(as featured in taxation.co.uk)

Lessons on professional negligence claims

Introduction

The recent case of McClean and others v Thornhill QC [2022EWHC 457 (Ch) (“McClean”) has brought to light the issues of bringing a claim in professional negligence. The article gives an overview of what must be proved to be successful in any professional negligence claims and the evidential hurdles the Claimant must surmount to be successful.

Proving Negligence

To prove negligence, the Claimant has to establish the following:-

  • a duty of care exists;
  • the Professional has breached the duty; and
  • that damage has been caused to the claimant as result of that breach.

Such claims are also linked to the retainer or Client Care Letter, which establishes the limits of the professionals work to be carried out and which establishes the contractual obligations. Any claim for professional negligence will refer to the contractual obligations as well as the obligations in tort. Any action brought will or should plead both if applicable.

In this article we hope to give an overview of the limits of the duty owed, whether the professional advises or simply imparts information, the issue of causation and the do’s and don’ts of advising clients.

The scope of the retainer / engagement letter

Save in certain cases, the award of damages are different under each ‘head of claim’. From the perspective of pursuing a claim, the lawyer acting for the Claimant should examine the retainer to ascertain whether the work complained about was within the scope of the retainer. Conversely if you are giving advice, then the retainer must meet the client’s needs but must protect the adviser to limit the liability of what the professional is contracted to do and what is within the area of advice/work sought by the client.

The professional and client may, by agreement, limit the duties which would otherwise form part of the professional’s retainer. As a matter of good practice, the professional should confirm such agreement in writing. If the professional does not do so, the court may not accept that any such restriction was agreed.

In the case of a consumer, legislation will apply despite any purported exclusion clauses attempting to limit or exclude liability. If in doubt get advice, especially if the retainer is complex or where the degree of liability (and potential award of damages),will be significant if things go wrong

Tort and the Duty of Care

From a tort perspective, the professional who holds themselves out as having a particular degree of expertise must act in accordance with the standards expected of such a professional.  The greater the degree of expertise held out, the greater the duty of care that is expected.

In Hurlingham Estates Ltd v Wilde & Partners [1997] STC 627, a conveyancer fell into a ‘tax trap’ when advising a client who was paying a large sum for a lease. It resulted in the client becoming exposed to a charge under TA 1988, s 34(1). According to Lightman J, this was an oversight that ‘any competent solicitor, practising in the field of conveyancing or commercial law, should be aware’. Indeed, the defendant’s solicitor admitted he had little knowledge of tax. His point was that he and the client had agreed he would not give any tax advice. As such, he was not culpable. However, in the absence of the client supporting this position and there being no confirmation in writing, the judge rejected this claim and asserted that the defendant had assumed the full responsibilities of a solicitor and was under the duty to advise on the tax consequences of the transaction. This assumed considerable significance in McClean, but an analysis is beyond the scope of this article.

Incidental advice

In the case of a solicitor, it is implicit in the solicitor’s retainer that he/she will proffer advice which is reasonably incidental to the work that he/she is carrying out. This generally applies to solicitors but there is no reason why it should not apply to, for example, accountants and any other tax advisers

A summary of these principles can largely be found in Minkin v Landsberg[1] . Here, the Court of Appeal set out a number of factors to be considered in relation to the duty of care owed. This case concerned solicitors’ negligence but is applicable to tax advisers also and was an argument deployed by Leading Counsel for the Defendant in McClean.

Those principles are as follows:

  • A solicitor’s contractual duty is to carry out the tasks which the client has instructed and the solicitor has agreed to undertake.
  • It is implicit in the solicitor’s retainer that he/she will proffer advice which is reasonably incidental to the work that he/she is carrying out.
  • In determining what advice is reasonably incidental, it is necessary to have regard to all the circumstances of the case, including the character and experience of the client.
  • In relation to (iii), it is not possible to give definitive guidance, but one can give fairly bland illustrations. An experienced businessman will not wish to pay for being told that which he/she already knows. An impoverished client will not wish to pay for advice which he/she cannot afford. An inexperienced client will expect to be warned of risks which are (or should be) apparent to the solicitor but not to the client.

This case was revisited in the case of Lyons v. Fox Williams LLP [2018] EWCA Civ 2347. in which the court held that:

“the solicitor’s obligation to bring to the client’s attention risks which become apparent to the solicitor when performing his retainer does not involve the solicitor in doing extra work or in operating outside the scope of his retainer.”

Additionally, the court held that there is only a duty on a solicitor to warn if, at the time, there was a risk or danger that the solicitor was or should have been aware of. Such hazards usually need to be obvious to the professional, but also be something that the client would not appreciate[2].

The Failure to Warn – a Tax Case

The Court of Appeal decision in Barker v Baxendale-Walker Solicitors [2017] EWCA Civ 2056, reversed the findings of the lower court. The case involved employee trusts for capital tax planning.

