Legal Watch: Professional Indemnity August 2014 – Issue 002
Accountants not under a roving duty The recent judgment in Mehjoo v Harben Barker (A Firm) was gratefully received by all accounting firms and most other professional advisers too. The Court of Appeal upheld an appeal from a firm of chartered accountants, Harben Barker Limited (HB), against a decision of the High Court that it was negligent in giving taxation advice to its client, Mr Hossein Mehjoo (M) and liable for approximately
In This Issue: • Accountants not under a roving duty • Negligent solicitor succeeds in reducing damages
additional fees he incurred attempting to minimise his tax
• Surveyor not under a duty to predict subsidence
liability and interest.
• SAAMCo revisited
£1m. The loss comprised of M’s capital gains tax (CGT), the
The court had to consider whether the accountants were liable in negligence for failing to refer the non-domiciled client, M, to a tax planning specialist to save CGT on the sale of his business. To answer the question, the court looked at the firm’s limited obligations to advise on tax planning as set out in the retainer, any implied duty of care based on past business relations and the standard expected of reasonably competent accountants. The Court of Appeal ruled that HB did not fail in its duty of care, as the duty did not extend to giving the specialist tax planning advice that M alleged was required in the circumstances.
Background M was born in Iran in 1959 and was resident in the UK since 1971. He subsequently claimed asylum and became a British citizen. He built up an extremely successful retail fashion business and in 2003 his company merged with another to form a UK registered company, Bank Fashion Limited (BFL). All of his business interests were in the UK where he continued to live. In April 2005 BFL was sold for £22m of which M’s share was roughly £8.5m.
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Prior to the completion of the sale of the shares in BFL, M sought the advice of HB through one of its partners, Alan Purnell (Purnell) as well as two other firms of tax advisers. It was accepted that HB were generalist accountants.
The High Court M succeeded at first instance. The judge found that the 1999 retainer did not oblige HB to advise M on how to minimise his tax liabilities unless specifically requested to
Purnell had acted as M’s accountant since 1980. As a partner
do so. However, it could be inferred from Purnell’s conduct
in HB, Purnell continued to provide M with accountancy
in giving unprompted tax advice that the retainer had been
services and general taxation advice up to the time of the
varied to impose a duty to give tax planning advice.
dispute.
There had been a meeting in October 2004 to discuss the
M ultimately invested in a Capital Redemption Plan (CRP).
tax implications of the sale of the shares and how M might
The CRP failed and M brought a claim against HB for failing
reduce those liabilities. Purnell told M that more radical tax
to direct him to an appropriate non-domicile tax specialist
schemes might be available, even though he could not say
before the sale. The litigation centres on M’s attempts to
that any would necessarily be suitable or what they were.
avoid the payment of CGT on the disposal of the company shares.
The judge held that even if the 1999 retainer had not been varied prior to the critical meeting between M and Purnell
M alleged the following:
prior to the sale, during that meeting HB had undertaken to
• he retained his Iranian domicile of origin for UK tax purposes and could have entered into a complex taxation scheme — known as a Bearer Warrant Scheme (BWS) — and avoided CGT entirely on the disposal of his shares in his company.
provide M with advice as to how to minimise his tax.
• HB should have advised him that he had, or might have, non-dom status, which had significant tax advantages, and
The Court of Appeal (CA) unanimously overturned this
• HB should have advised him to seek tax advice from a firm of tax advisers or accountants which specialised in advising non-doms on their tax affairs. If so, he would have implemented the BWS before the scheme was blocked by primary legislation in March 2005.
of the fact that there is no such thing as a general retainer.
The only engagement letter was signed in July 1999. The
do so.”
1999 retainer provided for general accounting services. The retainer consisted of assisting M to fulfil his annual obligations in respect of income tax and CGT, including preparing annual tax returns and other routine compliance matters. In addition, HB could provide more extensive tax and financial planning on an ad hoc basis. HB was never asked to give M tax planning advice to reduce the already low rate of CGT applicable to disposal of his shares. 02
The trial judge awarded M £763,658 for the CGT, £180,000 for the additional fees and interest payable on the CGT.
