Overview
The key professional negligence cases of 2021 picked up on recurring challenges in this area of law and addressed in particular:
- The methodical way to analyse the link between a defendant’s scope of duty and the loss he or she has caused, and the abolition of the “information” and “advice” distinction which had caused so many convolutions in the case law;
- When a defendant owes a duty of care in the first place;
- When it is an abuse of process to attack the outcome of previous proceedings in a subsequent claim, and what has to be pleaded in order to mount such a claim; and
- The search for a sufficient unifying factor in aggregation clauses in professional indemnity insurance.
In this review of the year, Helen Evans, Ben Smiley and Anthony Jones of 4 New Square explain how the 2021 cases clarify the law, and look ahead to 2022.
The true extent of a defendant’s liability
2021 started with the Court of Appeal considering the surveyors’ negligence case of Hart v Large [2021] PNLR 13. Coulson LJ depicted it as a “single issue” case, the question being whether the judge had been right to assess damages so as to render the defendant (Mr Large) liable for all of the financial consequences of the respondents’ (the Harts’) disastrous decision to purchase the property[1]. Although Coulson LJ described the case as unusual on the facts, it involved a legal conundrum which has kept reappearing despite the Supreme Court’s decision in BPE v Hughes Holland [2018] AC 599. [2]
Coulson LJ explained the battle lines in Hart v Large (at [41]) as a clash between:
- The general principle derived from Watts v Morrow [1991] 1 WLR 1421, in the surveyors’ negligence context, that where a claimant has entered into a transaction in consequence of negligent advice, he may in some circumstances be entitled to all the losses incurred as a result of entering into the transaction;
- Cases such as BPE v Hughes Holland where in reliance on negligent advice as claimant has embarked on a particular course of action, but suffered some losses as a result of risks against which it was no part of the advisor’s duty to protect (such as the commercial risks of a project).
In Hart v Large, Coulson LJ examined the increasingly controversial distinction between “information” and “advice” cases that originally derives from the “SAAMCO” case [1997] AC 191. He echoed Lord Sumption’s description of that approach in BPE v Hughes Holland as a “tool” rather than a clear dividing line between distinct types of case. He made clear that the essential issue for the court is “to ascertain the kind of loss against which Mr Large was under a duty to protect the Harts” [47].
On the facts, Mr Large’s duty was not merely to inspect and report on the condition of the property; he also owed an obligation to make appropriate recommendations as to any further necessary investigations. The effect of this was that he should have advised the Harts not to buy the property- and was therefore liable for the entire consequences of the purchase.
The Hart v Large case presciently set the scene for what was arguably the largest shakeup in the law of professional liability in 2021- the Supreme Court’s decision in MBS v Grant Thornton.
MBS v Grant Thornton: the emergence of the 6 stage test and other clarifications of the law
MBS v Grant Thornton [2021] 3 WLR 81 (and the parallel clinical negligence decision of Khan v Meadows [2021] 3 WLR 147) arguably changed, and certainly clarified, the correct approach to the assessment of causation, loss and damage in the negligence sphere in four ways, addressed below.
(1) The six questions
The majority of the Supreme Court formulated a six stage roadmap in order to establish whether a defendant is liable in negligence for damage:
(1) Is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence? (the actionability question)
(2) What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care? (the scope of duty question)
(3) Did the defendant breach his or her duty by his or her act or omission? (the breach question)
(4) Is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission? (the factual causation question)
(5) Is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant’s duty of care as analysed at stage 2 above? (the duty nexus question)
(6) Is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote, or because there is a different effective cause or because the claimant has mitigated his or her loss or has failed to avoid loss which he or she could reasonably have been expected to avoid? (the legal responsibility question).
While many of these questions are not themselves new, the Supreme Court emphasised the importance of the order of the questions. They expressly wanted to draw attention to the location of the scope of duty test in the scheme of the law of negligence. The Court believed that people had misunderstood the law because they had lost sight of where the question of scope of duty fits in with the other key concepts in negligence claims (see in particular the explanation by Lords Hodge and Sales at [12]). The roadmap is not intended to change the law, but rather to reduce the misapplication of the law.
