Professionals play a critical role in establishing and building a sustainable business. Entrepreneurs often rely on their input, which drives critical decisions. However, there may be instances where their advice or actions result in financial loss. In these cases, the question arises: Can you hold that person liable? Understanding professional liability and the significance of a letter of engagement is key to answering this.
When Can You Hold a Professional Liable?
Professional liability generally falls within the scope of either contractual liability or delictual liability. The latter involves holding someone accountable for wrongful actions outside of contractual obligations. The case of Trustees for the Time Being of Two Oceans Aquarium Trust v Kantey & Templer (Pty) Ltd (2005) (“Two Oceans Aquarium Case“) provides a valuable framework for understanding when a professional, including professionals, may be held liable in delict.
The court laid out four essential elements:
- You must prove that the professional needed to meet the expected standard of care for their profession. The critical question is whether they acted with the skill and diligence expected of a reasonably competent professional.
- Proving wrongfulness in cases involving pure economic loss, such as faulty accounting leading to financial loss, is more challenging. In this context, there must be a legal duty of care that the professional breached. As noted in the judgment:
“When we say that a particular omission or conduct causing pure economic loss is ‘wrongful,’ we mean that public or legal policy considerations require that such conduct, if negligent, is actionable.”
This means that not all professional mistakes are grounds for liability—only those where public policy demands accountability.
- There must be a direct link between the professional’s negligence and the financial loss suffered. If multiple factors contributed to the loss, proving causation becomes more difficult.
- The professional should have been able to foresee that their negligence could cause the financial harm in question.
In the Two Oceans Aquarium Case, the plaintiff’s claim failed because they could have avoided the risk through proper contractual terms.
The Role of a Letter of Engagement
This brings us to the importance of a letter of engagement or written mandate. This document outlining the scope of the professional’s work, the responsibilities of both parties and the terms of the relationship is an essential tool in avoiding disputes and clearly defining liabilities.
The client must allege and prove (which is easier to do in the case of a written mandate or engagement):
- The mandate;
- Breach of the mandate;
- Negligence in the sense described above (viz. failure to exercise the required skill, knowledge and diligence expected of an average attorney);
- damages, which may require proof of the likelihood of success in the aborted proceedings;
- That damages were within the contemplation of the parties when the contract was concluded.
In Satara Ontwikkelaars v Krynauw (2016), which involved a delictual claim against an attorney, the court emphasised that professional liability often arises from a breach of contract. To succeed in a claim, a plaintiff must prove the existence of the mandate, a breach of that mandate, negligence, and the financial loss directly caused by that breach. A clearly defined letter of engagement or written mandate makes it easier to pinpoint when and how a professional breached their professional duties.
Moreover, a letter of engagement or written mandate sets realistic expectations. It delineates what the professional is and is not responsible for, reducing the chances of liability arising from a misunderstanding.
Lessons from the Thoroughbred Breeders’ Association Case
In Thoroughbred Breeders’ Association (“TBA”) v Price Waterhouse, the TBA alleged that the auditor’s negligence caused significant financial loss. However, the court found that Price Waterhouse had complied with the professional standards required of auditors, and the claim was dismissed. This case highlights that simply suffering a financial loss is insufficient; there must be a breach of professional standards. Auditors and professionals are often required to make difficult judgment calls, and courts are reluctant to impose liability unless it can be clearly demonstrated that they deviated from accepted practices.
Conclusion
When entering into a professional relationship with a professional, ensuring that you have a well-drafted letter of engagement is essential. It helps establish the scope of work, limits potential misunderstandings, and provides clarity on what constitutes negligence. This document can also shield you from unforeseen issues and help avoid disputes. When in doubt, always ensure that you and your professional agree on the terms before any work begins.
While it is possible to hold a professional liable for negligence, proving professional negligence is often challenging, especially in cases of pure economic loss. Courts are generally cautious about imposing liability without clear evidence that professional standards were breached. A letter of engagement serves as a safeguard, ensuring that both parties are aware of their rights and obligations from the outset.
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