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Professional Indemnity Claims: Avoiding the ProblemsAlan Eadie, Partner

2 April 2014

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Professional Indemnity Claims: Avoiding the problems

Standard of skill and care against which to measure any breach of duty

The Issues of Reliance, Causation and Quantum

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Standard of Performance

Perhaps comfortingly……

Failure is expected

Success is never guaranteed

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Standard of Performance

contract before delict

express before implied contractual terms

regulatory principles and rules

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Why should contract be the primary focus?

The obligation to exercise reasonable skill and care is not the whole story

A professional will be liable for breach of specific contractual requirements irrespective of the amount of skill and care exercised

The defence of contributory negligence may not be available

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Liability for Breach of Specific Contractual Requirements

Sweett (UK) Ltd v Michael Wight Homes [2012]

EW Misc 3

Platform Funding Ltd v Bank of Scotland Plc [2009] Q.B.426.

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Availability of Defence of Contributory Negligence

Forsikringsaktiesleskapet Vesta v Butcher [1986] 2 All E R 488 per Hobhouse J Where the defendant’s liability arises from some contractual

provision which does not depend on negligence on the part of the defendant, in which case there is no scope for contributory negligence

Where the defendant’s liability arises from a contractual obligation expressed in terms of taking care (or its equivalent) but not corresponding to a common law duty to take care which would exist independently of contract, in which case, because the duty of care is a product of contract, there is no scope for contributory negligence

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Availability of Defence of Contributory Negligence

Forsikringsaktiesleskapet Vesta v Butcher [1986]2 All E R 488 per Hobhouse J

Where the defendant’s liability in contract is the same as his liability in the negligence independently of the existence of any contract, in which case the defence of contributory negligence ought to still be available even where the claimant frames his action in terms of breach of contract

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Duty of Reasonable Skill and Care

Hunter v Hanley 1955 SC 200

usual and normal practice within the profession

extent and in what respects the solicitor in question has not adopted that standard practice; and

course the solicitor has adopted is one which no other ordinarily competent solicitor, exercising reasonable skill and care, would have taken

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Qualifications to Hunter v Hanley

Not to be taken too literally! Dynamic New practices – science, technology, etc. New attitudes – Rangers FC R.I.P. New requirements

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Standard of Reasonable Skill and Care

The standard that members of a given profession do in fact ordinarily achieve

or That which, in the opinion of the court, members

of the profession ought to achieve?

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Standard of Reasonable Skill and Care

Lax practice / systemic imprudence

 

Edward Wong Finance Co Ltd v Johnson, Stokes and Masters [1984] 1 AC 296,

 

Patel v Daybells (a Firm) [2002] PNLR 6  

“If a practice in the profession exposes clients or patients to a foreseeable and avoidable risk, the practice may not be capable of being defended… and in those circumstances the fact that it is commonly (or even universally) followed will not exclude liability for negligence”

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Standard of Reasonable Skill and Care - Areas of specialism

The degree of reasonable skill and care to be expected of the ordinarily competent solicitor specialising in the particular area of law concerned

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Standard of Reasonable Skill and Care?

The degree of reasonable skill and care to be expected of the ordinarily competent general civil court practitioner who ought to know better than be so idiotic as to go dabbling around in specialised areas of law in which he is not sufficiently well versed to avoid falling down a great big hole

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Standard of Reasonable Skill and Care - Defender’s specific qualifications and experience

The standard of skill and care appropriate to a solicitor with those particular qualifications and experience;

or The standard of skill and care appropriate to members of

the profession generally, operating in that field of practice?

Andrew Master Hones Ltd v Cruikshank & Fairweather[ 1981] RPC 389, Per Graham J:

“The degree of knowledge and care to be expected is thus seen to be that degree possessed by a notional duly qualified person….the test is therefore, if I may put it that way, an objective test referable to the notional member of the profession, not a subjective test referable to the particular professional man employed.”

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Standard of Reasonable Skill and Care – Nearly There!

That degree of skill and care that:

ought ordinarily to be exercised by reasonably competent members of the profession

who operate in the same field of practice, profess the same specialisation (if any); and

hold broadly the same status or formal rank

as the defender

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Standard of Reasonable Skill and Care – and finally…

Where the defender is a an organisation offering

professional services…..

 

The standard of skill and care appropriate to those professional staff who ought have undertaken the work

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Reliance, Causation and Quantum

Negligence

Reliance

Causation

Loss

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Reliance, Causation and Quantum

Causation – a two stage process

Whether the losses are consequences of the breach - - a question of fact

Whether those consequences are within the limits of what the law considers recoverable – - a question of law

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Stage One Causation

Causation pure and simple

“But for….”

