Introduction
2018 was another significant year for professional liability cases. The key developments have fallen into two broad areas. The first is liability. A wide range of questions relating to the responsibilities owed by professionals has come before the courts this year. To whom do professional people owe duties? For whose acts can they be held to account? What is the proper scope of professionals' responsibilities and who is to judge the appropriate standard? The second area is "loss of a chance." Aspects of this issue went before the Supreme Court in late 2018 but it is likely to remain a "hot topic" for the foreseeable future.
The first area of development – liability
When do professionals owe duties to non-clients?
There is nothing new in the courts being called upon to decide when a professional person owes a duty of care in tort to a party that has not in fact engaged him. However, the 2018 cases were notable for their clear focus on assumption of responsibility in preference to the other potentially available tests. In Steel v NRAM [2018] 1 W.L.R. 1190, the Supreme Court considered whether a solicitor acting for a borrower owed a duty of care to a mortgage lender.1
The case was unusual in its facts. The defendant solicitor, who acted for the borrower, had sent an email to the lender (Northern Rock) that was peppered with obvious errors. It led to the lender releasing all its security when it was only supposed to be releasing a charge over one unit. However, Northern Rock could easily have detected the solicitor's mistakes if it had only checked its own files.
Having considered the potential routes to holding the borrower's solicitor liable, Lord Wilson, with whom the other Justices agreed, concluded that the concept of assumption of responsibility was the "foundation of the liability...The concept fits the present case perfectly."
However, the Supreme Court decided that the solicitor had not assumed responsibility to Northern Rock on the facts. The transaction was at arm's length and between two commercial parties. It was not reasonable for Northern Rock to have relied on what the borrower's solicitor said, and it was not reasonably foreseeable that it would do so. The facts had been at Northern Rock's fingertips: Lord Wilson pointed out that there was no authority for the proposition that there could be an assumption of responsibility "for a careless misrepresentation about a fact wholly within the knowledge of the representee."
Steel v NRAM was not a promising case for the claimant on the facts, but there are other circumstances in which a party to a transaction often relies on the solicitor for the opposing party doing a proper job. This often occurs in conveyancing transactions, where purchasers depend on the vendor's solicitors checking that the vendor is who he says he is, or lenders depend on borrowers' solicitors ensuring that the mortgage monies end up in the right hands. Is this type of case enough to lead to a recognition that a solicitor for an opposing party owes a duty of care in tort?
This question was considered in the conjoined appeals of Dreamvar v Mishcon de Reya and P&P Property v Owen White & Catlin [2018] EWCA Civ 1082. Both cases involved purchases of property where the buyers were duped by the vendors. In both cases, the vendors' solicitors had carried out inadequate money laundering checks.
The duped buyers argued that the imposters' solicitors had owed them a duty of care in tort to verify their clients' identity. They pointed to the reliance that they necessarily placed on the imposters' solicitors to do their job properly. Nonetheless, the claim in negligence failed. As in NRAM v Steel, the focus was firmly on assumption of responsibility. Patten LJ highlighted that the imposter vendors and the buyers were engaged in a transaction at arm's length. Notwithstanding the convention of buyers not checking their vendors' identity, there was nothing to suggest that the imposters' solicitors had assumed any duty to the buyers to carry out any due diligence on their behalf. It would have been open to the purchasers' solicitors to seek some form of undertaking from the imposters' solicitors about whether the money laundering checks had properly been completed.
By contrast with NRAM v Steel, the claimants in Dreamvar were not merely confined to a claim in tort. They were also able to bring claims for breach of warranty of authority and breach of undertaking.
By acting for a party to a transaction, a solicitor is taken to give various warranties about his ability to act. The orthodox view is that the warranty of authority given by a solicitor is only to the effect that the solicitor acts for his client and not that his client is who he purports to be.
