engagement letters
DESCRIPTION
Presented by David Wende LL. BTRANSCRIPT
November 3, 2011 1
Insert any additional information here.
Helping to create windows of opportunity
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ENGAGEMENT LETTERS THAT WORK
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Today’s Discussion
• Law 101 for Chartered Accountants
• Written Contracts and Limitations of Liability
• How to do it wrong – Salgado v. Toth
• The Elements of any Engagement Letter
• How to limit liability and make it stick!
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Contract
• Implied term of “adherence to professional standards” (no negligence)
• Establish the mutual obligations between parties
• Opportunities to define and limit liability
• Cannot govern your obligations to third parties
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Standard of Care
Negligence:
The failure to adhere to the standard of care expected of a reasonable and prudent Professional in the provision of services to one to whom you owe a duty of care.
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• There must be a duty of care based on a “special relationship” between the CA and the representee.
• The representation must be untrue, inaccurate or misleading.
• The CA must have acted negligently in making the misrepresentation.
Negligent Misrepresentation
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• The representee must have relied, in a reasonable manner, on the negligent misrepresentation.
• The reliance must have been detrimental to the representee, i.e., damages resulted.
• The representation must have been made for the purpose that the representee would rely upon it in the way that he did.
Negligent Misrepresentation
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Protection?
• No written contract to protect you from third party liability• Define in your contract and your work
product the limited scope and purpose of your work product
• Clearly set out that it can only be relied upon by the client
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Restriction on Use
“This ________ was prepared for the exclusive use of [ Client ] and may not be used or otherwise relied upon by any third person without our written consent. We accept no liability to any third person whatsoever.”
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B.C. Limitation Periods
• Six years for economic loss;
• Section 6(3) postpones starting time of the limitation period until “a reasonable man would have had within his possession sufficient facts that he should have recognized he had a right to sue with a reasonable prospect of success.”
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Limitation Periods
• June 2011 – Complete December 31, 2010 Review and T2
• October 2013 – Discover substantial employee fraud
• February 2014 – Opinion from lawyer to sue CA
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Limitation Periods
Time to Sue Would Not Run Out Until February 2020 in British Columbia
• Unless you contract out of the Limitation Act time frame
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B.C. Limitation Periods
• No prohibition against any term in an engagement letter reducing the limitation period!
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CFO Engagement
• Highly adaptable for a multitude of purposes if you are “working” for one or just a few entities
• Let’s review what is in it
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The Essential Elements
• Introduction• Tell the client
• We’ll be setting out our respective obligations
• We will be limiting my liability• I need you to sign before I start work
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The Essential Elements
• Purpose, Objective and Scope• What is it you will be doing
• Client’s Responsibilities• What is it that the client has to do to
make this relationship work?
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The Essential Elements
• Indemnity?• Why should you have to pay if the
Client’s actions get you sued
• Termination• Are you paying me?• Are you putting me in breach of the
Rules of Professional Conduct
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The Essential Elements
• Confidentiality• File Inspections• Privacy Act
• Fees• Essential Terms• What if I have to respond to litigation or
government bodies, I.e BC Securities?
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Limitations Clauses That Work• Howe Sound School District No. 48 v.
Killick Metz Bowen Rose Architects and Planners Inc., (2008 BCCA 195) • Where there are no issues of
unconscionability, parties are entitled to arrange their affairs and assume risks at variance with the duties otherwise imposed by the law of tort.
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Key Limitation Terms
• Limit Liability to a specific amount that will be substantially greater than your fees
• Permit the Client to increase the limit of liability
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Key Limitation Terms
• Require agreement that client cannot sue you or employees individually - will work if you have insurance
• Not vicariously liable for other consultants
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Key Limitation Terms
• Limit time in which to sue to two (2) or more years from:• Last invoice• Substantial Completion• Suspension or Termination
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Salgado v. Toth 2009 BCSC 1515
• A study in how to NOT limit your liability:• Do not draw the limitation of liability
language to the attention of the client• Present the contract for signature after
the services have been largely performed
• Do not give the client time to read the contract
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Salgado v. Toth
• Don’t have all the clients sign the contract
• Have the limitation of liability language unclear and ambiguous
• Limit liability to your fees
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ICABC Permitted Limitations• June 2007, ICABC placed on the
Members Only portion of their website sample engagement letters
• Not an “official” position
• Limitations of liability in engagement letters now used by all national and larger BC firms
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Limitations that Work
• Let’s review 3 key elements:• The limitation language must be clear
and unambiguous to avoid the argument of “contra proferentum”
• Limiting liability should still provide some compensation for loss
• Limiting the time in which to sue must be reasonable
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Limitations that Work
• Establish a clear intent of the client to be bound
• Promote the client’s freedom to contract
• Evidence a willingness to negotiate specific terms
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Limitation Amounts
• Establish a published policy within your Practice based upon risk factors and amount of fees
• Examples:• $50,000 for a Review• $10,000 for a compilation• $25,000 for a T-1• A multiple of your fees, say 10 X to a
maximum of $100,000
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The Right Way
• Use email and fax to deliver written contract and terms to client when contacted, and before you do the work
• Draw to the potential client’s attention that there are limitations of liability clauses in the contract and ask them to review the clauses before signing
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The Right Way
• Do not begin work until the client has indicated in writing, either by fax or by an email, that he/she/it will accept the terms• Preference: Get them to sign the
contract and either scan and return, or fax it back to you
• Make sure the client hasn’t deleted, crossed out or made any changes
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The Right Way
• Obtain a new engagement letter every year, before you start the next year’s work
• Charge more
• Do it right the first time
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T1 Engagement
• Introduction• Note that the special warning about
limiting liability• Rule 205 warning• Warning of consequences for false
return
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T1 Engagement
• Client’s Responsibilities• We don’t review or audit, so you have to
get the numbers right• If you have a doubt, put it in writing• S. 163.2 Indemnity
• Working Papers
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Compilation Engagement
• Sets out the Notice to Reader text
• Note the Restriction on Use
• Management’s Responsibilities
• Minimal liability - $10,000, but you will negotiate for a higher limit
• A Chartered Accountant’s Lien
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Review Engagement
• Adds to the Compilation and T1 letters• Scope: Agrees no liability for failing to
direct employee fraud• Management’s responsibilities are
spelled out in a huge appendix• Independence section
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Review Engagement
• Alert client to Practice Review obligations
• Restriction on Use section
• Note higher limit on liability $50,000