The Court of Appeal decision. The CA considered that the judge in the High Court lost sight The terms and limits of a retainer and any consequent duty of care depend on what the professional is instructed to do. “An accountant in the position of HB was not therefore under a general roving duty to have regard to and to advise on all aspects of the claimant’s affairs absent a request to
The instances relied upon by the trial judge to conclude that HB’s retainer had been expanded were insufficient. This included evidence of when Purnell gave unprompted advice to M. More importantly, they were insufficient to expand the retainer to include specialist tax advice beyond routine tax advice.
The court noted that an accountant who is retained by a client
Mehjoo v Harben Barker (a firm) and another [2014]
to deal with his personal financial affairs will inevitably have
EWCA Civ 358
to point out what might be the hidden tax consequences of any particular proposal. This may well arise in the context of carrying out general accounting services such as preparing tax returns or discussions about the client’s business plans. Similarly, in handling the client’s tax affairs the client can expect his accountant to advise on any available tax reliefs under the relevant fiscal charge which may be available to him to reduce his tax liabilities. The CA nevertheless made it plain that “routine tax advice of this kind, though an important part of an accountant’s ordinary duties, is not what this case is about.” The trial judge failed to differentiate between the generalist tax advice which Purnell gave to M on the occasions referred to by the judge and the much more sophisticated form of tax planning exemplified by the BWS. The latter involves a complex re-formulation of the transaction, in order to bring about particular tax consequences, rather than a mitigation of the tax liability which the transaction will otherwise produce.
Commentary This case has significant implications for all professionals in relation to the scope of their retainer. It also highlights the inherent dangers in straying outside the terms of the engagement letter. The judgment is particularly helpful to accountancy firms, as it clarifies that they do not have a general duty to recommend specialist tax planning to their clients, unless they specifically offer this service to clients. To avoid any ambiguity on the scope of the retainer, professionals are best advised to confirm their retainer in writing and keep it up to date. In certain circumstances it would also be useful to specify what is excluded from the retainer. In this case it would have been helpful if HB had specifically excluded the specialist advice which M was seeking from the other two firms.
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Negligent solicitor succeeds in reducing damages A firm of solicitors successfully reduced a £186,000
and H obtained an injunction. J’s property was eventually
damages award for professional negligence by a former
repossessed and sold by the mortgage company for
conveyancing client in Darby & Darby v Joyce.
£70,000 less than she had paid for it. J instructed new
Darby & Darby solicitors (D) had acted negligently in the conduct of a dispute concerning restrictive covenants.
solicitors and alleged negligence against D.
Nevertheless, D clearly advised their client to cease building
The Lower Court
works and warned that expensive litigation would ensue
The Recorder found that D did not advise J about the
otherwise. The cost of injunction proceedings brought by
covenants and so breached the duty of care expected of
the covenant-holder to enforce a cessation of the building
him as a reasonably competent conveyancing solicitor. D
work was therefore not attributable to the firm’s negligence.
should not have accepted instructions in relation to the covenant dispute due to the potential conflict of interest.
Background
He concluded that D had failed to advise clearly on the
Ms Joyce (J) bought a £460,000 property, Tamarisk,
meaning and effect of the covenants, and failed to make
overlooking the Torquay Marina in 2007. J instructed Mr
it clear to J that all the building work needed to stop. He
John Darby of D to act for her on the purchase of Tamarisk.
found that had J been properly advised of the effect of the
J planned to carry out substantial building works to the
restrictive covenants at the outset, she would not have
property. She also intended to subdivide the property and
bought the property.
let half of it, to finance the project.
D was ordered to pay damages of approximately £186,000.
D failed to inform J that the house was subject to restrictive
The damages consisted of J’s mortgage repayments,
covenants. Under the covenants, the premises could only
insurance premiums, mortgage arrears, costs liability to
be used as a single private dwelling, and the external
the neighbours, money spent on the building works and
appearance of the property could not be altered without the
the £70,000 difference between the purchase price and
consent of the covenant-holder and neighbours, Mr & Mrs
distressed sale.
Hoyle (H).
The defendant appealed.
