A checklist of points to consider
Like many other providers of goods or services, professional accountancy firms often seek to limit their potential liability to their clients by including limitations or exclusions of liability in their engagement letters.
This is good risk management practice – as long as it is done carefully and effectively. Not everyone is aware of the extent to which they are able to restrict or exclude liability; the danger is that if get it wrong, you may have any unreasonable contractual provisions struck out, leaving you with unrestricted liability.
Moreover, the recent Consumer Rights Act has also introduced new restrictions on 'consumer' contracts (ie those other than with sophisticated commercial or corporate clients).
You should ensure that your terms of engagement meet the requirements of this recent legislation. We therefore recommend that you consider the important matters below to check whether your client engagement letters are working properly for you.
A limitation or exclusion clause may be regarded as being unenforceable if it is not fair and reasonable. What is fair and reasonable will depend on all the circumstances.
The Consumer Rights Act (s57) requires that you do not limit your liability below the value of your fees for a particular matter. This is a good benchmark to use as a minimum standard for all client engagements.
Firms cannot seek to exclude liability entirely to the client. A more common approach is to limit a firm’s liability in the engagement letter to a fixed amount (often described as a ‘cap’ on liability).
A cap set at a higher level is more likely to be enforceable and to protect the firm than a very low cap, and should be proportionate to the nature of the transaction and potential client loss. (In some cases, the loss may well be capable of being higher than a multiple of the fees you charge.)
When negotiating limitations or exclusions, firms need to balance the importance of limiting liability against the risk of any limitation or exclusion being held to be unfair or unreasonable.
In deciding what negotiating position to adopt, firms should take into account the nature of the client, the appointment and remit, and the overall commercial risk analysis.
In a case called Dennard vs Price Waterhouse, the court accepted that a relatively low limit of liability was reasonable, given that the clients were experienced business people who were aware of their ability to shop around.
A cap on liability that has been discussed and negotiated is likely to be regarded as more reasonable than a non-negotiated cap. Where a cap on liability is accepted without discussion, it is not necessary for firms to try to insist upon negotiation by clients but, where possible, the client should be given sufficient time to consider the matter and/or take legal advice.
It should be made clear whether the cap is an aggregate limit on liability, or applies separately to each breach or each claim. It may be appropriate for the cap to reflect the wording of any aggregation provision in the firm’s professional indemnity insurance.
It is good practice to document any negotiations concerning engagement terms and to keep a record of them on the relevant file. In particular, it is worthwhile recording any concessions made by the firm – for example, any upward adjustment to a limitation amount that was initially proposed.
In a recent case called Halsall & others v Champion Consulting & others, the fact that the engagement terms had been negotiated enabled the accountants to demonstrate that their limitation of liability was reasonable.
Any limitation of liability agreed with the client should be set out clearly in the engagement letter. Where a firm’s engagement letter comprises the firm’s standard terms, together with a covering letter, it would be sensible to draw attention to the cap on liability by referring to it in the covering letter.
Firms should consider taking their own legal advice on the drafting of any clause in the engagement letter that purports to limit liability. The following points of principle may assist firms:
It may be appropriate to seek to exclude liability for certain types of loss altogether.
Common examples are:
ACCA has a suite of template engagement letters and factsheets which are available to members. More information can be found here.
To discuss your own client engagement processes or another risk-related matter in more detail, contact Catherine Davis, ACCA relationship manager ,on 0117 906 5057 or email ACCAaccountants@uk.lockton.com.
Lockton Companies LLP is authorised and regulated by the Financial Conduct Authority. Lloyd’s broker. Registered in England & Wales at The St Botolph Building, 138 Houndsditch, London EC3A 7AG, Company No. OC353198.
This article has been prepared for Lockton by Ian Peacock, Partner Clyde & Co LLP