The claimant’s company had established an employee benefit trust (purportedly qualifying under IHTA 1984, s 86) with the claimant transferring to it his controlling interest in the shares. The argument was that, because the trust satisfied the conditions of s 86, there should be no transfer of value by virtue of s 28.

However, participators in the company are excluded from benefiting. It appears that one of the claimant’s objectives for the planning was ‘for the proceeds of sale to be enjoyed free of capital gains tax and inheritance tax’.

The deed establishing the trust provided that neither the claimant nor his spouse could benefit from outright distributions of income and capital from the trust. In addition, during the lifetime of the claimant and his spouse, the children were also excluded. However, after the parents died, the children could benefit from the trust free of capital gains tax and inheritance tax (the trust was established in 1998 – more than ten years before the disguised remuneration legislation in ITEPA 2003, Pt 7A). This ‘post death exclusion construction’ was somewhat unusual[3].

The details of the arrangements, however, are not important. The key in this case was whether the tax advice contained the required ‘risk warnings’. First, and contrary to the judge in the lower court, the Court of Appeal was of the view that ‘HMRC’s construction of [s 28] is very likely to be correct’ and that ‘Mr Baxendale-Walker’s construction of [the same] is very unlikely to be correct’.

However, it is not the case that the defendant was negligent because they took a particular view. It was arguable that a reasonably competent solicitor could have come to the same view. Instead, the central issue was whether enough warning had been issued to the client that HMRC (and the court) might take a different view. The question was whether ‘no reasonably competent solicitor in the position of the respondents would have failed to give the specific warning that there was a significant risk that the arrangement would fail’. It is incumbent on the adviser that, as part of the advice they provide, they must evaluate the position and determine whether, in all the circumstances, they should advise the client that there is a significant risk that the view he has taken may be wrong.

Interestingly, the judge suggested that a consideration of ‘all the circumstances might include:

  • The fact that this was a ‘very aggressive tax avoidance scheme’ that marketed an outcome that was ‘too good to be true’.
  • That the adviser’s fee was around £2.4m.
  • The high level of tax at stake meant ‘it should have been obvious to any reasonably competent solicitor practising in this area that there was a real risk that HMRC would take the post-death exclusion point at some stage’.

In failing to issue any such warning, the court found that ‘Mr Baxendale-Walker and his firm were clearly negligent’.

Causation

So far (perhaps) so good. However, if there is one obstacle to a successful claim it is the issue of causation. Even when a duty of care is established and it can be shown that there has been a breach of that duty, a claimant also needs to show that reliance upon the defendants advice caused the loss. We have broken the causation issue down to two distinct parts.

Factual causation: One needs to consider the counter factual position namely;  to compare the claimant’s actual position with one where there had been no negligence. In other words, would the loss have happened anyway or would the Claimant have proceeded in any event[4]. Annexed to this is the degree of reliance placed upon the advice.

In the authors’ experience, this is by far the biggest single factual issue likely to undermine the strength of  the claim brought. Anyone bringing such a claim must consider this issue thoroughly. This is always a question of evidential fact and the Claimant must be prepared to be put through a series of questions designed to elicit the strength of the causation aspect in the case they wish to bring.

In Barker v Baxendale Walker Solicitors (a firm) and another[5] the first instance Court (Roth J) did find the solicitor in breach of duty for failing to give a a general “health warning” about the EBT scheme (clear evidence of breach). However, this breach was not causative, as he further held that even if such a warning had been given, the claimant would nonetheless have proceeded with the EBT scheme (presumably because of the vast tax savings on a fund worth £35 million) and the evidence demonstrated that enquiries had been made by the Claimant about an alternative aggressive tax avoidance scheme.

Where for example tax avoidance scheme advice is under scrutiny, the Client might be asked questions such as

  • how many ‘schemes’ they entered;
  • What questions did they ask before entering;

If they were ‘serial avoiders’ or asked no questions, how might the causation test be decided evidentially? We venture not in favour of the Client and therefore the case will fail!

Legal Causation more properly termed remoteness: The second step is to determine whether the breach was the ‘legal cause’ of the loss. This is often referred to as ‘remoteness’ The adviser is not liable in damages in respect of losses of a kind which fall outside the scope of his duty of care.  The crucial element that must be demonstrated in every case is that the damage suffered by the claimant falls within the scope of the adviser’s duty, being damage the adviser was obliged to take care to prevent. As Lord Hoffmann put it in his seminal judgment in SAAMCO: “[The claimant] must show that the duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered.

The distinction between “information” and “advice” cases

In SAAMCO, Lord Hoffmann disapproved of the Court of Appeal’s distinction between “no-transaction” and “successful transaction” cases but drew his own distinction between “information” and “advice” cases.14

In the former, the adviser provides information for the purpose of enabling someone else to decide upon a course of action and must take reasonable care to ensure the information is correct. If he is negligent, he is responsible for the foreseeable consequences of the information being wrong -that will or may not include all of the damage suffered.

