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paul hyett

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Stepping carefully upon the ever-shifting sands of indemnity issues

Back in February 1999, I discussed in this column a ruling by Mr Justice Dyson which affirmed that an architect who had stipulated a limit of £250,000 under clause 6.2 of the SFA/92 Memorandum of Agreement had satisfied the 'test of reasonableness' under Section 11 of the Unfair Contract Terms Act 1977 (ucta) and was therefore entitled to restrict the extent of his liability to that figure.

The client would not accept the decision, so the whole business subsequently dragged on to the Court of Appeal.

On 23 March 2000, Lord Justices Beldam, Chadwick and Robert Walker upheld Mr Justice Dyson's decision. One of the reasons given was that when the contract between the architect and the client was made - which is the crucial date under ucta for determining the effectiveness of a limitation of liability clause - the overall construction value of the project ( a new house) had been estimated at about £225,000, and in that context the adoption of the £250,000 figure was deemed to have been rational as opposed to arbitrary. In previous decisions, the courts have struck down such limitation clauses because the amounts involved were deemed to have been set on an arbitrary basis.

As leave for further appeal to the House of Lords was refused, we can now be confident of our right to limit liability provided that the figure adopted can be shown to have been reasonable. This decision has very important implications for both architects and professional indemnity insurers, and Squire and Co, the law firm which acted in this case, has clearly done both the profession and insurance companies a great service.

Unfortunately, however, SFA/99 has now replaced the old SFA/92 clause 6.2 with an item under 'Articles of Agreement' that requires 'limit of liability and amount of professional indemnity insurance cover' to be stated. This implies that the figures are, or will be, the same - which is misleading given that the architect may hold a higher level of indemnity cover than the figure that he or she is willing to accept as a limit of liability on any particular job. Indeed, Mr Justice Dyson had made it clear that while the level of an architect's insurance cover was a relevant factor to be taken into account, it was not the determining factor in deciding the reasonableness or otherwise of the limit of liability. Indemnity cover is only one of a number of factors to be balanced against each other when making such an assessment.

Furthermore, disclosure of your insurance details may breach your policy terms. So, when using SFA/99, you should delete the words 'and amount of professional indemnity insurance cover' and simply ensure that you maintain cover at least to the stipulated level of liability plus a generous allowance to cover the other side's legal costs arising in any dispute (see this column , aj 20.1.00 and aj 21.5.98).

One cheery note: a new clause has been added to SFA/99. Its true effect will have to be tested in the courts, but the intention is clear enough: the new clause (9.6.1) obliges the client to 'indemnify' an architect with respect to 'legal and other costs' incurred, either when defending himself against an unsuccessful claim (or part claim), or in the successful pursuit of unpaid fees.

More interesting, however, is the provision within the same clause to the effect that the architect will, in such circumstances, be due a 'reasonable sum in respect of his own time spent in connection with such action or proceedings or any part thereof'.

This provision will sure make 'trigger-happy' clients think twice before com-mencing unwarranted actions - particularly when counterclaims are brought as a device for avoiding paying fees properly due. Bullying architects and their insurers into unfair 'settlements' by threatening enormous litigation costs is all too common.

One architect for whom I recently acted as an expert witness expended some £36,000 of professional time advising the litigation team during the successful defence of his case. Thanks to architect Stephen Yakeley, who introduced this clause into SFA/99, we can in future expect to be entitled to compensation when our personal time is wasted in this way. Hooray!

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