Update: professional negligence

A number of high-profile decisions came before the courts in 2009, with various significant issues affecting professionals being reviewed. Claims against professionals are likely to continue to rise in 2010.

There has now been a fairly steady stream of decisions as to advocates' immunity and door-of-the-court settlements including Kelley v Corston. Hall v Simons removed immunity from suit in civil and criminal proceedings for barristers and solicitor advocates. The House of Lords, in Moy v Pettman Smith [2003] EWCA Civ 466, held that the failure to explain the basis of advice as to whether or not to accept a settlement at the door of the court was not negligent. Subsequent findings (for example, Popat v Barnes [2004] EWCA Civ 820) are in line with this approach, so that barristers will not generally be held liable for advice given at the door of the court.

In McFaddens v Graham Platford [2009] EWHC 126 (TCC), the judge reviewed the respective roles and responsibilities of the barrister and solicitor and the judgment provides a useful summary of the principles. Contrary to the finding in Hickman v Blake Lapthorn [2005] EWHC 2714 (QB), the summary confirms that although a solicitor is generally entitled to rely on counsel's advice, the solicitor has a closer relationship with the client and a greater understanding of the background. The solicitor must, therefore, apply his mind to the advice received and reach an independent view.

In Pritchard Joyce and Hinds v Batcup [2009] EWCA Civ 369, the Court of Appeal decided that the two barristers in question were not negligent for failing to advise the client as to the time limit applicable to a possible claim against former solicitors. The Court of Appeal emphasised that great care should be taken to avoid reviewing the issues with the benefit of hindsight.

The latest finding, Fraser v Bolt Burdon [2009] EWHC 2906 (QB), entailed advice by both counsel and solicitors to accept an offer, prior to the hearing of the trial on quantum. The claimant subsequently sued for negligence on the basis that she could have secured a better outcome. The judge dismissed the claims holding that it was highly unlikely that the claimant would have recovered more at the quantum trial. Decisions have to be made at court with little time for mature consideration or discussion '“ it is an exercise of judgment.

Imposing absolute obligations

The judgment in Excel Securities Plc v Masood [2009] QBD (Merc) provides a careful review of a number of decisions on the issue of absolute obligations and the circumstances in which a professional may be at risk.

From a claimant's perspective, the benefits derived from establishing an absolute obligation are several. It no longer becomes necessary to prove negligence (Zwebner v The Mortgage Corporation CA (Civ Div)), the defence of contributory negligence is of no application and a contractual measure of damages applies, so as to put the claimant in the position it would have been if the warranted outcome had been achieved. In the lender litigation which followed the property crash in the 1990s, many lenders sought to take advantage on these bases.

In the cases which proceeded Zwebner, the courts underlined the requirement for any imposition of an absolute obligation upon a professional to be based on clear terms, which should not otherwise be readily accepted (Midland Bank Plc v Cox McQueen CA (Civ Div)).

The position reverted again, however, in the case of Platform Funding Ltd v Bank of Scotland Plc [2008] EWCA Civ 930, when the Court of Appeal held that a surveyor who accepts instructions to survey a particular property assumes a strict contractual obligation to inspect that property and will be liable for breach of contract even in the absence of negligence.

In Excel, the lender agreed to make a short-term commercial loan to an individual fraudster, secured on property he alleged to own, subject to proof of identity and residence. The borrower instructed the defendant solicitors to act on his behalf in the transaction and supplied copies of his driving licence and utility bills. He later attended their offices with the original identification documents. The defendant advised the lender's solicitors that they were instructed to act by the borrower and, as instructed by the borrower, paid the proceeds of the loan to a company who paid the monies to the borrower. Ultimately, the true owner successfully applied for the vacation of the charge registered in favour of the lender over the property.

The lender, as well as trying to recover the monies from the fraudster, claimed for breach of warranty of authority and applied for summary judgment against the defendant. The judge dismissed the application, holding that the solicitors had not impliedly warranted either the identity of the client or his title to certain property, only that they had authority to act on his behalf. The judge considered that there was a real prospect that the lender had relied on its own enquiries, in paying over the loan monies, rather than upon the implied warranty of authority.

In practice, it seems that the court is more likely to impose an absolute obligation on the solicitor where a breach of the general duty of care is also established. The issue remains of particular significance in view of the increasing number of lender claims emerging. The finding in Excel is, therefore, to be welcomed.

Apportioning liability

The recent case of Dunlop Haywards v Barbon [2009] EWHC 2900 (Comm) raises a number of issues on the duties of brokers as well as offering guidance on the likely approach of the court to the apportionment of liability between parties and contribution issues.