In P&P Property, the Court of Appeal found a way round the constraints of these authorities in the contractual documents governing the sale. The imposter's solicitor, OWC, had signed the contract "on behalf of the seller". The "seller" was a defined term in the contract, by reference to the property owner's name ("Clifford Michael Phillip Harper"). In the view of Patten LJ, this was enough to lead to the conclusion that OWC warranted that it was acting for the real Mr Harper. Ultimately this did not help the claimant, however, because a duped buyer still has to prove reliance and the P&P buyer could not.2
The claimants therefore had to fall back on their claims for breach of undertaking. This cause of action had its origin in the Law Society Code for Completion by Post 2011 which contains an undertaking whereby the seller's solicitor promises: "to have the seller's authority to receive the purchase money on completion."
The buyers argued that the Code requires a solicitor to have the authority of the real owner of the property and not an imposter who had no right to sell it. The Court of Appeal agreed. Since reliance is not an ingredient of a claim for breach of undertaking, it was this route which gave rise to the liability of the imposters' solicitors to the duped buyers.
For whom can professionals be held responsible?
Some professions are more prone than others to farming work out to agents. The field of financial services threw up two contrasting cases about the circumstances in which a professional may be liable for the acts of such an agent. The decisions should to be approached with some caution when considering the liability of non-financial services professionals because of the statutory and regulatory framework and webs of agreements between principals and representatives peculiar to financial services.
Frederick & Ors v Positive Solutions (Financial Services) Ltd [2018] EWCA Civ 431 concerned a financial services company which entered into an agreement with an agent. The agreement provided that the company would be responsible for the agent's activities when carrying out the "business in the agency hereby created or in the course of performance of the duties hereby contracted." Although the agreement purported to constrain the agent's conduct, he used the company's portal to arrange various mortgages based on false information about some borrowers. The agent paid some of the money to the borrowers and misappropriated some of it himself. The borrowers were left with loans that they could not service. They could not bring satisfactory proceedings against the agent because he was bankrupt.
The borrowers argued that the company was vicariously liable for the agent's activities. For its part, the company contended that he was on frolic of his own. All the company had done was to provide the mortgage portal which the agent had used for his own ends. The Court of Appeal agreed with the company: it decided that the agent was merely "moonlighting." The company was not liable for his misappropriations.
The decision contrasts at first sight with R (TenetConnect Services Ltd) v Financial Ombudsman [2018] EWHC 459 (Admin). Here, Ouseley J considered the liability of an IFA network for an "appointed representative" who turned out to be a fraudster. However, the case is different from Frederick in that the agency relationship had a specific statutory underpinning. Under s. 39(3) of FMSA, a financial services network is responsible for the representative's acts "in carrying on the business for which he has accepted responsibility."
Tenet argued that it had not "accepted responsibility" for fraudulent or unregulated activities of its agent. However, the argument failed. This is because the aim of s. 39(3) of FSMA is to ensure that clients dealing with the appointed representatives "have the same level of protection as if they had dealt with the firm itself." The regulatory framework had an important bearing on the outcome of the case – and demonstrates the need for care when considering whether financial services cases can be applied to other types of professional who have contracted with agents.
What are professionals responsible for?
Many of the 2017 professional negligence cases involved applying the distinction between "advice" and "information" cases confirmed by the Supreme Court in Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029. The pace of cases expressly considering the application of Hughes-Holland slowed in 2018. Of the two notable 2018 cases, one was unsurprising and the other more contentious.
First for the unsurprising case. Lloyds Bank Plc v McBains Cooper Consulting [2018] PNLR 23 concerned the liabilities of a "progress monitor" advising a bank on works being carried out on a former bingo hall in North London. Lloyds Bank lent the sum of £2,625,000 to allow the work to be carried out. McBains Cooper's function was to report to the Bank about the progress of the building contract and make recommendations about interim payments pursuant to the facility. However it failed to tell the Bank that (i) the cost of the development was greater than the amount of the facility and (ii) there had been significant changes to the building contract, involving the addition of a further floor (to be funded from the Bank's money).
Based on the above failures, the judge found that the Bank would have refused to fund any further lending from December 2008. He therefore found McBains Cooper liable for all of the Bank's losses after that date.
