Professional Negligence Claims against Solicitors, Financial Advisors, and Accountants
Carl Islam, Barrister TEP, 1 Essex Court, London
- Financial advisors
The tort of negligence is complete when three conditions are satisfied:
- the defendant owes a duty of care to the claimant;
- the defendant has acted or spoken in such a way as to break that duty of care; and
- the claimant has suffered relevant damage as a consequence of the breach.
The relationship of solicitor and client is primarily a contractual one and, as with any contractual relationship, a solicitor’s retainer is governed by the terms of the contract agreed with his client. This relationship is also regulated by both statute and the rules of professional conduct of the profession, the SRA Code of Conduct 2011 (http://www.sra.org.uk/solicitors/handbook/code/content.page).
A solicitor owes a concurrent duty of care to their client independently of their contractual obligations. A solicitor may also be liable to a third party for economic loss suffered as a consequence of a negligent misstatement or negligent advice despite the absence of any contractual relationship between them.
‘In Hedley Byrne & Co Ltd v Heller & Partners Ltd, Smith v Eric S Bush, Caparo Industries plc v Dickman, Henderson v Merrett Syndicates, White v Jones, Williams v Natural Life health Foods Ltd, Phelps v Hillingdon LBC, and Commissioners of Customs & Excise v Barclays Bank Ltd the House of Lords has explored the nature and scope of this professional liability. As the nature of liability has been clarified, three approaches to the imposition of a duty of care can be detected: the threefold test (foreseeability, proximity, and reasonableness), the incremental test (analogy with decided cases) and the assumption of responsibility test (analogy or equivalence with contract). It is now clear that if the assumption of responsibility test is satisfied, this will be sufficient to impose liability although in many cases the application of the three tests will tend to lead to the same result. The assumption of responsibility test is most useful in cases where the relationship is ‘equivalent to contract’ but the less applicable the analogy with a contract becomes, the less reliable or suitable a guide the assumption of responsibility test provides. In Customs & Excise Comrs v Barclays Bank plc  Lord Mance drew attention to the two core areas in which the assumption of responsibility test has led to the imposition of a duty of care: ‘(1) where there was a fiduciary relationship and (2) where the defendant has voluntarily answered a question or tenders skilled advice or services in circumstances where he knows or ought to know that an identified plaintiff will rely on his answers and advice.’ (‘Solicitors’ Negligence And Liability’ (2013) by William Flenley QC and Tom Leech QC, paragraph 1.13).
Lord Mance went on to state, ‘This review of authority confirms there is no single common denominator, even in cases of economic loss, by which liability may be determined. In my view the threefold test of foreseeability, proximity and fairness, justice and reasonableness provides a convenient general framework although it operates at a high level of abstraction. The concept of assumption of responsibility is particularly useful in the two core categories of case identified by Lord Bowne-Wilkinson in White v Jones , at p247F-G, when it may effectively subsume all aspects of the threefold approach. But if all that is meant by voluntary assumption of responsibility is the voluntary assumption of responsibility for a task, rather than of liability towards the defendant, then questions of foreseeability, proximity and fairness, reasonableness and justice may become very relevant. In White v Jones itself there was no doubt that the solicitor had voluntarily undertaken responsibility for a task, but it was the very fact that he had done so for the testator, not the disappointed beneficiaries, that gave rise to the stark division of opinion in the House. Incrementalism operates as an important cross-check on any other approach.’
The precise scope of a solicitor’s duty to advise depends amongst other things upon the extent to which the client appeared to need advice. An inexperienced client is entitled to expect his solicitor to take a much broader view of the scope of his retainer and of his duties than will be the case with an experienced client. The test is what the reasonably competent practitioner would do having regard to the standards normally adopted by his profession, which is directly related to the confines of the retainer, Midland Bank v Hett, Stubs & Kemp . In Cancer Research Campaign and ors v Ernest Brown & Co (a firm) and ors  the extent of a solicitor’s duty to give tax advice (about the IHT savings that could have been achieved by the making of a post-death variation) was expressed by Mr Justice Harman in the following terms,
‘I do not doubt the solicitor, in considering the will, must consider what inheritance tax complications that testator will cause by the bequests for which he is given instructions. But I refuse to hold, extending the duty to advise by, it was said, analogy, that there arises a duty to inform the intended testator , who has come in to instruct a solicitor about his or her will, about tax avoidance schemes in connection with some quite other estate.’
