Simmons & Simmons
Claims against professionals are on the increase generally, partly as a result of our society becoming a more litigious one; partly because the increased complexity of the work undertaken by professions has inevitably lead to an increase in mistakes and consequential litigation; and partly because of the perception of professionals as “deep pocket” defendants due to the professional indemnity cover which is a requirement of most professions.
Professional trustees are in a similar position. The expectations of trust fund beneficiaries, or pension holders, as the case may be, are ever higher and claims against trustees through the courts or through the appropriate ombudsman procedure are also on the increase. When launching the Law Commission’s Consultation Paper on Trustees’ Powers and Duties in 1997, the Law Commissioner Charles Harpum said :
“The old picture of the family trust with an avuncular trustee who had lots of spare time to devote to the running of the trust, and a range of trustee investments that consisted only of government stocks and mortgages, is long dead. The modern trustee needs professional help to steer the trust through the thicket of modern investment practice and to ensure that is properly managed to secure the best returns for the beneficiaries or purposes of the trust.”
Of course, it is not only in the field of investment that trustees need professional advice. As the need for trustees to obtain professional input increases, it becomes more important for trustees to ensure that they conduct their relationships with their advisers so as to minimise the risk of negligence by their advisers, and to ensure that in the event of a dispute arising with their advisers they are in the best possible position to seek compensation.
The purpose of this article is to consider the relationship between professional trustees and their professional advisers, and to provide some practical tips for trustees in their dealings with professionals and in handling situations when the professionals concerned may have acted or advised negligently.
When Things Go Wrong
There are three essential ingredients for a successful claim in negligence by trustees against their professional advisers:
1. There must exist a duty of care between the professional and the trustees.
2. There must be a breach of that duty – in other words, it must be shown that the advice or services provided were not up to the relevant standard.
3. The negligent advice must have been relied on and caused loss to the trust or pension fund.
Duty of Care
When trustees instruct a professional, a contract is created. The professional owes the trustee a duty to exercise reasonable skill and care in the performance of the contract, a duty which is implied into the contract by virtue of the Supply of Goods and Services Act 1982, Section 13 and exists at common law.
Professionals tend not, however, to enter into detailed written contracts, although letters of engagement setting out the terms and scope of the retainer are now increasingly common. It is not surprising, therefore, that an issue which commonly arises in litigation against professionals is precisely what was the scope of the retainer. If an omission complained of was not within the scope of the work required under the contact, a complaint against the professional relating to that omission will not succeed. An example is the decision in Virgin Management Limited –v- Morgan Group Plc  EGCS 16 where the defendant solicitors were found not to have been negligent in failing to advise of a potential VAT liability arising from a property transaction, because there was no evidence that they had been instructed to advise on that issue.
It is particularly important that professional trustees ensure either that their professional adviser has written to them accurately setting out the scope of the work required, or that they themselves set out in writing the work required of the advisor. In Carradine Properties Limited –v- D J Freeman  126 SJ 157 Donaldson L J held that the scope of the duty of care owed by a professional firm depends amongst other factors on the extent to which the client appears to need advice, stating that “An inexperienced client will need and be entitled to expect a solicitor to take a much broader view of the scope of his retainer and his duties than would be the case with an experienced client”. As sophisticated clients, professional trustees can expect an uphill struggle to persuade a Court that an adviser’s duty encompassed advising on a given area, if there is no written evidence to that effect.
Where there is no direct contractual relationship between the trustees and the professional, establishing the existence of a duty of care is less straightforward. For example, there is no direct contractual relationship between a trustee and a sub-agent, and in order to succeed in an action against a sub-agent it be would necessary to show that the sub-agent owed the trustee a common law duty of care in tort. The law in this area is complex and it is often difficult to predict whether or not a duty of care exists. The Courts use a number of different tests to establish whether a duty of care is owed by one party to another in such circumstances:
(i) Assumption of responsibility – the Court considers whether by its actions the sub-agent has assumed responsibility to the trustee.
(ii) The three-fold test – a duty of care is owed only if, first it was foreseeable that, if the advice was negligent, the trust would suffer damage; second, there was a sufficiently proximate relationship between the trustee and the sub-agent; and third, it is just and reasonable to impose liability.
(iii) The incremental approach – the Court considers whether a duty of care should be imposed by analogy with established categories of negligence.
In theory, whichever test is applied should produce the same result. It is likely that in any case where the sub-agent is aware that work is being done or advice given for the benefit of the trust, a duty of care will be owed to the trustee.
There is also no automatic contractual relationship between trustees and professional advisers who have been appointed by a third party other than the trustees. Trustees of occupational pension schemes are obliged to appoint their own advisers (Pensions Act 1995, Section 47). There is no similar legal requirement for other trustees to appoint their own advisers, but it undoubtedly makes sense for them to do so. In order to succeed in a claim against a third party’s advisers, the trustees would face the uncertain task of establishing that a tortuous duty of care was owed by the professional to the trustees. If at all possible, therefore, trustees should ensure that they obtain advice from their own advisers, rather than relying on advice obtained by another party. If that is not possible, the trustees should at the very least seek the professional’s consent to their relying on the advice, which if granted would assist in establishing the existence of a duty of care between the trustees and the professional.