The roadmap has subsequently been referred to in a number of subsequent cases[3], but so far has only been followed assiduously in a construction case: BDW Trading Ltd v UBS Corp Ltd [2021] EWHC 2796 (TCC). Even in that case, the six stage test does not appear to have led to any different result.
(2) The scope of duty test
The focus of the decision in MBS was to reconsider the scope of duty test. Both MBS and Khan v Meadows turned on the proper analysis of the scope of duty. The test was summarised at [4] and repeated at [13] of the majority’s decision in MBS v GT as follows:
“the scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty, judged on an objective basis by reference to the purpose for which the advice is being given”.
Having considered the source of this test, the majority concluded at [17]:
“…in the case of negligent advice given by a professional adviser one looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk.”
The scope of duty question is therefore answered by considering what is the purpose for which the advice is being given, or (put another way), what risk was the duty supposed to guard against. If the loss suffered was that which the advice (viewed objectively) was supposed to avoid, then it will fall within the scope and be (subject to the answers to the other questions) recoverable. The impact of this approach can be seen from the application of the test to the facts in the two parallel decisions.
In MBS v GT, the claimant was a building society and mortgage lender. The Defendant, Grant Thornton, was its auditor, which had negligently advised that long-term interest swaps could be shown in the claimant’s accounts on a “hedge accounting” basis. When the claimant discovered that hedge accounting was not permissible, it closed out the swaps by exercising break clauses, incurring significant losses in the process (“the MTM losses”). The claim for the MTM losses failed before the Court of Appeal because the value of the swaps depended on the market conditions at the time, and the claimant had received market value when it exercised the break clauses. The Supreme Court overturned the decision of the Court of Appeal. It held that, on the trial judge’s factual findings, the Defendant’s purpose had been to advise whether the claimant could use hedge accounting in order to implement its proposed business model. In the light of that purpose, the MTM losses fell within the scope of the Defendant’s duty of care.
In Khan v Meadows, the claimant, when pregnant, had been wrongfully advised by the Defendant doctor that she did not carry the haemophilia gene. Had she known, she would have undergone foetal testing. This would have revealed that her foetus was affected and she would have terminated her pregnancy. The Defendant admitted liability for the consequences of the child’s haemophilia, but denied liability in relation to the fact that the child also had autism. The High Court held that the claimant was entitled to damages in relation to the costs of both the child’s autism and haemophilia. The Court of Appeal and Supreme Court both disagreed. The purpose of the advice was to make an informed decision regarding haemophilia. The risk of autism was not something which the advice was supposed to guard against. The mother’s losses from having a child with autism therefore fell outside the scope of the duty.
The Judicial Committee of the Privy Council applied the same approach as the Supreme Court in Khan in Charles B Lawrence v Inter-Commercial Bank [2021] UKPC 30, a lender claim from Trinidad and Tobago against a negligent valuer, which was complicated by the fact that the lender did not have legal title to the valued land. The lender had settled with the attorney which had negligently advised on title. The Privy Council held that the losses suffered by a lender as a result of the valued property having a defective title were outside the scope of duty of a negligent valuer, since the purpose of the valuation report was to value the property on the assumption that it had good title, rather than to advise on or give information about the title to the land.
(3) The information vs advice distinction is no longer
The Supreme Court did away with the information vs advice distinction (considered in Hart v Large as discussed above). In MBS, there was agreement between the majority (at [22]) and Lord Leggatt (at [92]) that we should “dispense with the descriptions of “information” and “advice” to be applied as terms of art in this area”. Seeking to crowbar the representations by professionals into either of these categories had proved:
- Unhelpful, because it added a layer of analysis which was complex and prone to be misunderstood or misapplied; and
- Artificial, because even in a true “information” case, the professional could properly be characterised as an “adviser”, and the so-called “information” could almost invariably be presented as “advice”.
(4) The end of counterfactuals?
