Limiting Liability Through Contractual Agreement

Can an Engagement Letter Be Made Bulletproof?

Craig P. Ehrlich, and Joanne D. Wiliams

Fearing catastrophic jury verdicts for malpractice, many professionals are increasingly using liability-limiting language—particularly waivers of punitive damages and alternate dispute resolution agreements. For example, in their 2006 year-end proxy statements, Brightpoint, Inc., and UDR, Inc., disclosed that their agreements with Ernst & Young LLP were subject to “alternative dispute resolution procedures and an exclusion of punitive damages.” Waste Management Corp.'s auditor agreement is similar, but it refers only to “mutual exclusion of punitive damages.” Sun Microsystems's auditor agreement is subject to alternative dispute resolution procedures. Likewise, FTI Consulting states that its 2006 engagement letter with KPMG was “subject to alternative dispute resolution procedures and an exclusion of punitive damages.”