Standard of Care
The standard of skill and care required of professional advisers is that of :
“the ordinary skilled man exercising and professing to have that special skill. A man need not possess the highest expert skill; it is well established law that it is sufficient if he exercises the ordinary skill of an ordinary competent man exercising that particular art”. (McNair J in Bolam -v- Friern Hospital Management Committee  1 WLR582)
It is also likely that a professional who holds himself out as having specialist skills (i.e. skills above those of the ordinary competent practitioner in his field) will be judged by a higher standard appropriate to a specialist in that field.
A professional can therefore be wrong without being negligent. Incorrect advice or errors of judgment will only give rise to a claim if a reasonably competent practitioner would not have given that advice or if the error of judgment was one that no reasonably competent practitioner would have made.
A distinguishing feature of professional negligence actions is that they generally require an expert in the same profession to provide expert evidence on general and approved practice in the particular discipline in question, to enable the Court to decide whether or not the defendant professional satisfied the appropriate standard of skill and care.
Reliance, Causation and Damages
A professional may have acted negligently, but if his actions or advice did not cause the loss, there will be no claim. There may be occasions when the recipient of advice does not, in fact, rely on it. If it can be shown that, even if the professional had given proper advice, the trustees would have acted in exactly the same way, a claim for negligence will not succeed.
Similarly, for a claim in negligence by the trustees to succeed, the trust fund must in fact have suffered loss. In English law, damages are intended to be compensatory and not punitive (as in the USA). Broadly speaking, the object of an award of damages for negligent professional advice is to put the claimant into the position it would have been in had there been no breach of duty on the part of the professional. The damage claimed must not be too remote and a claimant must also have complied with the duty to mitigate its loss.
Perhaps the biggest mistake trustees can make when using professional advisers, is to assume that they have thereby relieved themselves of their own responsibilities over the matter in question.
The legal position governing the delegation of trustees’ powers and duties to agents is a complex one, which is expected to be simplified by the new proposed Bill on Trustees’ Powers and Duties. It is beyond the scope of this article to consider precisely what are the current obligations on trustees who delegate functions to a professional agent. The draft Bill, however, will tighten up the obligations on trustees in such circumstances. Even where the professional is retained merely to advise, there remain responsibilities on the trustees.
The beneficiaries of a trust often have no direct contact with the trustees’ professional advisers. If something goes wrong as the result of negligent professional advice, the beneficiaries will look to the trustees in the first place to put matters right and are likely to scrutinise the trustees’ actions closely: Was the professional appointed by the trustees appropriate for the task? Did the trustees give proper and adequate instructions to the professional? Did the trustees adequately supervise the professional’s work?
If the trustees pursue a claim against the professional, their conduct may also come under close scrutiny in those proceedings. The wave of claims by lenders against their professional advisers, which followed the 1980s property market collapse, were defended partly on the ground that the lenders were guilty of contributory negligence. Every aspect of the lenders’ internal procedures, processes and investigations were scrutinised and in many cases found to be inadequate. In one recent decision, a lender was found to have been up to 90% contributorily negligent, a finding which clearly had a significant impact on the overall outcome of the claim (Nationwide Building Society –v- Various Solicitors (Unreported, 2 February 1999)).
In any large claim against a professional, contributory negligence may feature as a defence. It is impossible to consider specifically all the areas which might expose trustees to a claim of contributory negligence. However, ensuring that the adviser appointed is appropriate for the task in question; that all professional advisers receive proper written instructions; that full disclosure of all relevant documents and information are given to professional advisers; that advisers’ appointments are kept under review; and that advisers are supervised in some systematic way, should help to minimise that risk.
It is still relatively rare for professionals to seek to exclude or limit their liability and in some specific circumstances exclusions or limitations by professionals are void ( for example, Solicitors’ Act 1974, Section 60 (5) renders void any provision in a “contentious business agreement” with a solicitor which seeks to exclude liability for negligence or breach of duty) or prohibited or restricted by the relevant professional conduct rules (for example, solicitors are not permitted in any circumstances to attempt to exclude all liability to their clients).
However, the more sophisticated members of the accountancy profession are using liability caps in many areas of their work. The validity of such caps or exclusions is governed by the Unfair Contract Terms Act 1977. Liability (other than for death or personal injury) can only be excluded or limited insofar as the provision satisfies the requirement that it is “a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in contemplation of the parties when the contract was made” (Unfair Contract Terms Act 1977, Sections 2 (2) and 11 (1)). The factors which will be taken into account by the Court in determining whether an exclusion is valid include the resources available to the professional to meet a liability and how far it was open to the professional to cover itself by insurance (Unfair Contract Terms Act 1977, Section 11 (4)).
