Professional Negligence

Professional Negligence

Keel-Hauled

JOHN JEFFREY-COOK CTA (Fellow), FCA, FCIS, ATT reviews University of Keele v Price Waterhouse.

A LIMITATION CLAUSE did not relieve an accountancy firm from liability for negligence in setting up a profit-related pay scheme for a university.

Background

Following a cold call from Price Waterhouse to Keele University in September 1995, Keele, in December, invited Price Waterhouse and its auditors, KPMG, to tender for the establishment of a profit-related pay scheme. Price Waterhouse was appointed and, on 26 April, Keele signed Price Waterhouse's terms of engagement which, under the heading 'Liability', included: 'We will use all reasonable skill and care in the provision to you of the services set out in this letter.

'In no circumstances shall any liability (whether arising in contract, negligence or otherwise) of Price Waterhouse, its partners or employees, relating to services provided in connection with the engagement set out in this letter (or any variation or addition thereto) exceed £1,700,000 being twice the anticipated saving to Keele University from the implementation of the profit-related pay scheme.

'Subject to the preceding paragraph we accept liability to pay damages in respect of loss or damage suffered by you as a direct result of our providing the services ['limb one']. All other liability is expressly excluded, in particular consequential loss, failure to realise anticipated savings or benefits and a failure to obtain registration of the scheme ['limb two']. …'

An opt-in scheme began on 1 August 1996 which involved employees substituting or sacrificing part of their existing taxable pay. Schemes were designed to ensure that both employer and employee were better off. However, the scheme failed to satisfy the requirements in paragraph 6 of Schedule 8 to the Taxes Act 1988 that at least 80 per cent of the employees participated in the scheme. Certain employees could be excluded, including those employed for less than three years. The scheme's calculation took as the numerator employees of both above and below three years' service who opted to join the scheme, but the denominator excluded short-term employees who were entitled to join but did not do so. Price Waterhouse accepted that its advice had been negligent. The principal issues at trial were therefore causation and the measure of damages.

Price Waterhouse sought to rely on the limitation clause contained in the terms of engagement. Argument centred on the two limbs identified in square brackets in the third paragraph quoted above. Mr Justice Hart at [2003] All ER (D) 36 found that the first limb of the limitation clause expressly accepted liability for loss and damage directly suffered as a direct result of the provision of the services, and that the second limb only purported to exclude other liability which did not fall within the terms of the express acceptance. Thus, he held that the second limb was contradictory to the first and that the first limb took primacy.

The judge awarded Keele damages of £1,670,163 with interest of £170,915. The major element was an award of 80 per cent of the savings which would have been achieved by schemes successfully implemented for each of the relevant years. The judge assessed the chance of success of the scheme, if proper advice had been given, at 80 per cent. The figure before interest for 80 per cent of the savings in question was £1,249,856.

Price Waterhouse appealed, contending that the effect of reading the first and second limbs together was that the loss and damage referred to in the first limb should have been interpreted as excluding the failure to realise anticipated savings or benefits.

(Justin Fenwick QC and Graeme McPherson for Keele; Laurence Rabinowitz QC and Mark Cannon for Price Waterhouse.)

Judgment in the Court of Appeal

Lady Justice Arden, with whom Lord Justices Buxton and Wall concurred, dismissed Price Waterhouse's appeal but her reasoning differed from that of the judge in the High Court. She held that the first and second limbs were not self-contradictory nor was the second limb in any relevant respect unclear. However, she was satisfied that the judge reached the right conclusion. She held that the first limb of the exclusion clause took primacy over the second limb and, accordingly, Price Waterhouse were liable for Keele's loss.

The correct approach to the construction of a contractual clause was to consider both limbs as a whole and to consider whether the two were capable of reconciliation. The failure to realise anticipated savings, which was directly caused by Price Waterhouse's provision of the services, was covered by both limbs. On the ordinary meaning of the first limb, loss for which liability was accepted included such loss. The second limb, which excluded liability, specifically referred to the failure to realise such savings so that loss resulting from such failure was within that limb also.

The use of the word 'other' at the start of the second limb determined which limb took precedence. That limb was the first one, leaving the second limb to form a residual category of liability. The two limbs were not, as the judge held, inconsistent, but simply displayed a hierarchical structure determined by the use of the word 'other'.

Decision for University of Keele

(Reported at [2004] EWCA Civ 583.)

Commentary

Keele had barely started this scheme when Kenneth Clarke announced in his last Budget on 26 November 1996 that income tax relief for profit-related pay would be phased out: see section 61, Finance Act 1997.

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Issue: 3976 / Categories: