It’s all in the small print – limiting accountants’ liability

Accountants are pretty savvy when it comes to limiting their potential liability exposure. When examining any claim against an accountant it is essential to consider the retainer at the outset, not only to identify the contractual relationships arising, but also to establish whether an agreement exists to either limit the scope of the retainer or cap liability. The question then is whether the limitation of liability or cap is enforceable.

Scope of duty

Retainer letters will usually set out precisely what the accountant has agreed to do, and sometimes more importantly what they have specified they will not be doing. Mills & Reeve recently acted for the successful defendant at the Court of Appeal in Minkin v Landsberg, in which the claimant argued that the defendant solicitor who was instructed solely to draft a consent order should have gone further and advised the claimant on the merits of her claim. Jackson LJ examined the nature and scope of the retainer and confirmed that it was indeed limited.

However, a word of warning. The larger or more specialised the firm, the greater chance that the court will impose a higher burden on the standard of care owed under the retainer. In the recent decision of Altus v Baker Tilly Tax and Advisory Services LLP, Judge Keyser QC referred to a broader duty for practices holding themselves out to be specialists: “The defendants are reasonably to be expected to have much greater technical resources than an “ordinary firm” and as a result to be aware of relevant impending changes to tax legislation.”

So how is it possible to limit liability and how do accountants seek to do so?

Limitations are incredibly varied throughout the industry. If contested, all disclaimers or limitations of liability will be tested against the provisions of the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contract Regulations. The fundamental test for both is that the clause must satisfy the requirement of reasonableness.

There is little in the way of decisions on the efficacy (or otherwise) of limitations in accountants’ retainers. Some guidance was provided in the decision of Killick v Pricewaterhouse Coopers where the judge listed the factors that may be relevant in determining reasonableness: 

• The way in which the term came into being and is used generally. 
• The strength and the bargaining position of the parties relative to each other. 
• Whether the client had an opportunity of entering into a similar contract with other persons without having to accept a similar term. 
• How far it would have been practical and convenient to go elsewhere. 
• The reality of the consent to the customer to the term. 
• The size of the limit compared with other limits and widely used standard terms. 
• The availability of insurance to the suppliers. 
• The possibility of allowing for an option to contract without the limitation clause but with a price increase in lieu.

To assess the effectiveness of any limitation, the contract will need to be considered against the wider relationship between the accountant and client and whether the limitation or exclusion has actually been incorporated into the contract.

Caps on liability

Capping liability is a commonly adopted approach. Whether it is possible to do so depends on the term and the value of the transaction. We have seen attempts to cap liability at a multiple of the fee and in our view, it is highly unlikely that such a cap would be enforceable.

However, caps which limit liability to the amount of the accountants’ professional indemnity insurance are much more likely to be considered reasonable. Again, this will turn on the nature of the retainer and the bargaining position of the parties.

Third parties

Accountants’ retainer letters usually provide that services are for the benefit of the client only. Such express disclaimers of responsibility to third parties are common and can be effective where the accountant has no knowledge that the client will be passing its advice/report to a third party. The point was tested in the recent decision of Barclays Bank Plc v Grant Thornton UK LLP in which Cooke J considered and upheld a third party disclaimer. Factors considered to be relevant to the disclaimer being judged reasonable were the respective commercial strength of the contracting parties, the history of inclusion of disclaimers within previous reports and the fact that the disclaimer appeared on the front page of the report.

Auditors

Since 6 April 2008 auditors have been permitted to agree an indemnity with a company for the costs of successfully defending civil or criminal proceedings. This is now standard industry practice. It follows that when dealing with a claim against an auditor, it is worthwhile checking whether there are any indemnities or liability limitation agreements in place, with a view to extinguishing or limiting exposure.

Practice points

• The starting point for your assessment of an accountant’s exposure is the retainer letter. Do the terms (a) narrow the scope of what it was responsible for doing (b) exclude, limit or cap its exposure for claims and/or (c) was the retainer superseded by events/correspondence? 
• Think about whether the insured can rely on these terms. Were they properly brought to the client’s notice? Are they reasonable based on all the circumstances and especially the relationship between the parties? 
• Relying on onerous limitations of liability or caps will rarely be straightforward, especially in the larger claims. But remember they can be used as potent weapons when attacking the basis and/or value of claims from the outset as well as strong negotiation levers.