Question of fact

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Stage One Causation

What the claimant did in fact do as a result of the professional's breach of obligation or duty

Vs

 

What hypothetically the claimant would otherwise have done

 

What hypothetically other parties would otherwise have done

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Stage One Causation

What the claimant did in fact do as a result of the professional's breach of obligation or duty

All about reliance

Shouldn’t be taken for granted

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Stage One Causation

What, hypothetically, the claimant would have done instead

Lord Hoffman in Chester v Afshar [2004] UKHL 41:

“The burden is on a claimant to prove that the defendant's breach of duty caused him damage. Where the breach of duty is a failure to warn of a risk, he must prove that [had he been advised of it] he would have taken the opportunity to avoid or reduce that risk.”

Tested of balance of probabilities -

an “all-or-nothing” question

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Stage One Causation

What, hypothetically, a third party would have done

Tested on loss of chance – a question of percentages

Claimant needn’t prove what a third party would have done….

As regards what the third party would have done, the claimant merely has to demonstrate a chance - albeit a substantial rather than merely speculative one – that the third party would have reacted to the claimant's benefit……. Allied Maples Group Ltd v Simmons & Simmons (a firm) [1995] EWCA Civ 17

But Defender may want to!

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Stage One Causation

McCann v Waddell & Mackintosh [2014] CSOH 15

McCrindle Group v Maclay Murray & Spens [2013] CSOH 72

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McCrindle Group v Maclay Murray & Spens [2013] CSOH 72

What the claimants actually did in reliance on advice – accept an offer of £90,000

What they would otherwise have done on balance of probability – accept an offer of £450k had it been made

What the third party might otherwise have done, assessed on a loss of chance basis – a 40% chance that they would have made an offer of £450k : 40% x 450 = £180k

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Stage Two “Causation”

Whether the losses are consequences of the breach - - a question of fact

Whether those consequences are within the limits of what the law considers recoverable – - a question of law

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Stage Two “Causation”

Where the consequences have been affected by competing factors other than just the professional’s negligence:

The acts of the claimant The acts of third parties The input of other professionals Fluctuations in the market

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Stage Two “Causation”

What’s it all about?

Law: Remoteness

In contract: Transfield Shipping Inc v Mercator

Shipping Inc [2008] UKHL 48

In delict: South Australia Asset Management Corpn

v York Montague Ltd [1996] UKHL 10 ('SAAMCO')

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Stage Two “Causation”

What’s it not about?

Fact: cause and effect

Transaction and no transaction

Effective and Dominant causes

Causa causans and causa sine qua non

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SAAMCO made Simple

Duty to provide information (category 1)

Duty to provide advice (category 2)

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SAAMCO made Simple

Preferred Mortgages Ltd. v Shanks & Ors. [2008]

PNLR 20

 

 

negligent overvaluation entire loss

Surveyor

Solicitor

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SAAMCO made Simple

Capita Alternative Fund Services (Guernsey) Limited

and Anor v Drivers Jonas (a firm) [2011] EWHC 2336 (Comm)

True value c £35,000,000 Defenders’ valuation £48,000,000 Claimants’ actual loss: £63,000,000

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To conclude….

Smith New Court Securities Ltd v Citibank NA

per Lord Steyn

 

“The development of a single satisfactory theory of causation has taxed great academic minds…... But, as yet, it seems to me that no satisfactory theory capable of solving the infinite variety of practical problems has been found. Our case law yields few secure footholds. "

