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Tax Professionals Under Attack -- II

05 September 2001 / Christopher Cant
Issue: 3823 / Categories:

CHRISTOPHER CANT, barrister, concludes his examination of the law in relation to professional negligence and tax advisers.

In Part I of this article, published in last week's issue of Taxation, Christopher Cant discussed the impact of the Limitation Act and the terms of any retainer on professional negligence claims. This concluding instalment examines the standard of care and other relevant issues.

CHRISTOPHER CANT, barrister, concludes his examination of the law in relation to professional negligence and tax advisers.

In Part I of this article, published in last week's issue of Taxation, Christopher Cant discussed the impact of the Limitation Act and the terms of any retainer on professional negligence claims. This concluding instalment examines the standard of care and other relevant issues.

Standard of care

In general the standard of care is the same as for all professionals. The professional must exercise the reasonable skill and care of an ordinary skilled professional carrying out the same engagement. In the context of tax advice this means a professional versed in tax matters. Vice-Chancellor Megarry did question whether a professional holding himself or herself out as having particular skills or experience should be subject to a higher standard and considered that such a professional should be (Duchess of Argyll v Beuselinck [1972] 2 LL Rep 172).

There is really little scope for argument as to the applicable standard of care if a professional holds himself out as having specialist tax expertise. Mr Justice Lloyd set out the standard quite clearly in Matrix Securities Limited v Theodore Goddard [1998] STC 1. As regards the solicitors involved, their duty was to exercise all such skill and care as reasonably competent solicitors professing specialist tax expertise. Similarly as regards the tax silk it was to exercise all such skill and care as a reasonably competent tax specialist silk. In the case of both the solicitors and the silk they were found to have exercised such skill. The judge did not accept that the duty imposed on the professionals was that they should ensure that a particular result was brought about. It does not place the professionals in the role of guarantors.

In Wedderburn v Grant Thornton (unreported) the accountants stated that they could not guarantee that the scrip dividend proposals would work, although they had in the past. The judge said that this was quite proper and that it would be wrong to give a guarantee.

In determining whether or not the particular professional has attained that standard, the court needs to decide whether the act or omission forming the basis of the complaint is something which no competent member of the relevant profession would have done or omitted. It is only if no such member would have so acted or failed to act that the particular defendant will be liable. It is not enough for the claimant to show that one such member would not have so acted or failed to act.

There is the further very important point that in reaching the decision the court has to look at the events as they were going to occur and not to judge the matter retrospectively. It is not for the court to employ hindsight in order to reach a decision (see Vice-Chancellor Megarry in Duchess of Argyll v Beuselinck, supra at page 185 and Mr Justice Lloyd in Matrix Securities Limited v Theodore Goddard, supra at page 31). At the time that advice is being given, there may be a whole range of important issues, whilst at trial the focus will be on a much smaller number which obviously changes the perception with which matters are viewed. In reaching a decision on this the court may admit expert evidence. In the Matrix Securities case, expert evidence was given by Andrew Park QC, as he then was. His evidence went as to the practice concerning clearance applications, the relationship between different sections and the relationship between different parts of the Inland Revenue. His evidence was of considerable importance. Most of this evidence was concerned with practice rather than strict law. In particular he gave evidence as to what would have been expected to be included in the important letter to the Inland Revenue seeking clearance.

In professional negligence cases the general trend has been for expert evidence not to be admitted if the case involves contentions that a professional has got the law wrong rather a point of practice. The justification for this is that points of law are for the judge to decide and not an expert. In his recent judgment on this point in the Liverpool Roman Catholic Archdiocesan Trust case (Mr Justice Evans-Lombe (6 July 2001) The Times, 14 August 2001) the judge rejected large sections of the expert's report because it related to points of law.

Advice of counsel

The general position in the context of negligence is that acting on counsel's advice is not always a complete defence but it can normally be relied on (Davy-Chiesman v Davy-Chiesman [1984] Fam 48). The point arose in the Matrix Securities case and Mr Justice Lloyd held that the solicitors could act on the advice of appropriately selected counsel (as in that case) unless they strongly disagreed with the advice on an important point.