A solicitor who prepares a will is obliged to take any necessary steps to put his client’s wishes into effect. He should therefore explain the consequences of implementing T’s testamentary planning strategy, and cannot abdicate professional responsibility by instructing counsel, Estill v Cowling Swift and Kitchen . In a client care letter a solicitor can expressly carve out the giving of tax advice from the scope of his retainer. Regarding the existence of a duty to give tax advice see Carradine Properties Ltd v DJ Freeman & Co , and Hurlingham Estates Ltd v Wilde & Partners  (where a duty to give tax advice was held to exist in a property transaction).
A solicitor must ensure that their client is fully advised about execution of their will. In Esterhuizen v Allied Dunbar  the Judge stated,
‘The process of signature and attestation is not completely straightforward and disaster may ensue if not correctly done. Any testator is entitled to expect reasonable assistance without having to ask expressly for it. It is in my judgment not enough just to leave written instructions with the testator. In ordinary circumstances just to leave written instructions and to do no more will not only be contrary to good practice but also in my view negligent.’
The case is also authority for the proposition that the standard of care applicable to solicitors applies with the same rigour to non-solicitor will-writers. Note that professional indemnity insurance will not apply if a firm of accountants or a trust company draft an English law trust relating to English property. Under s.22 Solicitors Act 1974 and subject to minor exceptions contained in s.22(2), and (2A) this is a criminal offence.
Unless instructed expressly, a solicitor does not normally have a duty to advise his client about the commercial wisdom of a transaction, particularly where the client was an experienced businessman. However, if in the course of carrying out his retainer, the solicitor becomes aware of a risk, or potential risk to his client, he is under a duty to inform his client. In Gabriel v Little & ors  the judge stated the following principles:
- The starting point is that a solicitor’s duty is to be measured against his retainer. This has been well settled since at least Midland Bank Trust Co Ltd v Hett Stubbs & Kemp . It was explained in Pickersgill & anr v Riley , ‘[as] to the extent to which a solicitor should make enquiries or investigate matters that he has not been asked to enquire into or investigate, their Lordships think that para 10-160 in Jackson & Powell on Professional Negligence (5th ed, 2002) correctly states the position: ‘In the ordinary way a solicitor is not obliged to travel outside his instructions and make investigations which are not expressly or impliedly requested by the client.’ In support of that proposition the text goes on to refer to Clarke Boyce & Mouat , A Privy Council decision, where Lord Jauncey of Tullichettle said, at p.437: ‘When a client in full command of his faculties and apparently aware of what he is doing seeks the assistance of a solicitor in the carrying out of a particular transaction, that solicitor is under no duty whether before or after accepting instructions to go beyond those instructions by proffering unsought advice on the wisdom of the transaction.’ And in Reeves v Thrings & Long  Sir Thomas Bingham MR said, at p.275, in a dissenting judgment: ‘It will always be relevant to consider what the solicitor is asked to do, the nature of the transaction and the standing and experience of the client…it was in my view [the solicitor’s] duty to draw [his client’s] attention to any pitfall, particularly any hidden pitfall, the contract might contain.’ Simon Brown LJ said, at P.279: ‘I cannot accept that [the solicitor] was under any further duty to his client, any duty to advise him upon the commercial implications or importance of the access provision or to warn him against the risks that it might pose for the future development, operation or sale of the hotel. These matters are well within the client’s competence to appreciate and evaluate for himself business considerations rather than legal ones.’
- Nevertheless, the principle that a solicitor’s duty is strictly circumscribed by his instructions must not be taken too far. [Counsel] referred me to the observations of Laddie J in Credit Lyonnais v Russell Jones & Walker : ‘However, if, in the course of doing that for which he is retained, he becomes aware of a risk or a potential risk to the client, it is his duty to inform the client. In doing that he is neither going beyond the scope of his instructions nor is he doing extra work for which he is not to be paid. He is simply reporting back to the client on issues of concern which he learns of as a result of, and in the course of, carrying out his express instructions. In relation to this I was struck by the [following] analogy. If a dentist is asked to treat a patient’s tooth and, on looking into the latter’s mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. So too, if in the course of carrying out instructions within his area of competence a lawyer notices or ought to notice a problem or risk for their client of which it is reasonable to assume the client may not be aware, the lawyer must warn him.’ I think that this passage accurately reflects the legal position.
While a professional advisor was not necessarily liable for all the consequences of the client entering into a transaction, they were liable for losses falling within the scope of the duty which had been broken. In Gabriel v Little & ors  the judge referred to the following passage from the judgment of Lord Hoffmann in South Australia Asset Management Corp v York Montague Ltd : ‘…a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them. The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable losses which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong.’
