Professional duties to third parties - assuming responsibility

Summary

A barrister engaged by the promotors of a tax scheme owed no duty of care to investors in that scheme: McClean & Ors v Thornhill [2023] EWCA Civ 466.

Background

Investors in failed film finance tax schemes alleged breach of duty by the leading tax silk (Andrew Thornhill KC) who had been engaged by the schemes’ sponsor and promotor (Scotts) to advise on the schemes. Mr Thornhill advised Scotts on the tax consequences of the schemes in a series of opinions. The scheme marketing materials outlined the tax benefits of each scheme, which Mr Thornhill confirmed to Scotts accorded with his opinions, and he allowed his name to be included in marketing materials as advisor to the scheme.

The claimant investors alleged that Mr Thornhill owed them a duty of care, having assumed responsibility to them by endorsing the schemes, and that he had breached that duty by, amongst other things, giving negligent advice.

At both first instance and on appeal, the investors’ claims were dismissed; Mr Thornhill did not owe a duty of care to the claimant investors in respect of advice given in connection with the schemes.

No assumption of responsibility

The Court of Appeal, upholding the first instance judgment, held that no duty of care arose. There was nothing to suggest that Mr Thornhill took on responsibility for the investors or others in relation to the scheme. Although the appellant investors argued that Mr Thornhill, a professional tax silk, having “expressly, voluntarily and for reward” put his name to the scheme, had effectively become a “member of the sales team” and thereby assumed responsibility to prospective investors, the court found nothing to suggest that Mr Thornhill was anything other than Scotts’ advisor.

As a general rule, professionals owe duties only to their own clients, not to the opposite party to a transaction or to third parties. Although, exceptionally, solicitors have been found to owe a duty of care to the opposite party because they stepped outside their normal role (such as in Al-Kandari v JR Brown & Co [1988] QB 665), the Court of Appeal was not persuaded that the Al-Kandari exception applied in Thornhill.

As re-stated in Steel v NRAM Ltd (formerly NRAM Plc) [2018] UKSC 13, central to establishing that a professional has assumed responsibility for the purposes of negligent misrepresentation claims are the two questions: (i) whether or not it was reasonable for a representee to have relied upon a representation; and (ii) whether the representor should reasonably have foreseen that it was likely he or she would do so. All the more so, these “twin inquiries” are key ingredients in a claim by an opposite party in a transaction, where reliance is “presumptively inappropriate”.

In the circumstances, it wasn’t reasonable for the investors to rely on Mr Thornhill’s advice without independent enquiry, nor reasonably foreseeable to him that they would do so. The regulatory and commercial context of the schemes was that:

• these were unregulated collective investment schemes, which could not be marketed to the general public, only through investment professionals,
• Scotts and the investors were commercial counterparties, on the opposite sides of an arm's length sale transaction.
• Mr Thornhill was clearly advising Scotts, and not independent. Where the investors were sophisticated and high net worth individuals with their own advisors, it “was presumptively inappropriate for investors to rely on anything said by Scotts' adviser, and not the reverse”; and
• The default expectation that investors would take their own advice was supported by the scheme documents, which contained a number of disclaimers and warnings that scheme investors should take their own advice. The subscription agreement asked investors to warrant that they had taken “appropriate professional advice” before applying.

The Court of Appeal did then, obiter, find that if there had been a duty, Mr Thornhill would have breached it; his advice had been negligent to the extent that it was expressed in entirely unequivocal terms, where “reasonably competent tax advice should have identified the risks”.

Comment

Establishing that a professional advisor has assumed responsibility to third parties has a high bar. The presumption, as made clear in Thornhill, is that an advisor only owes duties to his or her own client.

The starting point for establishing a duty of care to third parties, as the basis for liability for negligent misstatements which have caused economic loss, will be the questions asked in NRAM, namely whether reliance by the third party was both objectively reasonable and foreseeable.

A professional who gives advice knowing that it may be passed to third parties should ensure that they warn of the potential risks, and emphasise the need for third parties to make their own enquiries, taking professional advice as appropriate. The Court of Appeal dismissed attempts by the Thornhill investors to argue that independent inquiry plays no part in the NRAM test. Citing NRAM, the Court of Appeal noted that: “In assessing the reasonableness of the reliance (looked at objectively), the question whether it was reasonable for the representee to act without making any independent check or inquiry is highly relevant, and in many cases, likely to be determinative”. Here, the various disclaimers and warnings in the scheme documents were central to the decision that Mr Thornhill had not assumed responsibility for the investors.