Limitation clauses

It is often the practice of professionals to include terms in their retainer limiting the extent of their liability. Commonly the term may seek to set a maximum limit on the amount of the damages. Such provisions raise a number of issues. As with all such clauses, the first question is whether as a matter of construction the clause applies to the particular circumstances of the case. Two other issues have been considered recently by Mr Justice Neuberger in the context of a claim against a firm of accountants. The first is whether the clause satisfies the requirements of reasonableness contained in the Unfair Contracts Act 1977. The second is whether the claim can be relied on as a defence to a claim by a person other than the client.


Killick v PricewaterhouseCoopers (5 July 2000 reported at [2001] PNLR 1) concerned an unsuccessful application for summary judgment by the claimant. It is a claim by the executors of a deceased shareholder against accountants in respect of a valuation of shares carried out by the accountants for the purposes of a buy back of the shares in accordance with the company's Articles of Association. The accountants were appointed by the directors. The letter of acceptance from the firm contained a clause limiting the maximum damages payable to a specified amount. A large maximum was negotiated in return for an increased fee. The learned judge rejected the claimants' contention that on the summary judgment application the clause should be held to be invalid. It is to be noted that the burden of proving that the clause is reasonable lies on the person seeking to rely on it (section 11(5), Unfair Contracts Act 1977).

Whether the clause is reasonable is a factual matter for the court to decide. The factors which are generally to be taken into account include the following:

(1) the strength of the parties and their respective bargaining positions;
(2) the opportunity for the client to retain a professional on similar terms but without the limitation clause;
(3) how practical it would have been to go to another professional;
(4) the nature of the limitation clause and how it compares with other similar clauses in use (i.e. what is the general practice within the particular profession);
(5) the manner in which the clause was negotiated, the choices (if any) offered to the client and the degree to which the client agreed to it;
(6) the availability of insurance to cover the liability;
(7) the fee the client was prepared to pay.

Mr Justice Neuberger did not decide the point. There was no evidence from the defendant directed to the issue of reasonableness of the limitation relied upon and the judge was concerned that a decision could affect the profession generally. It was too important a point to decide in such circumstances. The learned judge did not voice a view on the issue.

If it is a term which has been freely entered into and seeks to impose a reasonable limitation which is related to the extent and availability of the professional's insurance cover, then there are good arguments for the limitation being regarded as satisfying the statutory requirements of reasonableness. In the context of advice concerning tax avoidance, there may be an additional argument in favour of such a clause. The nature of the work carries an increased risk and this may be an added justification for such a clause.

Limitation clauses and third parties

The second issue with regard to limitation terms considered by the judge in Killick v PricewaterhouseCoopers was whether the professional can rely on the term to defend a professional negligence claim by someone other than the client. This could be a particularly important point in the context of tax planning. Even in a case which involves tax planning for a specific set of circumstances, there may easily be persons who are affected but are not the client. There may be shareholders or members of a family who are not the client but may be adversely affected if matters go wrong.

The problem is more acute if the tax planning is not for a specific case but is in respect of instructions to produce proposals which will be used a number of times. The persons using the proposals may not become clients of the professional but, if there is a defect in the proposals, may seek redress from the professional. In such circumstances, can the professional rely on a limitation clause contained in the retainer between the professional and the actual client?

The separate issue as to whether and when the professional owes a duty of care to the third parties is considered below.

