UPDATE: professional negligence

A person who has instructed a professional to advise him on a transaction and later finds that he has suffered a loss often asks why the professional did not protect him. Sometimes he will be right. Frequently, he will not be, or at least not obviously so, and since SAMMCo [1997] AC 191, the scope of professionals' duties has been a source of much litigation. In particular, the issue of when a solicitor should give commercial advice, or advice that might be seen as commercial, has given rise to a number of decisions, including Pickersgill v Riley [2004] PNLR 31, PC and Mowlem v Neil F Jones & Co [2004] EWCA Civ 768. More recently, and the main focus of this update, two first instance decisions, Football League Ltd v Edge Ellison [2006] EWHC 1462 (Ch) and Marplace v Chaffe Street [2006] EWHC 1919 (Ch), have provided useful guidance on how the relevant principles are to be applied.

If the question of solicitors' commercial advice has given rise to a steady stream of litigation, then limitation, almost a fixture in these updates, has given rise to a flood. The most important recent addition is the House of Lords' decision in Law Society v Sephton [2006] UKHL 22 and this is the second topic we cover. Lastly, we touch on the Court of Appeal decision in Abou-Ramah v Abacha [2006] EWCA Civ 1492, dealing with dishonesty in civil law.

Commercial advice

Football League Ltd v Edge Ellison

The Football League Ltd (FLL) thought that it had not previously maximised potential revenues from the sale of its television rights and therefore established a commercial committee, made up of experienced businessmen, to work with professional advisers on the intended sale. As well as their general business experience, some members of the committee also had extensive experience in media business.

Edge Ellison acted for FLL during the negotiations and the partner involved spent a great deal of time working for FLL, often from their offices. Indeed, FLL came to consider that partner as their own in-house lawyer (para 29) and he also fulfilled the role of secretary to the commercial committee during the material negotiations. In June 2000, a deal was signed with ONdigital, a subsidiary of Carlton Communications Plc and Granada Media Plc, both large well respected media firms listed in the FTSE 100. ONdigital entered administration in March 2002 and, as parent company guarantees had not been taken, FLL could not recover the future monies owing under its contract with ONdigital.

FLL then sued Edge Ellison, alleging it had failed properly to advise as to the obtaining of appropriate guarantees from Carlton and Granada. Edge Ellison denied the claim, on the basis that the issue was not one on which they were required to advise, and the judge, Rimer J, agreed that there was no general duty to advise. In particular, he found that there was no express term in the retainer to advise FLL as to the consequences of ONdigital entering administration and, while acknowledging that that did not mean that there could not be a similar implied term (para 45), concluded that there was no such implied term.

This was a factual conclusion following a long examination of the facts and preference by the judge for Edge Ellison's version of events (paras 242-8). Nonetheless, a number of points of wider application can be extracted.

First, it emphasised the need to consider 'the terms and limits' of the solicitors' retainer. This is not new '“ indeed it goes back at least as far as Oliver J's decision in Midland Bank v Hett Stubbs & Kemp [1979] Ch 384 '“ but assertions of a general retainer are still made by claimants and Football League is not the only recent decision to reiterate that there is no such thing. See Regent Leisuretime v Skerrett [2006] EWCA Civ 1184 (para 34): 'There is no such thing as a general retainer imposing a duty to consider all aspects of the client's interests whenever the solicitor is consulted.' (Less relevantly, but reassuringly, the Court of Appeal in that case also observed (para 37) that: 'A solicitor is not bound to know all the law.')

Second, it illustrates how Pickersgill is to be applied in practice. It did not, for example, provide a ground of distinguishing Pickersgill that Mr Pickersgill had advised as to the risks of contracting with a limited company, as even that would not have been required had Mr Pickersgill been satisfied on reasonable grounds that Mr Riley was already aware of those risks. Likewise, the argument that all the solicitors needed to do was ask one simple question did not make them liable, it being implicit in Pickersgill that a solicitor is entitled to make assumptions about what advice his client needs, based on the type of client he is. Lastly, FLL was not able to get around the essentially commercial nature of the advice it said should have been given by asserting that the relevant person at the defendant had effectively become their in-house lawyer. In short, and although fact-sensitive, that did not expand the ambit of the retainer (para 271-4).

Third, it contains an interesting perspective on the differing attitudes that might be brought to a transaction. Lawyers, Rimer J noted (para 268), are 'traditionally acutely risk-averse'. Nonetheless, he regarded it as 'misleading to focus on the issue at stake in this claim by looking at it through the instinctively cautious perspective of a lawyer'. The issue was 'an exclusively business one' and to be looked at in those terms.

Fourth, it points out (para 270) that the fact that other solicitors would or might have given the advice that FLL contended ought to have been given did not mean that there was an implied term that that advice would be given. This was primarily a conclusion of law, reference being made to Saif Ali v Sydney Mitchell [1980] AC 198, but was supported by a practical point. The focus of the case, and of many cases, was dictated by what had gone wrong, but the logic of FLL's argument was that the defendants ought to have considered a variety of issues and there was, Rimer J said, no such duty: a solicitor is not required to review the whole range of commercial considerations that underlie a particular deal, work out which ones he is concerned the client may not have given sufficient thought to and remind him about them.

Fifth, it reinforces the presumption against expert evidence on the duties of a solicitor. FLL sought to rely on the evidence of a solicitor experienced in negotiating sports rights agreements, but that was rejected as inadmissible. There was, Rimer J concluded (paras 277-80), no common usage among solicitors peculiar to the giving of advice in relation to sports rights agreements and therefore no basis on which the evidence should be accepted.

