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What is today's blog about?
In this week’s blog, we look at the RICS Guidance Note Risk, Liability and Insurance (1st Edition) (amended November 2021). This is essential reading for all RICS APC and AssocRICS candidates involved in providing surveying services.
You can download a full copy of the Guidance Note here.
What is the aim of the Guidance Note?
The Guidance Note aims to provide guidance on mitigating or avoiding the risks and liabilities associated with surveying work.
What claims may a surveyor face?
Surveyors may face claims under breach of contract and under negligence.
When providing surveying services, a surveyor will agree a contract (or Terms of Engagement) with the client defining the scope of service and obligations of each party. The client (i.e., the other party to the contract) can take action against the surveyor if any of the terms are breached. There is an implied term that the surveyor will provide services with reasonable skill and care, i.e., to not act negligently.
A claim can also be brought under the tort of negligence. A tort is a civil wrong recognised by law, rather than a breach of contract. This requires the same standard of service as the implied term discussed above, i.e., to act as a reasonable professional would do in the circumstances.
However, a claim under the tort of negligence can be brought by anyone (i.e., a third party) to whom the surveyor owes (or has assumed) a duty of care towards. This is wider than a breach of contract which can only be brought by the contracting party, i.e., the client.
When considering whether a duty of care is owed to a third party, the Court will consider whether the damage suffered was reasonably foreseeable as a result of the defendant’s actions, whether the relationship between the parties was sufficiently proximal and whether it is just, fair and reasonable to impose a duty of care.
This duty of care could arise where a surveyor allows a third party to rely upon their advice. This means that the third party can acquire similar rights to that of a client, but without the protection of the surveyor’s contract and any liability cap.
Specific instances of where a third party may be owed a duty of care include owner occupier purchasers (borrowers) in mortgage valuations, following the cases of Smith v Bush (1990) and Harris v Wyre Forest District Council (1989). This will not extend to buy to let purchasers (borrowers), however, following Scullion v Bank of Scotland (2011).
See our blog on a valuer’s duty of care for further information here.
Surveyors should, therefore, be very careful when defining in their Terms of Engagement what the client may use the surveyor’s work for. Ideally, this should only be for the sole purpose intended. If a client then relies on the advice for any other purpose, the Terms of Engagement should exclude liability for losses incurred as a result.
What is the remedy for a breach of contract or the tort of negligence?
Damages (for financial loss) are generally awarded for both to put the complainant in the position that they would have been if the contract was not breached or the negligent act not committed, i.e., no better or worse off.
Under contract, the loss must have been in reasonable contemplation when the contract was agreed. Under tort, the loss must have been reasonably foreseen by both parties at the time when the negligent act occurred. Any other losses will generally not be compensated for.
Who can a claim be brought against?
Generally, claims are made against the firm who provided the services.
However, claims can be brought against individual partners in a partnership. This promotes the benefits of using company structures such as a LLC or LLP, where the partners’ personal liability is limited.
To avoid any problems, all Terms of Engagement should expressly exclude personal liability.
How long can claims be brought for?
The Limitation Act 1980 allows claims to be brought for up to 15 years from the date of the negligent act. File records should be retained for this period in the event of any claims being made at a later date.
Section 2.7 of the Guidance Note provides further guidance about the limitation periods under contract and tort, in addition to where the services were provided under deed.
As Professional Indemnity Insurance (PII) is agreed on a ‘claims made’ basis, the policy must be in place when the claim is made (irrespective of when the services were provided). This emphasises the importance of having run-off cover if a firm ceases to trade for a sufficient period of time.
What is a liability cap?
A liability cap limits the amount of damages that can be claimed by a client in the event of loss, even in the event of a negligent act. This helps firms to manage risk around the provision of surveying services.
Liability caps must be written explicitly into a firm’s Terms of Engagement and must be reasonable to be enforceable. What reasonable means, however, may differ between a business or a consumer client and firms will need to take this into consideration when agreeing liability caps.
Reasonableness relates to:
Risk level
Level of fee
PII limit and premium
Potential liability without a cap
Type of client
Contractual wording, ideally noted in the contract and in any covering engagement letter
Example wording for a liability cap could be:
‘Our aggregate liability arising out of, or in connection with, these services, whether arising from negligence, breach of contract, or any other cause whatsoever, shall in no event exceed £[x]. This clause shall not exclude or limit our liability for actual fraud and shall not limit our liability for death or personal injury caused by our negligence.’
There is also a difference between liability caps and a firm’s PII limit. The former is the contractual agreement between the client and the firm, i.e., the maximum amount that would be paid to the client in the event of a claim. The latter is the maximum amount that the insurer will pay out for a claim. It is best practice, therefore, to agree liability caps below the PII limit.
A liability cap could be set as a multiple of a proposed fee or a % of a value reported, amount loaned or value of a construction contract.
What should Terms of Engagement include to manage risk?
In summary, to appropriately manage risk, Terms of Engagement should include:
Scope of work
Fee basis
Liability cap
Contracting entity (i.e., the firm) and exclusion of personal liability
Proportionate liability if advice is provided alongside other professionals, such as a solicitor or architect
Third party reliance
Alternative dispute resolution method to avoid costly Court litigation
Governing law and jurisdiction, i.e., requiring any claims to be subject to English law (or the home country of the firm)
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Stay tuned for our next blog post to help build a better you.
N.b. Nothing in this article constitutes legal, professional or financial advice.