Trustees’ Liability for Professional Negligence
(taken from Isssue No 4 – December 1997)
You are not paranoid: everyone really is out to get you.
Legal claims against professions, including professional trustees, are now commonplace. There are several reasons for this:-
trans-Atlantic trends. There is a greater awareness today of legal rights, and a greater willingness to enforce those rights;
- economic cycles. A recession breeds litigation;
- the increasing complexity of work undertaken. Much more is expected of professionals today than used to be in the past;
changes in the law itself. As we shall see, legal duties and obligations exist today which never used to exist;
- the availability of funding for litigation. The abolition of Legal Aid for most civil cases next April, to be replaced with conditional fee arrangements, may well change the position.
The main types of claim which a professional trustee may face can be categorised as follows:-
Breach of Trust/Fiduciary Duty
Actions by beneficiaries, particularly
- actions arising from an alleged failure to pay the right people the right amount at the right time;
- actions concerning the loss or diminution of trust assets.
Actions by those with whom trustees contract.
Breach of Statutory Duty
A failure to act in accordance with statute eg Trustee Act 1925, Trustee Investment Act 1961 or Financial Services Act 1986. In practice, such claims are likely to be brought by beneficiaries and coupled with claims for breach of trust.
Breach of duty of care owed in tort for negligence. What is interesting – and worrying – about such claims is that they can be brought by third parties who are not beneficiaries or in any contractual relationship with trustees.
It is the possibility of claims in tort for negligence on which I wish to focus for a moment.
Against the floodtide of claims, there are defences. Insurance is one. Another is exemption clauses, which purport to exclude or restrict liability. All professionals seek to utilise such clauses. Trustees are no exception and it is an issue which will be examined in some detail in a moment.
Tort: How We Got Where We Are And Where We Are Going
Fashions change. That is true of the law as much as haute couture. Professional negligence claims, based in tort, seem to be subject to cycles, depending on the attitude of the House of Lords at the time.
Once upon a time, life was simple: a professional owed a duty of care in contract to his client and no one else. A trustee owed a duty of care to the settlor of a trust and to the known or identifiable beneficiaries. No claim could be brought by a third party who did not have any contractual relationship with a trustee.
The possibility of an action by such a third party was opened up by two truly landmark cases: Donoghue -v- Stevenson  and, particularly relevant to claims against professionals, Hedley Byrne -v- Heller & Partners Ltd .
In Donoghue -v- Stevenson, Lord Atkins postulated his famous question:-
`Who then in law is my neighbour?`
Lawyers have been arguing this point ever since.
Thirty-five years ago, Hedley Byrne established for the first time that a third party could be liable for negligent acts causing financial loss only. (Previously, negligent actions created a liability to a third party only where physical injury had resulted). In Hedley Byrne, the defendant, who had voluntarily but negligently provided a reference, was held liable on the basis that he had `assumed responsibility` towards the plaintiff and that there was a special relationship between the parties. The `assumption of responsibility` test was thereby created, a test still applicable today. For example, in 1996, accountants Binder Hamlyn had audited a company purchased by ADT. That audit was held by the Court to have been negligent. When asked by ADT, during the course of its acquisition, Binder Hamlyn confirmed that it `stood by its audit`. To the surprise of many, and the consternation of the accountancy profession, Binder Hamlyn were held liable to ADT: they had assumed responsibility. It did not matter that Binder Hamlyn had not even been paid for their advice. This decision (which was settled before any appeal could be heard) did more than anything else to encourage auditors to seek ways to limit their liability. They have my sympathy in that.
For more than 20 years, the existence of some `special` relationship or the `assumption of responsibility` seemed to be the only grounds on which a third party – not in a contractual relationship – could claim for negligence causing financial loss. That changed in 1978 in the case of Anns -v- Merton Borough Council. Lord Wilberforce established a two stage test for establishing whether an actionable duty of care in tort or negligence existed. Such a duty of care arose:-
(a) where the defendant should have foreseen the damage to the plaintiff which resulted from the defendant’s acts or
(b) there were policy considerations which made it unreasonable to hold the defendant liable.
Potentially, Anns opened the legal floodgates. If Lord Wilberforce’s test was correct, a duty of care could arise in any circumstances where it was possible to foresee that an act or omission might harm another. The English Courts quickly recognised the potential danger and uncertainty if too liberal an interpretation was given to Lord Wilberforce’s test. The 1980’s (particularly in the later years) were therefore a period of retrenchment. This conservative approach can be seen in a passage in a speech by Lord Templeman in the 1988 House of Lords decision in CBS -v- Amstrad:
`My Lords, it is always easy to draft a proposition which is tailor-made to produce the desired result. Since Anns put the floodgates on the jar, a fashionable plaintiff alleges negligence. The pleading assumes that we are all neighbours now, Pharisees and Samaritans alike, that foreseeability is a reflection of hindsight and that for every mis-chance in an accident-prone world someone solvent must be liable in damages`.
The floodgates were finally shut in 1990 when the House of Lords established, in the case of Caparo -v- Dickman & Others, what is the current test by which the existence of a duty of care in tort is to be determined.
The facts of this case were not complicated. The plaintiff had invested in a company believing, reasonably enough, that the company’s accounts prepared by the defendant auditors were accurate. They were not.
Applying the principle in Anns, it is entirely foreseeable that a potential investor would make a decision whether or not to buy shares on the strength of a company’s audited accounts. Therefore, it was argued, the defendant auditors owed a duty of care to potential investors, including the plaintiff. The House of Lords effectively rejected the Anns test and held that it was insufficient, to establish a duty of care, merely to demonstrate reliance on the accounts and the foreseeability of loss. Instead, their Lordships formulated a new, and much more limited, three stage approach to establishing the existence or otherwise of a duty of care in tort. The three elements are:-
(a) foreseeability of harm (including foreseeability that a particular plaintiff would rely on any given statement);
(b) proximity between the parties; and
(c) fairness, which takes into account general policy considerations.
Only if all three elements are present will the Court hold that a duty of care exists.
The foreseeability of harm is relatively straightforward and perhaps little different to the test in Anns. Foreseeability really only acts as a preliminary filter. Of much greater importance, and difficulty, is the requirement that there be sufficient `proximity` or sufficient `nexus` between the parties. In Caparo itself, it was held that an auditor was generally not in a sufficiently proximate relationship to either existing shareholders (who were at least identifiable) or future investors (potentially anyone and everyone).
© Philip Vaughan,
Simmons & Simmons