Afan Valley Ltd v Lupton Fawcett LLP: Scope of duty in professional negligence claims

The Court of Appeal's decision in Afan Valley Ltd & Ors v Lupton Fawcett LLP [2026] EWCA Civ 2 provides important clarification on the scope of duty and recoverable losses in professional negligence claims, particularly where the alleged breach concerns regulatory advice.

The case involved 43 insolvent companies that operated investment schemes through special purpose vehicles, raising over £68 million from investors. These schemes offered substantial returns, including annual "rent" of 8-12% and a buy-back option at 125% after ten years. The claimants alleged that Lupton Fawcett, their solicitors, negligently failed to advise that the schemes constituted collective investment schemes (CISs) under the Financial Services and Markets Act 2000, exposing them to significant liabilities under section 26 FSMA.

Section 26 FSMA renders agreements made by unauthorised persons unenforceable and entitles investors to recover their money plus compensation for losses sustained. The claimants argued that had proper advice been given, the schemes would not have proceeded, avoiding these liabilities. They quantified their loss at approximately £63.5 million, representing investor funds received less returns paid.

The Court of Appeal unanimously dismissed the appeal, upholding Sheldon J's decision to strike out the claims. Lord Justice Nugee, giving the leading judgement, emphasised that defendants are only liable for losses within the scope of their duty of care, applying the principles established in SAAMCO and refined in Manchester Building Society v Grant Thornton.

The Court identified Lupton Fawcett's duty as concerning "the impact of FSMA if the schemes were CISs". This narrow formulation proved fatal to several aspects of the claim. The Court rejected arguments that losses arising from sales commissions and legal fees fell within the duty's scope, noting these costs would have been incurred regardless of whether the schemes were CISs.

Central to the appeal's failure was the "£ in £ out" argument. The Court held that receiving £68 million whilst simultaneously incurring a liability to repay that sum generated no net loss. This principle, established in Galoo Ltd v Bright Grahame Murray, meant the claimants were no worse off than if the schemes had not proceeded.

The claimants attempted to circumvent this logic by arguing they were liable for compensation under section 26(2)(b) FSMA beyond mere repayment. However, the Court found this claim inadequately pleaded in the particulars. More fundamentally, counterfactual analysis demonstrated that investors would likely have had equally valuable claims in deceit or contract had the schemes not been CISs, given the pleaded fraud and dishonesty.

The Court applied a counterfactual test: would the losses have occurred even if the advice had been correct? In this case, the schemes would have collapsed identically had they not been CISs, as the collapse resulted from fraudulent operation rather than regulatory status. The only difference would have been the absence of section 26 liabilities, but investors would have retained strong alternative claims.

The decision reinforces that professional negligence claims require careful analysis of duty scope and causation. Losses must not only flow factually from the breach but must also fall within the risks the duty was designed to guard against. The counterfactual analysis provides a valuable tool for testing whether losses truly result from the specific breach alleged, rather than from independent causes that would have occurred regardless.

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