The final change brought about by MBS v GT is the doubt cast on the use of certain “counterfactuals” by the majority. In particular, Lords Hodge and Sales raised a particular issue regarding the use of SAAMCO-style counterfactuals, in the context of “information” cases. In SAAMCO, Lord Hoffmann had proposed identifying the extent of the loss suffered by the claimant which falls within the scope of the defendant’s duty, by asking in an “information” case whether the claimant’s actions would have resulted in the same loss if the advice given by the defendant had been correct. That was put forward a way of identifying what has come to be known as the “SAAMCO cap”. The Supreme Court in MBS highlighted difficulties with the use of that type of counterfactual. However, they did not suggest that such counterfactuals could serve no purpose. Rather, Lords Hodge and Sales agreed with Lord Burrows that the counterfactual test may be regarded as a useful cross-check in most[4] cases.
Analysing when a defendant owes a duty of care in the first place
As explained above, although it was not a focus of the appeal itself, an essential part of the 6 stage test laid down in MBS v Grant Thornton involves identifying whether the defendant owed the relevant claimant a duty at all.
This issue was however considered in the patent agents’ case of BASF Corp v Carpmaels & Ransford [2021] EWHC 2899 (Ch). The First Claimant held a European patent for a diesel emissions treatment system. The Second to Fourth Claimants were manufacturing companies in the same group. In May 2012 the European Patent Office revoked the First Claimant’s patent. The Defendant, which had been retained by the First Claimant, filed an appeal out of time. All of the Claimants in the group sued for damages, and the court had to decide whether the Defendant owed them all a duty of care.
The judge- Adam Johnson J- concluded that the Defendant did not. There was no implied retainer between the Defendant and the other Claimants in the group, and the First Claimant had not contracted as the other Claimants’ agent. The Claimants could not satisfy the “assumption of responsibility” test which has assumed increased prominence in this type of case since Steel v NRAM [2018] 1 WLR 1190.[5] The Claimants attempted to persuade the court that their case was analogous to the “disappointed beneficiary” line cases arising out of neglected wills (where there is liability to a claimant notwithstanding their lack of relationship or reliance on a professional). However, this argument was rejected. Adam Johnson J regarded the proposed duty to the other Claimants in the group as “too nebulous a formulation” and their proposed exploitation of the patent as “embryonic”. He commented (at [321]) that there was no basis to “fashion a remedy” along the lines of disappointed beneficiary cases where the claimants were an “altogether amorphous group who were not readily identifiable at the time.” He also made clear that the BASF case was not one where there was a lacuna or “black hole” if not duty of care were recognised: the issue was that the Defendant patent agent’s duty only “extended so far”, and not to other companies in the group.
The BASF case reaffirmed the assumption of responsibility as the touchstone of liability. The case was therefore similar in its outcome to another 2021 authority addressing when accountants acting as introducers of investment schemes can owe a duty of care to investors, namely Knights v Townsend Harrison [2021] EWHC 2563. There HHJ Cawson QC held (at [253]) that:
“there may be circumstances in which an accountant, in introducing a client to a tax scheme in the context of an ongoing professional relationship may owe a duty not to introduce an unsuitable client to an unsuitable tax scheme. …..
Further, there may, as I see it, be circumstances in which the nature of the relationship was such that it was incumbent upon the accountant to proffer advice in relation to the tax scheme, and the implications of entry into the same. However, this would all be dependent upon showing that the circumstances were such that the accountant had assumed responsibility for such matters.” (emphasis added)
Micawber’s law of collateral attack?
Moving away from the existence or extent of a professional person’s responsibility, a trio of cases in 2021 tackled the twin questions of abusive collateral attacks on previous judgments, and/or the extent to which Claimants have to plead out how matters would have been different if their advisers had not been negligent.
In Charles Dickens’ novel David Copperfield, Mr Micawber was famed for his optimism that “something will turn up”. Defendants in professional negligence claims involving an attack on a court’s prior judgment often regard claimants as taking a similar approach, adopting the hope that the evidence will bear out their attack, rather than explaining why a judge would have reached a different decision.
Case 1: Allsop v Banner Jones
The first case considering collateral attack was Allsop v Banner Jones [2021] 3 WLR 1317. The case arose out of matrimonial proceedings between Mr and Mrs Allsop. Mr Allsop was severely criticised by the District Judge for engaging in risky and loss making share trading. The District Judge made what is known as a “Norris add-back”, namely, he notionally added back to the assets money which he concluded that Mr Allsop had in fact lost. He also made unfavourable findings about Mr Allsop’s credibility.