J commenced building works which were, unbeknownst to her, in breach of the covenants. She received a letter from H warning her to stop the works until written permission for them was granted, otherwise an injunction would be sought. J re-instructed D to assist her with the ensuing neighbour dispute. D attempted to negotiate consent, but did not initially advise J to stop the works or give any advice on the covenants. D later told J to cease all work until agreement had been reached, and J signed an undertaking to that effect. However, J continued with some building work
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The Court of Appeal The appeal was allowed in part. Lord Justice Rimer described D’s handling of the case in 2007 as a professional ‘disgrace’. The solicitor proceeded to discharge his retainer with “an unusual lack of professionalism”. He failed to take notes of any meetings and gave no clear advice to J in the early weeks of the dispute.
However, the Court of Appeal held that D’s negligence
be remitted for that assessment to be made. Rimer J noted
had not caused J to continue with building works in 2008,
that in SAAMCo (1997), the House of Lords disapproved
which resulted in the neighbour taking out an injunction. The
the distinction between so-called ‘no transaction’ and
Recorder had erred in finding that the injunction proceedings
‘successful transaction’ cases.
were caused by D’s negligence.
To award J damages in the sum of the mortgage payments
On being re-instructed, D should have identified a potential
made, or which ought to have been made, and insurance
conflict of interest and referred J to other solicitors. D did
payments for the property, was to compensate her for the
not give any clear advice on the nature and effect of the
cost of purchasing the property. There was no rational basis
covenants for a significant period. D knew that the works
on which J could claim to be compensated for incurring
were continuing, but J was not advised to stop. D eventually
expense which, if not incurred in relation to her enjoyment
told J to obtain consent before resuming the works and
of the occupation of Tamarisk would, on the probabilities,
advised that the works had to stop. Despite D’s unequivocal
have been incurred in relation to another property. The same
advice, J did not stop all building work. It had been relayed
went for the insurance premiums.
to her that, if she did not stop the works, she would face expensive litigation. She did not stop the works and, as a direct consequence of her refusal to accept that advice, she was sued. Therefore, J was the cause of the injunction proceedings and, in particular, their costs.
The Recorder’s award of the costs of the building works was upheld. He found that J had bought Tamarisk, because of D’s negligence and, but for that negligence, she would not have purchased it. She incurred expense in building works to the exterior and interior that she would not, but for D’s
The Recorder’s conclusion that, had J known of the
negligence, have done at all. They did not enhance the sale
covenants, she would not have bought Tamarisk was
price and so could be regarded as wasted. To the extent
correct. The Recorder found, on the balance of probabilities,
that J continued with the exterior works after the initial
that she would not. He had not applied a presumption and
objections from H, it could not be said that she thereby
his view was a proper one to arrive at on the evidence.
failed to mitigate her loss because, for a significant period,
The judgment deals with the correct measure of damages. The trial judge had made a very generous award of damages to the claimant. The appeal court held that that was wrong and had to be overturned.
D did not advise her to stop the works. The incurring of wasted costs in carrying out the works was the type of loss for which D should be regarded as accepting responsibility, as well as being a type of loss within the contemplation of the parties at the time of the breach.
The consequence of the court’s conclusion on the causation issue was that J’s costs of the injunction proceedings in the sum of £23,000, was not a recoverable head of loss. Further,
Commentary
the consequential matters that led to the distressed sale of
On appeal, the court therefore restricted the damages
Tamarisk in 2009 at a loss, were not caused by D either. The
award to two heads of loss:
loss on the resale was therefore not a recoverable head of
(i) Any difference in value at the date of purchase between
loss.
the price paid for the property in ignorance of the restrictive
However, J was entitled to damages representing the
covenants, and the open market value with the restrictive
difference, if any, between (i) the price she paid for Tamarisk
covenants, and
and (ii) the value of Tamarisk, subject to the covenants,
(ii) the client’s wasted costs on the building works to the
when she purchased it. The Recorder had made no finding
property.