Last, and despite noting (para 330) that 'it is only in rare cases that a solicitor is able to advance a plea of contributory negligence', it concludes that, had the defendants been liable, still there would have been a finding of contributory negligence of 75 per cent. Thus the decision illustrates that, although a finding of contributory negligence will often not be available to a solicitor, where it is, there is nothing to prevent a very high level of contributory negligence from being found.

Marplace

This was a claim arising out of a company purchase and, as with Football League, gave rise to a lengthy judgment. Ultimately, however, the judge concluded (para 390) that 'the whole case [was] '¦ designed to shift the blame onto [the defendant solicitors] for what was an essentially commercial failure' and that the claims could be 'dealt with simply on the basis that [those solicitors] had no duty in the circumstances to give the advice which it [was]'¦ pleaded they should have given'.

Again, those conclusions were essentially factual and the decision creates no new law on solicitors' duties to advise on commercial issues. Two specific issues do, however, merit highlighting. First, paras 407-8 contain a useful reminder that a solicitor will generally not be able to avoid advising on a transaction simply because he has been instructed to implement an agreement reached by his client. 'The solicitor's non-participation in the negotiation of the terms of the deal does not,'said the judge, 'relieve him of the duty of pointing out to the client any legal obscurities of which the client might have been unaware, or of drawing the attention of the client to any hidden pitfalls'. Second, the judge commented (para 409) that a corporate lawyer would expect to be asked at short notice to attend lengthy and sometimes late meetings and seems to have thought it an implied term of the retainer of such a lawyer that he would do so.

Liability limited to legal advice

Although such issues are ultimately fact-sensitive, both Football League and Marplace show a welcome willingness to distinguish between commercial and legal issues and to disavow any general duty on solicitors to advise as to commercial issues. At least where the potential claimant is an experienced businessman, they should give pause for thought before non-advice on a commercial issue turns into litigation against a solicitor.

Limitation

Law Society v Sephton

Sephton was a firm of accountants. From 1989 to 1995, the firm provided accountants' reports to the Law Society regarding Mr Payne, a solicitor. While those reports showed Payne's accounts to be in order, the reality was that he had misappropriated significant funds from the client account. The Law Society discovered this when it intervened in the practice in May 1996. Shortly afterwards, former clients of Payne began to make claims on the Solicitors' Compensation Fund and the fund eventually paid out over £1m on those claims.

The Law Society issued a claim against Sephton on 16 May 2002, ie, just less than six years after the intervention, but more than six years after the misappropriations, and Sephton contended that the claim was out of time. Limitation was tried as a preliminary issue, the key question being when damage occurred. Was it, in short, whenever Payne misappropriated money after a negligent report had been delivered, or only when a claim was made on the compensation fund? The House of Lords considered it was the latter: only once a claim was made on the fund had it suffered loss or damage; until then, any loss was contingent only and not sufficient to start time running.

This decision has a number of ramifications. Most specifically, it exposes accountants who provide reports pursuant to the Solicitors' Accounts Rules, and others in an analogous position, to a very long tail form of liability. Even the primary six-year limitation period cannot begin to run in their favour until actual knowledge on the part of the Law Society that there has been a defalcation in the client account (because there will be no possibility of a claim until then) and it may be that, in fact, time does not run until later still.

More generally, a number of points arise. First, it is now clear that a contingent loss as such is not damage sufficient to start the limitation period running. Lord Hoffmann put it this way (para 31): 'The possibility of an obligation to pay money in the future is not itself damage.' Second, any loss that depends on the making of a claim by a third party would appear to be a contingent loss.

Third, there appears to be a distinction in professional negligence cases between those in which some underlying transaction or asset is directly affected by the negligence and those in which there is no such transaction or asset. Thus, Forster v Outred [1982] 1 WLR 86 was correctly decided (although it now needs to be read subject to Sephton) because the value of the property charged by Mrs Forster was diminished, but Gordon v JB Wheatley & Co [2000] Lloyds Rep PN 605 was not, because the advice received (that a collective mortgage investment scheme did not need authorisation under the Financial Services Act 1986) did not mean the claimant obtained rights that were worth less than they should have been.

Fourth, the fact that a prudent accountant would include provision for contingent liabilities was considered irrelevant.

Quite how significant these general points will prove to be in practice is unclear. Gordon was the only previous case disapproved by Sephton and on the whole its practical impact could be limited. It does, however, have the potential to create anomalies.

Dishonesty

Abou-Ramah

Since the Privy Council decision in Royal Brunei v Tan [1995] 2 AC 378, there has been a debate as to whether the test of dishonesty in civil law requires subjective dishonesty, ie, knowledge or appreciation on the part of the alleged wrongdoer of the alleged dishonesty. In Twinsectra v Yardley [2002] 2 AC 164, the House of Lords was taken to have held it did. In Barlow Clowes v Eurotrust [2006] 1 All ER 333, on the other hand, the Privy Council held it did not.

In Abou-Ramah, the Court of Appeal held that the Barlow Clowes approach was to be followed. Arden LJ summarised (para 59(a)):

t is unnecessary to show subjective dishonesty, that is, consciousness that the transaction is dishonest. It is sufficient if the defendant knows of the elements of the transaction which make it dishonest according to normally accepted standards of behaviour.'

Hopefully this clear enunciation of the issue will put an end to the debate. As, however, two members of the court expressly stated that the issue did not need to be decided (paras 23 and 90), regrettably it may not.