Mr Allsop sued his solicitors and barristers. He complained that no witness statements had been served to explain both the volume and alleged culpability of his share trading (although witness statements are not ubiquitous in financial remedy proceedings, and Mr Allsop gave oral evidence before the District Judge). However, his Particulars of Claim did not explain in adequate detail what he said the written evidence would have contained, and what impact it would allegedly have had on the outcome before the District Judge in the family proceedings.
The solicitors successfully applied to strike out this plank of Mr Allsop’s case (alongside other aspects of the case). Mr Allsop appealed to the Court of Appeal. He complained that the judge in the professional negligence claim had applied too exacting a test, requiring him to show that he would have put forward evidence that would have “entirely changed the aspect of the case” (a test derived from Phosphate Sewage v Molleson (1879) 4 App Case 801).
The Court of Appeal agreed that the judge in the professional negligence claim had applied the wrong test. It held at [44] that the correct test is derived from Secretary of State for Trade & Industry v Bairstow [2004] Ch 1 and involves considering whether the second claim:
- Is manifestly unfair to the defendant; or
- Would bring the administration of justice into disrepute (e.g. because in the professional negligence claim, the claimant can point to no new facts or law to suggest that the first court could have reached an alternative decision).[6]
The Court of Appeal allowed Mr Allsop’s appeal on this plank of the case, subject to the requirement that he amend his case relating to the share trading to explain how it was alleged that serving written evidence could have led to a different outcome.[7]
Case 2: PricewaterhouseCoopers LLP v BTI 2014 LLC
Similar issues arose in the auditors’ negligence claim of PricewaterhouseCoopers LLP v BTI 2014 LLC [2021] EWCA Civ 9. The case involved the decision of directors of a company to declare dividends based on their understanding of the company’s liabilities to indemnify another (and therefore the amount of available capital). In fact, the company’s liabilities were more onerous than thought. The situation culminated in proceedings against both the directors (for declaring the dividends) and the auditors (for failing to identify the problem).
The claim against the directors preceded the claim against the auditors. The claim failed- the court finding that the directors had prepared the accounts on a proper basis for the purposes of the dividend payment. The auditors sought to strike out the claim against them on the basis that it was a collateral attack on the judgment in the claim against the directors. The auditors were critical of what they perceived to be the paucity of the claimant’s explanation of why there should be a different outcome in the case against them, an approach they described as “Micawberism on stilts”.
Both at first instance and on appeal, the courts refused to strike out the claim against the auditors as an abusive collateral attack. The Court of Appeal also adopted the Bairstow test- namely, that a case is only abusive if it would be manifestly unfair to a party, or that permitting the claim would bring the administration of justice into disrepute. As in Allsop, this proved too exacting a test for the Defendant to satisfy at a summary stage.
Case 3: King v Stiefel
The third case in the trilogy is King v Stiefel [2021] EWHC 1045 (Comm). The case arose out of convoluted underlying litigation. Summarised as simply as possible, the Claimants had been involved in proceedings alleging fraudulent misrepresentation against various Defendants (“the Misrepresentation Defendants”). During the trial of that claim, they discontinued their action against the Misrepresentation Defendants, and agreed to pay costs on the indemnity basis. They were ordered to pay £1.7m on account of those costs.
The Claimants then sued the Misrepresentation Defendants and the Misrepresentation Defendants’ lawyers. They alleged that they had been involved in an unlawful means conspiracy which the judge, Cockerill J, described as defying “any powers of precis” [4]. The Claimants alleged that but for the conspiracy they would have won the Misrepresentation Claim, or would not have had to pay the costs of that claim.
The Defendants applied for summary judgment. A distinguishing feature between the King v Stiefel case and the “collateral attack” authorities discussed above was that here, the Claimants had brought two sets of proceedings against the same parties (namely the Misrepresentation Defendants, even though the second action included fresh Defendants as well). Further, the Claimants had discontinued their first action. The effect of this was that CPR 38.7 applied- a provision which requires Claimants to obtain the court’s permission if they want to make another claim against the same Defendant arising out of the same or substantially the same facts.
