How clearly do you bring to the attention of your client your standard terms of business, a term of which seeks to limit your firm’s liability in negligence liability to a liability cap (e.g. £3m)? See Michael Hirtenstein v Hill Dickinson LLP [2014] EWHC 2711 (Comm).
Michael Hirtenstein v Hill Dickinson LLP [2014] EWHC 2711 (Comm) is a case which related to alleged negligent advice given by the defendant law firm in connection with the acquisition of a yacht. The allegation of negligence centred upon whether the firm, using the standard form of memorandum of agreement approved by the Mediterranean Yacht Brokers Association, should have advised the client to obtain a personal guarantee of the yacht’s condition from the selling company’s beneficial owner. The court held that the firm had not been negligent in that regard. However, in the process of assessing damages on an assumption that the firm had been negligent, the court analysed the effectiveness of a clause in the firm’s standard terms of business limiting liability to £3m.
Under section 2(2) of the Unfair Contract Terms Act 1977, liability for negligence cannot be excluded or restricted by reference to a contract term except insofar as that term satisfies the requirement of reasonableness set out in section 11 of the Act. Mr Justice Leggatt held that, in the circumstances of this case, the limitation clause in the firm’s standard terms of business was not reasonable and was therefore void.
The transaction was brief: the firm was instructed on a Tuesday, sent a retainer letter on the Wednesday, and the matter completed on the Friday. As is often the case, the terms of business were attached to a formal retainer letter delivered to the client on the Wednesday. The limitation of liability was not brought specifically to the client’s attention. As is also often the case, no express acceptance of the terms of business was received from the client, but the court held that by continuing to instruct the firm after receiving the terms of business, the client impliedly agreed to contract with the firm on those terms Of significance was that, by the time the retainer letter (attaching the terms of business) was sent to the client, the firm was already instructed and in the process of carrying the client’s work, with the acquisition scheduled to be completed two days later. The client was therefore already committed to retaining the firm with no realistic possibility of rejecting the terms of business and/or using other solicitors.
Although rules of conduct relevant at the time (paragraph 2.07 of the Solicitor’s Code of Conduct 2007) permitted solicitors to limit liability to clients, this was only the case if the limitation was not below the minimum level of insurance cover required for solicitors, was brought to the client’s attention, and was communicated in writing. The firm was held not sufficiently to have brought the limitation to the client’s attention and whilst this did not automatically render the limitation void for unreasonableness, it was a powerful indicator.