The duties of financial advisors arise from a range of sources: statutes; the common law; and codes of practice. Breach of these duties may give rise to civil liability. Some liabilities are characterized by reference to a duty, (e.g. breach of contract), others may be characterized by reference to the relevant default, (e.g. misrepresentation). Whether and, if so, to what extent liability may arise from one or more sources will require close analysis of the circumstances and context of each case.
In Peekay Intermark Ltd & Anor v Australia and New Zealand Banking Group Ltd , Richard Sibbery QC stated,
‘The true nature of the product was very different from what Mrs B told Mr Pawani. It was a derivative product taking the form of a structured deposit, which gave investors no interest in any underlying GKO, and no say in how the investment was to be liquidated in the event, for example, of sovereign default. Accordingly, on the first main issue I have concluded that the nature of the product on offer was indeed misrepresented to Mr Pawani, in a fundamental respect, and that he reasonably understood from what Mrs B told him that Peekay would be acquiring an interest in a GKO, with a USD hedge. I am satisfied that Mr Pawani did no more than glance through the FTCs and the Risk Disclosure Statement. Having seen and heard Mr Pawani give evidence, I do not find this at all incredible, as ANZ suggested it was. Mr Pawani clearly placed great confidence in GPB as his private bankers, and had evidently had no prior cause to think that the FTCs would contain any nasty surprises. He did notice the heading to the FTCs, “USD Hedged Russian Treasury Bill”, which he reasonably regarded as consistent with what he had been told about the product by Mrs B. He did not, however, take in either the fact that the FTCs described a structured deposit, which gave investors no interest, whether legal or equitable, in the GKO defined therein as the Reference Obligation, or the settlement procedures applicable in the event of default. Mr Shah, the countersignatory, did no more than exactly what he was told to do by Mr Pawani, ie. to initial and countersign the documents. In failing properly to read the FTCs Mr Pawani was, as the Claimants accepted, taking the risk that they contained subsidiary or ancilliary terms which were not to his liking. He was unwise not to do so, as he recognised in the course of his testimony. Nothing in this judgment should be taken as an encouragement to investors to ignore written terms and conditions applicable to their investments. However Mr Pawani’s initialling/signature and return of the FTCs and the Risk Disclosure Statement did not in my judgment nullify or supercede Mrs B’s prior oral misrepresentation as to the very nature of the product being marketed. Mr Pawani had no reason to think that the terms and conditions he was expecting to receive and to be asked to sign and return would relate to a fundamentally different product from that which had been described to him. He assumed, as did Mrs B, that if there was a material change in the FTCs from what had been discussed over the telephone, it would have been pointed out. In the circumstances, Mr Pawani’s initialling/signature and return of these documents, under cover of his instruction letter which referred to them, does not, contrary to the submissions of ANZ, show that he was content to contract on the terms of the FTCs irrespective of any prior misrepresentation as to the nature of the product to which they applied, or that he cannot have been induced by and did not rely on any such misrepresentation in making the investment. Whilst I did not find the case on which the Claimants relied, Arnison v. Smith (supra), a particularly helpful analogy, I reject ANZ’s submission that an express misrepresentation as to the terms of the FTCs themselves, or a representation by Mrs B that the Claimants could safely ignore the FTCs, would have been necessary in the light of Mr Pawani’s receipt, initialling and return of the FTCs. I do not think that Woolf LJ was purporting in Lloyds Bank PLC v. Waterhouse (supra) to lay down any rule of law to the effect that a party who seeks to disown his own document – such as a contractual document initialled or signed by him, as here – has to show that misrepresentations were made as to the nature or effect of that document. But in any event the principles applicable here are those applicable to claims for damages for misrepresentation under section 2(1) of the Misrepresentation Act 1967, not those applicable to a claim to avoid a contract on the grounds of misrepresentation. There is no principle of law which prevents a party to a written contract for the sale of a product (whether an investment product or something more tangible) from claiming damages for misrepresentation where he has been induced to enter into the contract by a pre-contractual misrepresentation as to the nature of the product sold. Whether he has been so induced will be a question of fact in each case. I am satisfied that Mr Pawani was in fact induced to invest US$250,000 in the name of Peekay by Mrs B’s misrepresentation as to the nature of the product. I accept his evidence that he would not have made the investment if he had known the true position, namely that Peekay would have no interest whatsoever in any GKO, which would merely be the Reference Obligation for the purpose of a derivative product, and no control over what was to happen in the event of a default in relation to that Reference Obligation. The element of control was important to Mr Pawani, and he would, for example, have wanted at least the opportunity to participate in any restructuring option in the event of sovereign default. This is borne out by the fact that he had retained other investments affected by the Russian default in the hope that their values would recover, as at least some did. Although he realised that he would be one of several investors with an interest (so he thought) in the GKO, and had given no thought to how, in the event of a default, the position would be resolved between the participating investors, he would at least have had some control: the liquidation of the investment would not have been entirely out of his hands, as was in fact the case. Peekay was, in effect, locked into its investment from the moment it was made, and in any event did not discover its true nature until after the Maturity Date, 16th October 1998, or indeed until after ANZ had operated the Appendix 2 machinery to produce a return to Peekay of only US$ 5,918.06. In the circumstances, the correct measure of damages under section 2(1) of the Misrepresentation Act 1967 is the difference between that sum and the amount of the investment, namely US$ 244,081.94. In the absence of any plea of contributory negligence, I do not have to consider whether section 1 of the Law Reform (Contributory Negligence) Act 1945 would in principle be applicable to a case such as this (in the light of Gran Gelato v. Richcliff (Group) Ltd  Ch. 560), and if it was, to what extent, if at all, it would be just and equitable to reduce such damages on account of any “fault” on the part of Peekay.’
