Duty of care - Accountants as introducers

The High Court has recently given judgment in the case ofKnights & others -v- Townsend Harrison Limited[1] concerning a chartered accountant’s introduction of a client to three tax schemes and an investment opportunity.

HHJ Cawson QC found that no contractual or tortious duties were owed by the accountants (THL) in this instance. His decision contains a helpful analysis of the law in this area and reinforces the importance of clear engagement letters for professionals whether acting as introducer or adviser.

Introduction to the tax schemes               

The legal principles around ‘duty’

Before addressing the claimants’ ‘introduction case’ and ‘advice case’ specifically, the judgment set a broader picture of the legal principles at play. In summary:

1. Carney v Rothschild Investments[2] held that establishing a duty of care required:

• that the defendant had actually given what could properly be described as advice; and
• that in doing so, had assumed responsibility for its advice, or owed a duty of care due to the ‘three stage’ or ‘incremental’ tests.

2. Following Carney, the Hedley Byrne[3] ‘assumption of responsibility’ test was the most appropriate test in this type of case. The two elements of the test are:

• whether the defendant reasonably foresaw that the claimant would rely on its advice; and
• whether the claimant did in fact reasonably rely on the advice.

3. The Hedley Byrne assumption of responsibility test is most helpful when the relationship is closer to one of contract and requires a “special relationship” between the parties. In this context, the authorities around disclaimers were considered in relation to THL’s limitation of liability letters. A disclaimer shouldn’t be considered a contractual exclusion but should be viewed as a relevant fact when questioning whether the defendant had assumed responsibility for a particular statement[4]

How this applies to the present case

The claimants’ ‘introduction case’ was rejected. This was on the basis that, while both parties’ experts said they wouldn’t have introduced their own clients to the schemes in question, Mr Knights wasn’t an unsuitable person to introduce them to. It also couldn’t be said that the schemes could not reasonably have been introduced to him, or that the schemes were bound to fail, noting that they were underpinned by legal advice from leading tax counsel.

When it came to the ‘advice case’, the first thing to establish was what if any advice THL had actually provided.  Applying Gestmin[5], rather than simply weighing up the credibility of the witnesses, the focus should be upon the documents and inherent probabilities of the situation, applying the burden of proof and recognising that verbal exchanges would have occurred. In doing so, the judge wanted to avoid the risk that key details could have been “falsely created by a flawed recollection”

The judge found THL probably did generally encourage the claimants to consider the schemes and offered reassurance. However, he wasn’t able to conclude that THL had gone further in making two particular alleged statements. 

The second question was whether THL assumed responsibility for the general encouragement found to have been provided. The judge concluded they hadn’t, due to a few key factors including:

• THL’s engagement letter and Terms of Business made it clear they wouldn’t recommend a particular investment or type of investment, as they weren’t authorised to do so.
• THL’s limitation of liability letters explained that THL couldn’t advise on the potential outcome of any tax planning strategy and the risks involved. They also required the claimants to confirm they were relying on the scheme promoter’s advice. The claimants’ evidence that these letters were presented as a ‘mere formality' wasn’t accepted.
• The fact that advice was received from the scheme promoter was a factor suggesting THL didn’t owe an adviser's duty of care. This would be the case unless, or until, THL was on notice that the claimants were not relying on the scheme provider’s advice (a conclusion which could not be drawn).
• When it became clear that the tax schemes weren’t working as intended, the claimants didn’t promptly challenge the advice they’d allegedly received from THL. In fact, the claim relating to one of the schemes was found to be time-barred.

On that basis, the claimants failed to establish that THL owed the alleged duty of care. 

While it wasn’t necessary in the circumstances, the judge briefly considered causation. He found that the claimants hadn’t established that they wouldn’t have gone ahead with the tax schemes had they not been advised as alleged. The judge also considered remoteness/scope of duty (applying Manchester Building Society -v- Grant Thornton UK LLP[6]) and measure of damages. 

Introduction to the investment

Once again, the judge found no contractual or common law duty arose in relation to the investment opportunity THL had introduced to the claimants. There was no agreement for THL to carry out due diligence and no consideration for any such agreement (notwithstanding that commission was paid). Discussions between the parties at the time didn’t identify the task with enough certainty for any kind of binding agreement to arise, and there were no implied terms either. The lack of any real consensus about what THL had been tasked with also pointed against any other assumption of responsibility by THL to carry out the kind of due diligence contended. The claimants’ delay in bringing the claim again indicated that they hadn’t placed reliance on THL. 

Our take

This decision will clearly be welcomed by professionals, particularly accountants, who may introduce clients to products such as tax schemes and investment opportunities without providing any substantive advice or recommendation. 

It’s often argued that a mere introduction amounted to (or was understood as) an endorsement or similar, which has resulted in professionals facing misdirected allegations of negligence.

These findings should provide some reassurance to professionals who carefully document and explain their engagement terms, and clearly draw the line between the types of advice/services they are or are not providing.

The ruling also reinforces that payment of commission alone doesn’t establish that anything more than an introduction was provided, or that it was an incentive for an honest professional to give dishonest advice. It also doesn’t show that commission was taken in consideration for any other service provided by the professional to the client (this would usually be paid by the promoter rather than the client, in any event).

While this case is largely positive for professionals in this field, it’s also a cautionary tale. Significant costs will have been incurred by THL and its insurers, as well as management time lost to defending the case all the way through to a full trial. All of this action was required despite (amongst other things) the clear limitation of liability letters, the fact that the claimants took advice from the tax scheme promoters and that Mr Knights had acknowledged THL could not “officially” advise on the investment.

Any professional who is making similar introductions should revisit their engagement letters, terms of business and training for client-facing staff to make sure they’re minimising the chance of this type of claim being pursued at all. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.