing limitations of liability with their clients. Reliable and comprehensive data are hard to obtain. Various surveys of the larger English solicitors practices in recent years suggest that firms are increasingly looking to limit liability to clients, but that many firms have sought to do so only relatively recently and that few firms seek to do so routinely but rather on an ad hoc basis according to the client and the nature of the instruction. It appears that the most common practice is to limit liability to the level of actual insurance cover carried32, and that proportionate liability clauses are rarely used. There also remains considerable concern among lawyers that seeking limitations of liability will lead firms to lose business to firms who do not.
The Guide also permits solicitors to seek to exclude or limit their liability to third parties for negligent misstatement33. As noted above, it is considered that UCTA will apply to a disclaimer of liability to a third party, for example contained in an opinion letter or when providing information or advice which was originally prepared for another party or another purpose.
Others
A brief mention of the position in two particular and important industries:
Financial practitioners regulated by the Financial Services and Markets Act 2000 are subject to some particular restrictions on their ability to exclude or limit liability either under that Act or under the Conduct of Business Rules issued pursuant to that Act by the Financial Services Authority, the UKs
financial services regulator. Those regulated by the Act include analysts, bankers, brokers, custodians, investment advisers, traders, valuers, insurers and accountancy firms.
Many standard form contracts used in the construction industry provide for exclusions or limitations of the liability of construction professionals. For example, the Royal Institute of British Architects standard form agreement for the appointment of an architect34 provides for a contractual limitation period, limitation of liability to a specified sum, and proportionate liability having regard to the contribution to the clients losses of any other professionals retained.
The future
There are three particular developments in the pipeline which may affect professionals ability to limit their liability for negligence in the future. First, the Law Commission, a body which considers and recommends changes to the law, published a draft Unfair Contract Terms Bill35 in February 2005 containing proposed amendments to the legislation which currently governs limitation of liability provisions.
The draft bill seeks to establish a single regime applicable to such provisions in consumer and commercial contracts, removing some inconsistencies and overlaps in the existing legislation. It proposes that the reasonableness test under UCTA should be replaced with a fair and reasonable test. The factors to be taken into account under the new test suggest that outcomes will not differ significantly from those under the test. It is as yet unclear whether the Government will proceed with the draft bill.
Second, the Law Society has indicated that it will propose removing the restriction on solicitors limiting their liability under contentious business agreements. It is not yet known when this de-regulation may occur. Finally, proposals are currently under consideration in Parliament to change the law to allow auditors to limit their liability to audit clients for liability for negligence, default, breach of duty or breach of trust occurring in the course of the audit36. It is proposed that the limitation will be able to be expressed in any way, and not just by reference to a fixed monetary sum or a formula.
The limitation of liability agreement may only apply in respect of acts or omissions occurring in the course of the audit of the accounts for a single financial year, and must be authorised by the shareholders.
The limitation must be fair and reasonable in all the circumstances of the case having regard to ... the auditors responsibilities under [the Companies Act 1985] ... the nature and purpose of the auditors contractual obligations to the company, and ... the professional standards expected of him37. In determining what is fair and reasonable, the courts are expressly required to ignore matters arising after the loss or damage in question has been incurred or matters affecting the possibility of recovering compensation from other persons liable in respect of the same loss or damage38.
It is expected that these provisions will become law later this year or early next. This will undoubtedly provide huge comfort to the larger accountancy firms; they are often the only parties left with any money or worthwhile insurance cover following large and/or high profile corporate collapses or accounting scandals. Unable to protect themselves by agreeing limitations of their liability for alleged audit negligence, they have as a result repeatedly been targeted over the years by claims running to hundreds or even billions of pounds.
Despite the recent collapse of one of the largest such claims during trial39, the potential threat to the very existence of firms from these claims and the enormous costs of defending them places huge pressure on firms to settle even very weak claims. Accountancy firms will hope to be able to use the new rules to reduce this pressure in the future.
Barlow Lyde & Gilbert, August 2006
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1 The contra proferentum rule - see Photo Productions v Securicor Transport [1980] AC 827, House of Lords (our highest court, which usually sits as a panel of five judges).
2 Gillespie Bros v Roy Bowles Transport [1973] 1 All ER 193, Court of Appeal (which usually sits as a panel of three judges).
3 Ailsa Craig Fishing v Malvern Fishing [1983] 1 WLR 964, House of Lords.
4 [2004] ECWA Civ. 583, Court of Appeal.
5 A provision of obvious particular relevance to the position of medical and health professionals.
6 Such a duty will be implied into a contract for the supply of services by section 13 of the Supply of Goods and Services Act 1982 if not expressly agreed.
