article
No soft target
1 May 2009
Recent court cases give accountants good reason to defend
themselves against professional negligence claims, says Nichola
Evans and Helen Davis of Browne Jacobson.
Given the amount of news coverage on accountancy firms being
taken to court for negligence, you would be forgiven for assuming
that successfully suing advisers was a common occurrence. In
reality, firms are in a stronger position to defend themselves
against such claims, given recent cases.
So what can be done by accountants to limit their exposure to
potential claims? One area which requires some consideration is the
scope of the retainer which underpins most professional
relationships.
One case reported last year is instructive as it clarifies the
importance of getting the basic framework right from the outset of
a contractual agreement. In the case of J P Morgan Bank (formally
Chase Manhattan Bank) v Springwell Navigation Corp [2008] EWHC
1186, the Commercial Court robustly dismissed a claim for damages
in relation to alleged negligent advice with regard to emerging
markets investments.
The claim was complex, with the trial taking over 60 days,
culminating in a lengthy judgment and a great deal of commentary.
In the current climate, we believe that this case is likely to be
relied upon and referred to in many similar claims.
Springwell Navigation Corporation, a company owned and operated
by one of Greece’s wealthiest shipping dynasties - the Polemis
family - had a longstanding relationship with J P Morgan Bank.
During the 1990s Springwell borrowed increasingly large sums of
money from J P Morgan and invested very heavily in exotic debt
instruments. In particular, Springwell invested heavily in Russian
bonds which collapsed in value in 1998 during the Russian debt
crisis.
Springwell brought claims against J P Morgan, for damages of
$700 million, alleging that an advisory relationship existed with
them and that they – the bank’s client - should have been advised
that this was not an appropriate investment. Further, even if J P
Morgan had no duty to provide advice, they alleged that they had
been misled by statements that the investment opportunities were
suitable.
J P Morgan claimed it did not have an advisory relationship with
Springwell and the Polemis family, who they said were experienced
investors who chose their own trades in full knowledge of the risks
involved.
The Court rejected the allegations made by Springwell,
particularly highlighting its sophistication and experience as an
investor able to engage in the higher risk transactions and
ultimately make its own decisions. The Court took into account how
the business between the parties had been conducted throughout
their relationship and reviewed all contractual documentation. This
showed that the parties contracted on the basis of a trading and
banking relationship and not that of an advisory capacity.
The allegation that, even if J P Morgan had no duty to give
advice they did not provide full information as to the nature of
the investment, also failed for the same reasons. Springwell’s
claim therefore failed on all accounts.
Whether an investor actually relies on advice and whether a duty
of care exists will always be fact specific. The Court will clearly
be wary of holding anybody liable unless there is a clear
contractual obligation or strong evidence to the contrary and will
place a great weight on how sophisticated the investor is.
This case follows that of The Football League Limited v Edge
Ellison where the law firm was sued in relation to an agreement
concerning the televising of football matches. In this case, the
broadcasters went into liquidation during the contract, prompting
the Football League to sue Edge Ellison for negligence, claiming
that they should have advised that guarantees be taken to cover
such an eventuality. The court took the view that the solicitors
were not employed to take a general overview of commercial
considerations and that the Football League was a sophisticated
commercial client.
These two cases send a clear message to those giving or
receiving advice to ensure that all obligations are clearly agreed
and recorded. What comes out loud and clear is that there is no
such thing as a ‘general retainer’ imposing a duty to consider all
issues relating to a client’s interests.
The current economic climate will inevitably see an increase in
litigation, and statistics show that this is already the case. On
the flipside, it is likely that insurers and large institutions
will be more likely to vigorously defend any allegations of
negligence made against professionals. It is human nature to
believe that if an investment goes wrong, the party who gave that
advice is to blame and that damages will result, but that is not
necessarily the case.