A recent High Court decision provides a useful analysis of the circumstances in which a professional advisor to a company will owe a duty of care to a third party.
In the case of Swynson Ltd and Hunt v Lowick Rose LLP, the court refused to lift the corporate veil for an individual investor whose company had received negligent advice from a defendant accountancy firm.
Mr Hunt was approached by the defendant accountancy firm in 2006 in relation to an investment opportunity in an English company, EMSL, to enable that company to facilitate a management buy-out of a company trading as Evo. The defendant had previously advised Mr Hunt on investments in both a personal capacity and sometimes through a corporate vehicle. The initial discussions took place with Mr Hunt, who subsequently identified Swynson as the corporate vehicle for the investment. The claimants asserted that these initial discussions with Mr Hunt included representations by the defendant about Evo’s performance.
Swynson then lent £15 million to EMSL in October 2006. By the end of the trial, it was conceded by the defendant that Swynson’s loan was made in reliance on the negligent advice and due diligence reports about Evo’s future prospects which the defendant had prepared. Swynson and not Mr Hunt was party to the defendant’s engagement letters in respect of the defendant’s advice and due diligence. Following the initial loan, Evo performed poorly and Swynson made subsequent smaller loans to EMSL in 2007 and 2008 in an attempt to rescue Evo but without success.
The main issue before the court was whether the defendant, in providing its advice and due diligence reports, owed a duty of care to Mr Hunt personally as well as to Swynson.
The claimants argued that there was a duty of care on the basis that:
- the defendant was aware that Mr Hunt’s assets were at stake and the defendant ‘assumed responsibility’ for its advice to Mr Hunt; and
- where the defendant provided advice outside the retainer, it assumed a duty of care in relation to that advice, for example the advice provided to Mr Hunt beforeSwynson became involved.
The judge considered the analysis in the case of Her Majesty’s Commissioners of Customs and Excise v Barclays Bank plc of tests laid down in previous case law as to when a professional adviser owes a duty of care to a third party. She relied on Lord Bingham’s comments about an assumption of responsibility being a sufficient but not a necessary condition for a duty of care which “may obviate the need for further inquiry”.
The judge came to the following conclusions:
- It is useful to ask whether the professional person assumed responsibility for the advice to the third party;
- The test of whether responsibility has been assumed is an objective test and does not depend on the thoughts and intentions of the advisor;
- Foreseeability by the professional person of the third party’s reliance on the advice and loss where the advice is not inaccurate is not a sufficient basis to infer an assumption of responsibility; and
- Liability is only established if the third party has relied on the advice.
The judge found that the defendant only assumed responsibility for the
accuracy of its advice to the entity who entered into the transaction: Swynson. Although it was foreseeable that Mr Hunt would lose money if the advice given to Swynson was bad, foreseeability was not the right test. The judge stated that there was no authority to the effect that a professional person providing advice to a corporate entity owed a duty of care to the human agents of that corporate entity, whether they are directors, shareholders or funders. The fact that the defendant knew that Mr Hunt’s money was at stake was not enough to establish such a duty.
The judge also rejected the notion that a duty was owed to Mr Hunt based on advice given before selecting Swynson as the vehicle for the loan. It would be wrong to separate that early advice from the chain of advice on which Swynson ultimately acted. The adviser assumed responsibility only to the party making the loan, whoever that would turn out to be.
Crucially, the judge was aware of the danger of any finding which could be interpreted as lifting the corporate veil. The judge considered that finding a duty of care for Mr Hunt could create a wide class of claimants in other circumstances where there were several or more third parties. The fact that representations were made separately to the third party prior to the company’s involvement did not necessarily mean that the company and the third party’s reliance created separate duties of care. What mattered was who the chain of advice was ultimately for the benefit of and crucially this was the corporate client. The decision emphasises the real importance of clearly identifying who your client is and evidencing this in an engagement letter at the outset of any instruction.
Swynson Ltd & Anor v Lowick Rose LLP  EWHC 2085
Henderson v Merrett Syndicates Ltd  2 AC 145
Hedley Byrne & Co Ltd v Heller & Partners Ltd  AC 465
Caparo Industries Plc v Dickman  2 AC 605
Her Majesty’s Commissioners of Customs and Excise v Barclays Bank plc  UKHL 28