PROFESSIONAL NEGLIGENCE LEGAL UPDATE. Talk by Rachel Robertson on 3 June 2010

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1 PROFESSIONAL NEGLIGENCE LEGAL UPDATE Talk by Rachel Robertson on 3 June 2010 INTRODUCTION Legal test Quick overview of the legal position with regard to professional negligence. Focus is on Scottish position but there are not many substantive differences between Scotland and England. Case law update Examination of recent case law both English and Scottish. Solicitors, surveyors and accountants Not covering area of medical negligence - complicated field. Instead, going to focus on the professions of solicitors, surveyors and accountants. But the general principles and legal test apply to all professions. Various issues arising There are various issues which arise in relation to professional negligence claims. Can t cover all but case updates referred to will give a flavour of the current issues which are arising. Limitation issues and recent changes Will examine the issue of limitation - fairly topical at the moment as shown by recent English cases. Recent increase in claims Examination of why there has been a recent increase in the number of professional negligence claims being raised and proceeding through the courts. LEGAL TEST Test of negligence The normal rules of delict apply where someone causes harm to another in the course of his business usually a client or customer is harmed. Broad terms:- Professional person should possess a certain minimum degree of competence. Should also exercise reasonable care in the discharge of their duties If do that, should avoid any claims of professional negligence. Hunter v Hanley 1955 SC 200 What is the test of negligence that a court will apply in Scotland? To determine whether there has been a breach of duty of care, the defender s conduct is judged by the standard of care expected in his profession. So the wronged party must prove that the defender s conduct fell below that of a reasonable solicitor, accountant, surveyor etc. Hence the usual practice of other professionals in the same area will be a significant factor in determining whether there has been negligence or not.

2 The test is set out in the leading case of Hunter v Hanley 1955 SC 200. In this case the Pursuer claimed that the doctor treating him was negligent in using a needle which was unsuitable. The Lord President (Clyde) said this:- Even a substantial deviation from normal practice may be warranted by the particular circumstances. To establish liability by a doctor where deviation from normal practice is alleged, three facts require to be established. First of all it must be proved that there is a normal practice; secondly it must be proved that the defender has not adopted that practice; and thirdly (and this is of crucial importance) it must be established that the course which the doctor adopted is one which no professional man of ordinary skill would have taken had he been acting with ordinary care. No professional man So it is not enough that the defender s conduct deviated from normal practice it must be shown that no professional man of ordinary skill would have followed the course taken by the defender. This standard will provide protection to the client but also recognises that success can t be guaranteed in every case. For example, the credibility of a witness can determine the outcome of litigation. The duty is likely to be owed as a contractual obligation. That sets the standard by which professionals will be judged. SOLICITORS Contract and delict A solicitor can be liable to their client in both contract (ie a letter of engagement) and delict for a harm done. Examination of the more unusual situations which can arise:- Duties to client and Third Party Normally a professional person doesn t owe a duty of care to a third party there is an exception when that third party is a disappointed legatee. For example, a solicitor draws up a will under which X is meant to be the main beneficiary. But he is negligent and X misses out of his legacy. But X has no contract with the solicitor does he have a claim against him? X has suffered an economic loss but he didn t rely on the solicitor s advice and probably isn t even aware of his identity. The Scottish Courts long refused to recognise such a duty of care. In England, the case of White v Jones [1995] 2 AC 207 examined this situation. A solicitor was instructed to change a will a father had been estranged from his daughters and removed them from his will. They were reconciled and he instructed his solicitor to make them beneficiaries but the father died before this was altered. The House of Lords found the solicitor owed a duty of care to the disappointed legatees. It was thought that the solicitor has assumed responsibility for the potential beneficiaries. Hence it was thought that a negligent solicitor should be liable. This case has now taken effect in Scotland in the unreported case of Robertson v Watt & Co (4 July 1995). It is thought that because there is only a restricted class of people who could claim ie the legatees who are known to the solicitor, that a duty of care can be justified in these circumstances.

