Top City trio use claim caps in auctions

The City's top law firms have begun routinely capping their liability against future negligence claims in response to the explosion in auction-driven corporate deals, it has emerged.

Magic circle firms Slaughter and May, Clifford Chance and Freshfields Bruckhaus Deringer have all admitted to Legal Week that they frequently look to cap their liability on vendor due diligence reports they produce for bidders in M&A auctions.

The top-level trio are agreeing the caps based primarily on deal value, with £25m cited as a common claim limit by one senior partner.

One magic circle partner commented: "Vendor due diligence is becoming more popular as part of the auction package and we view it as an increased risk. In the cases we have done [this work] in the past, we have capped our liability and will look to do the same in the future."

The admission is the clearest indication yet that the practice of agreeing liability caps in individual deals, which has been pioneered by mid-tier law firms, is now being adopted by London's legal elite.

The practice, which has become common in the accountancy profession, has until recently been considered a professional taboo for lawyers and remains a highly sensitive issue. Many lawyers have also argued that clients will resist its use in major corporate deals.

However, partners at the three firms stressed the move was a specific response to recent demand for vendor due diligence, the reports produced by the selling or target company for bidding parties.

The reports, regarded as having put lawyers in an unclear position in terms of duty of care, have become common with the recent vogue for corporate auctions, notably in the private equity sector.

Another magic circle corporate partner commented: "Accountants have been limiting their liability for years and we are starting to adopt the same approach. It is not yet the market norm but many of our clients are sympathetic."