In an increasingly litigious society, the accountancy industry is well aware that the provision of accountancy services can give rise to a broad spectrum of potential claims. It is often necessary for accountants to rely on contractual terms that limit liability but developing such terms can be something of a legal minefield. Statutory restrictions prohibit clauses that limit liability too widely but do not provide definitive guidance as to what form of clause will be upheld or struck down by the courts.
Recent cases such as the much publicised Mehjoo v Harben Barker  have reiterated the importance of a well drafted retainer letter, which is continually kept under review. Any confusion about an accountant’s duties or instructions can lead to an accountant being held liable far outside the scope of initial instructions. A carefully constructed engagement letter should clearly set out these duties plus any limits on liability and is an extremely useful tool for striking the difficult balance between protecting against liability and falling foul of statutory restrictions.
The ICAEW and ACCA recognise the risks of accountants being exposed to unlimited liability and have provided useful guidance (available via their respective websites) on limiting liability in a way that is unlikely to contravene statute.
The ICAEW makes a number of recommendations on limitation clauses in engagement letters. It particularly advises that the clause is clear and in writing, as well as discussed and negotiated with the client. It allows that accountants are entitled to be robust in negotiations over limiting liability but should avoid being unfair or unreasonable particularly where clients are in a lesser bargaining position. The emphasis is on the nature of the client, the work and the overall commercial risk. Practically, the ICAEW suggest specifying which tasks will and will not be undertaken, specifying client obligations (eg to ensure information provided is accurate) and setting out any limitations on the work such as limited time or lack of information with an explanation of the potential impact of those limitations.
The ACCA guidance is similar but also addresses the situation in which a client requires complicated advice in very short space of time. ACCA suggests specifying the impact of the short time frame, recommending that further time is devoted to the advice and warning against relying on the advice without further consideration unless there is a genuine emergency.
The Unfair Contract Terms Act 1977 (UCTA) provides that all clauses seeking to limit liability for negligence must meet the requirements of the reasonableness test. There is a parallel test for consumers in the Unfair Terms in Consumer Contracts Regulations 1999. The test requires the term to be fair and reasonable in all the circumstances that were (or should have been) in the contemplation of the parties at the time the contract was made. A range of factors are taken into account, including:
- the relative bargaining strength of each party
- whether the client was induced into entering the contract
- whether the client knew or ought to have known about the term
- the likely resources available to the person limiting liability to meet the liability if it arises
- how far it was open to the person limiting liability to obtain insurance cover.
Any clause failing to meet the test will be struck out entirely. This is the key cause of concern for accountants attempting to cap liability, as pitching an amount too low could lead to an accountant having no limit on their liability. It is essential for all such terms to be entirely separate so that removing the clause does not affect the other terms of the engagement (retainers might include standard wording that states that if one term is deemed ineffective, it will not affect any of the others). Providing a rationale for the value of caps (such as a sum linked to an accountant’s insurance cover or to a multiple of the fees paid) is particularly helpful towards showing that a cap meets the reasonableness test.
Those accountants carrying out audit work will be subject to a different statutory regime under the Companies Act 2006. These rules require new terms every audit year along with shareholder approval for any limitation clauses and allow terms that fail the fair and reasonable test to be amended to an amount the Court considers reasonable.
The Consumer Rights Act, which came into force in October 2015, also applies a new regime for those clients who are acting mainly outside of their business or profession (for example, trustees of self-invested personal pensions) along with an additional rule prohibiting caps on liability that are lower than the fees paid.
Guidance on UCTA
Case law on limiting liability has demonstrated that much will depend on the specific set of circumstances and the relationship between the parties. In Dennard v PricewaterhouseCoopers  a liability cap of £1m was permitted. Although the parties were not of equal bargaining power, the clients were still experienced business people who ought to have known about the cap and could have taken their business elsewhere. In Ampleforth Abbey Trust v Turner & Townsend Project Management Limited , it was held that a cap of £110,000 (set at the amount of the fees paid) was unreasonable given that the required level of indemnity insurance for the project was £10m.
It appears that clauses limiting liability to a share of the loss proportionate to the work done are likely to be found reasonable, particularly where it is contemplated that there will be other parties carrying out related work for the client (West v Ian Finlay & Associates ). This type of limit is a useful means of excluding the usual rule of joint and several liability that can require parties to meet a claimant’s full loss even if another party is also at fault. By contrast, wholesale exclusions of a particular type of liability are less likely to be found to be reasonable, even where the type of liability may appear less relevant, such as liability for indirect loss (IDS Building Distribution Ltd v Hillmead Joinery ).
These cases give a flavour of how the UCTA reasonableness test will apply. In most circumstances, evidence of clear communication with clients, sound commercial reasoning for limits and considering each client’s level of commercial sophistication will provide accountants with the best chance of their limitation clause being upheld.
Though limitation clauses are a well-established part of most accountancy firms’ standard terms, a blanket approach cannot necessarily be applied to limiting liability for all clients. It may not be commercially viable to apply highly tailored provisions to every set of instructions but accountants can provide a benchmark by, for instance, applying caps that provide multiples of the amount of fees paid. The focus on clients’ commerciality and bargaining position allows accountants to apply wider restrictions on liability for those commercially advanced clients who are most likely to negotiate on such terms. Wherever the limit on liability is eventually set, it is crucial to ensure that clients are clearly informed of it. Finally, it is worth remembering that prevention is better than cure. It is possible to avoid certain claims altogether by clearly defining the scope of engagement at the outset, reviewing the scope regularly and ensuring that an accountant acts within the scope of its engagement throughout.