Liability caps in Australian consultancy agreements: what's reasonable

A reasonable liability cap is one your insurance can actually meet. For most Australian design consultants that means capping total aggregate liability at the amount recoverable under your professional indemnity policy, with a stated dollar ceiling. A cap above your cover is not protection. It is a gap you fund from your own balance sheet.

The rest of this guide is about how to tell which one you have been handed.

What is a liability cap actually limiting?

A liability cap sets a ceiling on what you can be required to pay if something goes wrong. It usually appears late in the agreement, often in a clause dealing with liability generally, and it is easy to skim past because the language is dry.

Three things decide whether it is worth anything. Whether the cap is aggregate or per claim. Whether it sits inside or outside your insurance. And what has been carved out of it, because a carve-out returns uncapped exposure through the back door.

What does a reasonable cap look like?

The test is not whether the number is large. It is whether the number is one you could survive being asked for.

A cap tied to your professional indemnity cover passes that test, because the money exists. A cap of $20 million when you hold $10 million of cover does not, because the second $10 million comes from you. The clause looks protective and is not.

Aggregate matters as much as amount. A cap that applies per claim, with no overall limit, is barely a cap at all on a project that can generate several claims from one design decision.

How do fee-multiple caps compare with fixed caps?

The failure mode of a fee multiple is quiet. Nobody recalculates it when the fee grows through variations, and a cap that started inside your cover ends up outside it. If you agree a multiple, check what it produces at the highest fee the commission could reach, not the fee at signing.

Which carve-outs should you resist?

Carve-outs are the exceptions that sit under the cap, usually introduced by "except in respect of". Each one restores unlimited exposure for that category.

Some are conventional and hard to shift, such as liability that cannot lawfully be limited. Others are worth pushing on. A carve-out for breach of confidentiality, for intellectual property infringement, or for anything described as wilful or reckless can swallow the cap depending on how widely it is drafted, because most claims can be characterised as falling into one of them if a lawyer is motivated.

The point to make in negotiation is not that carve-outs are unacceptable. It is that a cap with four broad carve-outs is not a cap, and both sides should be honest about which it is.

What about consequential loss?

An exclusion of consequential or indirect loss is separate from the cap and does different work. The cap limits the amount. The exclusion limits the kind.

Push for it to run both ways. An exclusion that protects only the principal is one-sided, and mutuality is an easier argument to win than removal.

Does an indemnity undercut the cap?

This is the most common way a negotiated cap turns out to be worth nothing, and it is worth more attention than the cap itself.

An indemnity is a promise to cover someone else's loss. It sits in a different clause, often several pages away, and it is frequently drafted without any reference to the liability cap. If clause 14 caps your liability at $2 million and clause 15 says you indemnify the principal against all loss arising from the services, the two provisions are in tension and the tension will be resolved when it matters least.

Two things fix it. Make the indemnity subject to the cap in terms, and narrow what triggers it.

The trigger is the part consultants overlook. An indemnity against "all loss arising from the Services" is not limited to loss you caused. It can respond to loss that merely has some connection to your work, including loss caused by someone else. Professional indemnity cover generally responds to liability arising from your negligent acts, errors or omissions, so an indemnity drafted more widely than that is one you are funding personally.

The words that do the work are "to the extent caused by the negligent act, error or omission of the Consultant". They convert an open-ended promise into something close to the liability you would have had anyway, which is precisely the point.

Is the cap per claim or aggregate?

A cap expressed per claim can be reached repeatedly. On a project where one design decision produces defects in several elements, a claimant with a motivated lawyer can often frame that as several claims.

Aggregate is the position to hold. If you cannot get it, a cap per claim with an overall ceiling is the compromise worth proposing, because it preserves the client's ability to bring separate claims while keeping your total exposure knowable.

Check the wording rather than the heading. A clause titled "Limitation of Liability" that limits "liability in respect of any one claim" is a per-claim cap regardless of what the heading suggests.

What if the client will not cap at all?

Some will not, particularly on institutional or government work where the form is fixed and the person you are negotiating with has no authority to change it.

That turns a drafting question into a commercial one. Uncapped liability is not automatically a reason to decline a commission, but it should be a reason to price it, and to be explicit internally about what you have accepted.

Three questions worth answering before you sign:

• Does the fee reflect the risk, or the hours? On an uncapped commission those are different numbers.
• Has your broker been told? An uncapped position is relevant to your insurer, and telling them afterwards is worse than telling them now.
• Would this commission survive a claim? If a single bad outcome would take the practice with it, the answer is about the size of your business, not the size of the fee.

The honest version of this conversation is that plenty of consultants sign uncapped agreements knowingly, because the client is good and the work is worth having. That is a defensible decision. Signing one without noticing is not.

A worked example

Take the commission in our sample review: a fee of $180,000 on a Victorian consultancy agreement.

The agreement as drafted had no aggregate cap on liability at all. Against a fee of $180,000, exposure was limited only by what a claimant could prove. Separately, the insurance schedule required $20 million of professional indemnity cover maintained for ten years, while the consultant actually held $10 million.

Two problems, and they compound. Uncapped liability, and a requirement to carry cover the consultant did not have. Signed as drafted, the consultant is exposed on both sides: no ceiling on the claim, and a policy that would not have reached the contractual requirement anyway.

The amendment closed both. Aggregate liability limited to the amount recoverable under the consultant's PI insurance and in any event to $2 million, consequential loss excluded both ways, and the insurance requirement reduced to the $10 million actually held.

Note what the number is anchored to. Not the fee, not the project value, but the cover. That is the anchor to argue from, because it is the one you can evidence with a certificate of currency.

What to ask for

Wording you can adapt and send. The first is the cap itself:

The Consultant's total aggregate liability under or in connection with this Agreement is limited to the amount recoverable under the Consultant's professional indemnity insurance, and in any event to $[amount]. Neither party is liable for consequential or indirect loss.

If the cap is a fee multiple and you cannot move it, add the ceiling:

and in any event not exceeding the limit of the Consultant's professional indemnity insurance

If the carve-outs are broad, narrow them rather than deleting them:

The exceptions in clause [x] apply only to liability that cannot lawfully be limited or excluded.

And the argument to put alongside it, in the covering email:

Our professional indemnity cover is $[amount] and the cap should sit within it. A cap above our cover does not give you more security, it just moves the shortfall to a balance sheet that cannot meet it.

That last point converts more often than any amount of drafting, because it reframes the cap as something that protects the client's recovery prospects rather than only the consultant's downside.

Where this stops being general

Everything above tells you what a fair cap looks like. It does not tell you what is in the forty pages on your desk, whether the cap has been undercut by an indemnity three clauses later, or whether the insurance schedule asks for cover you do not hold.

That is the work that remains, and it is specific to your document.