Engagement letters


Published on

Presented by David Wende LL. B

Published in: Business, Economy & Finance
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Engagement letters

  1. 1. November 3, 2011 Insert any additional information here. Helping to create windows of opportunity
  2. 2. ENGAGEMENT LETTERS THAT WORK November 3, 2011
  3. 3. Today’s Discussion <ul><li>Law 101 for Chartered Accountants </li></ul><ul><li>Written Contracts and Limitations of Liability </li></ul><ul><li>How to do it wrong – Salgado v. Toth </li></ul><ul><li>The Elements of any Engagement Letter </li></ul><ul><li>How to limit liability and make it stick! </li></ul>November 3, 2011
  4. 4. Contract <ul><li>Implied term of “adherence to professional standards” (no negligence) </li></ul><ul><li>Establish the mutual obligations between parties </li></ul><ul><li>Opportunities to define and limit liability </li></ul><ul><li>Cannot govern your obligations to third parties </li></ul>November 3, 2011
  5. 5. Standard of Care <ul><li>Negligence : </li></ul><ul><li>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. </li></ul>November 3, 2011
  6. 6. <ul><li>There must be a duty of care based on a “special relationship” between the CA and the representee. </li></ul><ul><li>The representation must be untrue, inaccurate or misleading. </li></ul><ul><li>The CA must have acted negligently in making the misrepresentation. </li></ul>Negligent Misrepresentation November 3, 2011
  7. 7. <ul><li>The representee must have relied, in a reasonable manner , on the negligent misrepresentation. </li></ul><ul><li>The reliance must have been detrimental to the representee, i.e., damages resulted. </li></ul><ul><li>The representation must have been made for the purpose that the representee would rely upon it in the way that he did . </li></ul>Negligent Misrepresentation November 3, 2011
  8. 8. Protection? <ul><li>No written contract to protect you from third party liability </li></ul><ul><ul><li>Define in your contract and your work product the limited scope and purpose of your work product </li></ul></ul><ul><ul><li>Clearly set out that it can only be relied upon by the client </li></ul></ul>November 3, 2011
  9. 9. Restriction on Use <ul><li>“ 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.” </li></ul>November 3, 2011
  10. 10. B.C. Limitation Periods <ul><li>Six years for economic loss; </li></ul><ul><li>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 .” </li></ul>November 3, 2011
  11. 11. Limitation Periods <ul><li>June 2011 – Complete December 31, 2010 Review and T2 </li></ul><ul><li>October 2013 – Discover substantial employee fraud </li></ul><ul><li>February 2014 – Opinion from lawyer to sue CA </li></ul>November 3, 2011
  12. 12. Limitation Periods <ul><li>Time to Sue Would Not Run Out Until February 2020 in British Columbia </li></ul><ul><li>Unless you contract out of the Limitation Act time frame </li></ul>November 3, 2011
  13. 13. B.C. Limitation Periods <ul><li>No prohibition against any term in an engagement letter reducing the limitation period! </li></ul>November 3, 2011
  14. 14. CFO Engagement <ul><li>Highly adaptable for a multitude of purposes if you are “working” for one or just a few entities </li></ul><ul><li>Let’s review what is in it </li></ul>November 3, 2011
  15. 15. The Essential Elements <ul><li>Introduction </li></ul><ul><li>Tell the client </li></ul><ul><ul><li>We’ll be setting out our respective obligations </li></ul></ul><ul><ul><li>We will be limiting my liability </li></ul></ul><ul><ul><li>I need you to sign before I start work </li></ul></ul>November 3, 2011
  16. 16. The Essential Elements <ul><li>Purpose, Objective and Scope </li></ul><ul><ul><li>What is it you will be doing </li></ul></ul><ul><li>Client’s Responsibilities </li></ul><ul><ul><li>What is it that the client has to do to make this relationship work? </li></ul></ul>November 3, 2011
  17. 17. The Essential Elements <ul><li>Indemnity ? </li></ul><ul><ul><li>Why should you have to pay if the Client’s actions get you sued </li></ul></ul><ul><li>Termination </li></ul><ul><ul><li>Are you paying me? </li></ul></ul><ul><ul><li>Are you putting me in breach of the Rules of Professional Conduct </li></ul></ul>November 3, 2011
  18. 18. The Essential Elements <ul><li>Confidentiality </li></ul><ul><ul><li>File Inspections </li></ul></ul><ul><ul><li>Privacy Act </li></ul></ul><ul><li>Fees </li></ul><ul><ul><li>Essential Terms </li></ul></ul><ul><ul><li>What if I have to respond to litigation or government bodies, I.e BC Securities? </li></ul></ul>November 3, 2011
  19. 19. Limitations Clauses That Work <ul><li>Howe Sound School District No. 48 v. Killick Metz Bowen Rose Architects and Planners Inc., (2008 BCCA 195) </li></ul><ul><ul><li>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 . </li></ul></ul>November 3, 2011
