If the cap fits …

As a consultant or a contractor you may frequently be required to state the level of your insurance cover in contracts with clients. Nothing surprising there. What is more surprising, indeed alarming, is how often those insured appear to believe that the sum somehow reflects their total potential liability under the contract. This may be more an ostrich-inspired reaction than an actual belief, but the unpalatable fact is that a claimant can sue you for whatever your total liability may be – even if that is several multiples of your total insurance cover.

Clearly, the risk is all the greater if you operate as an (unlimited) partnership or sole trader. So what do you do? Transferring your worldly wealth to the dog seems a bit iffy. Your spouse may be a marginally better bet, but that could involve cleaning up your act in a rather drastic way. Neither option is tempting.

There is a more practical solution: a cap. Not of the begging variety (that's plan B). Rather, I mean a cap on liability – a contractually agreed maximum sum for which you can be sued, ideally no greater than your level of insurance. Many clients will consider capping your liability at a mutually acceptable level, and both the RIBA and ACE standard form contracts contain wording to accommodate a cap.

The issue of a cap is not only relevant in respect of an astronomical claim. You may consider a cap on liability to be a commercial necessity where high-value (and therefore often high-risk) work is carried out at a low fee. Survey work on a high-value building, the typical "technical adviser" role in PFI projects, or indeed a checking role of any description can carry the risk of high liabilities for a comparatively small return. Just the excess payable in the event of a claim can dwarf the fee in such circumstances.

A cap can offer a solution to differences at the contract stage and turn a job that’s too risky into a viable proposition

Caps on liability may also provide a solution if you find you become embroiled in legal wrangling at contract negotiation stage over particular terms, such as the extent of consequential losses for which you should be liable in your warranties to third parties. Many firms, particularly smaller consultancies, try to reduce their liability to particular, specified heads of loss. This is reflected in the current British Property Federation's purchaser/tenant form of warranty. Its recipient, on the other hand, may well require the consultant or contractor to be liable for all the losses that it causes. A cap can sometimes offer a form of compromise: liability for additional heads of loss may be agreed at a set maximum level.

However, a cap is not an easy solution. One problem is that it is frequently stated to apply "to each and every claim", or words to that effect. Your single error could result in a claim in relation to each of say 10 warranties granted on the job. That could mean that a cap of £5m written into each of the contracts could result in a total payout of £50m (or £55m if the client claims too) – way above the £5m you may have had in mind as your total liability.

Another potential pitfall is the Unfair Contract Terms Act 1977. If you are contracting with a consumer, or on your own written standard terms of business, your cap may be void if it is unreasonable in the particular circumstances. In respect of death or personal injury, a cap would not be effective in any event. And, depending on the drafting, your cap may only apply to claims under your contract, leaving claims in tort unlimited. For these reasons and more, you should seek legal advice on the drafting and effect of your cap.