There is strong dicta against allowing the professional to rely on the limitation clause as a defence to a claim by a third party (see Lord Brandon in The Aliakmon [1986] 1 AC 785 at page 817 but some doubt has been cast on the absolute nature of the dicta by Lord Justice Purchas in Pacific Associates Inc v Baxter and Others [1991] 1 QB 993 at page 1022 E-F). The reasons for such a view are that the third party is not a party to the contract and may be unaware of the limitation clause. These dicta are in cases concerning the supply of goods and not professional negligence cases. A different view was taken in the House of Lords case of White v Jones [1995] 2 AC 207, which extended a solicitor's duty of care in respect of the drafting of a will to beneficiaries who have suffered loss as a result of defective drafting. In that case Lord Goff (at page 268 G-H) stated that the assumption of responsibility to a beneficiary will 'of course' be subject to any term of contract between the solicitor and the testator. In contrast, Lord Nolan expressly left the point open (at page 294 F-G).

Mr Justice Neuberger refused to decide this issue summarily and voiced the view that he did not regard it as 'straightforward'. It is an issue which ultimately must be decided by an appellate court. There is an attraction in taking into account the limitation clause when defining the scope of the duty owed by a professional to a third party. It is part of the terms upon which the advice is given. This area of law is in such a state of flux that it is impossible to predict the outcome with any degree of confidence.

Duty of care and third parties

As mentioned above, the persons affected by tax advice may well not be limited to the clients. An obvious example is when the professional advises a promoter of tax avoidance proposals. Does the professional who has advised owe a duty of care to the persons who implement the proposals but are not clients of the professional? If there is such a duty of care, then the extent of the potential liability could be very substantial, particularly if reliance cannot be placed on any limitation clause contained in the retainer with the client.

This issue has arisen in a number of different contexts with accountants. The starting point of such consideration is the well-known decision of the House of Lords in Caparo Industries plc v Dickman [1990] 2 AC 605. In that case, auditors of a company were held not liable to the shareholders of the company. This applies equally in respect of investors in a company (Anthony v Wright [1995] 1 BCLC 236). This decision applied what is known as the 'threefold test' to determine whether a duty of care is owed to a third party. This test asks three questions:

(i) Was it reasonably foreseeable that the claimant would suffer the damage that has occurred?
(ii) Was there sufficient proximity between the professional and the claimant?
(iii) Is it fair, just and reasonable that the professional should owe a duty of care to the claimant?

Since Caparo, an alternative formulation of the general test has gained ground. This is that there has to be an 'assumption of responsibility' (Henderson v Merrett Syndicate [1995] AC145 and White v Jones [1995] 2 AC 207 applied in Peach Publishing v Slater [1998] Lloyd's Rep PN 364 in which the claim failed as the accountants had prepared the management accounts for the shareholders to convince them that no warranties should be given to the claimant purchasers). Whether this test will be applied in any set of circumstances is uncertain. As stated by Lord Justice Clarke, the law relating to an accountant's duty of care is in a state of flux and seldom susceptible to precise determination.

The important factors are whether the advice has been given for a specific purpose of which the adviser is aware and which is relied upon by the recipient without independent advice being sought. Lord Oliver in Caparo considered that a duty of care would arise to third parties if:

(a) the advice was required for a particular purpose;
(b) the adviser knows that the advice will be supplied to third parties in order that it can be used for the purpose;
(c) the adviser knows that it is likely to be relied on for that purpose without independent advice;
(d) acted upon by the third party to his detriment.

The two vital elements in establishing a duty of care owed to a third party are the adviser knowing that the advice will be relied on by the third party and that the third party will not receive independent advice. This approach was followed by Mr Justice Neuberger in Killick v PricewaterhouseCoopers, supra when he decided on the summary judgment application that the defendant firm did owe a duty of care to the executors even though there was no retainer by them. The factors that the judge took into account were that:

(a) the accountants were appointed for the specific purpose of valuing the shares so that the buy out could proceed;
(b) the accountants knew that was the only reason for their appointment;
(c) the executors were not involved in the process, nor did they have an ability to challenge the value fixed;
(d) the executors could not protect themselves by taking out an insurance policy whereas the fee could have been increased to cover increased insurance premium;
(e) if there was no duty then the executors could not recoup loss in another way;
(f) a specific and limited class of claimants affected.

