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Economic uncertainty and value for money: why the small print matters for housing associations

What impact do terms and conditions (T&Cs) have in the instruction of professional advisers?

We look at what the impact can mean in terms of the service that Housing Associations (HAs) receive, and what impact this can have when there is an issue.

Why now?

Now is a good time to review T&Cs, with a buyer’s market as a result of the current economic climate. Savills have reported that the final six months of 2016 saw the largest fall in residential land prices in London since 2008. There also continues to be concerns around the value of the pound, inflationary pressures and the impact that this could have on the cost of building out sites.

There are also some lessons learned from the claims that have come out of the downturn in 2008/2009.

Why bother with the T&Cs?

Often in response to an instruction, a professional will send out their standard T&Cs. Even if you do not expressly agree or sign these T&Cs, you might still be bound by them. This is on the basis of an interpretation of whose terms have priority in the negotiations between the parties, or conduct over a period of time in dealing with that professional. This can impact on:

  • the scope of services to be provided by the professional; and
  • whether there are any limitations of liability.

The scope of services

A HA’s instructions to its advisers might set out what is required of the professional. This may be immaterial, if the professional’s terms are incorporated (and not the HA’s) into the instruction. The scope of the services to be provided can be materially different to what you thought the professional was instructed to do. This can include caveats about the level of due diligence that they will carry out, what reliance the HA can place on particular advice and the obligations on the HA to provide information.

Limitations of liability

(1) Financial caps on liability

A professional’s T&Cs might introduce a financial cap on their liability. For example, a valuer might seek to limit their liability to a certain sum for each valuation or for a series of valuations. This may be linked to the fees charged. In some circumstances, this might be appropriate. However, it is important that any limitation of liability is considered in the light of a particular case.

As a general guide, limitations of liability which seek to limit a surveyor’s liability to a sum less than the market value of the property or site should not normally be acceptable.

(2) Net contribution clauses (or proportionate liability clauses)

A professional’s T&Cs might also contain a net contribution clause (NCC). In summary, they state that if another professional is also liable for the HA’s loss, then that professional is only liable for their share (and not the other professional’s share). This has the effect of transferring the credit risk for any other defendant’s negligence on to you.

If you come across any T&Cs which refer to the liability of other parties, then it is important to seek legal input on the impact of this.

Example

HA instructs valuer (V) to value a proposed development site, before purchasing the site. V values the site at £8 million (Market Value) and the HA agrees to purchase the site for this sum. In fact, the site was in fact only worth £5 million. Therefore the HA overpaid by £3 million. The HA considers that it has a potential c £3 million claim against V.

V admits overvaluing the site but, relying on its T&Cs, argues the following:
  • V blames the quantity surveyor (QS), whose costings V relied on in carrying out the residual valuation.
  • V also blames the HA’s solicitors (S), who, it says, failed to report that the site had been purchased for just £4.5 million two months before its valuation.
  • V argues that S and QS are more culpable than V and, together, are responsible for 75% of HA’s loss.
  • Therefore, V ‘s liability is limited to only 25% (£750,000) under the NCC.
  • Even if V’s share of the loss is higher than £750,000, V says that its liability is capped to a maximum of just £1 million under its T&Cs in any event.
  • In summary, the HA’s potential £3 million claim against V is, potentially, limited to £1 million or even just £750,000.
  • In order to recover the rest of its loss, HA might need to pursue S and QS, even if the merits of those claims might not be so good. Also, if, for example, the QS is insolvent then the HA might not be able to recover the balance.

Summary

Liability limitations can be incorporated into contracts in a number of ways. If you receive the professional’s T&Cs, or if the professional even just refers to the T&Cs without providing a copy, they may still bind you.

The key message is: if you instruct a professional, and you receive their T&Cs, it is important to check what they say. They can impact on the scope of the services to be provided and on your recovery options when there is an issue.

If in doubt, it is always better to seek legal input. You are welcome to contact Neil Franklin or Sam McCollum of TLT, if you would like advice in relation to any particular case, or if you would like advice around your standard T&Cs.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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