Accountants do not have an open ended duty of care

When the case of Hossein Mehjoo v Harben Barker (Court of Appeal) [2014] EWCA Civ 358 was heard in the High Court last year, the decision caused consternation among professional advisers as Harben Barker, an accountancy firm, was held to be negligent after failing to advise their client, Mr Mehjoo, to seek specialist advice in relation to capital gains tax savings that could be achieved because of his non-UK domicile status. Following the High Court decision, a common perception among practitioners was that they would be held negligent if they did not advise their clients to enter into tax schemes to avoid tax liabilities.

Two issues, in particular, were of concern to professional advisers in relation to the High Court decision. First, the engagement letter and the relationship between Mr Mehjoo and his accountant was such that there appeared to be a clear and mutually accepted understanding that his accountant had a duty to consider his client’s tax position and give advice on how to reduce his tax liabilities. The relationship went beyond the wording of the engagement letter, which was regarded as a “formality” by the two parties.

The second issue was that, although the accountants were not criticised for lacking specialist knowledge in respect of non-domicile issues and of what planning opportunities might have been available for a non-domiciled individual, they should have known that the status had special advantages and they should have advised him to take specialist advice.

The High Court ruled that the firm had to compensate their client for the CGT he had paid.

The firm appealed, and the Court of Appeal have overturned the original ruling, concluding that the High Court “was wrong to find that Harben Barker were in breach of duty and it is therefore unnecessary to consider the various issues raised about causation and remoteness of damage”.

Lord Justice Lewison said:

“In my judgment it was impermissible for the judge to infer from the limited occasions upon which Mr Purnell [the accountant] pursued a line of inquiry beyond the strict limits of his retainer that there had been a far reaching (but silent) variation of the retainer, which had the effect of imposing an open-ended and apparently limitless duty upon HB.”

This is based on the decision in Midland Bank Trust Co Ltd v Hett Stubbs & Kent [1979] Ch 384, where Oliver J concluded that:

“There is no such thing as a general retainer in that sense. The expression “my solicitor” is as meaningless as the expression “my tailor” or “my bookmaker” in establishing any general duty apart from that arising out of a particular matter in which his services are retained. The extent of his duties depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do.”

This is good news for practitioners. Following the Court of Appeal decision, practitioners do not have an open-ended duty of care in relation to their clients. However, they do need to ensure that their letter of engagement reflects clearly the services they have agreed to provide to their clients.

If you would like further information in relation to the Mehjoo case please contact the TaxDesk on 0845 4900 509 and ask for Paul Howard.