The Court of Appeal agreed with the judge that McBains Cooper should be liable for the failure to tell the Bank that its money was being spent on work outside the scope of the building contract (which included the erection of the third floor). McBains Cooper was accordingly liable for all of the funds wrongly paid away on this part of the project. However, it parted company with the judge on the question of whether McBains Cooper was liable to compensate the Bank for all of the payments under the facility from the date when the issue came to light. The Court of Appeal decided that it was "illogical" to require McBains Cooper to pay out for all of these sums in circumstances where the Bank's manager was aware that the funding it was providing was always going to prove inadequate. Applying the approach of Lord Sumption in Hughes-Holland, the Court of Appeal observed that: "the bank was going to lose those sums, apart from the sums paid for the third floor, in any event."
Turning to the more controversial authority, Manchester Building Society v Grant Thornton UK LLP [2018] PNLR 27 concerned a claimant building society which issued "lifetime mortgages" with borrowers. To protect itself against interest rate fluctuations the building society entered into long term interest rate swaps. The defendant accountants advised the claimant that it could use a method known as "hedge accounting" which permitted changes to the fair value of the lifetime mortgages and therefore reduced the volatility in the claimant's profits. It then audited the claimant's accounts on the basis that this approach was permissible.
However, the claimant subsequently discovered that hedge accounting was not permitted under ISA39. It was forced to close out the swaps, stop lending and sell its book of UK lifetime mortgages. The claimant sued the defendant for negligence in the sum of £48.5m which included the £32.7m in respect of the cost of breaking the swaps. The defendant admitted certain breaches of duty, but the case became mired in the notoriously complex area of the scope of accountants and auditors' responsibilities.3
The judge held that but for the accountants' negligence the claimant would not have suffered the costs of breaking the swaps. However, he also concluded that losses incurred in breaking the swaps (i.e. the vast majority of the sums claimed) were not the type of losses for which the defendants had assumed responsibility and were not recoverable as damages. This was because the defendants were not responsible for the financial consequences of the claimant's business activities in circumstances where they had only been retained to advise in relation to how those business activities were to be treated in the accounts.
Whose standard is it anyway?
The starting point in professional negligence cases other than claims against legal professionals, is that a claimant should ensure that allegations of breach are supported by expert evidence: Pantelli v Corporate City Developments [2011] PNLR 12 and Sanson v Metcalfe Hambleton & Co [1998] PNR 542. However, in 2018, two cases challenged this position.
The first was Avondale Exhibitions Ltd v Arthur J Gallagher Insurance Brokers Ltd [2018] 5 WLUK 606. This was a claim against an insurance broker for failing to elicit adequate information from an insured about convictions and to explain the duty of disclosure. The claimant asked the court to find that the broker was negligent without adducing expert evidence about what a reasonably competent professional would have done. The court held that there was no "rule of law that expert evidence is required in every case before a finding of professional negligence can be made." However, it would be a bold claimant who would pursue an expert without expert evidence to support the case.
By contrast, in Shaw v Leigh Day [2019] PNLR 2, Andrews J upset the understanding that expert evidence was not usually necessary or appropriate in claims against legal professionals. The case concerned whether a lawyer had appropriately conducted an inquest. Surprisingly – given that the conduct of litigation is the matter about which courts have expertise- the judge held that expert evidence would be necessary to make out this type of allegation. The case is out of step with other authorities on expert evidence in lawyers' negligence cases.
Summary on liability developments
Several areas of duty of care were tackled by the courts in 2018, but many of the cases had the same unifying feature. Following the emphasis of the Supreme Court in Hughes-Holland in 2017, the courts retained a clear focus on what a professional person has agreed to be responsible for, or otherwise assumed responsibility for. This was the thread running through such seemingly disparate cases such as NRAM v Steel, Dreamvar and McBains Cooper and Grant Thornton.
Area of development 2: what next for loss of a chance?
The miners' compensation scheme set up to deal with industrial injuries such as Vibration White Finger ("VWF") gave rise to two important cases about the proper application of "loss of a chance" principles in "lost litigation" cases.
