The High Court has recently provided guidance on when a professional advisor will owe a duty of care to a third party.
The second Claimant in this action, Mr Hunt, was a businessman who was looking for ventures in which to invest. His business involved providing loans to companies whose business was considered too risky for them to obtain bank finance. The first Claimant, Swynson, was a company indirectly owned by Mr Hunt and set up to facilitate such investments.
The Defendant accountancy firm approached Mr Hunt in 2006 with the opportunity to invest in EMSL. The Defendant had dealt with Mr Hunt on a number of occasions previously, both in Mr Hunt’s personal capacity and through his various companies.
EMSL were seeking a loan of around £15m in order to fund a management buyout of another company, Evo. Initial discussions took place between the Defendant and Mr Hunt in his personal capacity. Mr Hunt subsequently decided to provide the requested finance through Swynson and a Letter of Engagement was provided by the Defendant addressed to Swynson and EMSL. Following preparation of a positive due diligence report by the Defendant, a loan of £15m was provided by Swynson to EMSL. Mr Hunt was not a party to the transaction.
Shortly after drawdown of the loan, it became clear that Evo was not enjoying the increase in business that had been predicted. Swynson made two further, smaller, loans in 2007 and 2008 in an attempt to revive the business and, as part of a re-financing exercise in late 2008, Mr Hunt personally took over the loan by providing funds to enable EMSL to pay off the sums owed to Swynson.
Ultimately, the business was not successful and in December 2012 the decision was made to wind Evo down.
The Claimants claimed losses from the Defendant in excess of £16m. The Claimants’ case was that the loan was made to EMSL in reliance on advice from the Defendant (including advice provided to Mr Hunt during the initial discussions) and a positive due diligence report about Evo’s future prospects received from the Defendant.
By the close of the trial, it had been conceded by the Defendant that the advice provided in its due diligence report had been negligent and that Swynson’s loan had been advanced on the basis of the negligent advice provided. Therefore, the central issue to be decided by the court was whether the Defendant owed a duty of care to Mr Hunt personally – as well as to Swynson – when providing the advice leading to the loan.
Mr Hunt argued that the Defendant owed a duty of care to him personally since the Defendant was aware that it was Mr Hunt’s personal assets that were ‘ultimately at stake’ in the transaction. In addition, Mr Hunt asserted that the Defendant owed a duty of care towards him since he was acting in his personal capacity during the initial discussions between the parties.
Mrs Justice Rose considered the circumstances in which a professional adviser owes a duty of care to a third party and set out the following guidance:-
(1) It is useful to ask whether the professional person has assumed responsibility for the advice to the claimant;
(2) The test of assumption of responsibility is an objective test and does not depend on the thoughts and intentions of the advisor;
(3) The advisor’s knowledge that a third party might rely on the advice and might suffer loss if the advice is inaccurate is not a sufficient basis for the law to infer an assumption of responsibility;
(4) Liability is established only if the claimant can show that he has relied on the advice.
The court held that there was no duty of care owed by the Defendant to Mr Hunt personally. The court considered that the Defendant had only assumed responsibility for the accuracy of its advice to the entity that entered into the transaction – Swynson. It was noted that the fact that the Defendant knew that it was Mr Hunt’s assets that were ‘ultimately at stake’ may have established that it was foreseeable that Mr Hunt would lose money if the advice was negligent. However, foreseeability was not the test.
Further, the court did not accept that a duty of care was owed by the Defendant to Mr Hunt by reason of the initial discussions. The advice provided by the Defendant at the outset of the matter was not separate from the ‘chain of advice’ upon which Swynson ultimately acted.
In addition, the court was mindful of the implications of piercing the corporate veil by looking through Swynson to Mr Hunt. The court considered that, if a duty of care was found to be owed to Mr Hunt, this could create a wide class of potential claimants in circumstances where there were numerous third parties.
This case provides a useful reminder of the principles to be applied when considering whether a professional advisor owes a duty of care to a third party. The court held that, in deciding to whom a duty of care is owed, it is important to ascertain who ultimately received the benefit of the ‘chain of advice’. This case also shows that the Courts will be reluctant to “pierce the corporate veil” to imply a duty of care to an individual director and/or shareholder where it is in fact a company that has entered into the transaction, rather than an individual, even in circumstances where it was the individual’s assets which were “ultimately at stake” as a result of the transaction.
In addition, this case also provides a reminder to professionals to ensure that they are clear on the identity of their client and the importance of this being evidenced in a Letter of Engagement entered into at the outset of a matter.
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