Limitation of liability

In this context, liability in contract ('contractual liability') is the liability you might attract for the professional services you agreed to provide under that contract. Only the parties who have signed the contract (ie the client) can sue you under that contract.

Liability in tort ('tortious liability') might arise where you delivered your professional services in a way that was deficient (negligent) and that this caused or contributed to damage or loss. Damage or loss can include injury to or death of a person, damage or loss to property (a building or personal possessions) and economic loss (the profits a client expected to or would have made, but there are some limitations to this).

It is very important to understand that a limitation of liability clause in a client and architect agreement, such as the CAA2019, does not avoid claims against the architect:

• in tort, by third parties. Third parties are the persons and company entities with whom the architect does not have a contract. For example: a passer-by injured by falling masonry; an individual injured in a fall when using the building; or a neighbour suffering damage to footings caused by negligent design. Public-liability insurance does not cover you for negligent professional services.

• for misrepresentation in pre-contract negotiations under the state Fair Trading Act or national Competition and Consumer Act. For example: where the architect promises something that turns out to be untrue or does not come about (and the architect cannot prove it had every reasonable belief that it would) and this promise leads someone into signing the contract.

Limitation of liability with clients and subconsultants

If a liability arises in contract or tort and it has been caused in whole or in part by the subconsultant, the architect will still likely be the ‘first in line’ to pay for that liability. The architect can in turn sue the subconsultant to recover an amount to pay, or contribute towards, the total liability. But the amount recoverable by the architect from the subconsultant (or their insurer) will be limited by the limitation clause in the subconsultant agreement.

Problems may arise where there is a gap between the limitation of liability of the subconsultant (to the architect) and that of the architect (to the client). For example, where the architect's liability is limited to, say $800,000 and there is a major structural failure caused by faulty design, but the structural subconsultant's liability is limited to $5,000. In these circumstances, the architect is liable to pay the $795,000 gap. Importantly, the architect's professional insurer is probably not obliged to pay the $795,000 shortfall because the shortfall arises from a contract clause the architect had chosen to accept that waived the legal rights the architect would usually have had.

So effectively the architect will probably be left paying the $795,000 out of their own pocket without the benefit of professional indemnity (PI) insurance. The risk of allowing subconsultants to limit their liability (especially to low amounts like $5000) is very serious. The lesson here is to always review your subconsultant agreements and to appropriately negotiate clauses that modify professional legal liabilities. The Institute’s Architect–Specialist Consultant Agreement (ASCA) 2017 provides a convenient and architect-friendly standard-form agreement that you can use to engage and pay a specialist consultant (subconsultant) directly. This agreement can be used for many different specialist services on projects of all sizes and complexity.

Problems can also arise if the architect's liability is limited only in contract, but the limitation of liability clause in the subconsultant agreement excludes both contract and tort. Here, the architect might still become liable in tort, but will be prevented by the limitation of liability clause from suing the subconsultant for all or part of that tortious liability.

While it may be considered unfair for the architect's liability to be limited but not the subconsultant's, it is not prudent to allow the subconsultant’s liability to be limited where the architect's is not limited. If the architect has limited its liability to its client under a limitation clause, then you might consider agreeing to a corresponding and proportionate limitation of the subconsultant’s liability to the architect.

The important point is that any limitation of liability between the architect and client and between the architect and subconsultant:

• ought to cover the same liability ground (usually by similar legal wording); and
• that the dollar amounts (the liability ‘cap’) should not be out of proportion to the risks of the subconsultant's role in the project.

In negotiating what a dollar limitation of liability should be, compared to the architect's liability limit, you should make an assessment of the likelihood of a claim against the subconsultant for their professional failure or negligence and an assessment of the size of a claim that would be attributable to that subconsultant. For example, the liability limit agreed with the structural subconsultant may be higher or equal to the architect's liability to the client, whereas the limit negotiated with say, an acoustic consultant, might be considerably less, if their work is confined to a limited area of the project.

The risk of uninsured liability explained above arises if the architect enters into a contract with the subconsultant which waives or modifies the architect’s right to make claims greater than the limited amount or after the limited time period. This means the risk of uninsured liability does not arise when consultants engaged by others on the project have limit of liability clauses in their contracts, because the architect is not a party to those contracts.

Including limitation of liability clauses

You may want to consider negotiating clauses into your client and architect agreement, which limit your liability to the client on the basis of:

• A dollar amount - which operates like a limit on what you would pay up to the dollar cap.
• Both contractual and tortious liability – that you would owe to the client.
• A time limit - after which date the client cannot sue you.

In turn, you may want to consider whether the limitation clause in your subconsultant agreement is suitably proportionate to (generally, not narrower or more limited than) the liability you are likely to be exposed to under your client-architect agreement for each of the above bases. If the limitation clause is too narrow, negotiate it with the subconsultant and, at a minimum, seek legal advice to ensure that the limitation clauses in your client-architect agreement at least line-up with the limitation clauses in the subconsultant agreement. This is often referred to as ‘back-to-back’ provisions.

The amount of your PI insurance cover should adequately reflect the risks it is required to cover and generally should be higher than any limitations of your liability that you negotiate with a particular client or for a particular project. A client-architect agreement that you propose to your client, or are asked to sign by your client, should contain a limitation of liability for your protection as the architect. Using a client-architect agreement with at least some limitation of liability gives you better protection than the alternative, which is unlimited liability.

If you are unsure about the dollar amount to which you limit your liability, we suggest that the 'least worst' position is that you limit your liability to the amount of cover your PI insurance provides, for any one claim. A better position is to negotiate a dollar limit to be less than your amount of cover.

Limitation of liability under the CAA2019

The limitation clause provided in the Institute’s Client Architect Agreement (CAA2019) strikes a balance between protecting the architect’s liability exposure to the client, without being too restrictive in that limitation on what the client can be compensated for.

Clause G.2 limits the architect’s liability to the net amount that the architect actually receives under their PI insurance. If the amount of the client’s claim against the architect is higher than what the insurer agrees to pay, clause G.2 limits the client’s claim to the dollar amount that the insurer pays out (minus any excess or deductible) and limits the client from seeking any further compensation directly from the architect. It permits a client to be compensated by the PI policy for an architect’s professional liability, while limiting what could otherwise be unlimited liability so that the architect is not left ‘out of pocket’ nor risking their personal assets.

Clause G.2.2 excludes liability for types of losses that are not closely connected with performing the services and types of losses that a court would not typically award or a typical PI policy would not cover.

For more detail see the User Guide that accompanies the CAA2019.

Further resource:

For information on the NSW Design and Building Practitioners (DBP) Act and Regulations, please refer to our dedicated Institute page.