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Home›Due Diligence›Is there a duty of care when an accountant acts as an introducer?

Is there a duty of care when an accountant acts as an introducer?

By Becky Ricci
December 23, 2021
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The answer to the question posed is, of course, very specific to the facts. However, the recent High Court case of Knights vs. Townsend Ltd. [2021] EWHC 2563 (QB), provides useful guidance to practitioners as to when such a requirement is or is not likely to arise. We discuss the facts of the case and key takeaways from the decision below.

Fund

In September 2011, the Plaintiffs hired public accountants for the Defendants. The defendant presented the plaintiffs with three tax schemes and an investment opportunity. The tax schemes were successfully challenged by HMRC and failed, and the investment opportunity resulted in a total loss of funds. With regard to the tax schemes, the Plaintiffs brought a claim alleging:

  • The defendant breached its duty of care by providing positive data through negligence advice and encouragement with regard to tax regimes.
  • In the alternative, the defendant breached its duty of care by neglecting presentation plans to applicants.
  • The breaches of due diligence led the claimants to enter into the tax schemes, as a result of which they suffered loss and damage.

Regarding the investment opportunity, the Plaintiffs alleged:

  • The defendant agreed, but failed to exercise due diligence regarding the investment opportunity and also provided negligent positive advice and encouragement in this regard.
  • The breaches of due diligence caused the claimants to commit funds to the investment which were lost.

decision

The High Court dismissed the claim on the grounds that the claimants had failed to prove their case due to the duty of care.

To determine whether there was a duty of care, the court followed Carney Investments vs. Rothschild [2018] EWHC 958 (Comm), applying the following legal principles:

  • Had the Respondent given what could properly be described as “advice”? and
  • Whether by doing so, the defendant had assumed responsibility for his advice or owed a duty of care under one of the other well-known incremental criteria for establishing duty at common law.

In considering the second question, the judge said that when the plaintiffs had engaged the defendant’s accountants and the question was within the scope of that engagement, it was appropriate to apply the test for presumption of liability set out in Hedley Byrne and Co Ltd v Heller and Partners Ltd [1963] UKHL 4. There are basically two elements to this test:

  • Whether the defendant had reasonably expected that the plaintiff would rely on his advice.
  • Did the Applicant in fact reasonably rely on the Opinion.

Request for advice

Applying the above legal principles, the judge first considered what advice, if any, was being provided. The judge found that the defendants generally encouraged the plaintiffs to consider the tax schemes. The judge said that whether the defendant had taken responsibility for the statements / encouragement given (and therefore owed a duty of care to the plaintiffs) must be objectively assessed by reference to what a reasonable person in the parties’ position would have understood. On the facts of the case, the judge was not convinced that the defendant assumed any responsibility for the encouragement / advice provided in connection with the tax schemes. The main reasons for this conclusion were as follows:

  • The Respondent’s engagement letter contained limitations of liability and made it clear that it was not providing advice or recommending a particular investment.
  • The warrant required applicants to confirm that they were relying only on outside advice.
  • The Claimants have signed the various declarations above indicating that they have understood the terms thereof.
  • The Grievor had in fact received advice from another party (the program providers).

As to the investment advisability, the judge was also unable to conclude that the defendant had accepted or had assumed the responsibility to carry out a due diligence exercise of the type claimed by the plaintiffs.

The request for introduction

The judgment clarifies that there may be circumstances in which a duty of care is owed to clients with respect to introductory cases. The judge said that the relationship between a client and his accountant is one of trust. Given the facts of the case, the judge held that there was no support for the proposition that these types of tax schemes should not be presented to claimants or that claimants were not fit people. to be presented.

Comment

The judgment in Knights vs. Townsend contains useful analyzes of the legal principles that will be applied in assessing the duty of care of accountants to their clients. The existence of a duty of care and the scope of that duty will of course be assessed objectively and will be very specific to the facts. What is clear from the ruling, however, is that clear letters of engagement, be it introducer or adviser, are likely to be very relevant to the court’s objective examination of whether the practitioner has assumed responsibility. As such, the judgment should reassure professionals and their insurers in cases where the terms of engagement have been carefully drafted.

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