PROFESSIONAL NEGLIGENCE: An Introduction

Professional Negligence Trends and Developments - A Year in Retrospect

Market trends 

As a firm that deals predominantly with high-value professional negligence claims for claimants the last year has, perhaps surprisingly, seen no diminution in the flow of new instructions across the full range of professional defendants. So far there has been no detectible diminution in clients’ appetite for pursuing these claims (with the benefit of funding or CFAs), and it may be that the general economic difficulties caused by the pandemic have caused clients to look more critically at the advice that they have received.

One of the most prolific areas in terms of new instructions over recent years has been professional negligence claims arising out of failed tax avoidance schemes. It had been generally thought that the level of these claims would gradually decline as the heyday of marketed tax avoidance is now over six years ago. It was thought that the effects of limitation would result in a gradual decline in these cases.

However, at least for the time being, there are still plenty of cases involving clients who have used EBT and EFURB (Disguised Remuneration) based tax avoidance schemes who have recently settled their liabilities under the Loan Charge Legislation with HMRC. Nevertheless, as limitation takes its toll, otherwise viable claims are likely to be literally ruled out of court.

The effect of this in light of the Court of Appeal’s decision in Wood & Pengelly is that there are likely to be an increasing number of claims based on secret commissions in relation to marketed tax planning and various other kinds of investments/financial transactions. In the past it was fairly common for advisers to seek to rely on a term in an engagement letter or other promotional material alerting the client to the general possibility that it would receive a commission from the provider of the investment/avoidance scheme but not to disclose the actual commission received in respect of the client’s transaction. In Wood & Pengelly the Court of Appeal confirmed that this would usually not be sufficient to avoid a finding of breach of fiduciary duty and/or bribery.

A further way forward may arise from the Court of Appeal’s other recent decision in Potter v Canada Square as it confirms that (advertent) recklessness may be sufficient to amount to a deliberate breach of duty for the purposes of the postponement of the limitation period under Section 32 of the 1980 Act.

Another increasing source of cases arises from failed “fractional” property investment schemes, such as selling off hotel rooms, student letting units, etc, to retail investors who do not understand that they are getting involved in a highly risky and possibly illegal collective investment scheme. Claims here may lie against the conveyancing solicitors who acted for the purchasers in such schemes and failed to give any proper warning of the transactions’ true nature and the very high level of risks involved.

Some good news for potentially negligent conveyancing solicitors, however, arises from the recent developments with leasehold properties where governmental pressure has caused many developers to remove or obviate what were otherwise onerous ground rent clauses. Those clauses saw ground rents, in some cases, reach six-figure or even seven-figure sums after a (relatively) short period of time, rendering the properties unsaleable and unmortgageable.

What does seem to be a continuing trend is that claimants are tending to be rather more sophisticated than perhaps was once the case in the choice of legal adviser for these claims and are able to seek out genuine specialist advisers through the directories and through the internet generally.

Legal developments 

One of the most significant developments over the last year has been the Supreme Court’s revisiting, in the case of Manchester Building Society v Grant Thornton UK LLP, of the principles set down in South Australia Asset Management Corp v York Montague Ltd (“SAAMCO”). In SAAMCO a distinction was made between “advice” and “information” and in an “advice” case a negligent adviser would be responsible for all foreseeable loss arising out of a course of action taken on the basis of that negligent advice. In an “information” case the negligent provider of information would be liable for all foreseeable consequences of the information being incorrect.

The distinction between the provision of advice and the simple provision of information has been a feature of claims, in particular those involving financial tax advice, and the Supreme Court has given welcome clarification: instead of carrying out an analysis as to whether advice or information had been provided, the emphasis should instead be on the extent to which the professional has influenced the decision made by the claimant:

“In our view, for the purposes of accurate analysis, rather than starting with the distinction between “advice” and “information” cases and trying to shoe-horn a particular case into one or other of these categories, the focus should be on identifying the purpose to be served by the duty of care assumed by the Defendant… Ascribing a case to one or other of these categories seems to us to be a conclusion to be drawn as a result of examination of that prior question.”

The Court was also at pains to highlight the limits of the counterfactual in dealing with complex hypothetical situations. The Court’s view was that the counterfactual should be used as a cross-check against any particular outcome but it must not be allowed to develop hypothetical life of its own as appears to have happened, below, in the Manchester Building Society case. The parties had spent considerable time and costs in dealing with and attempting to disprove a series of alternative scenarios advanced which did not assist the Court in coming to a final conclusion.

It is yet to be seen how the effects of all of this will work themselves out in reality, but the initial view is that this is a welcome clarification and is generally positive news for claimants.

Finally, a word on mediation during lockdown and going forward. Our experience, confirmed by some of the leading mediators, is that during lockdown remote mediation has worked astonishingly well, perhaps to the surprise of all of those involved. Perhaps instrumental in this has been the use of Zoom Pro, which enables the mediator to replicate the in-person mediation experience very accurately through the use of virtual private and confidential rooms for the parties, and the ability to convene joint meetings of all or some of the attendees including multiple meetings taking place simultaneously.

Mediators also report, and this is our experience, that it appears to be likely that the mediation process is actually speeded up by the use of the remote process - something that, on the face of it, is counter-intuitive and contrary to what might have been expected.

It will be very interesting to see to what extent the use of remote mediation continues. Our own suspicions are that notwithstanding the benefits described above, the majority of practitioners will wish to return to “face-to-face” mediations. Time will tell!

FS LEGAL SOLICITORS LLP