Professional Negligence - Good News For Tax Advisers

Tax advisers may sleep easier at night because of a recent ruling by the House of Lords, says CHRISTOPHER CANT, barrister.

I WARNED ABOUT the problems posed for tax advisers by the new approach adopted by the Court of Appeal to 'fraudulent concealment' in the field of limitation of actions in two articles last year entitled 'Tax Professionals Under Attack', Taxation 30 August and 6 September 2001, pages 550 to 554 and 574 to 577 respectively. It was one of a number of developments in professional negligence claims which made life more difficult for tax advisers.

The consequence of this change in statutory construction was to make it far harder for advisers to rely on the defence of limitation when dealing with a claim against them for professional negligence and, in turn, meant that all professions were faced with the prospect of significant increases in the number of such claims and the cost of insuring against them.

Since writing those articles, the House of Lords has reviewed the law on this issue and, as a result, there is very good news for tax advisers and other professionals. The House of Lords has overruled the decisions introducing the new approach and returned the law to what it had always previously been understood to be. The uncertainties that the new approach introduced have been swept away and in terms which will please any tax adviser.

Traditional approach

When dealing with a claim for professional negligence the first step is to consider whether the claim has become statute-barred. If the limitation period, normally six years, has expired then the claim may be defeated by relying on the statutory defence of limitation of action. A crucial point in determining whether reliance can be placed on the defence is the date when the cause of action first arose and the limitation period began to run.

Professional negligence claims may often be capable of being brought in either tort or contract. Traditionally in tort the limitation period has started to run from the date when loss was first suffered as a result of the negligent act or omission. In contrast, with claims for breach of contract the period runs from the date of the breach regardless of when the loss occurred. The limitation period may, therefore, start to run earlier with claims in contract than is the case with tort claims.

Prior to the recent intervention of the Court of Appeal, in any professional negligence case consideration of the possibility of relying on a limitation defence was fairly straightforward. The date when the cause of action first arose was ascertained, and then the expiry of the period of six years from that date was calculated. If the proceedings had been commenced outside that period, then reliance could be placed on the defence. Everyone knew where they stood with such an approach. In particular the extent to which a professional needed to take out insurance was known, which allowed each professional to plan cover, and insurers to fix premiums which reflected the cut off date for professional negligence claims.

There was always some scope for argument even with the traditional analysis. As discussed in the earlier articles, there is room for argument over issues such as when the loss is viewed as having occurred. There is the possibility that in some decisions, the date of the occurrence of the loss has been pushed back in order to defeat the limitation defence.

Further for the purpose of calculating the limitation period, time is postponed if any fact relevant to the right of action has been deliberately concealed from the claimant. This had always been taken to mean that the concealment must have been intentional or, possibly, reckless. In consequence, the postponement of time for this reason played little part in claims for professional negligence. The number of cases in which a professional deliberately concealed material information are small.

New approach

The simplicity of the traditional approach was changed dramatically by the Court of Appeal decision in Brocklesby v Armitage and Guest [2000] PNLR 33. This decision construed a little noticed subsection (section 32(2), Limitation Act 1980) in a wholly new manner. The sub-section provides that the deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.

This was construed as meaning that time would be postponed due to concealment if:

• the breach was knowingly and intentionally committed, whether or not it was appreciated that it was a breach; and
• the circumstances are such that the claimant is unlikely to discover such breach for some time.

Oddly and worryingly, such a construction meant that the postponement provision would operate even though there had been no actual concealment on the part of the professional, no intent to commit a wrong, and extraordinarily even if the claimant was aware of all the facts. All that the new approach required was that the breach should be the result of a deliberate act and, in the case of many professional negligence cases, this will be satisfied. In such circumstances, even if the claimant knew the facts, a legal fiction resulted that they were unknown. Negligent advice will have been intentionally given and that suffices, even though it is not appreciated at the time that the advice was negligent.

By adopting such an approach, the Court of Appeal dramatically increased the number of professional negligence cases that would be pursued. No professional would ever be certain that a line could be drawn under the possibility of a claim being made. The peace of retirement could be rudely shattered at any time.

House of Lords decision

After three years of uncertainty, the House of Lords has emphatically reverted to the traditional approach that previously operated. In Cave v Robinson Jarvis and Rolfe [2002] UKHL 18, the rationale for the defence of limitation was restated. It is in the public interest that a person with a good claim should pursue it within a reasonable time. To face a stale claim is to suffer an injustice. Evidence may no longer be available and the case is harder to try. The existence of the statutes of limitation is regarded as beneficial and they should not be construed restrictively.

The plight of the tax adviser faced with an aged professional negligence claim under the new approach was accurately summarised by Lord Millett in the following passage in his judgment which will be welcomed by all professional advisers:

Accordingly the new approach in Brocklesby v Armitage & Guest was overruled and the traditional construction reinstated. This means that in the view of Lord Millett, a professional will only be deprived of a limitation defence in two situations:

• where the professional takes active steps to conceal his own breach of duty after becoming aware of it; or
• where the professional is guilty of deliberate wrongdoing and conceals or fails to disclose the breach in circumstances where it is unlikely to be discovered for some time.

The professional will not lose the benefit of the defence if accused of negligence, when he was unaware that there had been a lack of reasonable care and so no disclosure had been made. There will be few cases of professional negligence which will fall within either of the two above situations. In most cases, the limitation defence will operate in the traditional manner so that claims not bought within six years from the accrual of the cause of action will be statute-barred.

An illustration of the importance of this decision can be gained from the express disapproval by Lord Scott of the decision of Mr Justice Laddie in Liverpool Roman Catholic Archdiocese Trustees Inc v Goldberg [2001] 1 AER 182. In the hearing of a preliminary issue as to whether a limitation defence could be relied on, Mr Justice Laddie followed Brocklesby v Armitage & Guest holding that as the advice had been given intentionally, reliance could not be placed on such a defence. The House of Lords has now stated that that decision was wrong and the claims being pursued were statute-barred.

By reason of this decision, it will now be possible for professionals to have a greater degree of control over planning their indemnity insurance cover. Premiums should not be as high as they would otherwise be under the new approach of the Court of Appeal. Retention of papers for six years should in many cases be sufficient rather than having to hold them indefinitely. Finally, retirement should be less susceptible to unpleasant shocks caused by cases from the distant past coming back to haunt the adviser.

Christopher Cant is a member of Chancery chambers, 9 Stone Buildings, Lincoln's Inn, London WC2.

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