engagement letters

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November 3, 2011 1 Insert any additional information here. Helping to create windows of opportunity

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Presented by David Wende LL. B

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Page 1: Engagement letters

November 3, 2011 1

Insert any additional information here.

Helping to create windows of opportunity

Page 2: Engagement letters

November 3, 2011 2

ENGAGEMENT LETTERS THAT WORK

Page 3: Engagement letters

November 3, 2011 3

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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November 3, 2011 4

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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November 3, 2011 5

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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November 3, 2011 8

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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November 3, 2011 9

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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November 3, 2011 10

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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November 3, 2011 11

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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November 3, 2011 12

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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November 3, 2011 13

B.C. Limitation Periods

• No prohibition against any term in an engagement letter reducing the limitation period!

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November 3, 2011 14

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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November 3, 2011 18

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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November 3, 2011 19

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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November 3, 2011 20

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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November 3, 2011 23

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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November 3, 2011 24

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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November 3, 2011 27

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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November 3, 2011 29

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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November 3, 2011 30

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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November 3, 2011 31

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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November 3, 2011 33

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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November 3, 2011 36

Review Engagement

• Alert client to Practice Review obligations

• Restriction on Use section

• Note higher limit on liability $50,000