Cockerill J declined to grant permission to the Claimants to bring the second claim. She was critical of the way in which the Particulars of Claim had gone about pleading the Defendants’ alleged fraud, making clear that an inference of fraud cannot be justified by “lumping together” a number of disparate, allegations [477]. She criticised the claim as evidencing a desire to alleged wrongdoing which had become a “kind of philosopher’s stone which transforms innocent errors into dishonest conspiracies – from which in turn the main conspiracy can itself be inferred.” [482]. Stepping back, she concluded that the claim was “structurally fatally flawed, abusive and lacking in pleadable substance.” [455].
Cockerill J found that part of the case also involved a collateral attack on a costs assessment, concluding that it was an abuse of process to mount a claim based on an allegedly dishonestly inflated costs bill when the same allegations had been advanced and withdrawn in costs proceedings on that bill (see e.g.[287]).
The facts of King v Stiefel may be outlandish and unusual but the case assists in untangling some issues that are familiar to any lawyer dealing with professional negligence claims, including the circumstances in which claimants can “restart” discontinued proceedings, and the interplay between arguments that have to be raised on a costs assessment and arguments that can be raised in a negligence claim.
Aggregation
Finally, while matters such as the precise formulation of the scope of duty may govern the size of the claim, the bottom line for many defendants to professional liability claims is whether, and to what extent, they enjoy insurance cover. In 2021, the key question of how claims against solicitors will aggregate under the SRA Minimum Terms and Conditions (“MTC”) was considered by the Court of Appeal in Baines v Dixon, Coles & Gill (a firm) [2021] EWCA Civ 1211. The decision certainly gives some guidance to aspects of the law in this notoriously unpredictable and fact sensitive field, but it is unlikely to be the last word on the matter, and aggregation is likely to provide fertile ground for disputes in the coming years.
Clause 2.5 of the MTC permit aggregation of claims ‘arising from: (i) one act or omission; (ii) one series of related acts or omissions; (iii) the same act of omission in a series of related matters or transactions; (iv) similar acts or omissions in a series of related matters or transactions…’ The MTC does not go on to define further what strength of connection renders one thing ‘related’ to another, and cases have tended to fall back on somewhat impressionistic language. The Supreme Court has relatively recently considered a dispute about sub-clause 2.5(a)(iv) (often referred to as “limb 4” of the MTC wording), and what amounted to “related matters or transactions”, in AIG Europe Ltd v Woodman [2017] 1 WLR 1168. In that case, Lord Toulson confirmed that the test for aggregation under that sub-clause relies on an overall assessment of the interconnection between different claims which is highly fact sensitive (at [22]) to satisfy a broad standard variously described as “a real connection between … transactions”(at [18]) or “some inter-connection between the matters or transactions, or in other words they must in some way fit together.” (at [22]).
The Baines case focused largely instead on sub-clause 2.5(a)(ii)- referred to as “limb 2” of the MTC wording. In that case, one partner (Ms Box) in the defendant firm was revealed to have been fraudulently misappropriating millions of pounds for years from clients whose trusts or estates the firm administered. Various claimants – including the Leeds Diocesan Board of Finance, the National Trust, other charities – sought that the honest partners of the firm account for the sums taken by Ms Box from the relevant trust accounts.
A key issue was whether or not the various acts of misconduct by Ms Box aggregated such that a single limit or insurance applied, or whether the honest partners’ insurance cover would respond separately to each claimant’s claim. Insurers argued in the Baines case that the various claims against the firm aggregated on the basis of sub-clause 2.5(a)(ii) (i.e. limb 2), concerning claims arising from ‘one series of related acts or omissions.’ At first instance ([2020] EWHC 2809 (Ch)), HHJ Saffman considered the guidance from Lord Toulson in the AIG case and concluded that the various fraudulent misappropriations by Ms Box were not sufficiently “related”. As HHJ Saffman put it (at [265]), while they shared the common factor of Ms Box’s dishonesty, “[d]ishonesty is not an act, it is a state of mind.”