7 What constitutes written standard terms of business has been the subject of considerable debate in the courts and academically in recent years, but is beyond the scope of this paper. For present purposes it suffices to note that section 3 will usually apply where the professional issues a letter of engagement and/or terms of business and even if there is some negotiation of the terms of the retainer. However, as section 2 applies to any attempt to exclude or restrict liability for professional negligence it is difficult to see how the application of section 3 could give rise to additional issues.
8 UCTA also applies to clauses purporting to exclude or limit liability for breach of warranties which are implied by other legislation into contracts for the sale and supply of goods.
9 This is one of five factors set out in schedule 2 of UCTA which are not expressly required to be taken into account in considering reasonableness under sections 2 or 3 but some of which in practice are.
10 See in particular the comments of Lord Wilberforce in Photo Productions v Securicor [1980] 1 All ER 556, at 561.
11 See, for example, Watford Electronics v Sanderson CFL [2001] EWCA Civ 317, Court of Appeal.
12 Another of the factors in schedule 2 of UCTA. In Stevenson v Nationwide Building Society (1984) 272 Estates Gazette 663, the client opted for a service subject to a restriction on liability which was cheaper than the service available without such a restriction and this was a factor which the court relied on in finding the restriction reasonable.
13 Sometimes breathtaking sums of money may turn on professional advice against which it would be impossible for the adviser to obtain adequate insurance cover and which would ruin him if he were to be held personally liable. In these circumstances it would indeed be reasonable to give the advice on the basis of no liability or possibly of liability limited to the extent of the advisers insurance cover, per Lord Griffiths, Smith v Eric S Bush [1990] 1 AC 831 at 859. Obviously, establishing what insurance cover was available at the time the engagement was entered into could be challenging evidentially. There may well also be an issue as to whether and if so at what point the theoretical availability of insurance cover should not be taken into account because its high cost meant it was not practically available.
14 An architect might have insurance cover of 10M, and be engaged to carry out a small project with an estimated contract value of 10,000. It would be absurd in such a case to say that any ceiling figure lower than 10M would be unreasonable, per Dyson J in Moores v Yakeley Associates (2000) TCLR 146. It is generally accepted by commentators however that if the professional in question is subject to a compulsory minimum level of insurance cover, a limitation of liability below that level of cover will
be unreasonable.
15 (2000) TCLR 146.
16 Salvage Association v CAP Financial Services [1995] FSR 654.
17 South West Water v ICL [1999] BLR 420.
18 Whether the customer knew or ought reasonably to have known of the existence of the term is another of the factors in schedule 2 of UCTA.
19 In Merrett v Babb [2001] ECWA Civ 214, the Court of Appeal held an employee of a practice of valuers which had been dissolved liable personally to the firms client for his negligent valuation. This decision was however distinguished by a differently constituted Court of Appeal in Bradford & Bingley v Hayes Dunphy & Hayes (2001). Bradford concerned a limited company whereas Merrett involved a partnership. There is good reason to suppose that, as in Bradford, the position of a member of an LLP would be similarly distinguished.
20 Statement, Managing the professional liability of accountants, October 1994 (which now forms section 1.331 of the ICAEWs Members Handbook). See, in particular, paragraph 28: For all engagements ... and particularly where the risks associated with a non-audit engagement are
unacceptably high, members should consider the need to negotiate a limitation on the monetary amount of any liability to the client.
21 PAS2/HS03, the latest version of which was issued in July 1995.
22 PAS2/HS14 the latest version of which was issued in March 1995.
23 Audit 01/03 The Audit Report and Auditors Duty of Care to Third Parties.
24 Although the detail is beyond the scope of this paper, an auditor is not ordinarily liable in law to third parties for negligent preparation of a statutory audit report and it is not considered that the section 310 prohibition applies to express disclaimers of such liability. As noted above, the ICAEW has produced guidance for auditors on the use of disclaimers in such circumstances.
25 Paragraph 12.11 of the Guide.
26 Solicitors Indemnity Insurance Rules 2005.
27 Paragraph 12.11 of the Guide.
28 Notes to Paragraph 12.11.
29 Section 60(5) of the Solicitors Act 1974.
30 Section 59(1) of the same Act.
31 Section 87.
32 The approach carries the risk that the limitation will not be reasonable. As noted above, UCTA looks at the level of available, not actual, insurance cover and a blanket approach to setting the limit will not take into account the clients likely foreseeable loss and has been a factor in the courts finding a limitation unreasonable in the past.
33 Paragraph 12.11(16).
34 SFA/99.
35 A parliamentary bill is the first version of proposed legislation to be placed before Parliament for consideration.
36 Sections 524 to 528 of the Company Law Reform Bill 2005.
37 Section 527(1) of the Bill.
38 Section 527(3).
39 Equitable Life v Ernst & Young, a claim for 2.6 billion (approximately US$4.7 billion) in which my firm acted for the successful defendant accountants.
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