Greater damages likely under new ‘scope of duty of care’ test in professional negligence claims

As David Hacker, commercial dispute resolution lawyer explains, ‘The upshot of the judgment for advisors is that if you have been retained by a client to provide advice to guard against a particular risk, and that advice proves to be wrong and leads to the risk in question materialising, then there is now an increased chance that you and your insurer will be on the hook for a bigger proportion of any financial loss that flows from this.’

To ensure that liability for future claims is kept to a minimum, advisors should ask a solicitor to review their current terms of business and provide a checklist of the steps that need to be taken to ensure that:

• the purpose of all client retainers is clear from the outset;
• there is clarity about the risk that the client is trying to protect themselves against; and
• there are clear limits on what the client can do in reliance on the advice provided.

Background

Within the context of professional negligence claims, there is a rule known as the ‘scope of duty of care’ principle. This ensures that a negligent advisor can only be held liable for foreseeable losses which fall within the scope of the duty of care that they owe to their client as implied by statute, common law, or the terms of the advisor’s retainer.

Since the House of Lord’s decision in South Australia Asset Management Corporation v York Montague Ltd in 1996, the courts have approached the question of whether losses claimed by a client are ‘within scope’ by first determining:

• whether the professional was retained to advise the client on the course of action they should take (a so-called ‘advice’ case); or
• whether the professional was simply retained to provide information, which the client could then use to make their own decisions (a so-called ‘information-only’ case).

Where the purpose of the retainer was to provide advice, the professional could be held liable for all foreseeable losses resulting from the client’s course of action. However, where the purpose of the retainer was solely to provide information, liability would only exist in respect of those losses that were attributable to the information provided being wrong.

In addition, in ‘information only’ cases, a counterfactual analysis was applied to determine whether the actions of the client, e.g. in adopting a particular business strategy, would have resulted in the same losses occurring even if the information given by the advisor had been correct. If they would have done, then a cap on liability would be imposed to prevent the client from recovering any losses that would have been incurred in any event.

Implications of the 2021 Supreme Court decisions

The Supreme Court has now said that categorising a claim as ‘advice’ or ‘information only’ should not determine whether a client’s financial losses should be recoverable.

Instead, what needs to be assessed is the ‘purpose’ of the duty of care assumed by the professional, judged on an objective basis by reference to the reason why the advice was given. To do this, you need to ascertain:

• why the help of a professional was sought, i.e. what risk was the client trying to protect themselves against by seeking professional advice; and
• whether the losses the client is now seeking to recover arise as a result of that risk coming to fruition, due to the negligence that has occurred.

This test is likely to make it easier for a wider range of losses to be recovered. For example, in the Grant Thornton case, Manchester Building Society was able to recover £13.4 million as a result of negligent advice about whether hedge accounting could be used in respect of the society’s lifetime mortgages business. Initially they had only been awarded £315,345 plus interest by the High Court, adopting the old negligence test approach.

The court also confirmed that the counterfactual analysis developed in the South Australia case should be viewed as no more than a means of cross-checking the outcome of the ‘purpose of duty’ assessment and should not supplant or subsume the outcome of that assessment to impose a cap on the losses that could be recovered.

The test for negligence

The court also laid out a new six-part test, including the ‘purpose of duty’ question, for determining whether negligence has occurred. This involves asking (in this order):

1. Is the loss which the client is seeking to recover actionable in negligence?
2. What are the risks of harm to the client against which the law imposes an obligation on the professional advisor to take care?
3. Did the professional advisor breach their duty of care?
4. Are the losses for which the client now seeks compensation a consequence of the breach that has occurred?
5. Is there a sufficient connection (or nexus as the court put it) between a particular element of the harm caused, and for which the client is now seeking compensation, and the subject matter of the advisor’s duty of care?
6. Is a particular element of the harm caused to the client irrecoverable under the rules governing negligence claims because (i) it is too remote, (ii) it was actually caused as a result of something else, (iii) the client has failed to avoid losses they could reasonably have been expected to avoid or (iv) the client has managed to mitigate their losses?

Implications

As a result of the Supreme Court judgment, it is expected to be easier for clients to recover a broader range of losses that flow from the provision of negligent advice.

If you are currently facing a professional negligence claim, then it is vital that you speak to a solicitor to determine how the judgment may affect the extent of your liability and if it would be appropriate to change your litigation strategy.

For further advice and support, please contact David Hacker.