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I think the main focus would be best to be on solicitors’ professional indemnity.Registration is from 5.30pm with the actual talk starting at 5.45pm. The seminar qualifies for 1.5 hours CPD so should go on till approx. 7.15pm (including any time for questions).Screen and powerpoint are available but it’s entirely up to you whether you want to use slides or not.I think attendees are generally appreciative of a hand-out, but again that’s entirely up to you.We had 21 attendees signed up for the original date so I would imagine that the numbers would be roughly the same, possibly higher, for the later date.   To my mind, many of the problems and the issues that arise in professional indemnity claims stem from confusion and misunderstanding around some of what we think of as very obvious prerequisites of any claim, namely: Standard of skill and care against which to measure any breach of dutyThe issues of Reliance, Causation and Quantum And given the huge amount of judicial consideration given to these issues – not all of it wholly consistent – there is an understandable tendency, in trying to unravel it all, to get tied up in ever more tangled bundles of string. So my aim this evening is to focuson these aspects and try to de-mystify them a bit; and the task I have set myself is to reduce each of these 2 topics to one slide a piece.  Unfortunately for you, however, to get to that, I am going to need a few more slides along the way. So, starting with…. Standard of Performance The problem here is that it is something of a moveable feast and professions generally operate in spheres where the intended result or a favourable outcome cannot always be achieved, sometimes because of factors outwith the professional’s direct control – in a medical context, the age and stamina of a patient will be as much a factor as the doctor’s skill, in a litigation context,no amount of skill and care may compensate for a witness’s lack of credibilitySo, if an employment lawyer told you he’d lost 40% of the employment tribunal hearings he’d ever run, you’d probably be fine with thatBut if a conveyancer told you that only 20% of his clients acquired good title to the properties he purchased for them; that might raise an eyebrowwhat if an engineer told you that maybe only 10% of the bridges he’d designed had ever collapsed? so there can be massively different expectations among different professions and also within different branches or practice areas within the same profession;  The context is therefore all important and the only sweeping generalisation might be that professionals are not generally held to be under a duty to warrant that they will achieve the result their clients want. But drilling down a stage further, what is the standard of skill and care against which a given professional ought to be judged in a given situation? Well, my immediate answer to that question would be that it’s not really the right question: or at least it’s not the first question you should be asking. Because it’s important to bear in mind that it is contract, rather than delict, that provides the background to the majority of claims against members of professions. So the correct starting point is establish the nature of the bargain as reflected in express and implied contractual terms.  Yes, by the time we get to the implied terms, the distinction between contract and delict becomes a bit more blurred because, for the most part, implied contract terms will generally amount to an adoption, of the standard delictual duty of care, applicable in the circumstances – and I will come onto that. But implied terms and delict really only come into it as a fall back or a concurrent basis of claim because there is some sort of obstacle to establishing straightforward contractual liability. And the fuzzy notion of a duty owed to a legal neighbour is often too blunt an instrument with which to undertake a sophisticated analysis of a solicitor’s performance o fa particular task in a particular context.  So, whether you’re on the pursing side or the receiving end of a claim, always bear in mind that contract rather than delict should provide the primary basis for analysis, supplemented where appropriate, by consideration of regulatory principles and rules. That is often the key to finding to a better definition of the scope of the services agreed to be provided, making a more precise determination of the scope of the duties owed and, where duties those have been breached, assessing what the what consequences the professional ought to be liable for. Something not to lose sight of, however, is that a contract is the product of a bargain struck between solicitor and client whereby the former will perform legal services in return for the latter paying fees. It is a bilateral animal so a client can’t simply impose a list of requirements and then blame the solicitor for failing to tick off each and every one of them, unless of course the solicitor has expressly undertaken to do so. That might sound a bit extreme but I’ve actually been involved in seen quite a few claims of late based on allegations of a solicitor failing to follow a client’s express instructions, not in the broad sense of failing to negotiate a divorce settlement or successfully pursue a case but in the very specific sense of failing to deploy a particular argument or introduce a particular piece of evidence or raise a particular point at a given time, in spite of the client’s express instructions to do so. 

