Limiting liability in engagement letters

Q: What can an engagement letter limit, and what can it never limit?

Three rules set the outer limits. Death and personal injury. Section 2(1) of the Unfair Contract Terms Act 1977 (UCTA) prevents any contract term excluding or restricting liability for death or personal injury caused by negligence. Other negligence, business clients. Under section 2(2), liability for other loss caused by negligence can be excluded or restricted only so far as the term satisfies the requirement of reasonableness. Consumer clients. Section 2 of UCTA does not apply to consumer contracts. Instead, section 57 of the Consumer Rights Act 2015 makes a term not binding on the consumer so far as it would exclude the duty to perform the service with reasonable care and skill, or would restrict liability so as to stop the consumer recovering the price paid. Any other limitation is tested for fairness under Part 2 of that Act. ICAEW's Technical Release TECH 09/15BL, Managing the professional liability of accountants, adds that firms should not try to limit liability that the law will not allow to be limited, such as liability for the firm's own fraud, and suggests saying expressly that fraud is not covered by the cap.

Q: What other exclusions are common?

Indirect or consequential loss and loss of profits. TECH 09/15BL notes these can be controversial and must be clearly defined. It also notes that where the firm's professional indemnity policy does not cover consequential loss, an exclusion of that loss may be reasonable. Losses caused by wrong information from the client. This is unlikely to be fair or reasonable where the scope of work requires the firm to check that information. Third parties. A cap binds only the client. TECH 09/15BL warns that banks, buyers or investors who rely on the firm's work are not bound by the engagement letter, and recommends release or hold harmless letters before work is shared, together with a clarification paragraph in reports stating who may rely on them.

Q: How might a proportionate clause and a cap work together?

Illustration only. A company pays a fee of £10,000 for tax structuring advice. The engagement letter, explained in the covering letter and signed, caps liability at £250,000 and limits the firm to its proportionate share of any loss shared with other advisers. The advice fails, partly because the company's solicitor drafted the documents wrongly, and the company loses £400,000. A court decides the accountant was 40% responsible. Without either clause, the company could pursue the accountant for £400,000, leaving the firm to recover 60% from the solicitor. With the proportionate clause, if it is upheld, the accountant's exposure starts at 40% of £400,000, which is £160,000. That figure is already below the cap, so the cap does not bite. If the share had been £300,000, the cap would reduce it to £250,000, provided the cap is found reasonable.

An accountant can cap liability to a business client for negligence only if the cap passes the reasonableness test in the Unfair Contract Terms Act 1977, and to a private individual only if it is fair under the Consumer Rights Act 2015. A cap that fails is not reduced to a sensible figure by the court; it simply falls away. Audit liability can be limited only through a liability limitation agreement approved by the company’s members.

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What can an engagement letter limit, and what can it never limit?

Three rules set the outer limits.

Death and personal injury. Section 2(1) of the Unfair Contract Terms Act 1977 (UCTA) prevents any contract term excluding or restricting liability for death or personal injury caused by negligence.
Other negligence, business clients. Under section 2(2), liability for other loss caused by negligence can be excluded or restricted only so far as the term satisfies the requirement of reasonableness.
Consumer clients. Section 2 of UCTA does not apply to consumer contracts. Instead, section 57 of the Consumer Rights Act 2015 makes a term not binding on the consumer so far as it would exclude the duty to perform the service with reasonable care and skill, or would restrict liability so as to stop the consumer recovering the price paid. Any other limitation is tested for fairness under Part 2 of that Act.

ICAEW’s Technical Release TECH 09/15BL, Managing the professional liability of accountants, adds that firms should not try to limit liability that the law will not allow to be limited, such as liability for the firm’s own fraud, and suggests saying expressly that fraud is not covered by the cap.

How does the reasonableness test work?

Section 11(1) of UCTA asks whether the term was a fair and reasonable one to include, having regard to the circumstances which were, or ought reasonably to have been, known to or contemplated by the parties when the contract was made. Section 11(5) puts the burden of proving reasonableness on the firm relying on the cap.

Where the cap is a specified sum of money, section 11(4) directs particular attention to two things: the resources the firm could expect to have available to meet the liability, and how far it was open to the firm to cover itself by insurance. That is why a cap set well below the firm’s professional indemnity cover is harder to defend.

Schedule 2 to UCTA lists guidelines, including the relative bargaining strength of the parties, whether the client received an inducement or could have gone elsewhere without a similar term, and whether the client knew or ought reasonably to have known of the term and its extent. TECH 09/15BL says these guidelines are likely to be applied to accountants’ engagement terms.

For consumers, TECH 09/15BL expects the Consumer Rights Act fairness test to work in much the same way, although no court has yet confirmed this.

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How should a liability cap be set and presented?

TECH 09/15BL makes several practical points that come up repeatedly in disputes.

