High Court upholds contractual terms setting out basis of relationship in dismissing breach of duty claim relating to introduction to third party investment schemes

The High Court has upheld certain contractual terms which set out the basis of the parties' relationship in dismissing a breach of duty claim by an investor and his associated companies against a chartered accounting firm in relation to losses alleged to have been suffered as a result of their introduction by the firm to various tax and FX trading investment schemes: Knights v Townsend Harrison Ltd [2021] EWHC 2563 (QB).

The decision is a reassuring one for financial institutions faced with claims alleging that they owe a duty of care to their clients when introducing them to third party investment schemes and are consequently responsible for any losses suffered as a result. It highlights the difficulties for claimants in establishing that a financial institution owed them a duty of care in relation to any third party investment schemes which they may have been introduced to as to part of their business relationship, especially where there are clear contractual terms in place at the outset stating that the financial institution has not assumed any responsibility to provide advice in respect of the investment schemes.

In the present case, the court found that the terms of business and limitation of liability letters provided by the firm to the investors contained clear wording that the firm: (i) was not giving a recommendation on a particular investment or type of investment; (ii) was not providing advice as to the success or risks of the investment; (iii) understood that the investor was relying on third party/independent financial advice as to the investment; and (iv) understood that the investor had read the contractual terms relating to their business relationship and acknowledged them, so there were no circumstances in which the firm reasonably foresaw that the investors would rely upon it or its advice.

We consider the court's decision in more detail below.

Background

In 2011, an individual and his associated companies (the claimants) engaged a chartered accounting firm (the defendant) as their accountant. This relationship was documented through various engagement letters (which incorporated the defendant's standard terms of business) and limitation of liability letters (the Limitation of Liability Letters).

The claimants subsequently brought a breach of duty claim against the defendant seeking damages in respect of losses alleged to have been suffered as a result of the defendant having introduced the claimants to various tax and FX trading schemes. The claimants' case was that the defendant owed certain common law duties of care to the claimants and had acted in breach of these duties of care.

The defendant denied that it owed any common law (or contractual) duty of care to the claimants or that the claimants were entitled to and did rely on the defendant. The defendant's case was that although it was the claimants' accountant, it was a mere introducer of the tax schemes and FX trading scheme to the claimants.

The defendant placed particular reliance on its terms of business and Limitation of Liability Letters, in which the defendant contended that it was not providing, and could not provide, advice in relation to the tax schemes or FX trading scheme.

Decision

The court found in favour of the defendant and dismissed the claim for the reasons explained below.

Duty of care principles

In its consideration as to whether there was a duty of care, the court highlighted the following key principles:

• Establishing the requisite duty required two things, namely that: (i) the defendant had actually given what could properly be described as advice; and (ii) in doing so, the defendant had assumed responsibility for its advice or the duty of care had arisen by reason of one of the other familiar tests for establishing a duty of care at common law (as per Carney v Rothschild Investments [2018] EWHC 958 (Comm)).
• The assumption of responsibility test was the appropriate test to apply because the other tests had been relegated in importance by the Supreme Court in a number of recent decisions, and the closer the relationship is to one of contract, the more likely that test is likely to assist. There are essentially two elements to it, namely whether the: (i) defendant reasonably foresaw that the claimants would rely on its advice; and (ii) claimant did in fact reasonably rely on the advice (as per Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465). This test requires a "special relationship" between the claimant and defendant, i.e. where one party has assumed or undertaken a responsibility towards the other (as per Henderson v Merrett Syndicates Ltd [1995] 2 AC 145).
• The disclaimer in the Limitation of Liability Letters should not be approached as if it were a contractual exclusion (as per Hedley Byrne). Rather, it is to be regarded as one of the facts relevant to answering the question of whether there had been an assumption of responsibility by the defendants for the relevant statement. The question must be answered objectively by reference to what a reasonable person in the position of the claimant would have understood at the time that he finally relied on the representation (as per McCullagh v Lane Fox & Partners [1996] PNLR 205).
• As a matter of contract law it is possible for parties to a contract to give up any right to assert that they were induced to enter into the contract by misrepresentation, provided they make their intentions clear, and a clause to this effect, if properly drafted, may give rise to a contractual estoppel (as per Peekay v ANZ [2006] EWCA Civ 386 and Cassa di Risparmio v Barclays Bank [2011] 1 CLC 701).
• The principles relating to contractual estoppel were less readily applicable where an adviser, albeit in the context of a retainer, advises in respect of the entry into a contract with a third party. However, this point did not arise for consideration on the facts of the present case; the court did not consider that contractual estoppel would arise in circumstances where the existence of the Limitation of Liability Letters would not in and of themselves have precluded the existence of a duty of care.
• In circumstances where a Limitation of Liability letter of the kind used in the present case is not received back for some time after the relevant advice has been acted upon, then that may be a factor relevant to the objective consideration by the court as to whether or not there had been an assumption of responsibility, and whether any assumption of responsibility has in fact been negatived by the existence of the Limitation of Liability letter. However, this will depend upon the individual circumstances of the case. The key issue is, as per McCullagh, what a reasonable person in the position of claimants would have understood as to the defendant's position so far as an assumption of responsibility was concerned from the fact that the Limitation of Liability letters had been sent to them, at the time that they committed themselves to the tax schemes.
• It may be that, on appropriate facts, a relationship of reliance exists even though the accountant does not in fact provide affirmative advice so as to give rise to that relationship – provided that relationship of reliance is not negatived by other considerations such as appropriately worded Limitation of Liability letters. Thus, there may be circumstances in which an accountant in introducing a client to a tax scheme in the context of an ongoing professional relationship may owe a duty not to introduce an unsuitable client to an unsuitable tax scheme. Although obiter, the position was expressed to be different in the context of a banker and customer relationship; the court suggested it may be less likely such a relationship of reliance exists in that context.
• There may be circumstances in which the nature of the relationship was such that it was incumbent upon the accountant to proffer advice in relation to the tax scheme and the implications of entry into the same. However, this would all be dependent upon showing that the circumstances were such that the accountant had assumed responsibility for such matters. This would in turn depend upon whether the accountant reasonably foresaw that the client would rely upon him in respect of these matters, and whether the client did, in fact reasonably rely on the accountant.

