Liability Caps under the spotlight: lessons from Convrgnt Value Engineering LLC v Kennedys Dubai LLP

Background

The claimant, Convrgnt Value Engineering LLC (CVE), was a Dubai-based construction company which retained Kennedys Dubai LLP (Kennedys) to pursue a substantial claim arising out of a construction project in the UAE. Kennedys' retainer included a liability cap limiting its liability to £3 million (the Liability Cap) and provided that the retainer would be governed by the laws of England and Wales. The underlying claim resulted in an award to CVE of AED 22.68 million plus interest and the return of a performance bond. However, CVE alleged that additional claims worth more than £15.5 million should have been pursued and recovered, and brought proceedings against Kennedys alleging breach of contract, negligent misstatement, and claims relating to failure of consideration and restitution. Kennedys' denied liability and sought to rely on the Liability Cap.

The Court held a preliminary issues hearing to determine:

• Whether UCTA applied to the retainer
• Whether the Liability Cap was reasonable
• Whether the Liability Cap applied to restitutionary and failure of consideration claims
• Whether statements made during the retainer process amounted to actionable misrepresentations or gave rise to an estoppel preventing reliance on the Liability Cap

The applicability of UCTA

S.27 of UCTA provides that “Where the law applicable to a contract is the law of any part of the United Kingdom only by choice of the parties (and apart from that choice would be the law of some country outside the United Kingdom) sections 2 to 7 and 16 to 21 of this Act do not operate as part of the law applicable to the contract”. Kennedys argued that the statutory restrictions on contracting parties to exclude or limit their liability, save to the extent that such exclusions or limitations satisfy the requirement of reasonableness, did not apply. 

The retainer expressly provided that English law governed the agreement - which Kennedys argued was only the case because the parties had chosen English law. However, the court was required to consider which law would have applied had the parties not made that choice. Applying the Rome I Regulation - which provides that a contract for the provision of services is to be governed by the law of the country where the service provider has its habitual residence - the court concluded (having rejected an alternative argument that Kennedys was merely a "branch", pursuant to Article 19(2) of Rome I) that although Kennedys' habitual residence was England rather than Dubai, the retainer was nevertheless "manifestly more closely connected" (adopting the language Article 4(3) of Rome I) with the UAE. The factors pointing towards this were: that the underlying dispute concerned a UAE construction project, the parties to that dispute were UAE entities, the litigation was pursued in the Dubai courts, local advocates were required for court appearances, evidence was located in the UAE, and the retainer was substantially performed from Dubai. Accordingly, absent the parties' choice of English law, UAE law would have governed the retainer.

The Court agreed that section 27 therefore applied, and CVE could not rely upon the reasonableness provisions in UCTA when construing Kennedys' Liability Cap.

Accordingly, the remaining findings in the judgment were obiter only, but nonetheless remain of significant interest, as we explore below.

The reasonableness of the Liability Cap

Although the judge's finding was that s.27 of UCTA had the effect of disapplying the provisions in the Act regarding reasonableness in respect of Kennedys' Liability Cap, the judge went on to consider whether the Liability Cap would have been reasonable had UCTA applied. Her conclusion was clear: it would not. The main factors leading to that finding were:

• 11(4)(a) of UCTA provides that for terms that seek to limit liability for a specific sum of money, regard should be given to the resources available to the party seeking to restrict liability. Whilst Kennedys was balance sheet insolvent for the years 2011 - 2013, its parent and member company, Kennedys LLP, was a substantial source of financial support.
• 11(4)(b) provides that regard should also be had to a party's ability to procure cover through insurance. Whilst Kennedys had not adduced evidence as to the level of PII cover it had in place, other evidence suggested it was £30 million, which was ten times the Liability Cap. The disparity between the Liability Cap and the insurance cover was "striking". The judge concurred that the existing case law considering s.11(1) of UCTA indicated that, when assessing the reasonableness of the Liability Cap, she should take into account the amount the claimant could reasonably have expected to recover in the underlying proceedings. She concluded that was likely to be significantly in excess of £3 million.