Do not try to exclude liability altogether. Where the firm has been paid for the work, a total exclusion is unlikely to be fair and reasonable. A cap at a reasonable level is more likely to be enforced.
An unreasonable cap gets no protection at all. If a court finds the figure unreasonable, it will not substitute a reasonable figure; the cap is unenforceable.
Give the client a real chance to consider it. Caps that the client had an opportunity to consider, take advice on and negotiate are more likely to be upheld. Drawing attention to the cap in the covering letter, not only in the standard terms, helps.
Make formulas clear and not arbitrary. A multiple of the fee, for example, should be easy to calculate and should reflect the client and the engagement rather than being applied blindly to every job.
Cover every route to a claim. The clause should catch claims in contract, in negligence and for breach of statutory duty.
Draft in severable parts. If one limb is struck out, the rest should still make sense and still apply.
Keep a record. File notes or correspondence showing how the cap was discussed help prove reasonableness later.

ICAEW’s sample engagement letter wording includes optional text for a limitation of liability clause in Part 3 of its engagement letter helpsheet, to be tailored rather than copied.

What is a proportionate liability clause?

Where a client suffers one loss caused by several parties, for example the accountant, another adviser and the client’s own finance staff, the client can usually pursue any one of them for the whole loss. The party who pays can then seek a contribution from the others under section 1 of the Civil Liability (Contribution) Act 1978, and section 2(1) says the court will set the contribution at what is just and equitable having regard to each person’s responsibility for the damage.

The weakness for the accountant is that a contribution claim is only worth something if the other party can pay. TECH 09/15BL describes a clause excluding joint and several liability, so that the firm is liable only for its proportionate share of the blame, even where others are unable to pay or are not party to the dispute. Such terms are sometimes called net liability or net contribution clauses.

The 1978 Act also protects a firm with a valid cap against being made to contribute more than the cap through the back door: section 2(3) provides that where damages the client could have recovered from a person were subject to a limit agreed before the damage occurred, that person cannot be required to pay more than the limited amount by way of contribution.

What other exclusions are common?

Indirect or consequential loss and loss of profits. TECH 09/15BL notes these can be controversial and must be clearly defined. It also notes that where the firm’s professional indemnity policy does not cover consequential loss, an exclusion of that loss may be reasonable.
Losses caused by wrong information from the client. This is unlikely to be fair or reasonable where the scope of work requires the firm to check that information.
Third parties. A cap binds only the client. TECH 09/15BL warns that banks, buyers or investors who rely on the firm’s work are not bound by the engagement letter, and recommends release or hold harmless letters before work is shared, together with a clarification paragraph in reports stating who may rely on them.

Can auditors limit liability?

Only through a statutory route. Section 532 of the Companies Act 2006 makes void any provision exempting an auditor from liability, but section 534 allows a liability limitation agreement if it complies with section 535 and is authorised by the members under section 536. Section 535 limits each agreement to one financial year, which must be specified. A private company can authorise the agreement by resolution before it is made, either waiving the need for approval or approving its principal terms, or by approving it afterwards.

The test differs from UCTA in one important respect. Under section 537, an agreement cannot limit liability to less than what is fair and reasonable having regard to the auditor’s responsibilities, contractual obligations and expected professional standards. If it purports to do so, it takes effect at that fair and reasonable amount rather than failing completely. Section 534(3) also takes these agreements outside section 2(2) of UCTA.

How long does the exposure last?

A cap limits how much is payable, not how long a claim can be brought. Under the Limitation Act 1980, claims in contract and in tort must generally be brought within six years of the cause of action accruing (sections 5 and 2). For negligence where the loss was not known about, section 14A gives an alternative of three years from when the claimant had the necessary knowledge, if that is later. An error HMRC finds years later can still produce a claim, so archived letters and their caps need to be kept.

How might a proportionate clause and a cap work together?

Illustration only. A company pays a fee of £10,000 for tax structuring advice. The engagement letter, explained in the covering letter and signed, caps liability at £250,000 and limits the firm to its proportionate share of any loss shared with other advisers. The advice fails, partly because the company’s solicitor drafted the documents wrongly, and the company loses £400,000. A court decides the accountant was 40% responsible.

Without either clause, the company could pursue the accountant for £400,000, leaving the firm to recover 60% from the solicitor.
With the proportionate clause, if it is upheld, the accountant’s exposure starts at 40% of £400,000, which is £160,000.
That figure is already below the cap, so the cap does not bite. If the share had been £300,000, the cap would reduce it to £250,000, provided the cap is found reasonable.

What mistakes undermine a liability cap?

Burying the cap in terms of business that the client never signed or was not sent.
Using a single figure for every client, regardless of fee, risk or insurance.
Setting a cap that cannot be explained by reference to the firm’s resources and insurance, given section 11(4).
Letting scope creep take the firm into work the letter does not describe, so the cap arguably never applied to it.
Sharing reports with lenders or buyers without a hold harmless letter.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.