Engagement terms: a cap that fits

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If there is one much-debated clause in accountants' engagement terms, it is all too often the liability cap

Exclusion clauses in a firm's engagement letters will, if they restrict liability for negligence, be subject to a "reasonableness test" under the Unfair Contract Terms Act 1977 (UCTA).

If a cap falls on the wrong side of UCTA, the court will strike it out completely.

For audit engagements, there is – at least in theory – the separate regime under the Companies Act 2006. Clauses can be rewritten to what is “fair and reasonable”, although very few agreements limiting the auditor’s exposure appear to have been approved in practice. We have seen none tested in court.

So, where does one aim to pitch the level of a cap? Accountants’ engagement letters reach the courts relatively rarely, but the current theme appears to be that robust limitation clauses will be upheld, at least on transactions with sophisticated commercial parties.

In Marplace v Chaffe Street (2006), for example, an (admittedly generous) £20m cap on a claim against solicitors was upheld as reasonable. The judge referred to the equal bargaining position of client and firm; the fact that the clause had been discussed and had not been imposed as “non-negotiable” at the time; and the commercial logic of the cap in light of insurance cover and the nature of the transaction.

Regus v Epcot (2008) was a contractual dispute about air-conditioning which turned on the enforceability of limitations on liability. The Court of Appeal found that a clause in Regus’ standard terms set at 125% of fees or £50,000 (whichever is higher) was reasonable. Epcot’s counterclaim was for some £626m.

In Dennard v PricewaterhouseCoopers (2010), Mr Justice Vos looked at a liability cap of £1m which – while the point was irrelevant because of his earlier findings – he ruled was reasonable. He found that the individual claimants in that case were experienced business people with considerable commercial influence. They knew and understood that accountancy firms customarily limited their liability, and had a choice of advisers, but they had chosen not to negotiate the limitation clause. They could not, he said, be regarded as “innocents abroad”.

Camerata v Credit Suisse (9 March 2011) was a claim against Credit Suisse for (amongst other things) negligent investment advice, successfully limited to “gross negligence, fraud or wilful default”. The client was sophisticated and well-advised; the investments were risky; and it was reasonable for Credit Suisse to wish to protect itself by excluding liability for “mere negligence”.

Shared Network v NextiraOne (9 December 2011) was a contractual claim in relation to network services. The court upheld in that case a cap of 50% of fees paid.

Set against these examples is the recent decision of Ampleforth v Turner & Townsend (27 July 2012) in which a limitation clause set at the fees paid to the construction professional was struck out as unreasonable. The contract there imposed on the firm an obligation to take out professional indemnity insurance of £10m. The limitation clause capped claims at some £100,000. There was no evidence that the clause had been discussed with the client; the client was effectively funding the indemnity insurance through the fee; but the effect of the cap was that the compulsory £10m insurance clause was meaningless. That, the judge said, was unreasonable.

As ever, one needs to be careful in taking too much from any one case. As the courts invariably point out, each contractual dispute will turn on its own terms. To satisfy the UCTA test, the firm needs to show that the cap was fair, given the particular circumstances at the time of the engagement letter, not later.

Ideally, one would be able to back up the commercial logic behind the cap by reference to contemporaneous documentation showing how the allocation of risk was communicated to the client.

If not, one will at least be on safer ground relying on a limitation based on the particular engagement, say by reference to the fees or by value of the transaction, rather than a “catch all” cap applied universally across all service lines. If there is a specific client requirement for a level of indemnity cover (common in public sector work for example), and the limitation falls well short of this, it is all the more important that the cap is highlighted and discussed with the client.

If there is one factor which appears to weigh more heavily, however, it is the bargaining strength and sophistication of the client. The court’s approach will be that much stricter on an engagement with a less experienced client. Where terms are agreed with an entity well-versed in dealing with the profession and with limitations of liability (often since the client relies liberally on such clauses itself), it seems there will be a reluctance on the court’s part to interfere.

All of which perhaps suggests that - at least with commercial clients – firms might pitch caps at a more aggressive level. How easy it is to negotiate those terms in the first place is, of course, another matter.

 

 


Andrew Howell

Andrew Howell is a partner in the commercial disputes team at Taylor Wessing international law firm  


 

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