Accountants' negligence in share valuation and limitation of liability provision in engagement letter
A case in May 2010 considered a claim against accountants for negligence in carrying out a company share valuation.
The judge found that the accountant's valuation negligently fell short of the lowest figure in the range of reasonably competent valuations. The claimants' loss was assessed at ?427.500.
This was someway below the liability cap of ?1m in the firm's engagement letter so whether or not the cap was effective in limiting the client's claim was not relevant. The judge nevertheless considered whether or not the cap met the test of reasonableness under section 2(2) of the Unfair Contract Terms Act 1977.
Section 2(2) of that Act provides that a person cannot "exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness".
Schedule 2 to the Act sets out guidelines for the application of the reasonableness test. The factors to be taken into account include the relative strength of the parties' bargaining positions; the extent of the client's knowledge of the liability limitation; and whether the client was offered any inducement to agree to the limitation.
The judge concluded that the limitation of liability clause would have been reasonable for two reasons in particular:
- Although the defendant accountant was in the stronger position, the claimants were also powerful and experienced business people, and the companies in which the claimants were controlling shareholders had considerable commercial influence. The claimants were fully aware of the possibility of going elsewhere for the advice. They had chosen to use the defendant firm for a number of reasons and knowing that it employed limitation clauses.
- The claimants knew or ought reasonably to have known of the limitation of liability term. They could not be regarded as "innocents abroad" and were entirely capable of protecting their own interests. They knew and understood that accountancy firms customarily limited their liability by clauses of this kind, but chose not to discuss or negotiate the limitation.
Case: Dennard & others v PricewaterhouseCoopers