Knowing the rules on engagement letters can help avoid expensive mistakes for advisers, warns Karen Eckstein, partner at Lake Legal LLP
This is the first of a series of articles which considers how engagement letters can be used to assist and protect a professional firm, providing practical tips on how to avoid falling into traps for the unwary. This article considers the risks arising out of ’distance selling’.
Is my contract enforceable?
Two sets of regulations exist which, if an adviser does not comply with them, may mean that he will be unable to enforce the terms of his engagement letter against his client. The practical implications of failing to comply with these regulations are that, not only will he be unable to enforce any claim for payment of any outstanding fees, but also that any limitation of liability included within the engagement letter (a liability cap, for example) would not be effective.
It is important, therefore, when agreeing to act for a client, to be aware of the existence of the regulations. The first is the Consumer Protection (Distance Selling) Regulations 2000 ('Distance Selling Regulations'). The second is the Cancellation of Contracts made in a consumer's home or place of work, etc, Regulations 2008 (Cancellable Contract Regulations).
Both sets of regulations apply to advisers advising 'consumers'. In other words, the regulations may be relevant where an accountant who acts for an individual in relation to that person's personal affairs.
In general terms, the regulations provide the client with a cooling-off period during which the client can cancel his instructions to the adviser without any cost. The cooling-off period comes into play once the client has been given formal notice of his right to cancel the contract. He then has a short period (seven days or seven working days, depending on the regulations) to cancel the contract and can do so free of any liability to pay costs (even if work of value has been done for the client). Of course, if the notice is not given to the client when it should have been, then the cooling-off period does not commence.
Although there is an overall three-month cancellation period for cancellable contracts, there is no such protection for distance selling contracts. The client can agree to opt out of the seven-day cooling-off period (but such opting out will only be valid if the client has been given the relevant notice and confirmed in writing that he wants work to start 'now').
It is important to clarify whether the regulations apply. In each case, therefore, when an adviser is acting for a client and is asked to deal with the client's personal as opposed to business affairs, the adviser should consider how the contract came into being, so that he can determine whether or not the regulations apply.
The Distance Selling Regulations apply where the adviser has not met the client in person when the contract is made. Therefore, these would apply where a client makes contact with the adviser as a result of an internet search or recommendation, and work commences before any face-to-face meeting. In many cases, no face-to-face meeting may ever take place.
The Cancellable Contract Regulations apply where the contract is entered into with the client away from the office. Therefore, if an adviser meets with the client at the client's home and the client then instructs the adviser as a result of that meeting, the regulations may apply.
In both cases, as mentioned above, a cooling-off period applies and the client has to be given a cancellation notice indicating his right to terminate the contract. However, in the case of the Cancellable Contract Regulations, the regulations are even more draconian because it is a criminal offence to fail to supply the notice to the client.
The consequences of failing to comply with the regulations are significant. Not only is it potentially a criminal offence, but it will be difficult, if not impossible, to successfully pursue a claim for fees where the relevant cancellation notice has not been provided. Further, any liability cap or other terms in the engagement letter upon which the adviser purports to rely will not be enforceable against the client. However, the client will still be able to pursue a claim against the adviser for professional negligence to the extent that the adviser has failed to provide proper service.
It can be seen therefore that it is important to clarify whether or not the regulations apply and to put procedures in place to ensure that the appropriate notice is given.
Failing to comply with the regulations can give rise to significant difficulties for an adviser and may mean that the terms contained within the engagement letter may be unenforceable. Careful consideration should be given in each case as to whether or not the client is a 'consumer' and, if so, whether the regulations apply.
Guidance is available on the websites of a number of professional bodies including ATT, CIOT, ICAEW, ACCA and ICAS and if an adviser is in any doubt as to whether or not the regulations apply to any client, and whether he needs to implement internal procedures to assist in identifying when the appropriate notices should be given to clients, he should take specialist advice. Failure to do so could be costly.
In practice: case studies
In each of the following case studies 'L' is a director of a company making widgets. L's company requires accountancy advice. L is a wealthy individual who also requires assistance in regards to his personal tax affairs. L has seen your firm advertised in the business section of the local newspaper. The cross indicates where the regulations do not apply.
Case study 1
L contacts your firm by email and asks you to act in relation to his personal tax returns. You send L an engagement letter and commence work.
L is a consumer within the terms of the regulations. The contract begins before the client has been met by you face to face. The Distance Selling Regulations apply and a cancellation notice will be required.
Case study 2
L contacts you to ask for a meeting to discuss whether or not your firm would be able to act for him. L has recently suffered an injury and is unable to travel, so you agree to meet with L at L's home. The meeting takes place and L instructs you to act in relation to L's personal tax affairs.
L is a consumer. The contact was entered into away from the office. The Cancellable Contract Regulations apply.
Case study 3
As per case study 2 above but, instead of instructing you to prepare L's personal tax returns, L asks you to undertake the company's accountancy work.
In this case, L is not a consumer and the regulations do not apply.
Case study 4
L arranges an appointment to come and see you in the office. L wants to discuss whether or not your firm can act for the company. During the course of the meeting, L asks your firm to act for him in relation to his personal tax affairs.
In that respect, L is a consumer. However, the contract was entered into in the office and therefore the regulations do not apply.
Karen Eckstein is a partner at Lake Legal LLP and member of ATT Council