3 Commercial advice A question arises regarding whether a solicitor is under a duty to provide commercial advice, rather than strictly legal advice. For example advice on the commerciality of a lease. There is a lot of case law on this issue most recently in the case of Tom Hoskins plc v EMW Law [2010]EWHC 479 (Ch) - English case from this year. Tom Hoskins plc sued their solicitors in connection with their handling of the sale of 5 public houses and a brewery. They claimed that the negligence of the solicitors meant that the transaction was completed late and on unfavourable terms. Also, they had been negligent in their drafting of the contract by allowing it to be signed in a form which allowed an assignee to refuse to give directors guarantees or rent deposits to the landlord. The question for the Court was whether the solicitor was required to give general commercial advice to a client. The principle established in the case of Credit Lyonnais SA v Russell Jones and Walker [2003] PNLR 2 is that a solicitor is not normally under any duty to give commercial advice to a client. The scope of EMW s instruction was to advise on and draft the terms of the contract of sale. The issue was whether the obtaining of the landlords consent to assign was within the scope of that instruction. EMW said a distinction had to be drawn between obtaining the consent in principle which they said wasn t part of their instruction and the drafting etc of the document. They argued that only the latter fell within the scope of their instructions. Tom Hoskins plc took the view that EMW were the project managers of the whole sale. The Court found that obtaining the consent was something that both parties were responsible for. It was not [EMW Law s] job to obtain that consent, any more than it is a solicitors task in a conveyancing transaction to obtain finance for the transaction. Midland Bank v Hett, Stutts and Kemp [1979] Ch. 384 Basically the point to take from this case is that the judge said the standard of a reasonably competent solicitor was not of a particularly meticulous and conscientious practitioner but rather the test is what the reasonably competent practitioner would do having regard to the standards normally adopted in his profession. This mirrors the legal test set out at first from the Hunter v Hanley case but puts it in the context of how it is applied to a solicitor. Frank Houlgate Investment Company v Biggart Baillie [2009] CSOH 2009 Court of Session case from end of last year. Pursuer engaged in conveyancing transaction and claimed they were persuaded to invest money by a fraudster, and the fraudster s solicitor was aware he did not own property over which they were granted a security. Raised action against the fraudster s solicitors on the basis of their alleged negligence. The client claimed this case was an exception to the rule that a solicitor does not owe a duty of care to another party in a transaction. They claimed the solicitors should have:- 1 Confirmed he owned the property; and 2 Advised them that he did not when they became aware and tell them not to invest any more money The Court held that a solicitor doesn t normally owe a duty of care to the other party in a conveyancing transaction. But if a solicitor becomes aware of fraud by his client he must ensure he

4 doesn t further that fraud in any way. If he does, he will be liable to the other party as a participant in the fraud. But other than there being dishonesty, a solicitor is not under any duty of case to disclose personal circumstances of his client to the other side and can assume his client is acting honestly. No negligence was found to have been proved failure of solicitors to ensure they were acting for the true owner of the property could not justify the imposition of a duty of care on them in favour of the other side. Levicom etc v Linklaters [2010] EWCA Civ 494 This case from last month shows how the Court of Appeal ruled on causation issues. Levicom appealed against the first instance decision that although Linklaters had negligently advised them about breaches of a shareholder agreement, Levicom had suffered no damage as a consequence because it would have proceeded in the same manner even had it received non-negligent advice. The appeal was allowed. The Court found that Linklaters had to prove their advice was not the cause of any loss and they had not done so. It was observed that a commercial client would not seek expensive legal advice and not act on it. This case is useful for showing the importance for solicitors in keeping contemporaneous records of advice and discussions between solicitor and client. SURVEYORS AND CONSTRUCTION INDUSTRY Brief outline only. Claims against surveyors have been on the increase for a couple of years so this is a pertinent issue. Contracts The law only requires surveyors, architects, engineers etc to meet the standards of competence prevailing in their profession. There is an implied term in their contracts that they will use reasonable skill and care. Of course, if there is an express contract provision to achieve a specific result then that will displace the implied term. Most common express obligation is probably to ensure a building is fit for its purpose. This raises the issue of whether an architect, contractor etc should agree to such a term. A client will have to prove negligence. So where there is a contract with an obligation to achieve a specified result within a design, in the event of a defect the client will have to prove that design caused the defect. Above sets out the basic legal position. Professional duties A designer will have to decide whether to agree to a fit for purpose obligation rather than simply the reasonable skill and care contractual term. They should consider their insurance and what level of cover they will be open to. If they do agree to the fit for purpose obligation then they won t be covered for a non-negligent error. And even if they do make a negligent error, the policy may not provide cover if there is no allegation of negligence against them.