This decision was reached even though the issue concerning the limitation clause remained live. The judge did not accept the argument that it would be unfair to hold that there was such a duty when the limitation clause could not be relied on by the defendant firm.

If it is the Caparo test which is applied, then the second question regarding proximity should be answered in the negative when the professional merely advises and the advice is not made available to any person implementing the proposals. If there is no reliance on the advice, then the professional should not be liable to those implementing the proposals. On the other hand, if the advice is made available to those considering implementing the proposals, then there must be a serious risk that the advice will be relied on to the knowledge of the professional (see Mathew v Maughold Life Assurance Co [1989] 3 PN 98 which concerned an avoidance scheme considered specifically by the professionals involved for the participant). In those circumstances the court may well take the view that there is sufficient proximity or an assumption of responsibility. In Galoo Limited v Bright Grahame Murray [1994] 1 WLR 1360 it was accepted that an auditor could notwithstanding Caparo be liable if the auditor knew and intended that a third party would rely on the accounts without independent inquiry (see also Lord Oliver in Caparo, supra at page 638). In such cases a vital issue will be whether it is appreciated that the third party will not be taking independent advice but will be relying on the advice given by the professional. There should be no liability if the third party obtains independent advice or it is reasonably expected that the third party will do so.

To attempt to avoid the imposition of a duty of care as a result of giving tax advice then consideration might be given to whether there should be an express disclaimer of responsibility. Such a disclaimer was successful in the bank avoiding responsibility in Hedley Byrne v Heller [1960] AC 465. However, since then it has been held that surveyors cannot rely on disclaimers contained in valuations for mortgages which are stated to avoid liability to the purchaser in the event of a negligent valuation. Such disclaimers are not regarded as satisfying the statutory requirements of reasonableness imposed by the Unfair Contracts Act 1977 (see Smith v Bush [1990] 1 AC 831). As with limitation clauses (discussed above) this must be a serious hurdle to overcome and the burden lies on the professional relying on the disclaimer to achieve this. It will always be difficult for a professional to rely on such a disclaimer.


In order to be able to recover for loss it must be shown that the negligence is the dominant or effective cause of the loss and did not merely present the opportunity for the loss to occur (see Galoo v Bright Grahame Murray, supra). This can pose difficult problems but will depend on the particular facts of the case.


There are no sweeping and simple answers to the question how to avoid claims. The following are important but not earth shattering:

(a) It must always be sensible to establish clearly and record at the start of a retainer precisely what instructions have been given and what are the objectives of the client.
(b) Although not easy in practice, notes of all meetings and discussions should be made and retained. This avoids or at least lessens the scope for disputes about the advice given and the state of the client's knowledge. An example of a case in which such records would have saved very considerable costs was Heffer v Tiffin Green (The Times, 28 December 1998). It concerned a liability owed by a firm's clients for back tax to the Revenue which had arisen because the level of the creditors of the business had been substantially inflated by an unqualified manager of the accountancy firm. The clients sued the accountants. The issue was whether anyone on behalf of the clients was aware that the profits had been artificially reduced. On appeal the Court of Appeal ordered a re-trial. All this could have been avoided if proper written records had been kept of the discussions with the clients.
(c) Documents may need to be retained for longer than was previously the case due to the possibility of cases being commenced later than had previously been the norm.
(d) Time limits need to be complied with.
(e) It should be made absolutely clear who is to be entitled to rely on the advice being given.
(f) There should be monitoring of the work of unqualified staff.
(g) If a problem does arise, then calm and careful thought needs to be given as to whether it is possible to retrieve the position possibly by using an alternative relief.
(h) Adequate professional indemnity insurance should be maintained.

This will require account to be taken of the recent developments in the law relating to limitation periods. It will not be safe to have run-off cover for just six years from retirement. Further it must be borne in mind that the courts may not give effect to any limitation clause relied on to cap the extent of liability.


Christopher Cant is a member of Chancery chambers, 9 Stone Buildings, London WC2.

Issue: 3823 / Categories:
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