Statutory liability in business

Statutory liability may, depending on the type of transaction, arise under section 90 of the Financial Services and Markets Act 2000 (FSMA). Under section 90, a person who is responsible for a prospectus or listing particulars may be liable to pay compensation to a person who acquires securities to which the prospectus or listing particulars relate where that person suffers loss as a result of any untrue or misleading statement in the document or the omission of any matter required. 

Persons responsible for a prospectus include:

• Each person who accepts, and is stated in the prospectus as accepting, responsibility for the prospectus.
• Each person who has authorised the contents of the prospectus.

Where a person accepts responsibility for a prospectus or authorises the contents of the prospectus they may state they are only responsible for specified parts in which case they are responsible only to the extent specified and only if the material is included in the form and context to which the person agreed. 

The methods of limiting liability to the client used in an engagement letter go further than straightforward exclusions of liability. They include:

• Defining the scope and responsibilities of the engagement.
• Restricting the way in which advice and opinions may be used, including restrictions on disclosure to third parties.
• Tailored limitation provisions, for example, caps on liability and proportionality clauses.
• Indemnities by the client in favour of the adviser.

Historically, the scope of the engagement was often described in fairly broad language, on the basis that it would be impractical to list all the things which the adviser might be expected to do. However, due to increasing pressures on adviser's fees and greater competition for certain mandates, there has been a trend for some advisers to include more precise scopes of work in their engagement letters. Legal Engagement letters now also frequently specify any key assumptions underpinning the scope and fee provisions in the letter. Including these more detailed provisions can help to flush out any mismatch between the client and the adviser's expectations at an early stage. 

A broadly worded scope may suit an adviser where the details of the transaction have not been worked out at the time the letter is signed, since it will ensure that the adviser is not in danger of acting without authority. However, if the description is too wide, the adviser may become responsible for advising on matters which are outside its expertise or on which it does not wish to advise and as a result increase its liability risk and, potentially, unrecoverable fees.