Update: professional negligence

The appellate courts have been, perhaps ominously, quiet on the subject of professional negligence over the past three months, but a number of first instance decisions provide an indication of the way that recent appellate judgments in the field may be interpreted.

Limitation, contingent liabilities and bilateral transactions

The perennial issue of the date of loss for the purposes of limitation once again reared its head in Pegasus Management Holdings v Ernst & Young [2008] EWHC 2720, (2009) PNLR 11, in which Lewison J considered and applied the recent decision of the Court of Appeal in Shore v Sedgwick Financial Services Ltd [2008] EWCA Civ 863 (see last update, Solicitors Journal, 152/48, 16 December 2008).

In Pegasus the second claimant, Mr Bradbury, had sold his business in 1997 for a substantial sum '“ the consideration for the sale being paid in loan notes as a way of deferring liability for capital gains tax. In 1998 E&Y provided advice on reinvestment relief, suggesting that Mr Bradbury set up and, using the proceeds from the sale of the loan notes, acquire shares in a newly incorporated company (Pegasus) that would be registered in Luxembourg but would be resident and trade in the UK for tax purposes. These transactions took place in April 1998 and Pegasus subsequently acquired a number of other businesses '“ and these acquisitions were also funded with the proceeds from the sale of the loan notes.

In October 2002 it emerged that the 'base cost' for tax purposes of the businesses acquired by Pegasus did not include the value of the goodwill in the businesses, and consequently significant capital gains tax liabilities would be incurred when the businesses were sold '“ even if the sale were for less than the amount Pegasus had paid. This consequence could, it was said, have been avoided if E&Y had timeously advised that Pegasus should incorporate and fund subsidiary companies to acquire the businesses.

Having observed at the outset of his judgment, apparently with some weariness, that 'it ought to be relatively straightforward to decide when a person has suffered damage. Unfortunately it is not', Lewinson J reviewed the authorities (see paras 53-105) emphasising once again that distinction between a contingent liability 'standing alone' (as in Law Society v Sephton [2006] UKHL 22) and a liability that means that a party to a 'bilateral transaction' (i.e. a transaction in which the claimant gives up something, usually money, in exchange for a bundle of presumed benefits) receives less than he should have done (see paras 91-92).

The judge held that as in Shore, the claimant in April 1998 had acquired something materially different, and less advantageous to him, than that which he ought to have been advised to acquire, and so had suffered damage at that point. Mr Bradbury's claim in tort was accordingly statute barred (the judge having already dismissed the company's claim on the basis that no duty had been owed to Pegasus). The case is therefore a further example of Sephton not changing the result of a case and, together with cases such as Shore, leads one to wonder whether Sephton will in practice have little impact outside its specific facts.

The judgment is interesting for Lewison J's apparent discomfort with the proposition, which he said was emphasised in Shore, that a claimant can suffer loss by being subjectively worse off at the time of entering into the transaction, even if he pays what, at the time, is the market value for what is acquired. In the instant case that was not an issue, because Mr Bradbury could not have disposed of his Pegasus shares without forfeiting his tax relief. However, it is well established that a loss can be sustained even if the quantum of that loss cannot be ascertained until, at a later date, it crystallises. The decision in Shore is consistent with that analysis.

The responsibilities of barristers and solicitors in litigation

Two recent cases touch on the relative responsibilities of barristers and solicitors towards the lay client, and hint at a possible future argument about the standard of care to be expected of barristers in particular.

In Williams v Thompson Leatherdale the defendant barrister (then a senior junior specialising in ancillary relief matters) was found to have been negligent in failing to advise his lay client in divorce proceedings of the possible implications of a then pending decision of the House of Lords, although the claim failed on causation. No negligence was established against the solicitors.

The Lords' decision in the case of White v White [2000] UKHL 54, handed down in October 2000, significantly improved the position of divorcing wives, especially in 'big money' cases. Mrs Williams alleged that had she been properly advised, she would not, in August 2000, have entered into a settlement with her former husband which was less advantageous than she could have hoped to achieve following White.Field J found that by the time of a settlement meeting in August 2000, the defendant barrister had known that the appeals in White had been argued and had been under a duty to explain the potential implications of the case and to explain that Mrs Williams had the option to suspend negotiations pending the outcome. He rejected the argument that because it had been clear that Mrs Williams wanted to achieve a clean break from her husband as quickly as possible, there was no need for him to give that advice because she plainly would not have wanted to suspend negotiations. Although when it came to causation, that was precisely the conclusion that the judge reached. The barrister should nonetheless have explained the pros and cons to Mrs Williams and allowed her to reach her own decision '“ perhaps illustrating the limits of the axiom that the client pays for the barrister's opinion and not his doubts.

