The High Court has dismissed a claim for negligent misstatement arising out of a reference which referred to an individual in negative terms in reliance on the conclusions of an investigation into his misconduct. There was no obligation on the referee to be satisfied that the investigation had been conducted reasonably and was procedurally fair.

Background

An employer owes a duty of care to the subject of a reference to take reasonable care and skill when preparing a reference and to provide a reference which is true, accurate and fair. Failure to do so can give rise to a common law claim for damages for negligent misstatement (amongst others).

An employer must not give a misleading picture overall and the duty of care extends to ensuring the accuracy of the facts upon which any opinion expressed in the reference is based.

Facts

In Hincks v Sense Network Ltd Mr Hincks was an independent financial advisor employed by Co-operative Independent Financial Solutions (CIFS). CIFS was authorised by the Financial Conduct Authority to sell financial products as an appointed representative of Sense Network Ltd (SNL).

Following a number of concerns regarding the advice given to customers by Mr Hincks, a sign-off process was implemented which required him to get pre-approval from SNL before offering advice / transacting final sales of financial products. Mr Hincks subsequently sold an investment to a client in breach of this process.

The incident was investigated by SNL's Compliance Director Mr Netting, and resulted in the termination by SNL of his authority to sell products on their behalf.

Mr Hincks subsequently applied for a job with another company. A reference was provided for Mr Hincks by Mr Netting which referred to the conclusion reached by the investigation, namely that he had "knowingly and deliberately circumvented" the pre-approval process. His application for the role was not successful.

Mr Hincks claimed that the investigation had been an "inadequate sham" and conducted by Mr Netting in bad faith and that the negative opinions expressed in the reference were misleading. He argued that before providing the reference, SNL had a duty to be satisfied that the investigation had been reasonably conducted and procedurally fair. He claimed damages for negligent misstatement and breach of contract.

High Court decision

The High Court dismissed Mr Hincks's claims.

The Court held that a referee was not obliged to enquire into the procedural fairness of an earlier investigation. Such an enquiry may simply not be possible, particularly given the likely passage of time, and that even if it was, it would be unduly burdensome for the reference provider to carry out. The High Court held that unless a "red flag" prompts further enquiry, there is no obligation to probe into the procedural fairness of an investigation. In this case, the Court held that the reference was not misleading and there was nothing in the documents relating to the investigation which would have raised a red flag and triggered the need for wider investigation.

However, the High Court went on to say that where an opinion in a reference is derived from an earlier investigation, a reference provider should take reasonable care "in considering and reviewing the underlying material so that the reference writer is able to understand the basis for the opinion and be satisfied that there is a proper and legitimate basis for the opinion".

In addition the High Court concluded that if the investigation had been carried out in bad faith and its findings were set out in the reference, that would by itself demonstrate a lack of reasonable care in the preparation of the reference such that the claims of negligent misstatement and breach of contract would succeed. However, after considering the investigation in detail, the High Court found no evidence of bad faith.

Comment

The High Court's finding that an enquiry into the fairness of a disciplinary investigation for reference purposes will generally not be required will be welcome news for those employers who provide references which are not purely factual.

However, the High Court did conclude that a referee should carry out a review of the material underlying a disciplinary investigation where its conclusions are relied on in a reference. This may represent a change of practice for some employers.

Further, where an employer chooses to express a negative opinion which derives from an earlier disciplinary investigation, the employer should be alive to any "red flags" which call the integrity of that investigation into question. Examples of red flags given by the High Court are where there are "obvious errors" in the material underlying the investigation or where the referee becomes aware of information which casts doubt on the reliability or integrity of the facts or opinions in the underlying material.

The apparent conclusion of the High Court that where an investigation into misconduct is conducted in bad faith any reference which sets out the "fruits" of that investigation would by itself give rise to liability is surprising and the basis for the Court's view is not set out. On the facts of this case, the reference was prepared by the same person who was alleged to have carried out the investigation in bad faith such that, if bad faith had been shown, it would clearly have affected the reference. If intended as a general statement, however, the Court's view would make it very difficult for employers to avoid liability in respect of a reference where bad faith in respect of the conduct of an earlier investigation is alleged.

This case will not impact employers who provide references which are purely factual and do not express an opinion about an employee i.e. those which are limited to name / dates of employment etc. as is common practice for many employers.