Application of duty of care principles to the present case

The court held that the claimants had failed to establish the existence of a common law duty of care.

Tax Schemes

As to the claimants' introduction case, the court commented that there was no support in the expert evidence for the proposition that these type of tax schemes were of the type that ought not to have been introduced by a general practitioner accountant acting reasonably in any event. Further, the tax schemes in question were underpinned by legal advice from eminent leading tax Counsel. In the circumstances, it could not fairly be said that the introductions to the tax schemes ought not to have been made. The court also said that it could not be fairly said that the claimants were unsuitable persons to at least introduce to promoters of tax schemes of the kind available. There were cogent reasons for the claimants to consider tax planning and the claimant investor involved demonstrated a significant level of sophistication and that he was not risk averse with regard to investments.

As to the claimants' advice case, the court commented that the defendant did generally encourage the claimants to give consideration to the tax schemes. However, on the evidence it was unable to conclude that the defendant went further and advised the claimants that they had nothing to lose in entering the schemes, or that the only real risk was that there might be a liability for corporation tax. The court was not persuaded that the defendant had assumed a responsibility to advise in respect of these matters. The 2011 engagement letter and the defendant's standard terms of business made it clear that the defendant would not recommend a particular investment or type of investment. Also, the relevant Limitation of Liability Letters explained in clear terms, amongst other things, that the defendant could not advise as to the success or otherwise of any tax planning strategy and the risks involved, and required the claimants to confirm that they were relying solely on the relevant scheme provider's advice. The fact that the claimants received such advice from another party was another factor pointing against the defendant being subject to an advisory duty of care. The court also said that it did not consider that the circumstances were such that it could properly conclude that the defendant was on notice that the claimants were not relying on the advice of the scheme providers; the claimants had signed the declarations saying that they had read and understood the relevant documentation. Even in circumstances where there was no evidence in relation to one of the tax schemes in question that a Limitation of Liability Letter had been signed, the nature of the relationship as between the defendant and the claimants in respect of the introduction to the tax schemes was well established by then as being one under which the defendant had made clear that it was assuming no responsibility towards the claimants in respect of the introductions and the provision of advice thereof. So these were not circumstances in which the defendant reasonably foresaw that the claimants would rely upon it or its advice, or in which the claimants did reasonably so rely.

FX Trading Scheme

The court commented that it did not consider that any binding and enforceable agreement had been concluded for the defendant to carry out any form of due diligence in relation to the FX trading scheme. There was also insufficient certainty as to what was to be involved. The court said that in the circumstances it was unable to conclude that the defendant had assumed responsibility to carry out a due diligence exercise of the kind that the claimants now contended ought to have been carried out that would have been concerned with the legitimacy and bona fides of the FX trading scheme. The relevant events took place against a background under which the claimants accepted that the defendant was not permitted to advise in respect of specific investments, could provide no warranty in respect thereof, and had sought to make it clear that it accepted no responsibility for the provision of any advice and more generally in respect of the FX trading scheme in the Limitation of Liability Letters sent prior to the claimants actually committing themselves to the FX trading scheme, albeit that the Limitation of Liability Letters were not signed until thereafter. The court also noted that the fact the claimants did not immediately hold the defendant responsible demonstrated that they placed no reliance upon the defendant to provide the due diligence of the kind that it was now alleged that the defendant ought to have carried out.

Accordingly, the court dismissed the claim.