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Are your engagement letters enforceable?

Regulations designed to protect consumers could mean that your clients can enforce your engagement, but you can’t!

TAXGUIDE 3/12 (TECH 02/12 TAX)

Download this guidance on the enforceability of engagement letters.

The recent Technical Release, TAXGUIDE 3/12 (TECH 02/12 TAX), provides guidance on the enforceability of engagement letters in the light of regulations designed to provide consumer protection.

Read more about this guidance on the enforceability of engagement letters along with the updated guidance on letters of engagement.

Which regulations?

The regulations in question are:

  • The Cancellation of Contracts made in a Consumer’s Home or Place of Work etc. Regulations 2008 (Cancellable Contracts)
  • The Consumer Protection (Distance Selling) Regulations 2000 (Distance Selling Contracts)

How important are these regulations?

If the regulations apply to a contract you have with a client, you are legally obliged to provide the client with a written notice of their right to cancel. The client then has the right to cancel the contract within a set period of time, (seven calendar or seven working days depending on which regulations apply).

If you fail to provide the written notice, it could mean that the entire contract becomes unenforceable. The client, however, may still be entitled to enforce their side. The implication is that you may be unable to recover payment for work carried out or be unable to enforce a limitation of liability clause. Further possible statutory consequences are set out in the regulations.

Does this affect all engagement letters?

No. The regulations only apply to consumers. A consumer is “a natural person who … is acting for purposes which can be regarded as outside his trade or profession.”

This definition immediately excludes many clients, eg limited companies, trusts etc. However, the regulations could apply to work done for an individual in relation to their personal affairs, eg a company director wanting personal tax work.

The Cancellable Contracts regulations apply to contracts made:

  • during a visit to the consumer’s home or place of work, or the home of another individual;
  • during an excursion organised by the trader away from his business premises; or
  • after an offer made by the consumer during such a visit or excursion.

The Distance Selling regulations focus on contracts made exclusively using a communication method that means trader and consumer are not simultaneously physically present (ie telephone/internet).

Some contract types are specifically exempted in the regulations. However, it is unlikely they would apply to a typical accountancy firm.

How do I know if the regulations apply?

This can be broken down into two main steps.

1. Consider whether the client falls within the definition of a consumer.

2. If they do, then determine where and how the contract was made to see if either of the regulations apply.

Step one is relatively straightforward. As mentioned above, you are looking at where you act for individuals in relation to their personal affairs.

Determining where or how contract was made could be more difficult. Broadly speaking, a contract is made when an offer is made and accepted. An important point to note is that the engagement letter provides evidence of the terms of the contract, but it is not necessarily the contract itself.

If in doubt about whether the regulations apply to a contract, it is advisable to assume they do. This will prevent the consequences of failure to comply.

What actions do I need to take?

Consider including prompts in your file opening forms to establish whether a client is a consumer and whether the regulations apply.

Download and review the ICAEW guidance. The guidance contains template written notices that you can adapt for use where the regulations apply.

July 2012