Complete Guide to Limitation of Liability Clause for Accountants

Accountancy firms often add clauses to their engagement letters to limit their liability, which is a smart way to manage risks and protect themselves.

But these clauses need to be reasonable. They might be ruled invalid if they are too extreme, leaving the firm open to unlimited liability. Here’s how firms can strike the right balance and shield themselves against risks.

Caps on Liability: A Common Approach

One common way accountancy firms mitigate legal risks is by setting a cap—a fixed limit on how much they can be held financially responsible for. These caps can either be negotiated with clients or follow standard terms. They might apply to all claims combined or be set for each claim.

For example, if a firm sets a cap, it becomes the maximum amount they will pay, no matter how big the claim is.

Another approach is to exclude certain types of losses entirely like:

• Indirect losses like lost profits.
• Losses caused by incomplete or incorrect information from the client.
• Joint liabilities, where responsibility is split proportionally.
• Errors or omissions made by third-party advisers.

These exclusions are often aligned with the firm’s professional indemnity (PI) insurance, so everything stays within their contractual obligations.

Fair and Reasonable Exclusions

Liability limits are only useful if they hold up in court. If a clause is deemed unfair or unreasonable—like one that drastically limits liability—it could be dismissed, exposing the firm to claims.

Here is what influences fairness:

• Client Type – Are you dealing with a large corporation, a small business, or an individual?
• Scope of Work – Is it a routine task or a project with major financial stakes?
• Risk Assessment – What’s the chance for losses in this engagement?

The Consumer Rights Act prevents firms from limiting liability below the value of their fees. A good rule of thumb is to set caps that align with the work’s scale and possible risks. For higher-stakes projects, a larger cap is more likely to hold up and better protect the firm.

Key Recommendations for Firms

To strike a balance between risk mitigation and client trust, firms should adopt these best practices:

1. Draft with Precision

Write liability clauses that cover all possible claims, like breach of contract or negligence. Make sure formulas for calculating liability limits are clear and easy to understand, avoiding confusing or vague methods.

2. Stay Within Legal Bounds

Do not attempt to exclude liability for losses that are legally non-excludable, such as fraud or regulated activities under the Financial Conduct Authority (FCA).

3. Use Clear Terms

Specify whether caps are aggregate (covering all claims) or apply separately to individual breaches. Provide clients with sufficient time to review the terms and consult legal advisers.

4. Structure Engagement Letters Thoughtfully

Separate the limitations or exclusions into their own sections within the engagement letter. This way, if one clause is found unenforceable, the rest of the letter still stands. For engagement letters with standard terms and a cover letter, highlight the key limitations in the cover letter.

5. Document Negotiations

Keep a detailed record of any discussions or negotiations about engagement terms. This documentation can serve as evidence of fair dealing if a dispute arises

Conclusion

Limiting liability is an important part of an accountancy firm’s risk management, but it needs to be done carefully. If the clauses are too strict, they could backfire and leave the firm open to unlimited claims.

To protect the firm and keep clients’ trust, focus on being clear, fair and legally compliant. Always get legal advice when drafting or updating engagement letters to make sure they strike the right balance between protecting the firm and meeting client needs.