Limitation of liability – T’s & C’s

A recent High Court decision, from one of the strands of litigation flowing out of the collapse of CBL Insurance, should provide some comfort for advisory firms and others whose engagement terms include a limitation of liability.

In CBL Insurance Ltd v Harris & [2021] HC 1393, the liquidators of CBL brought proceedings against six directors of CBL seeking to recover losses of $316 million and against CBL’s actuaries seeking to recover $278 million.  The claim against CBL’s actuaries (PwC) alleged breach of contract – and negligence and breach of statutory duty by the two appointed actuaries (who were employees of PwC).

Last month’s High Court judgment was confined to the actuary defendants’ strike out application.  That is, they sought to strike out the claims against the individual actuaries – and to have the application of the liability cap (in the terms of engagement) determined as a separate question.  In the case of the liability cap, the application was to either strike out or requiring the liquidators to re-plead their damages claim against the actuary defendants in excess of the liability cap in the terms of engagement.

In the decision, the High Court confirmed that the liability cap is effective, and required the liquidators to limit their damages claim (i.e. by reference to that liability cap).

As well as providing comfort to advisory firms and others who include liability caps in their engagement terms, confirming that the liability cap applied at what was a preliminary stage of the liquidators’ claim should also encourage settlement of claims – rather than have a claimant in the belief that the defendant’s liability might (somehow) be un-capped.

Background

Some of the background is quite specific to the circumstances of CBL as an insurer that was subject to ‘prudential supervision’ by the Reserve Bank under the Insurance (Prudential Supervision) Act 2010 (IPSA) regime.  Nonetheless, the principles applied by the High Court have much wider application.

In 2014, PwC was engaged to provide actuarial services to CBL.  Importantly, for the purposes of the IPCA regime, an actuary must be a natural person (and not a limited liability company or a professional firm (which is typically structured as a partnership)).  PwC’s terms of engagement with CBL provided for employees to be appointed as CBL’s actuary.  During the 5 years that followed until CBL’s collapse, two employees undertook the actuary role.

Importantly, the terms of engagement provided that:

• CBL agreed that its contract was with PwC, and that in the event of a dispute, it could only sue PwC and not PwC’s employees; and
• PwC’s liability was limited (capped) to 5 times the total fees paid in the relevant period.

Despite this, the liquidators brought claims against both PwC and the PwC employees who were the appointed actuaries for CBL.  Those claims were for an aggregate of $278 million – many times in excess of the liability cap.

Result

The High Court ruled that PwC’s terms of engagement did not suffer from ambiguity – and clearly precluded claims against PwC’s employees (a contractual promise which was for the benefit of those employees and may be enforced by them under the contracts privity regime that is now part of the Contract and Commercial law Act 2017).  As a result, the claims against the employees were to be struck out.

The Court also ruled that the liability cap limited PwC’s liability (and the employees if relevant) to five times the total fees paid in the case of non-recurring work or five times the annual fees paid in the case of recurring work.  In particularly, the judge ruled that PwC’s liability in contract, tort or otherwise is limited to the amount of the cap.  Because the terms of engagement covered the actuarial services carried out by the appointed actuary as well as the additional services, the liability cap applies to PwC’s contractual assumption of liability in respect of the appointed actuary’s actuarial services as well as PwC’s liability for additional services.

However, rather than strike out the claims out entirely, the Court gave the liquidators the opportunity to re-plead their case in order to address the impact of the liability cap.

As noted above, some of the background to the case was unique to the status of CBL as an insurer that was subject to the IPSA regime.  As a result, the Court was required to address submissions not only on matters of contractual interpretation and claims of ambiguity but also on the (novel) claim that the IPSA regime created a private cause of action against actuaries (for breach of statutory duty).

Comments

The decision on the strike out application re-affirms the effectiveness of clearly-drafted liability caps.  This will be of comfort to advisory firms and others whose engagement terms include a limitation of liability.  

It is suggest that liability caps trigger attempts at (legal) manoeuvres designed to out-flank them.  In this case, the High Court rejected submissions that this was a novel duty case involving a complex and unreviewed statutory scheme, and that the Court should be careful not to strike out the breach of statutory duty cause of action without a full trial.  Instead, it applied the plain words of the engagement terms in order to conclude that the claim would breach the liability cap.

Further information

Please contact me should you have any queries concerning the information to be provided.