In Mehjoo v Harben Barker (a firm) & Anor  (Court of Appeal), Lord Justice Patten observed,
‘An accountant who is retained by a client to deal with his personal financial affairs will inevitably have to point out what might be the hidden tax consequences of any particular proposal [i.e. routine tax advice]. This may well arise in the context of carrying out general accounting services such as preparing tax returns or more general discussions about the client’s business plans. Similarly, in handling the client’s tax affairs the client can expect his accountant to advise on any available tax reliefs under the relevant fiscal charge which may be available to him to reduce his tax liabilities. But routine tax advice of this kind, though an important part of an accountant’s ordinary duties, is not what this case is about. And Mr Stewart is, I think, right in his submission that much of the difficulty with the judge’s analysis of the scope of HB’s retainer and duty of care stems from a failure to differentiate between the tax advice of the kind which Mr Purnell gave to Mr Mehjoo on the occasions referred to by the judge and the much more sophisticated form of tax planning exemplified by the BWS which often involves a re-formulation of the transaction in order to bring about particular tax consequences rather than a mitigation of the tax liability which the transaction will otherwise produce… HB were not specialist tax planners of the kind I have mentioned and never offered to give the claimant such advice. Their retainer letter listed entirely conventional forms of tax advice including what they described as tax planning advice on the best use of reliefs. A more extensive tax planning service was available only on request and was never requested… As I have already explained, the giving of general tax advice (such as the availability of reliefs) was undoubtedly part of the existing retainer but it is difficult to see why a positive duty to advise on such matters should be extended in this case …to include a duty to give specialist tax planning advice as understood by the judge. HB were not and had never held themselves out to be specialist tax planners; and had never given Mr Mehjoo advice of that sort. It is therefore surprising to say the least that from a course of conduct which did not involve tax planning, they should be taken to have assumed a positive duty to give advice of that kind. The judge’s conclusion that such a duty had arisen by the time of the 2 October meeting is not, in my view, sustainable… I am not therefore persuaded that HB were under any duty to advise the claimant of significant tax advantages which, to their reasonable knowledge, did not exist.’
In the same case Lord Justice Lewison further pointed out,
‘What, to my mind, went wrong was that the judge lost sight of the wise words of Oliver J in Midland Bank Trust Co Ltd v Hett Stubbs & Kent  Ch 384 at 402:
“There is no such thing as a general retainer in that sense. The expression “my solicitor” is as meaningless as the expression “my tailor” or “my bookmaker” in establishing any general duty apart from that arising out of a particular matter in which his services are retained. The extent of his duties depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do.
Now no doubt the duties owed by a solicitor to his client are high, in the sense that he holds himself out as practising a highly skilled and exacting profession, but I think that the court must beware of imposing upon solicitors – or upon professional men in other spheres – duties which go beyond the scope of what they are requested and undertake to do. It may be that a particularly meticulous and conscientious practitioner would, in his client’s general interests, take it upon himself to pursue a line of inquiry beyond the strict limits comprehended by his instructions. But that is not the test. The test is what the reasonably competent practitioner would do having regard to the standards normally adopted in his profession, and cases such as Duchess of Argyll v Beuselinck  2 Lloyd’s Rep 172; Griffiths v Evans  1 WLR 1424 and Hall v Meyrick  2 Q.B. 455 demonstrate that the duty is directly related to the confines of the retainer.”’
White v Jones : http://www.bailii.org/uk/cases/UKHL/1995/5.html
To read my note ‘CGT / IHT Tax Trap & Professional Negligence’ please click on this link:LINK
To read my note ‘Remedies for Breach of Contract and Negligence’ please click on this link: LINK