The classic "loss of a chance" analysis is derived from Allied Maples v Simmons & Simmonds [1995] 1 WLR 1602. This requires a claimant to show that he had a "real and substantial chance" of achieving the better outcome which he contends he was deprived of by the defendant's negligence. A discount is applied to his damages in order to reflect the prospect of him failing to do so.
The Allied Maples approach is not without its difficulties. There is a lack of clarity about aspects of how a court is to assess the outcome of the lost chance. Taking the example of lost litigation, if the court thinks that a claimant would or was likely to have won on liability in his case, should the court consider the prospects of him achieving the unrealistically high award of damages that some claimants say they would have got? Or should the court try and reach a view on a more realistic range of damages? What evidence is a court allowed to take into account in deciding what the outcome might have been?
No trial within a trial?
The first significant decision of 2018 was Perry v Raleys [2017] PNLR 27. The courts have repeatedly asserted that it is not the function of a professional negligence case to conduct a "trial within a trial" in a lost litigation claim. In Perry, the Court of Appeal confirmed this principle and disapproved of the judge conducting a "mini trial" exercise on the question of whether a miner with VWF would have won a claim for damages for his alleged inability to carry out domestic and gardening tasks (a "services claim"). This issue arose because the miner's honesty about his condition was attacked by his solicitors when he sued them. The Court of Appeal held that the trial judge had gone too far by trying the question of what would have happened in the underlying trial on the balance of probabilities basis rather than on the Allied Maples approach. 4
After-available evidence
The other aspect of dealing with lost litigation cases which was considered in 2018 is whether "after available" evidence should be admitted. Edwards v Hugh James Ford Simey [2018] EWHC 963 also concerned a miner's VWF claim. The miner had decided, on his solicitors' advice, to abandon his services claim. By the time of trial in the professional negligence claim, medical evidence was available that would have been fatal to the services claim had it been known at the time of trial. The Recorder at first instance rejected the miner's claim on the basis that "had that evidence been available to the parties and the tribunal at the time", the case would have failed.
The claimant miner appealed on the ground that it was an error for the court to take into account evidence which was not and could not have been available at the time. The defendant solicitors argued that some aspects of loss can be fairly tried on a basis other than a "loss of a chance" assessment and therefore that the after-acquired evidence should be admitted.
The Court of Appeal explained the nature of a loss of a chance claim, which it felt had "often been forgotten or at least elided." It said that the "court is seeking to establish what was lost by the claimant, as at the date, often the notional date, of the original trial and settlement. It is easy to see why the elision occurs. The value of the original claim, however assessed, becomes the major component of loss in the professional negligence claim. But what the claimant should recover in the professional negligence claim is not established by answering the question: how much of the original claim can he prove now? Rather it is established by answering the question: what was the value of what he lost then?."
Where next?
There is an interesting divergence between the Court of Appeal's disapproval of approaching lost litigation on a "balance of probabilities" basis in Edwards and the approach to some other types of opportunities lost by professionals for their clients. Take for example the recent approach of the Commercial Court to the loss of insurance cover as a consequence of errors by insurance brokers. In Dalamd Limited v Butterworth Spengler Commercial Ltd [2019] PNLR 6, Butcher J considered what an insured had to prove against his negligent broker where an insurer had rejected his claim. He concluded that (i) the insured had to prove on the balance of probabilities that if the insured had sued the insurer (rather than the broker), the claim would have failed; (ii) the court should assess any argument by the broker that insurers would have avoided the policy for reasons unconnected with the broker's negligence on the balance of probabilities and (iii) that neither question fell to be determined on the Allied Maples appraoch.
The extent to which the Allied Maples approach should still apply across professions, and the problems inherent in the approach, therefore seem likely to detain the courts further in 2019.
Footnotes
[1] See also Playboy Club London Ltd v Banca Nazionale del Lavoro SpA [2018] 1 WLR 4041.
[2] P&P challenged the proposition that reliance had to be proved but were unsuccessful in this regard.
[3] See e.g. Galoo v Bright Grahame Murray [1994] 1 WLR 1360.
[4] The appeal was argued before the Supreme Court in December 2018.
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