It is important to be alive to the incorporation of exclusion clauses in a contract and to understand their potential impact and in particular whether the size of any liability cap is acceptable bearing in mind the potential liability which might arise from the instructions if the advisers were to advise badly. If a professional is proposing to impose a liability cap, it may well be possible to negotiate over the size of the cap. If it is not, consider using a different adviser who will not impose a limitation on liability.
As with all litigation, proceedings against a professional adviser must be started within the requisite statutory limitation period. The Limitation Act 1980 provides that all claims in contract or tort must be commenced within 6 years of the date on which the cause of action accrues, which in contract is the date of breach and in tort is the date damage was suffered. Under Section 14 A Limitation Act 1980, an extended period in which to bring an action in tort may be available of three years from the date upon which the trustee had, or could reasonably have been expected to have, knowledge of all the facts relevant to the claim.
These periods may sound long, but in practice parties frequently either do not appreciate that they have a valid claim, or do not take the necessary action, until it is too late. InH F Pension Trustees Limited –v- Ellison and others (TLR 5 March 1999) the defendant solicitors advised the trustees that they had power to transfer surpluses in one pension scheme to another. Transfers took place in 1988 and 1990. The transfers were invalid. The Court held that proceedings commenced by the trustees against the solicitors in 1997 were time-barred. All the facts relevant to the nature of claim were known to the trustees at the time the damage was suffered by making payments out of the scheme. The fact that the trustees did not appreciate until later that the solicitors’ advice might have been negligent did not bring the claim within Section 14 A Limitation Act 1980.
Bradstock Trustee Services Limited -v- Nabarro Nathanson  1WLR1405 concerned a similar action by trustees of a pension scheme against solicitors who had, in 1987, advised the trustees to agree to a request for repayment of surplus to the employer. In 1995, beneficiaries who sought to continue an action started by the trustees were held to be time-barred. Again, the extended time period under Section 14 A Limitation Act 1980 was of no assistance, because the relevant damage had occurred when the sums were paid over in 1987 and it was irrelevant that the beneficiaries had not appreciated at that time that the solicitors may have been negligent.
The moral is a simple one. Trustees must take independent legal advice as soon as they become aware that they may have a negligence claim against their professional advisers.
The Civil Justice Reforms
Limitation risks are not the only reason why it is important to take legal advice at an early stage in considering claims against professionals.
In April 1999, as part of the current reforms of the civil justice system, an entirely new code of civil procedure was implemented, with the aim of introducing fundamental reforms to the procedural requirements for civil claims. Two aspects of the new procedures particularly impact upon professional negligence claims.
First, the new procedures have introduced “pre-action protocols” designed to govern the actions of potential litigants in particular types of litigation prior to the commencement of proceedings. Two draft protocols now exist for negligence claims against solicitors and negligence claims against other professionals. The principal aim of both protocols is to provide the professional and its advisers with a timeframe (in some cases of up to 6 months) during which to investigate any allegation of negligence. During that period, a claimant will not be able to commence proceedings without running a serious risk of incurring adverse sanctions (including costs penalties) for failing to comply with the protocol. Both protocols set out in some detail the procedure to be followed, the information which both parties are required to exchange and the timetable with which the parties must comply. The ultimate objective of the protocols is to assist the parties to achieve an early settlement of claims, if at all possible, without the need for Court proceedings. Trustees cannot now expect to be able to instruct a solicitor to issue proceedings immediately a dispute arises or negotiations between trustees and their advisers break down. It does, however, make sense to instruct solicitors as soon as the dispute arises, to ensure that the pre-action protocol steps are taken as quickly as possible.
The second area of importance is the reforms relating to expert evidence. As mentioned earlier, claims against professionals rely heavily on expert evidence and it is important not to inadvertently prejudice the position on expert evidence. The trustees will need to obtain expert evidence at an early stage to establish whether or not there has been negligence by the professional. The draft protocol provisions relating to experts clearly envisage that the parties will address the issue of expert evidence in the pre-action period.
The new rules also spell out more clearly the role of the expert as an independent expert whose overriding duty is owed to the court. Experts are now required to summarise, in their expert reports, all instructions received. Those instructions are no longer privileged and in certain circumstances letters and documents containing the instructions may become disclosable to the Court and the opposing party. Great care therefore needs to be taken when instructing experts to ensure that they fully understand their duties and that the instructions given do not contain anything which might embarrass the trustees if later referred to in the expert report or disclosed in Court.
So, in conclusion, trustees should :
· Ensure that the terms of the professional’s retainer are set out in writing.
· Appoint their own advisers, rather than relying on advice given to a third party.
· Be alert to the use of and impact of exclusion clauses or liability caps.
· Beware of limitation issues.
· Take legal advice on potential claims as early as possible.
Professional Liability Group
Simmons & Simmons