The claimant, Dunlop Haywards (DH), provided a range of property services, including significant valuation work. The producing broker HPC was appointed to put in place £20m of professional indemnity cover, in two layers of £10m. DH told HPC that it required cover in respect of all of its activities, including its valuation work. HPC instructed a placing broker to place the cover in the Lloyd's market.

When claims were made in 2006 for negligent/fraudulent valuations, the primary layer insurers paid out the full indemnity limits. The excess layer, however, rejected the claims on the grounds that the excess policy did not include cover for liabilities arising from property valuations. It transpired that the excess layer policy included a limiting condition providing cover only for commercial property management activities. The court found that this did not include valuation activities. DH was, therefore, uninsured beyond the primary £10m.

DH sued HPC and HPC sued the placing broker. The excess layer insurers were also joined as defendants to the action.

HPC as producing broker was held primarily liable (80 per cent) for instructing the placing broker to obtain the wrong cover and the placing broker was liable (20 per cent) for failing to comply with an agreed instruction that cover would be obtained on no worse terms than the expiring cover. HPC, however, made the fatal mistake in providing a summary of the cover without referring to the limiting condition and providing assurance upon which DH was reasonably entitled to rely that the quote obtained covered all bases.

HPC asserted that, on a true construction, the policy covered valuations, or that the policy should be rectified to include valuation work. The court rejected these arguments and found that HPC were in breach of their duties (based on the old GISC code, ICOB and case law) which included to review the terms of the quotation received and to explain to DH the terms of the proposed insurance, and any changes to the terms of the expiring policies. The claim against excess insurers failed.

HPC also argued contributory negligence on the part of DH on the basis that its finance director had failed to read the summary of the terms and conditions of cover. The court has allowed contributory negligence in cases where the client is a sophisticated buyer (Youelle v Bland Welch and Others and The National Insurance and Guarantee Corporation Plc v Imperial Reinsurance Company). In this case, however, the court decided that DH had no specialist insurance knowledge and rejected the argument for contributory negligence given the way in which HPC presented the renewal report.

Limitation '“ where are we now?

The issue of limitation and the date when damage is suffered has come before the courts in a series of cases over the last few years, with the principle of 'contingent liability' and its application being revisited. From Forster v Outred to Nykredit v Edward Erdman to The Law Society v Sephton [2006] UKHL 22 and Pegasus Management Holdings v Ernst & Young (under appeal) [2008] EWHC 2720 (Ch). Other Court of Appeal cases include Watkins v Jones Maidment Wilson [2008] EWCA Civ 134, and Shore v Sedgwick Financial Services [2008] EWCA Civ 863.

Despite all of these, uncertainty remains as to the application of the principles which have emerged. The finding in the more recent case of AXA Insurance Limited v Akther Darby Solicitors and Others [2009] EWCA Civ 1166 does, however, underline the limits of Sephton (the purely contingent liability) and the continued relevance of the earlier authorities.

The principal question for determination by the Court of Appeal in AXA was as to the date of accrual of the insurer's cause of action in tort against the negligent solicitors: when did it first suffer loss '“ when the policy was incepted or at a later date? The Court of Appeal by a majority agreed that the cause of action accrued immediately on the issue of the policies. Arden LJ treated the case as one in which the act of negligence had resulted in the insurer entering into a 'flawed' transaction. Arden LJ suggested that the Supreme Court may wish to revisit its decision in Sephton in certain respects.

The decision in Williams v Lishman, Sidwell, Campbell & Price [2009] EWHC 1322 (QB) arose in the context of financial advice on the transfer of a pension plan.

The claimant relied on section 14 (a) of the Limitation Act to extend limitation for a period of three years from the date the claimant became aware, or should have become aware, that it had suffered a loss and therefore had a claim. The court, however, found in favour of the defendant that the claim was time barred. The claimant would have been aware, or ought to have been aware, at an earlier date that the fund was deteriorating and was not entitled to rely on the continuing advice of the financial advisers.

In the latest case of Nouri v Marvi & Others [2009] EWHC 2996, the defendant solicitor passed on a forged transfer of title to a third party. The court held that the claimant suffered damage when the solicitor failed to protect the asset by passing on the forged transfer, it was not contingent on subsequent registration. The argument that the solicitor owed a continuing duty to discover that he had been negligent and that this was capable of postponing the commencement of the limitation period was rejected by the court.

Although the position remains that each case must be considered on its own facts, as the recent findings demonstrate, the position for professionals, and their insurers, is improving.

Scope of retainer

The outcome in Cabvision Ltd v Feetum & Others [2009] All ER (D) 203 (Dec) continues to underline the importance of recording the extent of the retainer, and defining its scope and remit as clearly as possible.

The claimant sought to assert a broader retainer, which was rejected by the court, after reviewing the role and involvement undertaken by the firm and finding that it had throughout confined its activities to its limited retainer, as every record and reference to the retainer also confirmed.