A company retained an accounting firm to audit its financial statements. The engagement letter provided that any action by the company against the accounting firm had to be commenced within 24 months after the firm delivered its audit report.
After the firm delivered its audit report, the company and the owner sold the company for $80 million. The company warranted to the buyer that its financial statements were prepared in accordance with GAAP. The buyer subsequently sued the company and its owner, alleging that the company’s financial statements did not conform to GAAP. After that case settled, the owner and the company sued the accounting firm. The superior court held that those claims were time-barred under the contractual limitations period.
The only issue in the Court of Appeals’ published opinion was whether the contractual limitations period applied to the owner, who had not signed the engagement letter containing the contractual limitations period. (The Court of Appeals dealt with other issues in a separate memorandum decision.)
To decide this issue, the Court adopted a doctrine developed in other jurisdictions, the closely-related-party doctrine. That doctrine holds that under appropriate circumstances, non-signatory transaction participants may benefit from and be bound by contract terms when the non-signatory is “closely related” to a signatory or the dispute. In determining whether a non-signatory is closely related to a contract, courts consider the non-signatory’s ownership of the signatory, its involvement in the negotiations, the relationship between the two parties, and whether the non-signatory received a direct benefit from the agreement. Courts deciding also consider whether enforcement of the clause by or against the non-signatory would be foreseeable.
The Court held that the owner was “closely related” to the contract and that enforcement of the contractual limitation period against him was “foreseeable.” The owner owned the company and his claims against the accounting firm arose out of and related directly to the engagement letter between the company and the accounting firm. Accordingly, the contractual limitations period applied to the owner, making his claims untimely.
Judge Perkins delivered the opinion of the court; Judges Johnsen and Brown joined.
Posted by: Josh Bendor