In the latter, the adviser advises whether or not a course of action should be taken and must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he is responsible for all the foreseeable loss which is a consequence of that course of action having been taken.

An example of this can be seen in McClean. Leading Counsel’s arguments for the defence (in part at least) was one of causation. In other words (in reality and when the factual evidence is scrutinised) how much reliance was placed upon the advice given. These individuals were ‘savvy’ investors had not sought advice from either other Tax Counsel or from IFA’s who introduced the scheme, asked no questions and would have proceeded anyway given the large amount of tax saved.

To illustrate the point further, in McClean an analysis of the Judgment of Zacarolli J on the issue of causation concluded that all of the Claimants failed to make out their case as to causation.

On the fundamental question as to what the Claimants would have done had Mr Thornhill QC’s opinions contained a risk warning addressed to the investors, and having heard all 10 sample Claimants give evidence, the Judge found that as a matter of fact, there was no reason to believe on the balance of probabilities that such a risk warning would have affected their decision to invest. In other words they would have proceeded anyway.

In coming to that conclusion, the Judge found the following:

  • at least some of the investors had not even seen, let alone read, the relevant Opinions, despite being permitted to see them, and of those who had seen them, some admitted that they relied not so much on what they said as that the fact that had been written by him, which tended to undermine the argument that added risk warnings to them would have made any difference to them;
  • the scheme Information Memoranda already included risk warnings which had clearly not prevented any of the Claimants from investing; and
  • the Claimants would only get access to the scheme through an IFA, and the Claimants adduced no evidence from their IFAs as to the impact a risk warning addressed to the investors would have had to their advice to the investors; the Judge said “It is for the Claimants to establish reliance and causation, and the lack of any evidence from their IFAs is a significant hurdle in this respect”.

Interestingly we advised one Client who had never seen Counsels advice but wanted to rely upon it as a decision to invest along with a very poor letter of advice from his then accountant. The client invested year after year in tax schemes that failed (a serial tax avoider). Not surprisingly, the advice was negative.

 Fighting Funds that have disappeared-some hope of recovery

One complaint of scheme participators is that none of monies set aside for a fighting fund appears to be available when needed. In some cases, they have simply ‘disappeared’.

It should be remembered that money ‘set aside’ for such purposes is held on trust. In our view it should have been held in solicitor client account for such purposes. If it has been misappropriated the scheme participants might collectively consider bringing an action for breach of trust against the promoter personally. Recently the distribution of money without the beneficiaries’ consent – in this case the participators – was held to be the subject of summary judgment in the courts.

Lessons for the tax adviser

Professionals who advise clients should consider these points:

There should always be an engagement letter. This should accurately reflect the scope of services – those the adviser intends to carry out and, as in Hurlingham Estates, those they wish to exclude.

As in Minkin and Fox Williams, the adviser might also be required to give advice that is ‘reasonably incidental’ to the subject matter of the engagement letter. Consider  the principles set out in those cases and apply them carefully.

A general accountant standards of care will be compared only to the tax advice that a ‘reasonably competent accountant’ would offer and nothing more. See P Cannon (TC6254) for an interesting ‘take’ on this issue.

Remember also, advice that is incorrect is not automatically negligent as long as another reasonably competent adviser would have acted in the same way.

However, it is necessary to ensure in these circumstances, that the advice includes the necessary specific risk warnings. In particular when:

  • the fees are significant;
  • there is a lot of tax at stake; and
  • the advice is an aggressive tax avoidance scheme – although if professional guidelines are being followed the adviser will not be advising on avoidance schemes.

Finally, do not underwrite a scheme otherwise the whole transaction, should it fail, will brings the claim for damages squarely to your door (if you think this would never happen, see Halsall & Ors v Champion Consulting Limited & Ors [2017] EWHC 1079 (QB).

For more detailed advice on professional negligence, or if you think you might have a claim (not just in relation to tax), please contact either of the authors.

 

[1] [2015] EWCA Civ 1152

[2] [2] See Healey v Shoosmiths [2016] EWHC 1723 (QB) in which Shoosmiths successfully defeated the claim on the grounds that given Mr Healey’s sophistication they did not have a duty to go further than highlighting and commenting on the liquidated damages provision in a draft copy of the contract

[3] As an aside, it seems that such a post-death exclusion construction in the context of an investment company is something that HMRC’s inheritance tax disclosure of tax avoidance schemes (DOTAS) rules is looking to capture – (see example 18 on page 114 in the revised HMRC DOTAS guidance).

[4] See the analogy of the Mountaineers knee in SAAMCo

[5] [2016] EWHC 664 (Ch) (23 March 2016)