New York courts have frequently applied the continuous representation doctrine (“CRD”) to toll the three-year statute of limitations period for malpractice claims against accounting firms under CPLR § 214(6), which has exposed accounting firms to additional – and unwarranted – liability. But with two recent rulings by New York’s Appellate Divisions, accounting firms likely will be able to better shield themselves against the deleterious effects of the CRD by inserting into their engagement letters a contractual limitations provision and a merger clause.
The CRD is a court-created doctrine, originating in the medical malpractice context, that tolls the statute of limitations period where there is a “mutual understanding of the need for further representation on the specific subject matter underling the malpractice claim.”1 Courts in New York have varied widely on what that phrase actually means when applied to accountants and accounting firms. This inconsistency has led to increased uncertainty, making it difficult for accountants and accounting firms to limit their liability and to avoid the damaging effects of the CRD. A path to a more consistent approach to limit liability, however, has just been revealed.
Until recently, New York courts have not specifically analyzed the CRD in connection with a contractual limitations provision (as opposed to the legislatively created statute of limitations). But the New York Appellate Division, First Department, and the New York Appellate Division, Second Department, have both recently indicated that the CRD does not toll a contractually agreed-upon limitations provision. These decisions thus provide a framework for accountants and accounting firms to avoid the CRD and limit their liability.
In Aaron v. Deloitte Tax LLP, 149 A.D.3d 580, 581 (1st Dep’t 2017), the New York Appellate Division, First Department, affirmed the trial court’s refusal to apply the CRD to toll the parties’ one-year contractual limitations provision to allow a complaint to be filed six years after the purported caused of action accrued. The First Department stated that “plaintiffs may not avail themselves of the continuous representation tolling doctrine because the limitations period was contractual, not statutory, and was reasonable.” Id. The First Department affirmed the trial court’s reliance on the language of the parties’ engagement letter, which stated: “no action, regardless of form, relating to this engagement, may be brought by either party more than one year after the cause of action has accrued.”2 The First Department thus expressly found that the contractual limitation provision was a strict bar to the CRD. In addition, as an important practice point, it should be noted that the First Department found “reasonable” the one-year contractual limitation period despite the statutory three-year period under CPLR § 214(6).
In Collins Brothers Moving Corp. v. Pierleoni, 2017 N.Y. App. Div. LEXIS 7661, at *6 (2d Dep’t 2017), the New York Appellate Division, Second Department, also found that the CRD did not apply in connection with the accounting firm’s contractual limitation provision, but had a different rationale than the trial court. The trial court focused solely on the language of the contractual limitation provision in the parties’ engagement letters, which stated: “no action, regardless of form, arising out of the services under this agreement may be brought by either of us more than three years after the date of the last services for the year in dispute provided under this agreement.”3 The trial court determined that this language, in conjunction with a merger clause contained in the parties engagement agreements, demanded that the CRD be inapplicable. The existence of the merger clause was crucial to the trial court’s decision, as the trial court determined that the merger clause precluded the introduction of extrinsic evidence to demonstrate a mutual understanding outside of the parties’ written agreements. The Second Department affirmed the trial court’s ruling that the CRD was inapplicable, but it did so because it found that the plaintiffs’ allegations were conclusory and that the plaintiffs failed to raise an issue of fact that the CRD should apply. Importantly, however, the Second Department did not object to the lower court’s reasoning, and the Second Department did rely on the language of the contractual limitations period to limit the scope of the plaintiffs’ purported claims.
As a result of these recent cases, accounting firms now have the opportunity to better protect themselves against potential liability created when courts choose to arbitrarily impose the CRD to toll a statutory period of limitations. These decisions suggest that accountants and accounting firms can proactively avoid the application of the CRD, and the potential additional liability it imposes, by including in the firms’ engagement letters a contractual limitations clause and a merger clause. And as a practice pointer, accountants and accounting firms can further limit their liability with a contractual limitation provision that is shorter than three years.