Update | Professional negligence: Negligent litigation conduct

Clients who are disappointed by the outcome of their litigation can often feel in hindsight that it is their lawyer who is to blame for being too optimistic or pessimistic in their advice about the case. In the recent matter of Langsam v Beachcroft LLP [2012] EWCA Civ 1230, the claimant instructed the defendant firm of solicitors in relation to a professional negligence claim against his former accountants, which was settled by consent shortly before trial. The claimant then alleged that the defendant solicitors had, in the lead up to trial, given excessively cautious advice as to settlement and had failed to give appropriate advice on certain other matters. He claimed that this led to him settling the claim on less favourable terms than should have been the case. The defendants denied negligence contending that they had followed advice from leading counsel whom they had instructed in relation to the claim.

At trial, the judge dismissed the claim, finding that the critical advice was given ?by leading counsel (who was not a party), that the defendants were entitled to follow the advice, that the settlement figure suggested was not negligent, and that the defendants had not been negligent in relation to the handling of witnesses or the obtaining of valuations.

The claimant appealed. Dismissing the claimant's appeal, the Court of Appeal held by a majority that the judge had been entitled to find that the principal advice given and relied upon by the claimant in settling the claim was that of leading counsel rather than the defendant solicitors, with the result that the defendants would only be in breach of duty if that advice had been obviously or glaringly wrong such that they should have contradicted it.

The court unanimously agreed that the judge had been entitled to find that the advice was not wrong, and accordingly there was, in any event, no breach of duty by the defendants. The court held, among other things, that a lawyer would not be in breach of duty just because he did not provide an indication of the bracket or spectrum of likely quantum of a claim but only a figure at the bottom of the bracket, describing the claimant's submission to the contrary as entailing an over-prescriptive approach as to the way in which legal advice is given. The court rejected the claimant's complaints about the dismissal of his allegations of negligence in relation to failure to obtain witness statements ?and valuations.

The key risk management points to take from this case include the following. An obvious but important one is that the solicitor should spell out the positives and negatives of the litigation to the client. Despite the outcome in Langsam, it may be a sensible precaution to give to the client an idea of the spectrum of possible outcomes in the litigation as well as indicating where in the lawyer's judgment a reasonable settlement lies. Litigators are generally good at making attendance notes, but it is particularly important to ensure that notes are made of settlement advice and instructions, as there is perhaps a tendency to assume that the settlement agreement itself can be relied upon as documenting the client's instructions in this regard. Further, although the case is a confirmation that even solicitors who are themselves specialists can rely on counsel, it is nonetheless very important to ensure that counsel is properly instructed on a timely basis, otherwise it is likely that counsel's failure to give correct advice will be said to be due to the solicitor's own failings.

Unforeseeable risks

The Court of Appeal has given its ruling in Rubenstein v HSBC Bank [2012] EWCA Civ 1184, which relates to investment losses following the collapse of Lehman Brothers. In 2005, the claimant wished to invest the proceeds of sale of his home for about a year while he searched for a new property, and did not wish to accept any risk to the capital. Upon advice from an IFA at the defendant bank, including that the risk involved was the same as that for cash in a deposit account, the appellant invested the money in an AIG bond. The bond had two variable rate interest funds and the claimant's money was put into the enhanced fund, rather than the standard one. The claimant failed to find a property to purchase within a year and therefore the money remained in the bond for longer than intended. Following the turmoil in the financial markets in September 2008, including the collapse of Lehman Brothers, and the unprecedented run on major financial institutions including AIG, the claimant withdrew his money, but received less than his capital investment.

The claimant sought to recover his loss from the bank on the basis that he had been wrongly advised to invest in the bond. At first instance, the judge found that the IFA had acted negligently and in breach of the FSA's conduct of business rules then in force (COB) in recommending the investment. However, the judge found that the loss was irrecoverable from the bank because it was caused not by the breach of duty but by unprecedented market turmoil, and was therefore unforeseeable and too remote to be recoverable by the claimant.

The Court of Appeal held that the judge was correct to find that the financial adviser had been negligent and breached COB. The court reversed the judge's finding as to the recoverability of the claimant's losses, holding that those losses were not too remote a consequence of the breach of duty to be recoverable. The loss came about because of the very factor which made the investment unsuitable, namely its inherent susceptibility to risk from market movements. Although the collapse of Lehman Brothers may have been unforeseeable, the loss in value of the claimant's investment arose as a result of a collapse in the value of the market securities in which the enhanced fund was invested, which was foreseeable. The court also rejected the bank's further argument that, because the claimant had told the IFA that he would be unlikely to need the investment for more than a year, it should not be held liable for losses occurring in 2008, two years after the end of that period. Although the claimant thought it likely that he and his wife would buy a new home within a year, the possibility obviously existed that that timescale would be exceeded. Moreover, in circumstances where the claimant had been advised that the investment was equivalent to a cash deposit, there was no reason for him to be concerned about changing financial weather or for the bank to be free from responsibility once a year had passed.

Whether claimants can recover losses stemming from the financial crisis from professional advisers will be a live issue in a number of cases. This decision is therefore of interest, although its facts were at one end of the scale in that the claimant was advised by an individual who failed to understand the product in question, and an alternative fund existed that would have been suitable for the claimant. Ultimately, it was found that the loss was caused by the very thing that the client had sought protection from '“ susceptibility of his investment to market movements. In other cases defendants may be more successful with a foreseeability defence, dependant on factors such as the exact advice given, the sophistication of the client and risk tolerance, and the remove in time that the advice was given before the events of the financial crisis.

Breach of duty

In Newcastle International Airport v Eversheds [2012] EWHC 2648, the defendant firm received and acted upon instructions in 2006 from executive directors of the company to draft amended service contracts which provided inter alia, for bonuses to those directors upon the refinancing of the company. The defendant knew that the company had a remuneration committee, a function of which was to determine the company's policy on senior executive remuneration. It was contended by the company that the firm had acted in breach of duty, by taking instructions from the executive directors themselves rather than establishing the wishes of the remuneration committee through direct correspondence with the chair of that committee.

The court held that the firm had not acted negligently. The directors had actual authority to instruct the defendant firm to draft the contracts and, even to the extent that they had exceeded their actual authority, they had apparent authority, as they had been held out by the chair of the remuneration committee as authorised to give instructions to prepare the draft contracts, including as to the contents of the contracts, and there had been nothing to put the firm on notice that the directors were acting other than properly. The solicitors had acted in good faith on the basis of the instructions they were entitled to accept.

The judge accepted that the case would have failed in any event on causation grounds. Any advice which the firm might reasonably have been expected to give to the chair of the remuneration committee would not, on the evidence, have been heeded so as to halt the making of the relevant changes.
The real reason that the company suffered loss was because its non-executive directors (including the chair of the remuneration committee) failed to carry out their obligations to the company, particularly by failing to have adequate regard to documents sent to them. This case is currently under appeal.