Accountants’ Liability Developments in 2009 - Enforceability of Engagement Letter Provisions and Choice of Law

Sep 15, 2026

Uploaded by Ezra

In 2009, courts examined how engagement letters shape accountants’ liability disputes, particularly provisions governing dispute resolution and the governing-law threshold for third-party professional liability claims. Arbitration clauses in audit engagement letters were repeatedly enforced, including decisions granting motions to compel arbitration and addressing who decides arbitrability questions. A separate line of reasoning considered whether third-party claims fall within arbitration language tied to the engagement agreement’s scope.

LanguageEnglish

CategoryLetters

FormatPDF

Pages4

Reading Time2 min

AccessFree to download

Arbitration Clauses

Motions to Compel Arbitration

Scope of Arbitrability Questions

Enforcement Limits and Agreement Challenges

AccountAnts’ LiAbiLity DeveLopments in 2009: enforceAbiLity of engAgement Letter provisions AnD choice of LAw By Carol Lynn Thompson and Naomi A. Igra In 2009, several courts addressed issues related to one of the most important documents in any accountants’ liability case—the engagement letter defining the scope of the accounting firm’s engagement by its client. It is increasingly common for engagement letters to include provisions addressing how any disputes that may arise between the accounting firm and its client will be resolved. Several decisions this year discussed common engagement letter provisions, including arbitration clausesand limitation of liability clauses. Another decision addressed the important threshold question of what state’s law applies to professional liability claims brought by third parties against auditors. Arbitration Clauses Many audit engagement letters now contain arbitration clauses. There have been several decisions this year confirming the enforceability of such provisions and addressing the extent to which an accounting firm can rely on or invoke arbitration clauses in other parties’ agreements. First, in Ernst & Young LLP v. Martin, 278 S.W.3d 497 (Tex. App. 2009), the Texas Court of Appeals reversed a trial court decision and entered an order granting a motion to compel arbitration filed by Ernst & Young LLP (E&Y). The plaintiffs were California residents who had retained E&Y to provide tax advice. When the IRS disallowed the tax benefits claimed by the plaintiffs based on E&Y’s tax advice, they sued E&Y, asserting professional malpractice, fraud, unjust enrichment, and other common law claims. E&Y moved to compel arbitration based on a clause in its engagement letter, which provided that any disputes that could not be resolved by mediation had to be resolved by arbitration. The plaintiffs claimed that the arbitration clause could not be enforced because E&Y fraudulently induced them to enter into the agreement and that the agreement itself was unconscionable. The trial court denied E&Y’s motion to compel arbitration without explanation. The appellate court reversed, holding that the trial court had no discretion to deny E&Y’s motion given that the parties’ engagement letter required that an arbitrator resolve even the threshold question of whether the arbitration clause applied to the parties’ dispute. The court held that under the terms of the parties’ agreement, they had agreed to submit questions about the applicability or enforceability of the arbitration clause to an arbitrator and that under the Federal Arbitration Act (FAA), the parties’ agreement determined the scope of the issues subject to arbitration. Id. at 500–01. The plaintiffs argued on appeal that because E&Y’s engagement letter contained purportedly unlawful terms—such as limiting the amount of recoverable damages to the fees already paid to E&Y—that the agreement was unconscionable under California law and thus E&Y could not enforce the arbitration clause. The appellate court, however, distinguished the California case law cited by the plaintiffs and concluded that a court could resolve arbitrability questions only where there was a“challenge to the agreement to arbitrate itself.” [Id.](Id. at 500. The plaintiffs)[ at 500. The plaintiffs](Id. at 500. The plaintiffs), the court noted, had never argued that they did not knowingly agree to arbitration or that the specific agreement to allow the arbitrator to decide issues of arbitrability was unconscionable or invalid. Accordingly, the court concluded, the plaintiffs were bound by the express terms of the parties’ arbitration clause, which required any “arguments such as those made by appellees . . . to be decided by the arbitrator.” Id. at 501. Ernst & Young LLP also successfully moved to compel arbitration in a second case, Ernst & Young Ltd. Bermuda v. Quinn, 2009 U.S. Dist LEXIS 99385 (D. Conn. Oct. 26, 2009), decided by a federal district court in Conn

FAQs

What role do engagement letters play in accountants’ liability cases?

Engagement letters define the scope of an accounting firm’s engagement and often include dispute-resolution provisions that can control how later disputes are handled.

How did courts treat arbitration clauses in audit engagement letters in 2009?

Courts confirmed enforceability in multiple decisions and required arbitration when the engagement letter’s terms mandated arbitration for unresolved disputes.

What was the key threshold issue involving choice of law for third-party professional liability claims?

Courts addressed what state’s law applies to professional liability claims brought by third parties against auditors, framing a threshold legal determination.

Sep 15, 2026

Uploaded by Ezra