Although professional advisers such as accountants and lawyers take their responsibilities and potential liability seriously, increasingly high insurance premiums have led to a minority of advisers being under insured or, in extreme cases, uninsured.
Professional indemnity insurance premiums have risen as auditors and other professionals have been drawn into lawsuits arising from corporate frauds, corporate governance failures, disappointing takeovers or investments, and credit failures. The Enron and related Arthur Andersen collapses are extreme but vivid and recent examples of the impact of uncapped professional liability.
The Australian Federal government, concerned about these risks, has proposed extending existing state-based liability caps embedded in approved professional standards schemes. This raises the possibility that there will be an end to the one remaining avenue of unlimited liability for professionals who are entitled to use those existing caps.
Various circumstances can create exposure for a professional adviser, including: an engagement letter or retainer contract; legal opinions issued in a variety of transactions; auditors' comfort letters; and tax and other sign offs in offering documents.
Approaches that professional advisers in Australia have taken to limit their liability include exclusion or limitation of liability clauses in engagement contracts/letters (contractual caps), and statutorily authorized limitation of professional liability schemes (limitation schemes).
If enacted, professional advisers will also be able to rely on limitations under the Federal Liability Limitation Bill described below (statutory caps) in relation to statutory misleading and deceptive conduct claims under Australian state fair trading laws such as the Fair Trading Act 1987 (NSW) or relevant Federal legislation.
Claims
A typical situation in which claims might arise is where an accountant verifies accounting and/or statistical information used in an offering circular, or a similar disclosure document, relating to a securities issue.
In Australia, when securities are offered to retail investors the disclosure document is a long form prospectus; more limited disclosure can be made for professional or sophisticated investors (or those that fall within other exceptions in section 708 of the Corporations Act 2001 (Cth)). A professional adviser will be liable for any statement it has agreed can be included in a prospectus, but will be able to rely on a statutory due diligence defence in certain circumstances.
However, the duty not to engage in misleading or deceptive conduct, and the duty of care owed by a professional adviser, still applies to both a prospectus and a more limited disclosure document such as an offering circular or information memorandum.
These duties give rise to potential common law liability and, in the case of prospectuses, civil liability under statute. The issuer or third parties to which the professional adviser can be said to owe a duty of care may also make contractual, tortious or other statutory claims.
Breach of contract
Using the facts described above, for the issuer to be bound by a contractual cap included in an accountant's engagement letter, there must be a binding contract between the issuer and the accountant that includes the terms of that cap.
In the event that the accountant is alleged not to have performed the services in accordance with the engagement letter, a breach of contract claim could be made. However, damages may be limited by certain clauses. Those types of contractual caps typically specify a monetary limit on the level of losses that can be recovered and state that the issuer or claimant releases the accountant from any liability in excess of that monetary cap.
Negligence
Another remedy for a party claiming against a professional adviser is under a common law negligence claim. The question then arises as to the effect (if any) of a liability cap in relation to a negligence claim - a claim that does not rely on the terms of the engagement letter or other contract but rather on a duty of care owed to the party in question.
There must also be evidence of loss suffered. It is possible for a limitation of liability clause to be effective despite the absence of contract, as long as the clause was brought to the attention of the issuer or claimant. In that case, the professional adviser may be able to argue that the claimant did not rely on the relevant statement or that such reliance was not reasonable.
Misleading or deceptive conduct
It is possible in Australia to claim in these circumstances for misleading or deceptive conduct under the Trade Practices Act 1974 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) or the State and Territory Fair Trading Acts.
If a disgruntled party pursues this action, the question of whether a contractual cap would protect a professional adviser would arise. Unless the Federal Liability Limitation Bill is passed, it is not possible for a party who engages in misleading or deceptive conduct to limit or exclude its liability under existing legislation.
The limitation schemes do not override Federal legislation for a claim for misleading or deceptive conduct under the section 52 of the Trade Practices Act 1974 (Cth), section 12DA of the Australian Securities and Investment Commission Act 2001 (Cth) or section 1041H of the Corporations Act 2001 (Cth).
Limitation schemes
Limitation schemes limit the civil liability of a participating professional adviser. Examples in New South Wales of such schemes include schemes covering accountants, solicitors, consulting valuers, engineers and other professionals, who are each members of their relevant professional body (for example the CPA Australia or Institute of Chartered Accountants).
The liability limited by a limitation scheme includes, to the extent allowed by the legislation, all civil liability arising (in tort, contract or otherwise) directly or indirectly from anything done or omitted by a member in performing his or her job.
While terms of limitation schemes set up under the Professional Standards Act 1994 (NSW) vary, this usually does not affect damages claims below a certain limit. The level of that liability floor varies from one limitation scheme to another. For example, the relevant New South Wales accountants' limitation scheme sets a liability floor of A$500,000 ($347,000). Where damages are above this figure, that limitation scheme limits liability for those damages to an amount between A$500,000 and A$20 million. The amount of the limited liability is calculated by multiplying the reasonable charge for the service by 10, provided that the amount is not less than A$500,000 or higher than A$20 million. These limits do not apply to liability for damages arising from a breach of trust, fraud or dishonesty.
If a professional adviser is covered by a limitation scheme it could not rely on the liability floor or cap provisions of that scheme if it were the subject of a misleading or deceptive conduct claim by an issuer or other party it has advised. This would be the case in any action in negligence or for breach of contract arising from a breach of trust, fraud or dishonesty.
Such liability schemes would apply in relation to any other action brought by a claimant in negligence or for breach of contract.
Proposed statutory cap
The Treasury Legislation Amendment (Professionals Standards) Bill 2003 (Liability Limitation Bill) is now before the Australian Federal Parliament. If passed, the Bill will mean that liability limits that apply under certain professional standards schemes, will also apply to claims for misleading or deceptive conduct under Australian Federal legislation.
These Federal laws represent the last uncapped causes of action for those who claim to have suffered loss as a result of a professional adviser failing to act with due care and skill.
It is by no means certain that these changes will be enacted. Strong lobbying by opposition parties, banks and other financial sector interest groups may result in amendments that will allow parties to contract out of the statutory caps. With an imminent Federal election, there may be additional uncertainty about whether those measures will be passed any time soon.
Yet the recognition of contractual caps and the proposed Liability Limitation Bill are indicative of a more restrictive approach under Australian law to liability for some professionals. There are some other countries that have limited statutory liability caps for auditors (for example Austria, Germany and Greece) and others with recognition of contractual caps (for example Denmark, Luxembourg, Spain and The Netherlands).
But if the Liability Limitation Bill is enacted then Australia may be one of the few countries to recognize and apply both contractual and statutory caps on professional liability. It remains to be seen if the UK will follow suit, pending the outcome of the UK government's December 2003 consultative paper entitled Director and Auditor Liability.
Tessa Hoser is a partner, Nicholas Seddon a special counsel and Paul Jenkins a senior associate of Blake Dawson Waldron. The authors are grateful for UK source material provided by Jon Lawrence, a partner of Freshfields Bruckhaus Deringer, but they take responsibility for the views expressed in this article.