as to what that difference was. The matter would therefore
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These were consequential losses which should be subject to an assessment of damages at a future hearing. All other heads of damage allowed by the trial judge were overturned. The defendant was therefore successful in restricting the damages on appeal but the case illustrates the inherent difficulty in assessing damages. Lord Justice Longmore admitted that he “found it difficult to assess the damages”. Lord Justice Tomlinson also confessed that his “mind wavered” on the question whether D’s undoubted negligence should be regarded as causative of J’s costs liability in the injunction proceedings. It is worth noting that LJ Longmore dissented on this point and concluded that the expenses of the injunction proceedings were in fact attributable to D’s negligence. The decision also emphasises that conveyancing solicitors should always ensure that any restrictive covenants are fully explained to the client. At the trial, D asserted that he would have explained the existence of the covenants at their meeting in accordance with his usual practice but J denied he had done so. Unfortunately D had no attendance note of the meeting to support his assertion. D was also criticised by the court for failing to copy important correspondence from H’s solicitors to J that would have clarified the seriousness of her position. The case is a good example of why it is crucial for any professional to accurately record advice provided over the telephone or in meetings. A contemporaneous record of advice given to J in relation to the restrictive covenants may have stifled this costly professional negligence claim at the outset. Darby & Darby (A Firm) v Joyce [2014] EWCA Civ 677
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Surveyor not under a duty to predict subsidence A recent Court of Appeal decision provides welcome clarification to surveyors on the extent of their duty of care in providing mortgage valuations. In Anne Marie Hubbard v Bank of Scotland Plc the court dismissed the claimant’s appeal in respect of an allegedly negligent valuation report carried out by a surveyor employed by the defendant bank.
Background
Lower Court decision The claim was dismissed at first instance. The judge concluded that the surveyor had acted in accordance with practice accepted as proper by a responsible body of chartered surveyors skilled in their particular field and had not been negligent.
In 2005 Mrs Hubbard (H) purchased Ashton House, a large
The Court of Appeal
property on an old quarry site in Wolverhampton with the
The court held that B would not be liable unless S knew or
assistance of a loan provided by the Bank of Scotland Plc
ought to have known as a reasonably competent surveyor
(B). The house was built in 1979. It was located on its plot
that he should have recommended a full structural survey.
in such a way that it straddled the quarry wall underneath,
Surveyors regularly saw evidence of past movement. S took
so that the side of the house facing the road was built on
the view that the cracks he saw were small, old and not
rock but the garden side built on softer infill material. Prior
ongoing.
to purchase, a surveyor (S) employed by B undertook a valuation of the property. H paid a fee of £715 for her survey and the valuation report was addressed to her.
It was also important to bear in mind the basis on which the report was given. It was not a full structural survey. Its limitations were amply and clearly spelled out in the
The valuation report noted a few cracks in the wall of the
guidance notes and advice sections of the form. The duty
rear bedroom. S classified the cracks to be in category 0 (i.e.
was therefore more limited than that of a structural surveyor.
up to 0.1mm in width). The report noted that the property
His job was to produce a valuation on the basis of his visual
had not suffered from recent movement and that no further
inspection.
action was required. H said that she had asked S about the cracks on his inspection and that he had said that they were old and nothing to worry about.
S did not in fact think or suspect that the defect was one which could have a material effect on the valuation of the property, as his contemporaneous notes recorded.
The report was not a full survey and involved only a visual
Whether S ought to have had any such suspicion was the
inspection. It indicated that it was open to H to commission
subject of expert evidence and on which the judge preferred
a more detailed inspection and report.
the defendant’s expert. The judge found that at the time of
Following completion, the property suffered from differential
the survey in 2005, any significant structural issues in the
subsidence adjacent to the original cracking and the
immediate vicinity was not common knowledge.
house had to be underpinned. Subsequently, H pursued a
In dismissing the appeal, the court found that it was
claim against B to recover her losses on the basis that the
unrealistic to suggest that a valuation surveyor, who sees
valuation report prepared by the surveyor failed to:
a small long-standing crack which displays no signs of
i. state that there was (or might be) ongoing subsidence;
ongoing movement, is negligent in failing to recommend a
ii. advise H to seek specialist advice; and iii. warn H that the value of the property was reduced by the cracking.
full structural survey. Lord Justice Floyd said that: “To set the duty at that level would mean that the sale of any property which displayed cracking of almost any kind 07
would be held up pending a full structural survey. Such a conclusion would, I would have thought, not be welcome by vendors, by lenders or by borrowers.”