 So, whether you’re on the pursing side or the receiving end of a claim, always bear in mind that contract rather than delict should provide the primary basis for analysis, supplemented where appropriate, by consideration of regulatory principles and rules. That is often the key to finding to a better definition of the scope of the services agreed to be provided, making a more precise determination of the scope of the duties owed and, where duties those have been breached, assessing what the what consequences the professional ought to be liable for. Something not to lose sight of, however, is that a contract is the product of a bargain struck between solicitor and client whereby the former will perform legal services in return for the latter paying fees. It is a bilateral animal so a client can’t simply impose a list of requirements and then blame the solicitor for failing to tick off each and every one of them, unless of course the solicitor has expressly undertaken to do so. That might sound a bit extreme but I’ve actually been involved in seen quite a few claims of late based on allegations of a solicitor failing to follow a client’s express instructions, not in the broad sense of failing to negotiate a divorce settlement or successfully pursue a case but in the very specific sense of failing to deploy a particular argument or introduce a particular piece of evidence or raise a particular point at a given time, in spite of the client’s express instructions to do so. In one such claim I dealt with recently, the file was littered with demands from the client telling his solicitor to raise a particular matter, introduce a particular argument, ask a witness a specific question, issue a letter to the opposition that he, the client, had effectively “ghost written” for the solicitor: and the claim proceeded on the basis that, had the solicitor slavishly followed the client’s tightly choreographed set of steps, it would have yielded a much more favourable result for the client. The thing is, it might have done (although I happen to think it probably wouldn’t) but the point is that, to present a claim on that basis is to adopt an overly prescriptive approach to the way in which legal services are provided and legal advice is given. A solicitor, or indeed any professional, is not there simply to execute a series of steps; he needs to gauge the situation for himself and exercise his own judgement on how best to play the situation: and he will be judged objectively against the contractual obligations to which he has agreed to sign up or the objective standards of skill and care to which he is required to adhere, not to the unilateral demands of his client, however unreasonable those may be. One of the really important things about focusing on the contractual duties is that, unlike delictual duties, contractual duties are often defined terms of specific requirements which leave little, if any, room for error or omission….. It’s about “you will procure this result. You will report this matter. You will be taken to have certified this fact etc.” not that you’ll try your best to. If a solicitor has undertaken to fulfil specific contractual obligations, he will be liable if he breached them, quite irrespective of the amount of skill and care that he has exercised. The classic example of this is where a solicitor acts for a lender under instructions which are governed by the Council of Mortgage Lenders Handbook. There the requirements imposed by the CML Handbook are very often prescriptive and absolute. E.g. having to notify the lender if there has been a back to back sale or if the deposit isn’t actually paid at settlement. No lender is going to be interested in a solicitor making a decent stab at putting in place a valid security: I tried my best – failed woefully – but, hey, I acted reasonably. Having said that, courts will generally be slow to construe professional retainers as giving rise to strict obligations and strict liability but that doesn’t mean there aren’t situation where they will do.. I’ll give you a couple of cases falling either side of the divide:  Sweett (UK) Ltd v Michael Wight Homes [2012] EW Misc 3 (CC) A quantity surveyor was contractually obliged to procure a performance bond from a contractor. It didn’t happen and the contractor became insolvent. The Court ultimately held however that the contractual provision did not impose an absolute obligation but merely an implied duty to use reasonable skill and care to get the performance bond executed. The surveyor had done enough to satisfy this duty by drafting the bond, and putting pressure on the contractors to sign it. Contrast that with the case of Platform Funding Ltd v Bank of Scotland Plc [2008]EWCA Civ 930Q.B.426 in which a valuer who certified that he had inspected the relevant property was held to be subject to a strict obligation to inspect that property and not another one, even although he had been directed to the wrong property by the borrower. The Court of Appeal observed in that case that:  “although there is a presumption that those who provide professional services normally do no more than undertake to exercise the degree of care and skill to be expected of a competent professional in the relevant field, there is nothing to prevent them from assuming an unqualified obligation in relation to particular aspects of their work”. When deciding whether a particular obligation is qualified or unqualified the question to ask is “whether, having regard to the facts and matters known to both parties when the instructions were accepted, the professional person assumed an unqualified obligation in relation to the particular matter in question.”  The other significant point about contractual, as opposed to delictual breach, is that it does not allow the same scope for pleading contributory negligence.  The issue here is whether, because the concept of contributory negligence is a product of the law of delict or negligence, it is competent to plead a defence of contributory negligence to a claim brought in contract alone. Criteria for determining this was set out by Mr Justice Hobhouse in the case of ForsikringsaktiesleskapetVesta v Butcher [1986] 2 All E R 488 where he divided the cases where the issue arises into three categories: “(1) Where the defendant’s liability arises from some contractual provision which does not depend on negligence on the part of the defendant, in which case there is no scope for contributory negligence. (2) Where the defendant’s liability arises from a contractual obligation which is expressed in terms of taking care (or its equivalent) but does not correspond to a common law duty to take care which would exist in the given case independently of contract,in which case, because the duty of care is a product of contract, there is no scope for contributory negligence 

(3) Where the defendant’s liability in contract is the same as his liability in the tort of negligence independently of the existence of any contract”in which case the defence of contributory negligence ought to still be

available even where the claimant frames his action in terms of breach of contract. 