5 Hence there is some uncertainty in this field. Compliance with legislation and Codes of Practice etc The Pre-Action Protocol for Construction and Engineering Disputes applies to all construction and engineering disputes including professional negligence claims against architects, engineers and quantity surveyors. ACCOUNTANTS Number of claims rising Accountants in particular have faced a sudden jump in claims brought against them. For example, in 2009 there were more claims brought than in the previous 4 years put together. This is suggestive of the credit crunch effect more clients are facing financial difficulty and will look to lay the blame for losses at their accountants door. It remains to be seen whether this will subside or if the trend of an increasing number of claims against accountants will continue. A reason for the jump is that the claims typically involve a failure to spot fraudulent activity when looking at company accounts. During a financial recession fraudulent activity increases hence there is greater potential for accountants to be found open to criticism. Reasonable skill and care Like a solicitor there will be a contractual duty of care between an accountant and client in terms of the engagement letter. Reasonable skill and care is an implied term. Fiduciary duties This is where an accountant is distinct from other professions they have duties of loyalty, undue influence and confidentiality. Regulatory Rules and FSA Accountants are subject to Regulatory Rules and subject to FSA regulation also. This too should be borne in mind when considering claims against accountants another layer of investigation. Also, certain functions carried out by accountants are regulated by statute, such as company audits. This means that the relevant statutory context should always be considered when considering a professional liability claim against accountants. LIMITATION RECENT CHANGES 6 or 5 year rule In England claims based on contract are timebarred after 6 years from the cause of the action. This is 5 years in Scotland. Should distinguish this from latent damage cases (such as personal injury from medical negligence) which is a 3 year period. That is the starting position.

6 Identifying exact date of loss In delict, the date from which the limitation period runs is triggered by the date upon which the actual damage is sustained. This causes trouble for the Courts and is an uncertain and complex area particularly where there is a contingent loss rather than an actual loss. Normally the limitation runs from date of damage but a Pursuer will claim that they did not suffer the loss until long after the negligent advice. For example, when they come to sell a property bought 20 years later and discover they do not have title. They are therefore looking for more time to bring their claim. Area was uncertain after case of Law Society v Sephton & Co [2006] UKHL 22 which basically enhanced a claimant s prospects of overcoming the limitation hurdle. That case was concerned with a failure by accountants to identify a fraud. Because it was held there was only a contingent liability, the clock had not started for limitation purposes. The claimants therefore had longer to claim. Couple of cases since then have sought to clarify the issue:- Pegasus v Ernst & Young [2010] EWCA Civ 181 The Court of Appeal held in March 2010 that the limitation period runs from the moment the damage is suffered. Facts of the case alleged failure by Ernst & Young to give proper tax planning advice. Individual had sought advice to mitigate a large tax liability on disposal of a loan. He was advised to invest in a business but part of that advice was flawed and adverse tax consequences flowed from that. Advice was between but claims were issued in Claimants admitted that claims based on breach of contract by E&Y committed more than 6 years previously were time-barred. But in delict (or tort in England) they argued that the actual damage had not been suffered within that 6 year window. In the Court of first instance it was held that they had suffered actual damage in 1999 so the claims were timebarred. This was appealed. Appeal was dismissed. The Court of Appeal rejected their argument that the limitation period did not start until the consequences were actually suffered. Rather, it held that the damage was suffered as soon as the alleged defect in advice became incapable of being cured that was the deadline to take advantage of tax relief in This case shows the importance of identifying exactly when the damage has occurred and therefore when the limitation period starts. Easy to be critical of the Court s willingness to start the clock running at a point when quantifying damage is so difficult. AXA Insurance Limited v Akther etc [2009] EWHC 635 (Comm) English case from April Details of case fairly complicated. Basically, AXA brought proceedings against 89 firms of panel solicitors alleging they were in breach of duty in concluding 26,000 claims. The value of the claim was over 65million. Proceedings were raised in 2008 and the policies were dated 2001 onwards with about 26,000 of them more than 6 years before proceedings commenced. The solicitors defence was that these claims were timebarred and the Court agreed. The Commercial Court indicated that the loss is likely to be suffered when the Pursuer enters into the transaction. That is the case even though the loss doesn t crysallise until later. Consequences of this:-

