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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional liability

Marlowe LLP's engagement letter with Quenby Ltd limits Marlowe's liability to 2 million. The audit later fails to detect a fraud caused by a negligent failure to perform planned procedures, and the client claims 9 million. Quenby's directors had agreed the clause. Which conclusion is most appropriate, assuming local law permits liability limitation agreements only where fair and reasonable?

Marlowe's liability to the client may be capped at 2 million if the clause satisfies the legal test, such as being fair and reasonable, and was properly approved. It is not automatic, and it does not bind third parties who were not party to the agreement.

  1. AThe cap is automatically void because the auditor was negligent
  2. BThe cap applies in all circumstances because the directors agreed to it
  3. CMarlowe's liability to Quenby may be limited to 2 million if the clause is judged fair and reasonable and properly approved, but the cap would not bind third partiesCorrect
  4. DMarlowe has no liability because it is a limited liability firm

Explanation

Negligence is exactly the situation a cap addresses, so it is not automatically void. Enforceability depends on the legal test (for example fair and reasonable) and proper approval, so it is not absolute. It binds only the contracting parties, not third parties. Firm structure does not remove liability for its own negligence.

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