Written on July 22, 2016 – 9:51 am | by Katie Ionson
Felty v. Ernst & Young LLP, 2015 BCCA 445, is an interesting case from the Court of Appeal of British Columbia. The issue on appeal was whether the trial judge erred in concluding that a retainer agreement clause limiting the respondent firm’s liability to the amount of its fees was enforceable.
The respondent, Ernst and Young (EY), was hired to provide tax advice in respect of divorce proceedings and a proposed settlement. The retainer agreement was signed by the appellant’s lawyer, Ms. Robin. Evidence was provided that this arrangement was requested by EY in order to ensure that the law firm was bound by the contract and fees would be paid. In the agreement the client agreed to be bound by EY’s “Standard Terms and Conditions”, which included a condition limiting EY’s liability in respect of the advice provided to the amount of its fees. When the lawyer inquired about this clause, EY informed her that the issue was non-negotiable and, if she did not agree to it, EY would not accept the retainer. The lawyer provided her client with a copy of the retainer agreement and, upon receiving her client’s agreement, proceeded to sign it. Unfortunately, in providing their advice EY missed the application of a “special rule” in the Internal Revenue Code, resulting in the tax estimate being off by some $540,000 USD. This mistake was not discovered until after the settlement agreement had been executed and the client had agreed to assume liability for tax in respect of the settlement payment.
On appeal, the court considered two issues. Was the client was bound by the retainer agreement, given that it was signed by her lawyer and not her personally? Was the limitation of liability provision in the retainer agreement unenforceable on public policy grounds?
On the first question, the Court of Appeal found that the client was a “disclosed principal” and was bound by the retainer agreement, which her lawyer had signed as her agent. The retainer clearly indicated that it was for tax advice personal to Ms. Felty and the parties understood that such advice was not of interest to the lawyer or her firm except insofar as they were advising Ms. Felty. EY was aware of Ms. Felty’s situation and this was apparent from the agreement. It also noted that a solicitor-client relationship gives rise to an inference of agency and remarked that the limitation of liability provision only makes sense if Ms. Felty were a party to the contract. It would be Ms. Felty and not the law firm that would have a claim against EY (the trial judge found that the lawyer was entitled to rely upon EY’s advice and so had not been negligent). Ms. Felty had also reviewed and consented to the agreement prior to it being signed by her lawyer, thereby providing Ms. Robin with the authority to incur the fees.
The Court of Appeal found that the limitation of liability provision was not unenforceable on public policy grounds. Ms. Felty argued that the desirability of holding professional advisors to a high standard of diligence was an over-riding public policy concern. She also argued that the relationship between her and EY was a fiduciary one, similar to that between a solicitor and client and that the risk of negligence should be “allocated” to the fiduciary. The Court disagreed. Holding professionals to a high degree of diligence was not sufficiently compelling to justify exercising the Court’s power to refuse to enforce the provision on public policy grounds. For this, more extreme and truly reprehensible behaviour was required (the Court provided the example of a manufacturer knowingly adding a toxic compound into baby formula).
The Court of Appeal also noted that the trial judge’s finding that the provision was not unconscionable was not challenged on appeal. In concluding that the provision was not unconscionable, the trial judge noted that Ms. Felty had received independent legal advice from her lawyer regarding the agreement and that it was open to her to engage another firm with a less onerous limitation of liability provision to provide the advice.
The lesson? Be sure to read the standard terms and conditions of any retainer agreement of a professional engaged to assist with a transaction and take limitation of liability provisions seriously. For lawyers, before adding limitation of liability provisions into your standard retainer agreement, be sure to check with your law society. These sorts of limitations are often prohibited, including in B.C. where this case originates.