Commentary The court drew an important distinction between the duty of care owed by a valuation surveyor and a structural surveyor. It was common ground that the defendant’s valuation report was not and did not purport to be a full structural survey. It contained guidance notes on the first two pages which stated: “You have chosen a valuation report which is a limited inspection of the property highlighting only those items which we consider will materially affect value. It is prepared… in accordance with the RICS Mortgage Valuation Specification…Valuers cannot see through solids or see things that are hidden by wall and floor coverings. They will not move furniture or obstructions… Valuers will look at the outside of the property…You still have the option to request a more detailed report and we would be pleased to help you with this.” The scope of the professional’s retainer was therefore also pivotal in this case. Fortunately for B, the retainer was clearly set out in this matter. It is a useful reminder to all surveyors to clearly set out the extent of their retainer at the outset. Anne Marie Hubbard v Bank of Scotland (t/a Birmingham Midshires), Bank of Scotland Plc (t/a Colleys) [2014] EWCA Civ 648
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SAAMCo revisited A full report of the recent summary judgment application in Credit & Mercantile Plc v Nabarro (A Firm) 2014, is not yet available, but we consider it worth a mention because the principles set out in South Australia Asset Management
Chancery Division decision Judgment was granted accordingly and the SAAMCo cap was applied.
Corp v York Montague Ltd (SAAMCo) (1997) were once again
The cases since SAAMCo have distinguished between a
applied. The court held that, in accordance with SAAMCo,
professional’s duty to advise someone as to what course
a mortgage lender had no real prospect of showing at trial
of action to take and a duty to provide information for the
that it could recover more from a negligent solicitor than the
purpose of enabling someone to decide on a course of
difference between the actual value of a property and its
action - a subtle difference between the giving of advice
value with planning permission.
and providing information. The former professional advisor
Background
would be liable for all the foreseeable consequences of the action taken in reliance on that advice if it was negligent. The
Credit & Mercantile Plc (C) was a mortgage lender. A
latter advisor would only be liable for the consequences of
prospective purchaser approached C for funding to
the information being wrong, and not all the consequences
complete the purchase of a property. C instructed Nabarro
of the reliance.
solicitors (N) to act for it on the potential advance.
If the particular breach of duty had resulted in the lender
The previous owner of the property had obtained planning
taking a security which was of less value than it thought,
permission to demolish the existing dilapidated house and
the measure of damages was capped at the difference in
construct a new one. However, the planning permission
value, applying SAAMCo. Whereas, in a case in which the
related to the neighbouring land too and could not be
lender, if it had known what it should have known, would
implemented on the property on its own. N negligently failed
have decided that the borrower was a borrower to whom
to notice that fact and made its report on title accordingly. C
it did not wish to lend, the solicitor was liable for all the
advanced £1.65 million to the purchaser who subsequently
lender’s loss Bristol & West Building Society v Fancy &
defaulted on the loan. Despite efforts to sell the property
Jackson (1997) considered.
to repay the sums due under the mortgage, a significant shortfall of £1.5 million remained. C subsequently claimed this from N.
Applying those principles, C had no real prospect of showing that it could recover more from N than the difference between the actual value of the property and the value with
N disputed causation and quantum and applied for
an implementable planning permission in accordance with
summary judgment in regard to the measure of loss. N
SAAMCo. The problem with the planning permission had
sought a declaration that the loss recoverable by C was
not been appreciated until after the borrower’s failure to
limited to the difference between the value of the property
repay. However, although it was clear that N was entitled
with implementable planning permission and the actual
to the benefit of the SAAMCo cap, it was not clear that the
value of the property at the time of the transaction in August
relevant date for comparing the values was August 2007.
2007. C submitted that N could be liable for the whole of the loss because the ability to implement the planning permission went to the viability of the whole transaction and not just the property’s value. 09
Commentary
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The SAAMCO principle was originally described by Lord
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duty, but subsequently described as relating to the extent of liability. In any event, the SAAMCO principle serves to limit
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its negligence.
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giving an opinion on the current value of a property. The
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future state of the market. The principle therefore insulates the surveyor from losses above the difference between the surveyor’s negligent valuation and the property’s actual value at the date of valuation.
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However, where the professional’s duty is to advise on whether a transaction or a particular course of action should be taken by the client, then the scope of that duty is wider than above and the SAAMCo cap does not apply.
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