  20. 20. Key Limitation Terms <ul><li>Limit Liability to a specific amount that will be substantially greater than your fees </li></ul><ul><li>Permit the Client to increase the limit of liability </li></ul>November 3, 2011
  21. 21. Key Limitation Terms <ul><li>Require agreement that client cannot sue you or employees individually - will work if you have insurance </li></ul><ul><li>Not vicariously liable for other consultants </li></ul>November 3, 2011
  22. 22. Key Limitation Terms <ul><li>Limit time in which to sue to two (2) or more years from: </li></ul><ul><ul><li>Last invoice </li></ul></ul><ul><ul><li>Substantial Completion </li></ul></ul><ul><ul><li>Suspension or Termination </li></ul></ul>November 3, 2011
  23. 23. Salgado v. Toth 2009 BCSC 1515 <ul><li>A study in how to NOT limit your liability: </li></ul><ul><ul><li>Do not draw the limitation of liability language to the attention of the client </li></ul></ul><ul><ul><li>Present the contract for signature after the services have been largely performed </li></ul></ul><ul><ul><li>Do not give the client time to read the contract </li></ul></ul>November 3, 2011
  24. 24. Salgado v. Toth <ul><ul><li>Don’t have all the clients sign the contract </li></ul></ul><ul><ul><li>Have the limitation of liability language unclear and ambiguous </li></ul></ul><ul><ul><li>Limit liability to your fees </li></ul></ul>November 3, 2011
  25. 25. ICABC Permitted Limitations <ul><li>June 2007, ICABC placed on the Members Only portion of their website sample engagement letters </li></ul><ul><li>Not an “official” position </li></ul><ul><li>Limitations of liability in engagement letters now used by all national and larger BC firms </li></ul>November 3, 2011
  26. 26. Limitations that Work <ul><li>Let’s review 3 key elements: </li></ul><ul><ul><li>The limitation language must be clear and unambiguous to avoid the argument of “contra proferentum” </li></ul></ul><ul><ul><li>Limiting liability should still provide some compensation for loss </li></ul></ul><ul><ul><li>Limiting the time in which to sue must be reasonable </li></ul></ul>November 3, 2011
  27. 27. Limitations that Work <ul><li>Establish a clear intent of the client to be bound </li></ul><ul><li>Promote the client’s freedom to contract </li></ul><ul><li>Evidence a willingness to negotiate specific terms </li></ul>November 3, 2011
  28. 28. Limitation Amounts <ul><li>Establish a published policy within your Practice based upon risk factors and amount of fees </li></ul><ul><li>Examples: </li></ul><ul><ul><li>$50,000 for a Review </li></ul></ul><ul><ul><li>$10,000 for a compilation </li></ul></ul><ul><ul><li>$25,000 for a T-1 </li></ul></ul><ul><ul><li>A multiple of your fees, say 10 X to a maximum of $100,000 </li></ul></ul>November 3, 2011
  29. 29. The Right Way <ul><li>Use email and fax to deliver written contract and terms to client when contacted, and before you do the work </li></ul><ul><li>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 </li></ul>November 3, 2011
  30. 30. The Right Way <ul><li>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 </li></ul><ul><ul><li>Preference: Get them to sign the contract and either scan and return, or fax it back to you </li></ul></ul><ul><li>Make sure the client hasn’t deleted, crossed out or made any changes </li></ul>November 3, 2011
  31. 31. The Right Way <ul><li>Obtain a new engagement letter every year, before you start the next year’s work </li></ul><ul><li>Charge more </li></ul><ul><li>Do it right the first time </li></ul>November 3, 2011
  32. 32. T1 Engagement <ul><li>Introduction </li></ul><ul><ul><li>Note that the special warning about limiting liability </li></ul></ul><ul><ul><li>Rule 205 warning </li></ul></ul><ul><ul><li>Warning of consequences for false return </li></ul></ul>November 3, 2011
  33. 33. T1 Engagement <ul><li>Client’s Responsibilities </li></ul><ul><ul><li>We don’t review or audit, so you have to get the numbers right </li></ul></ul><ul><ul><li>If you have a doubt, put it in writing </li></ul></ul><ul><ul><li>S. 163.2 Indemnity </li></ul></ul><ul><li>Working Papers </li></ul>November 3, 2011
  34. 34. Compilation Engagement <ul><li>Sets out the Notice to Reader text </li></ul><ul><li>Note the Restriction on Use </li></ul><ul><li>Management’s Responsibilities </li></ul><ul><li>Minimal liability - $10,000, but you will negotiate for a higher limit </li></ul><ul><li>A Chartered Accountant’s Lien </li></ul>November 3, 2011
  35. 35. Review Engagement <ul><li>Adds to the Compilation and T1 letters </li></ul><ul><ul><li>Scope: Agrees no liability for failing to direct employee fraud </li></ul></ul><ul><ul><li>Management’s responsibilities are spelled out in a huge appendix </li></ul></ul><ul><ul><li>Independence section </li></ul></ul>November 3, 2011
  36. 36. Review Engagement <ul><li>Alert client to Practice Review obligations </li></ul><ul><li>Restriction on Use section </li></ul><ul><li>Note higher limit on liability $50,000 </li></ul>November 3, 2011