Engagement letter - Loss limit question

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#1
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I saw it in a large local firm's engagement letter whereby they have a "loss-limit" clause in their engagement letter. Something like the following:

"Accountant’s total liability for any breach of this agreement, for any failure to perform any term of this agreement, for any claims relating to or arising out of its performance of this agreement, and for its own ordinary or gross negligence (but not its reckless or willful misconduct) in any aspect of its relationship with Client, shall not exceed the greater of (X) times the amount of the fees paid to and received by Accountant under this agreement."

I wonder, what percentage of tax preparers would you estimate use these kinds of clauses?
 

#2
Frankly  
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Any judge with the tiniest modicum of common sense and respect for Joe Taxpayer would invalidate any such limitation and rebuke the tax pro simply based on the excessive length of that sentence. It's written for attorneys, and demonstrates that the engagement "agreement" is one-sided.
 

#3
Nilodop  
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I think large firms routinely use some version of OP's example. Also see this article. https://www.journalofaccountancy.com/is ... tions.html. and this excerpt.
Limitation of liability and indemnification of the firm. Where permissible, these clauses help limit the firm's exposure if a claim arises. If the engagement is of a type whereby the firm would be precluded from including these clauses, which would impair the independence of the firm, strike these terms from the terms and conditions through a notation in the engagement letter.

And this paper by an insurance outfit. https://www.sompo-intl.com/sites/defaul ... posure.pdf
Examples of liability provisions incorporated into client agreements include the following:
• Limit liability exposure to the amount of fees
Limit the firm’s liability exposure to the amount of the fees they will earn, or consider a higher threshold, e.g., two or three times the fees, in exchange for a higher fee, which helps show that the clause was negotiated and not forced on the client.
Example: “You agree that the firm’s total liability to you and any third party for any and all damage arising out of this agreement from any cause, including but not limited to contractual liability of the firm’s negligence, errors omissions strict liability, breach of contract or breach of warranty shall not in the aggregate, exceed the fees paid to the firm during the then current term of this agreement.”
 

#4
makbo  
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This topic is in the wrong forum; hopefully a moderator will come along and take care of that. Any moderators reading or participating in this thread? :| [fixed]

As for the question, I include such a clause in my engagement. (I also state that the taxpayer is responsible for paying any additional tax they legitimately owe, I'm only responsible for penalties but not interest due to my error). I don't know if Frankly's legal opinion is valid, especially the part about "one-sided", but I didn't write my engagement letter for a judge, and I didn't hire an attorney to write it (although I used industry templates and the H&R Block service agreement as models). Rather, I write it to communicate and set expectations with the client. Basically I'm telling them, if I make a mistake, and I can't get penalties abated (requires your cooperation), and you pay the penalties, then I will reimburse you up to a certain amount without a fight.

Of course, I always have the option to resolve any dispute more favorably for my client than stated in my engagement. Obviously I will try to follow the instructions of my E&O insurer when I file a claim, which I is something I have not needed to do.

The only time I can recall where this may have been an issue is with one prospective client, not high-end, who seemed ready to hire me until he read my engagement, then said he didn't think we would be a good fit, I couldn't have agreed more.
Last edited by makbo on 25-Nov-2018 10:54am, edited 1 time in total.
 

#5
JAD  
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I disagree with Frankly's legal analysis. I have a loss limitation. It is as written by the managing partner of a firm in which I was a very small minority partner. If I remember correctly, my former partner took the language directly from the engagement letter template of a high end SF law firm that we occasionally worked with.
 

#6
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I have same language but far shorter, simply limiting it to fees paid for the disputed service(s). I was advised by my lawyer to include it, if for no other purpose than to muddy the waters should a legal dispute occur. Would I take it that far? Not necessarily.

Bulk of my engagement letters are verbatim from CNA, with a few additions such as loss limit. They're far more experienced and knowledgeable than I at how to handle legal language and issues.
 

#7
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I have this language for tax advice. If I prepare a tax matrix for a large company my fees may be 5k but if I get something wrong, they could be looking at much larger audit assessments. My hope is the language protects me from a 1MM+ lawsuit when my fees were low in comparison. **Knock on wood**
 

#8
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Does anyone out there NOT use loss-limit language in their engagement letters? And why not?
 

#9
zl28  
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i have a clause in my engagement letter that if any clause is deemed invalid, the rest of the clauses are not invalidated.

so where is the detriment of including hte clause

though i think i've chatted with someone and 1x fee might have seemed weak, than listing 2 or 3x might ahve been better.
 


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