Making the Case for Limitation of Liability Clauses
Beyond Numbers · May 2007
By David Wende, LL.B.
Editor: David Wende is a senior partner with the law firm of Alexander Holburn Beaudin & Lang LLP in Vancouver, and has worked with CAs since 1980. He has published several articles in Beyond Numbers and CAmagazine on professional liability matters. The ICABC encourages members to consider Wende’s argument that practitioners need to better protect themselves by using specific language in their engagement letters, but also reminds members of their professional obligations to consider clients’ interests, recognizing that this is a delicate balance. An example of the challenge in balancing both interests is the fact that the CRA reassessment period can vary, and can be longer than the limitation period recommended by Wende.
In the 20 years that I have participated in ongoing professional development for the ICABC, I’ve stressed the importance of including in engagement letters multiple terms that limit the liability of the CA or firm for any errors or omissions in their professional services.
A longstanding concern for the CA profession is the lengthy period during which a CA may remain potentially liable to a client for any past errors and omissions they’re alleged to have made. This concern continues to increase as many current members near retirement—no one wants to be exposed to the burden of defending claims during their retirement years. Unfortunately, in the absence of any limiting language within the engagement letter, the potential for such liability remains.
Our courts have traditionally viewed clauses that exclude liability as repugnant, arguing that a defendant should not be able to avoid all liability for non-performance of a contractual obligation. However, the courts have looked more favourably on contractual terms that purport to limit, rather than eliminate, the liability of the non-performing party.
As set out in the British Columbia Limitation Act, the basic limitation period permits only a six-year window in which to bring a claim following a breach of contract; however, actions based on the negligent performance of professional services are not governed by the same rules of law. Section 6(3) of the Limitation Act provides for an extension of the time in which to commence the action based on the concept of “discoverability.” Herein lies the exposure risk.
Let’s assume, for example, that review engagements were carried out by a CA firm for the years 2000-2002, and substantial employee fraud occurred during this time but went undetected until 2007. BC’s Limitation Act provides that an action could be brought against the CA firm for negligence and breach of contract in the performance of the 2000-2002 review engagements six years after the fraud was first “discovered” and the client might reasonably have sought professional and legal advice. Imagine, in such circumstances, having to wait until at least the year 2013 to know whether or not an action is possible.
For years, I’ve been suggesting that a clause addressing this very concern be added to every engagement letter. Borrowing the language from similar terms employed by architects in their standard form agreements for decades, I have suggested language such as the following:
You [the client] agree that our liability for all claims you may have or bring in connection with the professional services rendered arising out of or ancillary to this agreement shall absolutely cease to exist after a period of four years from the date of:
- performance of this engagement;
- delivery to you of our Review Engagement Report, your financial statements, or the completion of the preparation of any tax filing with any government authority;
- suspension or abandonment of this engagement; or
- termination of our services pursuant to this agreement,
whichever shall occur first, regardless of whether you were aware of the potential for making a claim against us within that period. Following the expiration of the aforesaid period, you agree that neither you, your agents, or assigns shall make any claim or bring any proceeding against us.
As I mentioned, similar wording has been used in architectural agreements for many years; only recently, however, has this language been tested and upheld in our courts. Fortunately, two very recent decisions make clear the enforceability of such a clause.
In The Board of School Trustees v. Kellick Mets Bowen Rose Architects and Planners (2007 BCSC 28) and The Board of School Trustees of School District #72 (Campbell River) v. IBI Group Consultants Ltd. et al, 2007 BCSC 280, the British Columbia Supreme Court was asked to consider the effect of similar language employed in the standard form agreements entered into between the respective school districts and their architects. In both cases, the standard form agreements provided for any action to be brought within six years of a defined benchmark in time, but the architects were being sued for problems due to water leakage issues and other related deficiencies discovered long after the end of these six-year terms.
