Professional negligence update: scope of the duty to clients

Feature | 2 July 2012

Katie Papworth and Sophie Davies discuss recent cases concerning the scope of a professional’s duty to its clients

Broker negligence

The Court of Appeal decision in Jones v Environcom Ltd and Others [2011] EWCA Civ 1152 upheld David Steel J’s finding at first instance that, while the broker in this case acted in breach of its duties owed to the insured, no loss was suffered as a result of that breach because the risk was uninsurable in any event.

The defendants in the action, Environcom, ran a recycling business which involved the destruction of refrigerators using a plasma gun. In September 2007 a major fire (thought to be caused by a plasma gun) resulted in Environcom making a claim under its insurance policy. Insurers declined coverage for reason of non-disclosure of the use of plasma guns and of various smaller fires that had occurred at the plant previously. Environcom commenced third-party proceedings against their insurance brokers, Miles Smith, for failing to advise Environcom of its disclosure obligations and for failing to take adequate steps to elicit information requiring disclosure.

At first instance, it was Environcom’s 
case that Miles Smith’s breach of duty 
resulted in the failure of insurance cover. This was dismissed by David Steel J who 
found that, while Miles Smith had failed to give adequate advice, Environcom had failed to establish that they would have taken any risk reduction steps, and, even 
if they had, that insurance cover would have been provided in light of the disclosure. Finally, David Steel J concluded that even if cover had been obtained, 
the preconditions of such cover would probably have prevented the fire from occurring and therefore Environcom 
would not have had to make a claim 
under its insurance.

Environcom appealed the decision, focusing on David Steel J’s final point that, had Miles Smith not breached its duties, Environcom would have taken 
risk reduction steps and therefore the fire would not have occurred. In giving the leading judgment, Rix J found that the ‘no breach, no fire’ argument was a new issue and represented a change in Environcom’s case for which they would require permission to amend pleadings.

While permission was refused and 
the appeal dismissed on procedural grounds, it is interesting that the Court 
of Appeal did not rule out the possibility that such a claim could succeed, nor did 
Rix J consider there to be any logical difficulty in allowing both cases to be pleaded in the alternative (but for the broker’s negligence, cover would have 
been in place for the fire, and, in the alternative, but for the broker’s negligence, the fire would not have happened). Accordingly, practitioners suing brokers may wish to consider drafting their pleadings to cover both eventualities, although there are likely to be difficulties 
in establishing a causal link between no 
loss and the negligence.

This case is a salutary reminder to brokers as to the burden of disclosure. Unfortunately, the Court of Appeal did not address the disparity between the first instance decision in this case with the first instance decision of Synergy Health (UK) Ltd v CGU Insurance plc [2010] EWHC 2583 (Comm), in which Flaux J said that there was no definite requirement for brokers to give oral advice about disclosure and instead said that it would depend on the circumstances and relationship between broker and insured.
Brokers continue to be exposed to professional negligence claims and this issue is likely to be considered further.

Accountants: continuing duty argument

Following the case of Shepherd v Pinsent & Co [2012] EWHC 43 (TCC) (a solicitor’s negligence case), the High Court has 
again considered the effect of a contractual obligation to review past advice in 
two recent cases: Integral Memory Plc v Haines Watts [2012] EWHC 342 and 
Quayle v Rothman Pantall & Co [2012] 
EWHC 1474 (Ch).

In the subject case Integral Memory instructed Haines Watts, a firm of accountants, to provide tax advice in relation to a discretionary bonus scheme, the aim of which was to achieve national insurance contributions savings. Integral Memory argued that in an oral agreement, which was partly evidenced in writing, Haines Watts had advised that the scheme would achieve such savings unless there was a change in law, and that Haines Watts would advise Integral Memory if there was such a change in the law.

Integral Memory alleged that there was such a change in the law in 2003 and that Haines Watts negligently and/or in breach of contract had failed to advise it of this change, causing it to suffer a loss. Proceedings were issued against Haines Watts in 2011. On the face of it there was no defence to liability as it was plain that the law had changed, rendering the scheme invalid, and Haines Watts had failed to advise Integral Memory of the change.

However, Haines Watts pointed out that the failure to advise of the change in the law occurred in 2003, and it was at this point in time that the contract had been breached, meaning that the claim was time barred. In response, Integral Memory submitted that Haines Watts was under a continuing duty to inform it of the change. Haines Watts was therefore under a continuing obligation that arises afresh day after day, and that on each successive day there is a fresh breach of 
the contract.

Richard Sheldon QC, sitting as deputy judge, rejected Integral Memory’s argument as to a continuing contractual obligation, finding that there was a single breach of the agreement when the law changed in 2003 and that thereafter there was a failure to remedy an existing breach, not the commission of a fresh breach. The claim in contract was time barred.

This case illustrates that the ‘continuing duty to review advice’ argument cannot be used as a mechanism for overcoming the standard six-year limitation period. Furthermore, it is a useful reminder of the importance of considering the issues surrounding limitation at the outset of any professional negligence matter.

In Quayle, the claimant, a shareholder and managing director of a holding company of a property investment group, received personal tax planning and financial advice from Rothmann Pantall, a firm of chartered accountants, which was also the group’s 
tax adviser.

At the hearing of an application by Quayle to re-amend its particulars of claim, it sought to amend its claim to state that when the group was advised about matters that affected its shareholding, Rothmann Pantall was under a duty to have regard to the effect of that advice on the initial advice provided to Quayle. Furthermore, Quayle pleaded that Rothmann Pantall was under a continuing duty to review the advice first given in 2002 through to termination of the retainer in 2007 (after the first letter of claim was sent).

Rothmann Pantall rejected the re-amendments proposed by Quayle on the basis that: a) the amendments amounted to new claims; b) the limitation period had expired; and c) the new claims do not arise out of the same facts as the original claim.

Mr Justice Peter Smith noted that Quayle’s proposed re-amendment (the continuing duty argument) would eliminate any limitation points as it will run until the retainer was terminated in 2007 and therefore permitted the amendment on the basis that the continuing duty argument 
is “plainly one that has a real prospect 
of success”.

The trial is listed for this October and will be of interest for professional negligence practitioners and professionals given that there is likely to be an increase in claims running the ‘continuing duty’ argument.

It is apparent from the case law to date that the success of the ‘continuing duty’ argument will largely depend on the professional’s instructions under the agreed retainer. As a result, professionals need to ensure that they have a system in place whereby they can easily identify the matters in which they have agreed to provide continuing advice, whether it be on a change of law or in respect of a change in the client’s circumstances.

Solicitors’ duties

In Padden v Bevan Ashford [2011] EWCA Civ 1616, the Court of Appeal allowed an appeal against dismissal of a claim against Bevan Ashford for failure to properly advise the claimant in respect of a transaction whereby she effectively lost her interest in her home and other assets.

At first instance, the High Court held that there was no case for Bevan Ashford to answer on the basis that the solicitor concerned had only had a short initial meeting (less than 15 minutes) free of charge without an appointment and the claimant was determined to proceed with the transaction in any event. In rejecting this approach, the Court of Appeal confirmed that Bevan Ashford’s duty did not diminish because there was no charge for the meeting. The claimant had clearly approached Bevan Ashford to obtain legal advice in connection with an important and risky transaction.

The Court of Appeal’s decision highlights the need for firms to act with caution and ensure their advice contains appropriate caveats when dealing with enquiries from potentially new clients, or offering free ‘helpline’ services to existing clients. In light of this decision, firms should ensure that attendance notes are made of all meetings/conversations where advice is provided, regardless of whether or not the firm receives formal instructions.

Vol 156 no 26 03-07-12

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