Standard limitation of liability clauses are very common in engagement letters with auditors and accountants. A usual term is that the accountant/auditor’s damages exposure is limited to the fees paid by the client for the engagement. The efficacy of limitation of liability clauses, like all matters of contract interpretation, is dependent on the on the language used in the engagement letter and the factual matrix in each case.
The application of these principles yielded a rather surprising result in the recent case of RINC Consulting Inc. (Roustan Capital) v Grant Thornton, 2019 ONSC 7775; upheld by the Ontario Court of Appeal, 2020 ONCA 782.
The plaintiff, Walter Roustan was the principal and sole shareholder of RINC Consulting Inc., both of which held shares in Performance Sports Group (PSG). PSG was a public corporation that manufactured and sold hockey equipment under the Bauer brand.
From February, 2008, to September, 2012, Roustan was the Chairman of the board and a shareholder of PSG. After he resigned from the board, Roustan learned of and disagreed with a proposed change to PSG’s business strategy. He subsequently retained the defendant, Grant Thornton (GT), to conduct a survey of ten major PSG retailers in order to obtain information to support his views about the change in business strategy, and to confirm his suspicions about misreporting of sales.
It was contemplated that the results of the survey would be shared with PSG’s directors, officers, and shareholders (both individual and institutional) in an attempt to persuade them to Roustan’s view. When PSG learned of the survey sent directly to its retailers, it sent a cease and desist letter to GT, which then terminated the engagement with Roustan and refunded the funds he had paid.
While GT did not release the results of its survey, Roustan received similar information directly from PSG retailers through a SurveyMonkey® survey that he had independently conducted. Over the course of the next year, PSG’s financial circumstances declined, and it ultimately filed for protection under the Companies’ Creditors Arrangement Act (CCAA).
The plaintiffs sued GT for breach of contract for the manner in which it had terminated the engagement and claimed that had they received the results of the GT survey, they would have liquidated their shares earlier and suffered no loss.
Interpretation of the limitation of liability clause
GT denied the breach of contract. It relied upon the various manners in which the engagement letter permitted termination. In any event, GT asserted that any damages flowing to Roustan were constrained by the limitation of liability clause in the engagement letter between GT and Roustan:
In any action, claim, loss or damage arising from the Engagement, you agree that our liability will be several and not joint and several and you may only claim payment from us of a proportionate share of the total liability based upon degree of fault as finally determined.
The total liability assumed by us for any action, claim, loss or damage arising out of or in connection with the Engagement, regardless of the form of action, loss or damage, be it tort, contract or otherwise, shall in no event exceed the aggregate of the professional fees paid to us under the terms of the Engagement. In addition, we shall not, under any circumstances, be liable for any special, direct or inconsequential damages including, without limitation, loss of profit or revenue, failure to realize expected costs reductions or savings or similar losses of any kind.
GT argued that the plaintiffs’ action constituted a claim “arising out of or in connection with the Engagement” and could not exceed the aggregate of the professional fees paid. Since those had already been refunded, the damages were zero.
The trial judge disagreed, stating that the limitation of liability clause did not apply. He found that although the limitation of liability clause was not, strictly speaking, an exclusion clause, it was an exculpatory provision in the engagement letter. As a result, the enforceability and validity were to be guided by the three-part test set out by the Supreme Court of Canada in Tercon Contractors Ltd. v British Columbia (Minister of Transportation and Highways), 2010 SCC 4.
The trial judge determined the issue on an application of the first part of the test: as a matter of contract interpretation, does the exclusion clause apply to the circumstances as established by the evidence in the case? He also considered the key principle of contract interpretation according to Tercon, which is that the “words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purposes and commercial context”.
With these principles mind, the trial judge examined both paragraphs which related to limitation of liability and the circumstances established by the evidence, and found:
… The limitation clause is, on its face, concerned with what happens if GT is sued by a third party (such as PSG or its CEO), and establishes the apportionment of loss between GT and its client [Roustan]. The entire clause is premised upon the existence of an “action, loss or damage arising out of the engagement”, and mandates the client to indemnify GT on a several (and not joint and several) basis, thereby limiting GT’s share in any such loss or damage as found by a trier of fact. The limitation does not apply to the situation before me, namely GT’s improper termination of the Engagement letter.
The Ontario Court of Appeal did not consider the issue of the effect of the limitation of liability clause when it affirmed the trial judge’s decision. However, it is arguable that a fair interpretation of the clause, when read in light of the factual matrix, is that it is not to be so narrowly construed as to refer only to claims made against GT by third parties, but encompasses claims for breach of contract made by GT’s client, here the plaintiffs.
Also, the trial judge introduced the concept that the clause required Roustan to indemnify GT, thereby limiting GT’s share in any loss or damage. However, the word “indemnification” does not appear in the clause at all. Rather, it is arguable that the language would apply to a claim made by the client against both GT and another alleged tortfeasor, for example. In this case, in asserting a breach by GT of the engagement letter, Roustan arguably brought an “action…arising out of or in connection with the engagement”, which triggered the limitation of liability clause. There is nothing in the language that appears to limit claims to those brought by third parties.
This decision highlights some of the uncertainties that accountants/auditors face in relying upon limitation of liability clauses in their engagement letters.
Firstly, in most cases, these clauses are part of the standard engagement letter terms and conditions. It is therefore somewhat artificial to look to the factual matrix in any one case as an aid to interpretation.
Secondly, in interpreting such clauses, the court is permitted to look to public policy issues to refuse to enforce an otherwise valid exclusion clause. In fact, the Tercon test allows for consideration of these issues:
- As a matter of contract interpretation, does the exclusion clause apply to the circumstances as established by the evidence in the case?
- If the exclusion clause applies, was the clause unconscionable at the time the contract was made, as might arise from situations of unequal bargaining power between the parties?
- If the exclusion clause is found to be valid and applicable, should the court nevertheless refuse to enforce the clause because of the existence of an overriding public policy concern?
It is unclear whether the same result would have been achieved, had the trial judge considered all three elements of the test, since the decision does not refer to evidence relevant to the last two parts of the test.*
However, it would be prudent for accountants/auditors to re-visit the standard limitation of liability clauses in their engagement letters in light of this decision, and consider customized language in some engagement letters.
* See Felty v Ernst & Young LLP, 2015 BCCA 415, for a useful analysis of unconscionability and public policy considerations.