Enforceability of Engagement Letters

New Regulations came into effect of 13 June 2014 which supersede two previous sets of regulations that we have previously provided guidance on.

The affected areas are:

  • The Consumer Protection (Distance Selling) Regulations 2000; and
  • The Cancellation of Contracts made in a Consumer's Home or Place of Work etc. Regulations 2008.

The new regulations are the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. They only apply to contracts between “traders” (practitioners) and “consumers”.The full Regulations can be found here.

Cooling off period notification

The Regulations introduce changes to information which needs to be provided to a consumer and amendments relating to "cooling-off" periods (extended to 14 days – it was previously 7 days). Failing to give the consumer the relevant details about their right to cancel carries serious consequences - the 14 day period is automatically extended to 14 days after the practitioner eventually provides the consumer with details of this right or, if the information is never provided, to 12 months and 14 days. In addition, non-compliance with the Regulations will now be treated as a criminal offence and the practitioner is liable to being fined up to £5,000.  Any practitioner who is unsure whether the Regulations apply in a specific matter should take specialist legal advice.

Furthermore, a failure to comply with the Regulations may mean that, not only will the practitioner be unable to enforce payment of outstanding fees, but also that any limitation of liability included within the engagement letter would not be effective.  

This Guidance is only a summary of the Regulations and requirements and practitioners should form their own views of whether the Regulations will apply to their situation and take steps to comply with them. It is interim Guidance only as it will ultimately be encompassed in the update of the Engagement Letters for Tax Practitioners guidance which is currently being conducted by the joint professional bodies’ working party.

Which types of client are affected?

In short, the Regulations apply where a practitioner acts for a consumer.  In practice this means that a practitioner should always consider whether the Regulations apply where he acts for an individual in relation to that individual’s personal affairs.  Practitioners should be aware that this will include cases where they act for directors of company clients (for example, in relation to the directors’ personal affairs as well as for clients who specifically instruct them in relation to their personal affairs).  

 If the practitioner acts for a consumer (as defined) then he must consider whether the Regulations apply. This will require a consideration of where the contract was made and whether the client had met the adviser in person before the contract was entered into.  Practitioners should be aware that a contract may well be entered into before the engagement letter is sent to the client.  The engagement letter is evidence of the terms of the contract, but not necessarily the contract itself.  

The Regulations envisage three types of contract:

  • A distance contract (not face-to-face);
  • An off premises contract (not at the Practitioner’s business premises);
  • An on premises contract (neither of the above).

Engagement letters

Note that for all contracts, the engagement letter must set out specific information which is set out in Schedules 1 and 2 to the Regulations but that this includes the practitioner’s complaints handling policy, confirmation of how the contract may be terminated and the existence of any relevant codes of conduct and how copies of them can be obtained.  

Cancellation notice

If the contract is a distance or off premises contract then the client must be sent a cancellation notice (an example template from the Regulations is attached).  

The notice has to be in writing.  If the client has not sent a cancellation notice when he is entitled to then the contract may be unenforceable by the practitioner against the client.  

The client has 14 days to cancel his contract commencing on the date that the contract is made.  Until the cancellation period expires, the client can cancel the contract and may not be required to pay any fees to the adviser for the work done in that period unless he has made a written request for the performance of the contract to begin before the end of the cancellation notice.

Regulations exist which may render any engagement letter issued by a practitioner unenforceable by the practitioner against his client (although the clients may still be able to enforce against the practitioner).  A failure to comply with the Regulations therefore may mean that, not only will the practitioner be unable to enforce payment of outstanding fees, but also that any limitation of liability included within the engagement letter would not be effective.  

The practitioner should consider whether to include in their file opening forms a check list to establish whether a client is a consumer and if so whether the contract is a distance or off premises contract so as to ensure that the appropriate notice is sent to those clients, to preserve the enforceability of the contract terms (and recovery of fees) against their client.