In Felty v. Ernst & Young LLP, Anita Felty sought US tax advice from Ernst & Young LLP (“E&Y”) in connection with her separation and divorce.  Ms. Felty retained E&Y through her lawyer, and E&Y, before giving advice, required a written engagement agreement from Ms. Felty’s lawyer.  The engagement agreement limited E&Y’s liability to the total fees paid to E&Y for any claim arising out of the performance of its services.

Ms. Felty relied on E&Y’s advice in reaching a global settlement with her former husband, but later learned that the advice had been erroneous. Ms. Felty thus suffered an unexpected tax liability of more than $500,000 and she sued E&Y for damages for negligence.  E&Y conceded negligence, however, stated that its liability was limited to the fees paid of $15,314.  Both the trial court and British Columbia Court of Appeal agreed with the position of E&Y and limited the damages recoverable by Ms. Felty to $15,314.

Tax lawyers are not permitted to limit liability to their clients through provisions in their retainer agreements.  In many Provinces, however, tax accountants can.  When retaining tax accountants it is highly recommended that you carefully read any retainer agreement governing the relationship and strike out provisions that limit your accountant’s liability to you for their professional negligence.  If they are not prepared to do so, we recommend you find one that will… or hire a tax lawyer instead.

Click here to read the decision of the British Columbia Court of Appeal in Felty.