 That might sound a bit extreme but I’ve actually been involved in seen quite a few claims of late based on allegations of a solicitor failing to follow a client’s express instructions, not in the broad sense of failing to negotiate a divorce settlement or successfully pursue a case but in the very specific sense of failing to deploy a particular argument or introduce a particular piece of evidence or raise a particular point at a given time, in spite of the client’s express instructions to do so. In one such claim I dealt with recently, the file was littered with demands from the client telling his solicitor to raise a particular matter, introduce a particular argument, ask a witness a specific question, issue a letter to the opposition that he, the client, had effectively “ghost written” for the solicitor: and the claim proceeded on the basis that, had the solicitor slavishly followed the client’s tightly choreographed set of steps, it would have yielded a much more favourable result for the client. The thing is, it might have done (although I happen to think it probably wouldn’t) but the point is that, to present a claim on that basis is to adopt an overly prescriptive approach to the way in which legal services are provided and legal advice is given. A solicitor, or indeed any professional, is not there simply to execute a series of steps; he needs to gauge the situation for himself and exercise his own judgement on how best to play the situation: and he will be judged objectively against the contractual obligations to which he has agreed to sign up or the objective standards of skill and care to which he is required to adhere, not to the unilateral demands of his client, however unreasonable those may be. One of the really important things about focusing on the contractual duties is that, unlike delictual duties, contractual duties are often defined terms of specific requirements which leave little, if any, room for error or omission….. It’s about “you will procure this result. You will report this matter. You will be taken to have certified this fact etc.” not that you’ll try your best to. If a solicitor has undertaken to fulfil specific contractual obligations, he will be liable if he breached them, quite irrespective of the amount of skill and care that he has exercised. The classic example of this is where a solicitor acts for a lender under instructions which are governed by the Council of Mortgage Lenders Handbook. There the requirements imposed by the CML Handbook are very often prescriptive and absolute. E.g. having to notify the lender if there has been a back to back sale or if the deposit isn’t actually paid at settlement. No lender is going to be interested in a solicitor making a decent stab at putting in place a valid security: I tried my best – failed woefully – but, hey, I acted reasonably. Having said that, courts will generally be slow to construe professional retainers as giving rise to strict obligations and strict liability but that doesn’t mean there aren’t situation where they will do.. I’ll give you a couple of cases falling either side of the divide:  Sweett (UK) Ltd v Michael Wight Homes [2012] EW Misc 3 (CC) A quantity surveyor was contractually obliged to procure a performance bond from a contractor. It didn’t happen and the contractor became insolvent. The Court ultimately held however that the contractual provision did not impose an absolute obligation but merely an implied duty to use reasonable skill and care to get the performance bond executed. The surveyor had done enough to satisfy this duty by drafting the bond, and putting pressure on the contractors to sign it. Contrast that with the case of Platform Funding Ltd v Bank of Scotland Plc [2008]EWCA Civ 930Q.B.426 in which a valuer who certified that he had inspected the relevant property was held to be subject to a strict obligation to inspect that property and not another one, even although he had been directed to the wrong property by the borrower. The Court of Appeal observed in that case that:  “although there is a presumption that those who provide professional services normally do no more than undertake to exercise the degree of care and skill to be expected of a competent professional in the relevant field, there is nothing to prevent them from assuming an unqualified obligation in relation to particular aspects of their work”. When deciding whether a particular obligation is qualified or unqualified the question to ask is “whether, having regard to the facts and matters known to both parties when the instructions were accepted, the professional person assumed an unqualified obligation in relation to the particular matter in question.”  The other significant point about contractual, as opposed to delictual breach, is that it does not allow the same scope for pleading contributory negligence.  The issue here is whether, because the concept of contributory negligence is a product of the law of delict or negligence, it is competent to plead a defence of contributory negligence to a claim brought in contract alone. Criteria for determining this was set out by Mr Justice Hobhouse in the case of ForsikringsaktiesleskapetVesta v Butcher [1986] 2 All E R 488 where he divided the cases where the issue arises into three categories: “(1) Where the defendant’s liability arises from some contractual provision which does not depend on negligence on the part of the defendant, in which case there is no scope for contributory negligence. (2) Where the defendant’s liability arises from a contractual obligation which is expressed in terms of taking care (or its equivalent) but does not correspond to a common law duty to take care which would exist in the given case independently of contract,in which case, because the duty of care is a product of contract, there is no scope for contributory negligence (3) Where the defendant’s liability in contract is the same as his liability in the tort of negligence independently of the existence of any contract”in which case the defence of contributory negligence ought to still be available even where the claimant frames his action in terms of breach of contract. 

 

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Standard of Skill and Care

contract before delict• liability for breach of specific contractual requirements• Availability of Defence of Contributory Negligence

express before implied contractual terms regulatory principles and rules delict - duty of care

• Hunter v Hanley with appropriate qualifications • That degree of skill and care that

o ought ordinarily to be exercised by reasonably competent members of the profession

o who operate in the same field of practice, profess the same specialisation (if any); and

o hold the same status or formal rank

as the defender.

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Reliance, Causation and Quantum

Stage 1

Whether the losses are consequences of the breach

– a question of fact What the claimant did in fact do - reliance  What the claimant would otherwise have done - balance of

probabilities What other parties would otherwise have done - loss of chance

Stage 2

Whether the consequences are within what the law considers recoverable - a question of law Remoteness Duty to provide information (category 1) - loss capped to

consequences of information being wrong Duty to provide advice (category 2) - potential liability for full

loss (subject to foreseeability and mitigation)

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Professional Indemnity Claims: Avoiding the ProblemsAlan Eadie, Partner

2 April 2014