The ability to contractually limit liability, such as tort liability, continues to be an area ripe for appellate courts to clarify.[1] There remains a degree of uncertainty about whether and when a limitation of liability clause will be enforceable. The latest development comes from the British Columbia Court of Appeal (“BCCA”) in Felty v Ernst & Young, which considered a limitation of liability clause in the context of an agency relationship.[2] In that case, the BCCA called the question of enforceability of so-called exclusion clauses “vexed”[3] but ultimately concluded that the clause in that case was enforceable: recovery was limited to the fees paid to a tax advisor.

Background and Decision Below

Ms. Felty entered into a global divorce settlement, formalized in a court order based in part upon US tax advice from Ernst & Young LLP (“EY”). Ms. Felty’s lawyer had retained EY to provide US tax advice. EY’s engagement agreement was signed by and in the name of the lawyer and her Vancouver law firm who represented Ms. Felty in the divorce litigation (the “Engagement Agreement”). The Engagement Agreement contained a limitation of liability clause which limited EY’s total liability to its client for any claim arising out of the performance of its services to the total fees paid, regardless of the form of claim.[4]

Pursuant to the Engagement Agreement, EY advised Ms. Felty’s lawyer that she did not have to pay any US tax on a proposed transfer of shares in a divorce settlement offer. Based on this advice, Ms. Felty and her solicitor approached the divorce settlement on the basis that Ms. Felty would not be liable for any US tax on the transfer of shares. A settlement was reached and a consent order entered.

EY’s tax advice was erroneous and Ms. Felty was liable for $544,106 USD in US tax for the transfer. Ms. Felty sued EY in negligence, which was effectively conceded by EY at the start of trial.[5]

The trial judge held, inter alia, (1) Ms. Felty was bound by the terms of the retainer agreement with EY, as her agent and lawyer had signed it on her behalf, (2) the limitation of liability clause was enforceable and (3) awarded $15,314.95 in damages, being the amount Ms. Felty paid in fees to EY.

Issues on Appeal

On appeal, the BCCA considered whether:

  1. Felty was contractually bound by the Engagement Agreement;
  2. The limitation of liability clause was unenforceable on public policy grounds; and,
  3. Damages were limited to the amount of fees paid to EY.

Ms. Felty was Contractually Bound by the Engagement Agreement

In Felty, the BCCA first addressed whether Ms. Felty, whose agent had signed the Engagement Agreement, could be held to have contracted with EY. In finding that Ms. Felty was contractually bound, Justice Newbury, for the Court, relied on the seminal English case of Bridges & Salmon Ltd v The Swan (Owner), for the proposition that, where A contracts with B on behalf of C (a disclosed principal), the question of whether both A and C are liable on the contract, or only C, depends on the intention of the parties.[6]

The Court examined the objective intention of the parties and, in particular, the solicitor–client relationship between Ms. Felty and her lawyer.  The Court agreed that not every contract entered into by a law firm in the course of its business is undertaken as an agent for a client, but in these particular circumstances, Ms. Felty was specifically referred to in the Engagement Agreement, her identity and circumstances made known to EY. EY provided its advice for her benefit as an individual, and with Ms. Felty’s knowledge and approval.[7]

The Court concluded that, on the balance, Ms. Felty was contractually bound to the Engagement Agreement by her lawyer.

The Limitation of Liability Clause was Not Unenforceable on Public Policy Grounds

The BCCA then addressed whether public policy grounds would render the limitation of liability clause unenforceable, applying the analytical approach set out by the Supreme Court of Canada in Tercon Contractors,[8] commenting:[9]

The question of the enforceability of so-called exclusion clauses (which term has been extended to limitation clauses like Clause 15), has vexed Canadian courts for some time. The question is often encountered in conjunction with arguments based on unconscionability … and fundamental breach, and has often been overshadowed by those principles.

The Court was unmoved by Ms. Felty’s argument that the desirability of holding professional advisors to a higher standard of diligence was an “overriding” public policy that justifies exercise of the court’s power to refuse to enforce limitation clauses. In British Columbia, the Legal Profession Act, voids clauses in which lawyers seek to limit their liability for negligence or for any responsibility to which the lawyer would otherwise be subject.[10] The Chartered Professional Accountants Act contains no such similar provision.

The Court commented that the discretion to refuse to enforce such clauses is confined to cases which are compelling or overriding. Exclusion clauses will be invalided on the basis of public policy where the party seeking to rely on an exclusion clause knew it was putting the public in danger, was reckless as to whether it was putting the public in danger, or the conduct was so reprehensible that it would be contrary to the public interest to allow it to avoid liability.[11]

The circumstance in Felty did not rise to the level of reprehensible conduct that it would be contrary to the public interest to allow EY to avoid liability. Accordingly, the appeal was dismissed and the award of damages in the amount of $15,314.95 was undisturbed on appeal.

Implications

The BCCA’s consideration of the limitation of liability clause in an agency context presents a new twist in the case law in this area. Decisions of the Supreme Court of Canada on limitation of liability clauses have focused on when to relax privity, absent the traditional exceptions of agency and waiver.[12] In Fraser River, the Supreme Court of Canada declined to approach limitation of liability clauses from agency law (as the BCCA below had done), instead adopting the relaxation of the doctrine of privity set out in London Drugs.[13] What Felty makes clear is that when principals are contractually bound to third parties by their agents acting on their behalf, they are also bound by limitation of liability clauses. When signing contracts on behalf of a principal, agents, (including lawyers on behalf of their clients) should be aware of limitation of liability clauses and consider their potential implications fully.

Case Information

Felty v Ernst & Young, 2015 BCCA 445

Docket: CA40959

Date of Decision: October 28, 2015