Managing risk in providing litigation services.

When providing litigation services, many CPA firms include a hold-harmless provision in their engagement letters to protect their firms against liability for breach of the engagement agreement and to limit certain types of damages. The following article discusses the issues associated with such engagement letters. It is based on a section of Business Valuation/Forensic and Litigation Services Practice Aid 04-1, "Engagement Letters in Litigation Services," a practice aid recently issued by the AICPA Forensic and Litigation Services Committee. The principal authors of the practice aid are Charles L. Wilkins, CPA, and Jeffrey H. Kinrich, CPA.

Limitations on liability and damages

Some practitioners providing forensic and litigation services attempt to avoid liability or damages by the inclusion of a hold-harmless provision in the engagement letter. Such provisions may attempt to (1) limit liability, (2) limit damages, or (3) provide for indemnification by the other parties. Practitioners will benefit from careful consideration of these differences. Some clients may be willing to accept some limitations on the practitioner's liability while rejecting others. The practitioner should consult with legal counsel or a risk management adviser about which of these clauses are negotiable and which are not for any particular engagement. With respect to limitations on liability, the practitioner should be aware that a court or arbitrator might hold that such clauses do not provide any protection from claims that allege malpractice or other torts.

Limiting liability

A hold-harmless provision may provide some protection from liability based on breach of the engagement agreement and may limit certain types of damages such as consequential, incidental, or punitive damages. Generally, this provision is valid between the parties to the engagement letter. It may not limit damages for liability to third parties who justifiably relied on the practitioner's work.

The practitioner's attempt to seek indemnity or contribution for any liability may depend upon the circumstances, the wording of the provision, and the law. (1) The practitioner may want to seek the advice of counsel to determine the potential validity of any such provision.

Example 1: In no event will our firm be liable for incidental or consequential damages, even if we have been advised of the possibility of such damages.

Example 2: You and your client agree to hold our firm, its partners, and employees...