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Can the tables ever be turned: when can professionals sue their clients for breaching duties to them? by Helen Evans KC

Articles & Publications
7 December 2022

When professionals are sued, it’s not unusual for them to make an assertion that their clients were “up to something”, or to complain that they had provided wilfully misleading or incomplete instructions.

In this article, Helen Evans KC of 4 New Square Chambers examines what the recent case law tells us about where this type of allegation can lead.

Clients allegedly up to no good?

It is well known that the ability to defend a claim on the basis of a client’s unlawful conduct has become harder to predict as a result of the revamp in recent years of the “illegality” test[1]. It used to be the rule that if a client had to rely on his or her own unlawful activities as part of the case, the claim would be regarded as “tainted” and struck out. However, the courts now apply a discretionary test, which looks at factors such as the purpose of the law that has been transgressed and whether denial of the claim is proportionate or not.

Professionals sometimes see this new approach as unduly forgiving of former clients engaged in unscrupulous activities, and want to find a way to work round it.  One of the potential routes round this problem is for professionals to argue that the clients owed them duties to act in good faith and failed to do so. But does this argument work?

The first challenge is proving that a duty of good faith exists in the first place.

In the recent costs case of Candey Ltd v Bosheh [2022] 4 WLR 84, the Court of Appeal considered whether there was an implied duty of good faith in a conditional fee agreement (“CFA”) between a firm of solicitors and its clients.

In Candey, a firm of solicitors had acted for the Boshehs in a fraud claim. It was common ground that since the Boshehs had settled with their opponent, Sheikh Mohamed, but recovered nothing, Candey would not be entitled to any costs under the CFA. However, Candey alleged that the Boshehs had previously received a more advantageous offer from Sheikh Mohamed that would have culminated in some costs recovery. Candey therefore sought to criticise the Boshehs for not accepting that offer. Candey sued the Boshehs for failing to act in good faith.

Both at first instance and on appeal, the courts held that there was no implied term of good faith in the CFA:

  • The Court of Appeal depicted the claim as part of an “avalanche” of litigation in recent years where claimants had tried to show that they were parties to a “relational” contract carrying with it an implied obligation of good faith. However, the Court of Appeal pointed out that few such claims had succeeded;
  • The Court of Appeal held that it was not “so obvious that it went without saying” that the CFA and retainer should have such  an implied duty. They both worked perfectly well without it;
  • Then court went further, to suggest that it was “startling concept” to suggest that a client owed a duty of good faith without a term making this clear;
  • The Court of Appeal concluded that the fact that the litigation was handled on a CFA did not of itself make a difference, especially in circumstances where allegations of fraud were made against Candey’s clients in the litigation (and the “possible truth of the fraud allegations was inherent in the CFA itself”).

It is plain, as a result of Candey, that unless a professional’s engagement terms make clear that the client owes a duty to act in good faith, it will be difficult to get an implied duty to this effect off the ground. It is also uncommon- at least in my experience- for engagement letters[2] to include an express term to this effect.

The Candey case also illustrates that problems of privilege can arise when professionals seek to initiate proceedings based on their clients’ wrongdoing, rather than responding to a claim from a client (which would  carry with it a waiver of privilege).

What about misleading information or instructions?

Some professionals’ engagement letters- particularly those of auditors- contain express duties requiring clients to provide complete and accurate information.

In the audit context, this reflects the fact that under the Companies Act 2006, the directors owe a duty to keep proper financial records and the role of the auditors is to identify whether they are true and fair or not. It is not the duty of an auditor to compile the financial records in the first place.  Although the auditor has to devise tests to try and identify material misstatements or fraud, he is nonetheless entitled to confirmation from the audit client that the records are complete and accurate. This tends to be reflected in the engagement letter (as well as later management representations).

But what about other professionals?   In my experience, it is less common for engagement letters of other professionals to be as assiduous about including express duties on the part of a client to provide complete and accurate information. Some engagement letters do require timely responses to requests for instructions, or a more generalised requirement for cooperation.  It should be noted that the ability of professionals to try and impose duties on their clients is not untrammelled: their engagement terms will have to satisfy their regulators as well as avoid falling foul of other inhibitions (such as the inability to contract out of certain obligations).[3] It may be that this is why duties imposed on clients by professionals’ standard terms are usually kept within modest bounds.

Given the relatively narrow compass of clients’ obligations, it is still comparatively unusual for professionals to counterclaim against their clients for acting in breach of these types of duty. Counterclaims of this nature can give rise to tricky issues.  A good example of the type of problems that can emerge, albeit on extreme facts, can be found in the 20 year old case of Barings PLC v Coopers & Lybrand [2003] PNLR 34. There, the auditors attempted to counterclaim against Barings for deceit as a result of the misleading information given by Nick Leeson, who was engaged in fraud.  The judge held that even though the auditors had been misled, their duty extended to uncovering the fraud and that their deceit claim based on their clients’ duties to them accordingly failed.  A similar approach has also been adopted in more recent claims against auditors[4]. It is fair to say, however, that the success of these types of argument will vary depending on what type of professional or claim is involved.

However, whether or not a counterclaim against the client is appropriate, it is always worth reviewing the engagement letter to identify and work out how best to plead any duties the client owed. This is because the obligations owed by a client can be deployed in multiple contexts:

  • First, there has been a renewed focus on the need for a nexus between the duty and loss since the Supreme Court’s judgment last year in Manchester Building Society v Grant Thornton [2021] UKSC 20. This has reinvigorated the attention paid to scope of duty. Some indication of how the MBS v Grant Thornton approach might play out where “misinformation” by a client is to blame can be found in the expert witness negligence case of Radia v Marks [2022] PNLR 12. There it was held that it was no part of an expert witness’s duty to save a client from a finding that he or she had not given honest information. However, this finding was bound up with the fact that experts are not there to determine disputed facts. Furthermore, the duties that experts owe to courts mean that it is not their function to help shore up a litigant’s reputation for truthfulness either. These factors do not necessarily apply to the work of other professionals. Identifying and pleading a term in the engagement letter requiring a client to give accurate instructions would therefore help protect other professionals whose work is arguably more closely linked with protecting a client’s credibility;
  • Secondly, given the cautious approach that courts can sometimes take to making findings of contributory negligence against clients, it is always worth identifying where the boundaries lie between what a professional has agreed to do and what matters a client retains responsibility for.

Standing back, letters of engagement are a surprisingly under-utilised feature of professional negligence claims.  Litigators often review them looking for what duties the professional owed, or for limitation of liability clauses. However, it can be just as important to consider what obligations were placed on the client.

© Helen Evans KC of 4 New Square Chambers

This article is not intended as a substitute for legal advice. Advice about a given set of facts should always be taken.

Helen Evans KC was appointed silk in March 2022. In November 2021 she was named “Professional Negligence Junior of the Year” and in April 2022 was named “Times Lawyer of the Week.” Her practice comprises professional liability, fraud, regulatory and insurance coverage work. Her professional liability practice often has a legal, accountancy, audit or company law slant. She practises from 4 New Square in London and is the co-author of the Solicitors’ and Barristers’ Chapters in Jackson & Powell, the leading textbook on Professional Liability. For more details see www.4newsquare.com or email hm.evans@4newsquare.com

[1] See Patel v Mirza [2016] UKSC 42 (as applied in Stoffel v Grondona [2018] EWCA Civ 2031).

[2] At least in cases not involving CFAs or other funding arrangements.

[3] See paras. 2-011 of Jackson and Powell on Professional Liability.

[4] See for instance Assetco v Grant Thornton at first instance: [2019] EWHC 150 (Comm)

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