Lockton sets out the do’s and the don’ts
Accountancy firms often seek to limit their potential liability to their clients by including limitations or exclusions of liability in their engagement letters. While this is good risk management practice, it must be done carefully and effectively.
Restrictions or exclusions that go too far may unreasonably reduce liability – and if struck out, could leave liability unrestricted.
The most common approach is to limit a firm’s liability in the engagement letter to a fixed amount (often described as a ‘cap’ on liability). Caps can be negotiated or non-negotiated, and may apply as aggregate limits upon liability, or may cap the amount of each separate breach or claim.
Alternatively, it is possible to seek to exclude liability for certain types of loss altogether. Common examples are:
Firms may also seek to restrict or exclude certain types of liability that are also excluded under the firm’s professional indemnity (PI) policy, provided this is not inconsistent with the duties for which the firm is being engaged.
In any negotiation, firms need to balance the importance of limiting liability against the risk of any limitation or exclusion being held to be unfair or unreasonable. Where that is the case, those limitations or exclusions may be considered unenforceable. This could leave firms with unrestricted liability, creating significant exposure to any potential claim.
Determining a fair and reasonable exclusion is dependent on circumstances. 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.
Crucially, firms cannot seek to exclude liability entirely to the client. The Consumer Rights Act requires that firms do not limit liability below the value of their fees for a particular matter. This represents a good minimum standard for all client engagements.
Where firms seek to place a cap on liability, these 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 charged). A cap on liability set at a higher level is more likely to be enforceable, and thus to protect a firm, than a very low cap.
Firms should take their own legal advice on the drafting of any clause that purports to limit liability. However, the following principles may be of assistance:
Ultimately, 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 any cap by referring to it in the covering letter.
Catherine Davis – ACCA Relationship Manager, Lockton
If you have any questions about professional indemnity insurance, please contact your Lockton Account Manager for further advice or email ACCAaccountants@uk.lockton.com.
Lockton is ACCA’s recommended broker for professional indemnity insurance