Accordingly, the court concluded (obiter only) that there would have been no cost to the firm in agreeing a higher cap, so limiting liability to £3m, a figure significantly below the highest amount which could reasonably have been expected to be lost on breach, was unreasonable.

Restitutionary claim: the Liability Cap applies

CVE had argued that claims framed as a failure of consideration or unjust enrichment fell outside the Liability Cap because they were not claims for "loss or damage". The court rejected that submission. Looking at the wording of the clause as a whole, the judge emphasised its breadth and concluded that a narrow interpretation would be inconsistent with the commercial purpose and drafting of the clause. As a result, the Liability Cap would apply to restitutionary claims.

Misrepresentation and estoppel arguments fail

The final issue concerned a statement made when the retainer documents were sent to CVE. The covering correspondence stated that there was unlikely to be any disagreement arising from the terms and conditions and invited the client to raise any points that were unclear. CVE argued that this amounted to a false representation that there was nothing significant in the terms or that there was no need to read them, which either resulted in a claim in misrepresentation or meant Kennedys was estopped from relying on the Liability Cap. The court firmly rejected that argument.

According to the judge, sending contractual terms for execution carries an obvious expectation that the recipient will read them. Furthermore, the statement was one of opinion and not fact. Moreover, the invitation to raise any unclear provisions was inconsistent with any suggestion that the terms need not be reviewed. The statement was therefore incapable of bearing the meaning advanced by CVE.

The misrepresentation claim would also have failed on the basis of reliance. The evidence established that CVE's managing director understood that he was expected to read the documents and he had not relied on the statement as a reason for not doing so.

Commentary

There are four fundamental takeaways:

• Consider conflicts of law: The outcome turned entirely on s.27 of UCTA and Rome I. On any cross-border retainer, the first question is not whether the cap is reasonable but whether UCTA applies at all. That analysis affects reserves, settlement strategy, and the prospects of summary disposal, and should be done at notification, not at trial.
• Policy limits as evidence against the professional firm: The court assumed £30m of PII cover, and weighed that against the reasonableness of a £3m cap. It drew the inference against the firm more readily because it had not disclosed its position. Firms should expect claimants to seek disclosure of insurance positions in liability cap disputes, and should think carefully about how contractual caps interact with the limits being underwritten. A wide gap between the two is a problem in waiting.
• Broad wording earns its keep: The finding that “in any circumstances whatsoever” captured restitutionary claims is a useful reminder that introductory wording matters as much as the number.
• Obiter with teeth: Although the reasonableness findings were not necessary to the result, they were fully argued and carefully reasoned. We anticipate that they will be cited - and tested - in future UCTA challenges to a solicitors’ liability cap.

For law firms, we consider the following key aspects arise from the judgment:

• A cap without a rationale is a cap at risk: The single most damaging evidence was that nobody within Kennedys could explain the £3m Liability Cap. Firms should document, at the time terms are set or renewed, why a cap sits where it does: by reference to fees, the client’s realistic exposure, the firm’s resources and its insurance.
• Review the ratio between cap, cover and exposure: A cap fixed at a tenth of available PII cover invites exactly the inference drawn by the judge in this case. Liability caps should be revisited as insurance programmes and matter profiles change, and calibrated to the highest realistic loss on the engagement. Alternatively, firms should explain to clients that there are important commercial reasons for seeking a lower limit of liability, in terms of the impact on insurance premiums and claims history, when seeking to agree the terms of engagement. Our view is that a specific agreement with a sophisticated client should be given weight by a Court.
• Structure matters less than substance: Kennedys' “branch” argument failed even though the partnership deed, resolutions and licences all used the word. Labels in constitutional and regulatory documents will not determine the Rome I analysis; the determinative factor will be where control actually sits.
• Engagement letters are evidence: The covering letter survived the misrepresentation attack largely because it positively invited questions and the client accepted he knew he was expected to read the terms. Matter partners should be trained to present limitation clauses clearly, to draw them to the client’s attention and to record that they have done so.