The judge found the solicitors had not been negligent. His finding (para.88) that the solicitors were under no obligation to operate a system that alerted them to any appellate judgment concerned with family law will doubtless be a relief to many busy solicitors' practices.

Furthermore, the judge was of the view that had the solicitors in fact been aware of the decision in White, their duty would have been confined to seeking the barrister's advice as to its implications. What is not clear is the extent of the barrister's duty to keep on top of such developments; the judge found that there was no duty to advise in relation to White at a conference in March 2000, because the barrister was not at that point aware that leave to appeal had been granted. By the time of the settlement meeting he was in fact aware that the judgment was pending. But at what point can it be said that a barrister was under a duty to give particular advice about a change in the law of which he should have been aware, though on the facts he was not?

More fundamentally, what is the standard of care to be expected? Field J stated the test as follows (para.67):

'The relevant standard of care is that expected of a competent barrister of Mr Francis' seniority in 2000 who holds himself as being an expert in ancillary relief.'

In McFaddens v Graham Platford [2009] EWHC 126 (TCC), Judge Toulmin QC questioned that formulation (paras 45-50). He observed that although the 'seniority test' appears to have been introduced by Lord Carswell in Moy v Pettman Smith [2005] UKHL 7, neither Lord Hope nor Baroness Hale in that case made any explicit reference to it. He noted that the current Bar Standards guidance makes no mention of seniority, and that in cases involving medical practitioners the seniority of the practitioner is not normally relevant. Ultimately, the judge found that the defendant had not been negligent whether or not his seniority was taken into account '“ but it may be that we can expect further argument on this point in a future case.

Again, the judge in McFaddens had to consider the respective roles and responsibilities of the barrister and solicitor and the limits of the argument of reliance on counsel. The judgment contains (at paras 54 et seq) a useful summary of the principles, confirming that although a solicitor is generally entitled to rely on counsel's advice, particularly in matters of law, he usually has a much closer working relationship with the client. The barrister is often reliant on the solicitor to provide the factual matrix for his advice and the solicitor must still make his own independent judgment, particularly in a matter where his understanding of the facts may be better than the barrister's.

Advisers' liability for future trading losses: developments foreshadowed?

Rushmer v Mervyn Smith [2009] EWHC 94 (QB) was a fairly run-of-the-mill illustration of the need to prove actual reliance to succeed in a claim based on negligent advice. The claimant, who had consistently expressed disbelief at the profits stated in accounts prepared by his adviser, failed to make good his allegation that in reliance on them he had continued to trade, made further investments in his company and had, when the company in due course went into liquidation, become liable on a personal guarantee to the company's lender.

However, Jack J went on to consider a number of legal points including an argument that the loss claimed was irrecoverable under the principle that where an individual suffers loss, such as the diminution in the value of shares he holds in a company, which is merely a reflection of the loss suffered by the company itself, he cannot himself recover that loss.

The first interesting point is that the judge suggests at para.74 that not only was the loss Mr Rushmer suffered by being the company's guarantor irrecoverable under the 'reflective loss' principle, but that the existence of the principle negates any duty of care to the individual claimant, since there can only be such a duty in respect of damage which falls within the scope of the duty '“ an analysis which appears to go further than the previous authorities.

Another issue was whether the company itself would have had any claim for trading losses. It was submitted on behalf of Mr Rushmer that it would not and hence the 'reflective loss' principle did not apply. He relied on the decision of the Court of Appeal in Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360, in which a claim for trading losses against accountants who had failed to discover a fraud in the company's accounts was struck out.

Jack J accepted that the case was distinguishable, apparently because in Galoo the negligence merely provided the opportunity for the company to continue trading, whereas in the instant case the negligent advice was said to be specifically concerned with the company's viability to continue trading (see paras 75-76). Since the judge had already rejected the claim on the facts, the discussion is very brief but perhaps it foreshadows a future argument about the circumstances in which a company's auditors can be held responsible for the losses it sustains by continuing to trade when it ought to be wound up.