In both instances, the BC Supreme Court dismissed the actions against the architects on a summary basis, without the need of a trial. In each case, the Court held that there was nothing ambiguous in the language of the clause, nor in the intent of the parties with regard to the architectural agreements. In rendering these judgments, the Court looked for guidance to earlier decisions of the Supreme Court of Canada in which our highest court acknowledged the liberty and commercial flexibility of permitting the parties to any agreement to waive the duties or obligations that the common law would otherwise impose. Except in circumstances where such a limited liability clause was unconscionable or not clearly disclosed within the contract, the clause would not be deemed void—even for public policy reasons.
These decisions involving the standard form architectural agreement have thus set an important precedent for the CA profession, permitting CAs to limit their exposure to a reasonable time frame following the completion of their professional services. With this precedent comes some measure of certainty and peace of mind.
I must caution, however, that my suggestion to include a limited liability clause in engagement letters refers to private enterprise clients only. Use of such language in the engagement letter of a public company client would likely be inappropriate and unacceptable to regulatory authorities. In the US, the SEC has deemed that any limitation of liability clause in engagement letters impairs auditors’ independence.
This topic will be discussed further at a free risk management seminar sponsored by the ICABC and the Association of Insured Chartered Accountants (AICA) on June 18, 2007, in Vancouver. At this seminar, I will present sample engagement letters containing limitation of liability clauses that, in combination, limit the time and amount of liability, as well as the number of parties within a professional accounting firm who may be the subjects of a civil claim. I encourage you to attend this free PD session, which will also explore other risk management topics for public practitioners.
David Wende, LL.B., is a senior partner with the firm of Alexander Holburn Beaudin & Lang LLP, and leads a practice that focuses primarily on helping CAs fulfil their professional obligations according to the law and as members of the ICABC. Wende also acts as counsel to the ICABC itself.
ICABC advocates changing BC’s liability regime
BC’s liability regime is an ongoing problem for CAs and other professionals. While David Wende suggests a way to mitigate one of the liability issues faced by practitioners, we believe this is, at best, a temporary fix, and that the real solution lies in changing the province’s legislation.
British Columbia’s Limitation Act has remained unchanged since its inception in 1975. Since 1990, numerous studies and organizations have recommended reform. At the same time, other jurisdictions, such as Alberta, Saskatchewan, and Ontario, have modernized their limitation acts to shorten and define the commencement and duration of basic and ultimate limitation periods. By comparison, BC’s legislation is woefully behind the times.
With the advent of TILMA, the BC-Alberta Trade, Investment, and Labour Mobility Agreement (Beyond Numbers, November 2006), both governments have resolved to enhance overall competitiveness and reconcile existing standards and regulations that restrict or impair trade, investment, or labour mobility. As Alberta’s current Limitations Act sets out a basic limitation period of two years and an ultimate limitation period of ten, TILMA provides a great opportunity for the BC government to modernize our legislation.
Fortunately, our government has risen to this challenge and is currently undergoing a comprehensive policy consultation process to reform the Limitations Act.
The ICABC strongly supports reform, and is encouraging the government to adopt two-year basic and ten-year ultimate limitation periods. In partnership with the Consulting Engineers of BC, the Architectural Institute of BC, and the Association of Professional Engineers and Geoscientists of BC, the ICABC has submitted a position paper outlining our concerns with the current legislation (www.ica.bc.ca/kb.php3?catid=396).
In addition, the ICABC has submitted feedback electronically to the Ministry of the Attorney General as part of a stakeholder consultation process regarding the reform of the Limitations Act. Our recommendations are based on the belief that, where possible, BC’s Limitations Act should harmonize with that of Alberta.
The deadline for stakeholder input was April 23, 2007, but you can still review the Ministry’s green paper, Reforming British Columbia’s Limitations Act, at www.ag.gov.bc.ca/legislation/pdf/GreenPaper.pdf.
We believe that reforming outdated legislation will, ultimately, be the best way to protect both professionals and the public, and we strongly encourage the government to move ahead. In the meantime, we recognize the need for practitioners and firms to consider using measures such as those suggested by David Wende to deal with the anachronisms of the existing legislation.
Free PD seminar on Risk Management
Presented by the ICABC and the AICA
Monday, June 18, 2007
Renaissance Hotel, Vancouver