On appeal, the Court of Appeal focused more on the requirement of a “series” of related acts. That point had been specifically addressed (albeit on different policy wording) by the House of Lords in Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd [2003] UKHL 48, with Lord Hoffmann identifying (at [27]-[29]) that a claim arising from “a series of related acts” must arise from the related acts in combination. As Nugee LJ[8] summarised his view of the position in Baines, “if there is a series of acts A, B and C, it is not enough that act A causes claim A, act B causes claim B and act C causes claim C. What is required is that claim A is caused by the series of acts A, B and C; claim B is also caused by the same series of acts; and claim C too” (see [53]). On the facts of the Baines case, that meant that the claims made by the various trust claimants could only be aggregated if each of them arose not only from similar dishonest acts on Ms Box’s part, but from the combination of multiple dishonest acts. As Nugee LJ stated, “this would obviously not be so: the Bishop’s claim would arise from the theft from the Bishop of Wakefield Fund and have nothing to do with the theft from the Scholefield estate, and conversely with the Scholefield claimants’ claim” (see [54]).
The decision of the Court of Appeal in Baines gives a degree of clarity as to the relatively exacting requirement for aggregation of a series of related acts under sub-clause 2.5(a)(ii) of the MTC, at least on the facts before the court. But the Court declined the opportunity to undertake any broader reform in relation to aggregation more generally (and did not tackle the apparent clash of views between Lords Hoffmann and Lord Hobhouse in the Lloyds TSB decision- see [68]ff). It is therefore to be expected that disputes will continue between insureds and insurers as to whether multiple similar, but not combined, wrongful acts by an insured come within the language of broadly-drafted aggregation clauses.
One such case to watch – arising in the context of medical negligence and on the basis of different policy wording – will be the appeal in Spire Healthcare Ltd v Royal & Sun Alliance Insurance plc. At first instance ([2020] EWHC 3299 (Comm)), HHJ Pelling QC took the view that claims arising from the performance of incomplete surgeries should not aggregate with claims arising from the same surgeon’s performance of unnecessary surgeries (despite the surgeon’s performance of both categories of surgery involving both negligence and dishonesty). The judgment of the Court of Appeal is awaited.
Conclusion
2021 has provided welcome clarity to some areas which have caused confusion in recent years- prime examples being the route map laid down in MBS v Grant Thornton, the affirmation of “assumption of responsibility” as a key test, and the clearer formulation of the law on collateral attack. However, the complexity of this field of law often arises when applying these tests to new or unusual facts, and it is only when the tests are seen in context that challenges and difficulties can emerge. Looking ahead to 2022, we expect to see these new tests play out in practice, and for there to be further challenges to the law on aggregation in professional indemnity insurance.
Helen Evans, Ben Smiley and Anthony Jones, 4 New Square
hm.evans@4newsquare.com, b.smiley@4newsquare.com, a.jones@4newsquare.com
7 January 2022
© Helen Evans, Ben Smiley and Anthony Jones, January 2022. Disclaimer: this article is not to be relied on as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.
[1] See [3] of the judgment of Coulson J.
[2] See the round up for 2018 by Helen Evans, Thomas Ogden and Marie-Claire O’Kane of 4 New Square at https://4ns-old.localhost/publications/professional-negligence-round-up-of-2018/
[3] Knights v Townsend Harrison [2021] EWHC 2563, Cunningham v Rochdale Metropolitan Borough Council [2021] EWCA Civ 1719, Rushbond v JS Design [2021] EWCA Civ 1889.
[4] The SAAMCO-style counterfactual is most commonly useful in valuer cases, but even then, there are exceptions such as Charles B Lawrence v Inter-Commercial Bank, referred to above, which the Privy Council recognized was one of those cases where that counterfactual would have been unhelpful.
[5] See (1) the discussion of NRAM v Steel in 2018’s round up by Helen Evans, Thomas Ogden and Marie-Claire O’Kane, at https://4ns-old.localhost/publications/professional-negligence-round-up-of-2018/ and (2) the review of the subsequent 2019 case law by Helen Evans, Pippa Manby, Anthony Jones and Seohyung Kim at https://4ns-old.localhost/publications/professional-liability-round-up-of-2019/.
[6] See e.g. Laing v Taylor Walton [2008] PNLR 11.
[7] Note that the defendant solicitors contested any allegation that they were in fact negligent.
[8] With whom Phillips and Moylan LJJ agreed.
