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Limiting liability for non-audit appointments

A well drafted engagement letter is a crucial tool for all professionals in establishing the scope of their services and – if things go wrong – the extent of their liability to their clients. 

The engagement letter should clearly set out the actual services to be performed and the fees which will be charged. Where the scope of the services change as the work is performed, this should be recorded in a new letter of engagement. Any significant matters that are not going to be covered should also be listed in the engagement letter, although it is better to avoid a lengthy list of exclusions. Most importantly, the engagement letter should be signed by the client to indicate acceptance. 

Many accountants will want to sleep easier at night by introducing a specific limitation on their liability to their clients. Any such limitation should be clearly recorded in the engagement letter. 

‘Fair and reasonable’
Limitation of liability clauses are permitted, but will only be effective if they pass the ‘fair and reasonable’ test in the Unfair Contract Terms Act 1977 (UCTA).The main factors to be considered are: 

  • the strength of bargaining position of the professional and client
  • whether the client was given the opportunity to negotiate
  • whether the client knew about the limitation and what it covered
  • the resources available to the professional to meet a claim, taking into account the cost and availability of insurance cover. 

Unfortunately there are few examples of what the courts will find to be fair and reasonable under UCTA. However there are some basic rules of thumb which can be used as a starting point for deciding whether a limitation clause is likely to be found reasonable. 

To start with, a blanket limitation on any liability for negligence is highly unlikely to be reasonable. This is hardly surprising, when the professional has been engaged to provide the client with the benefit of his expertise. 

A financial cap set at a reasonable level, or one linked to the extent of the professional's indemnity insurance limit, is much more likely to pass the reasonableness test. Limitations that mirror market expectations or common practices are also more likely to be acceptable.  Financial caps linked to the level of fees charged for the work are (in our view) less likely to pass the test. 

Another guideline is that contracts between two commercial or experienced parties are more likely to be considered reasonable than those between a professional and an unsophisticated private individual. 

In one reported case involving accountants who attempted to limit their liability,[1] the court was willing to uphold a limitation of liability clause capped at £1m where the clients were powerful and experienced business people, knew that they could go elsewhere for advice, but chose not to discuss or negotiate the limitation. 

In another case, this time involving construction[2], the professionals were not so successful at limiting their liability. The contract required the project managers to take out professional indemnity insurance for £10m, yet they attempted to restrict their liability to the amount of their fees for the project (£110,000), a fraction of the insurance limit. The judge considered it unreasonable to attempt to limit liability in that manner. 

A more successful clause was drafted by solicitors[3] who successfully limited their liability to the extent of their professional indemnity insurance (£20m) in their contract with wealthy and sophisticated clients who were aware of the limitation and chose not to dispute it. 

Drafting tips

  • clarity is key. Make sure the limitation can be readily understood
  • formulae for limiting liability need to be clear and easy to calculate. Preferably avoid complex formulae in favour of a simple financial cap
  • take account of the nature of the client and nature of the retainer when setting your limitation. Avoid arbitrary or unreasonably low financial caps or caps set by reference to your fees
  • identify what types of claim are covered by the limitation, ie claims in contract, negligence and breach of statutory duty. Do not attempt to exclude liability for claims which cannot legally be covered by limitation clauses, ie fraud
  • if possible, set out several limitations as distinct and separate clauses. That way, if the courts find one limitation unreasonable, the others might still be effective
  • consider limiting your liability to your proportionate share of the loss, taking into account losses caused by other negligent parties, such as other professionals or employees. 

The key message is that the limitation of liability clause must be clear and drawn to the client's attention. Avoid hiding the clause in the small print of standard terms and conditions. Either set out the full clause in your engagement letter, or specifically draw the client's attention to the clause in a covering letter if it appears in the terms and conditions. Always ask the client to sign and return the engagement letter, specifically agreeing to its terms. 

You should be prepared to negotiate the terms of the limitation with your clients. Obviously you must avoid taking advantage of unsophisticated clients. With sophisticated clients, negotiated caps that have been considered and accepted by the clients are more likely to be considered reasonable than those that appear in standard terms and conditions. This does not mean that you should be forcing clients to barter, but a willingness to negotiate in appropriate circumstances will help demonstrate that the limitation clause is fair and reasonable.  

Third parties
Avoiding liability to third parties presents particular problems for accountants. Limitation of liability clauses which appear in the contract between the accountant and client will not be effective as against a third party. It is useful to stipulate in the engagement letter or contract the purpose for which and for whom the work is to be performed, and that the work may not be used for any other person or for any other purpose. Similar provisions in the end product, particularly in any reports prepared by the accountant which may be seen or passed on to third parties, will put another hurdle in the way of a third party claim. Specific disclaimers tailored to risks that have been identified for the particular retainer in question may assist the accountant, but the use of standard disclaimers is discouraged by ACCA. 

Impact of limiting liability
While the possibility of limiting liability may make some accountants sleep easier at night, it is still challenging to agree appropriate liability levels with clients which will pass the ‘reasonableness’ test in the courts. Devoting time and thought to the level of limitation you seek to agree with your clients should safeguard your client relationship and provide protection for you and your firm in the future. 

In summary
The key points for limitation of liability clauses are: 

  • make sure it is clear and unambiguous
  • set financial caps at reasonable levels
  • take the nature of the client and retainer into account
  • be willing to negotiate the terms of the clause
  • expressly incorporate the clause into the contract of engagement
  • draw it to the client's attention. 

Ian Peacock – partner, Bond Pearce LLP (on behalf of Lockton Companies LLP) 

Further information
ACCA’s Technical Factsheet 173 provides further, detailed, information on engagement letters for tax practitioners.

[1]Dennard v PricewaterhouseCoopers LLP [2010]

[2]The Trustees of Ampleforth Abbey Trust v Turner & Townsend Management Ltd [2012]

[3](Marplace (No 512) Ltd v Chaffe Streedt [2006]

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