7 Time limit is becoming similar to that in contract claims Professionals should consider limitation where a claim is made 6 years after the advice is given may have a defence On the other side, a Pursuer shouldn t delay bringing the claim and seeking to have to rely on the discretion of the Court. Cost to claimant in this case for delaying was 20million But each case will be determined on its own facts. Which is turns means that there is a lot of scope for arguments about limitation and more cases to come. This leads to a lot of uncertainty and expense for professionals and claimants who are forced to litigate to test the issues. Worth pointing out that the 3 judges in the AXA case were not unanimous which shows this is a difficult issue and one with more mileage. RECENT INCREASE IN CLAIMS Credit crunch Increase in the number of professional negligence claims and litigation throughout 2009 and that continues into This might be explained by the credit crunch and particularly how it has affected the construction industry. Because professionals will have insurance cover in place, many will be opportunistic and see this as a chance to recover some losses incurred during the recession. Pricing risks Also, cash flow problems led to many issues between suppliers, contractors and sub-contractors. One major risk is where a developer runs out of money mid-way through a project it can then be claimed that there was a failing by a construction professional to provide an accurate costing or to manage the project properly. It is easy to see how when one party is sued, there is potential to try to lay that blame at the door of another contractor so many parties can become embroiled. This is expensive. The rule of thumb is that the greater the pricing risk on the contractor, the greater the risk for a claim. It is for this reason that fixed price contracts are more in favour now. More intense regulatory scrutiny Another reason for an increase in claims is that regulatory scrutiny of professionals, particularly in the financial sector, has intensified. This makes service providers more susceptible to criticism. FUTURE CHANGES Rise in claims continuing? In England the figures for professional negligence claims reaching Court doubled from 2007 to Don t have updated figures but it is expected that this trend will continue. Interestingly, the trend is for more claims to be raised against solicitors rather than other professionals. One reason for this is the economic downturn and corporate and conveyancing work (which is very much affected by the recession) is open to greater scrutiny. For example, companies check that

8 diligence has been done properly and if there is a defaulting borrower then a client might query the advice given by their solicitor. Also, to protect against the credit crunch some professionals (mainly solicitors) may diversify into other specialisms and end up doing unfamiliar work and thus opening themselves up to criticism because they don t have the necessary skills or knowledge. Surprisingly, claims against those involved in the construction industry haven t been on the increase as much as claims against other professionals. 2 reasons for this:- May be a lag in claims being brought since the credit crunch since it is expensive to bring a claim so Pursuers can t afford to proceed during a recession. Contractors are a poor target since they are likely to go under if a claim is brought against them. What will happen in the future? Hard to predict but there is a feeling that 2010 will continue to see the increase in professional negligence claims continuing. Reasons for that:- Property assets have plummeted so clients may look to blame solicitors and surveyors for that Credit crunch effects continue leads to greater scrutiny of transactions Likely to be more cases testing limitation since not definitively decided by Courts But on the other hand there is still economic uncertainty so clients don t want to get involved in litigation and paying solicitors fees. How to protect against? What should professionals do about that this to protect themselves? From a legal point of view, advice is as follows:- correct training of staff and supervision ensure staff work within area of expertise don t cut corners to get jobs done re-evaluate risk management processes keep thorough records, for as long as regulatory body requires and certainly for the limitation period notify your insurers to ensure cover much case law on this subject and early notification is important to ensure cover. Time will tell