Enforcing Limits: British Columbia Court Of Appeal Weighs In On Limitation Of Liability Clauses In Agency Context

The ability to contractually limit liability, such as tort liability, continues to be an area ripe for appellate courts to clarify.1 There remains a degree of uncertainty about whether and when a limitation of liability clause will be enforceable. The latest development comes from the British Columbia Court of Appeal ("BCCA") in Felty v Ernst & Young, which considered a limitation of liability clause in the context of an agency relationship.2 In that case, the BCCA called the question of enforceability of so-called exclusion clauses "vexed"3 but ultimately concluded that the clause in that case was enforceable: recovery was limited to the fees paid to a tax advisor.

Background and Decision Below

Ms. Felty entered into a global divorce settlement, formalized in a court order based in part upon US tax advice from Ernst & Young LLP ("EY"). Ms. Felty's lawyer had retained EY to provide US tax advice. EY's engagement agreement was signed by and in the name of the lawyer and her Vancouver law firm who represented Ms. Felty in the divorce litigation (the "Engagement Agreement"). The Engagement Agreement contained a limitation of liability clause which limited EY's total liability to its client for any claim arising out of the performance of its services to the total fees paid, regardless of the form of claim.4

Pursuant to the Engagement Agreement, EY advised Ms. Felty's lawyer that she did not have to pay any US tax on a proposed transfer of shares in a divorce settlement offer. Based on this advice, Ms. Felty and her solicitor approached the divorce settlement on the basis that Ms. Felty would not be liable for any US tax on the transfer of shares. A settlement was reached and a consent order entered.

EY's tax advice was erroneous and Ms. Felty was liable for $544,106 USD in US tax for the transfer. Ms. Felty sued EY in negligence, which was effectively conceded by EY at the start of trial.5

The trial judge held, inter alia, (1) Ms. Felty was bound by the terms of the retainer agreement with EY, as her agent and lawyer had signed it on her behalf, (2) the limitation of liability clause was enforceable and (3) awarded $15,314.95 in damages, being the amount Ms. Felty paid in fees to EY.

Issues on Appeal

On appeal, the BCCA considered whether:

Felty was contractually bound by the Engagement Agreement; The limitation of liability clause was unenforceable on public policy grounds; and, Damages were limited to the amount of fees paid to EY. Ms. Felty...

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