Disputes Yearbook 2023:
Professional liability

Claims against legal advisers by third parties

We have seen a recent increase in claims by third parties against legal advisers, ie, claims by persons connected to the adviser's client, such as customers, contractual counterparties and adversaries. 

The basis on which a tortious duty might be owed – in the context of reliance by a third party on the adviser's legal advice – was considered recently by the Court of Appeal in McClean & Ors v Thornhill KC [2023] EWCA Civ 466 (see Court of Appeal upholds decision that no duty owed to investors by barrister advising scheme promoter). In a positive development for the legal profession, the tax barrister in this case who advised promoters of a film finance scheme on the effectiveness of the scheme was found not to owe a duty to investors with whom his advice was shared. The court held that, "absent good reason to the contrary, the default expectation was that investors would not simply rely on what they were told about [the barrister's] advice". It was also held to be "presumptively inappropriate" and, in this case, "objectively unreasonable" for reliance to be placed on that advice without independent enquiry.

Perhaps as a consequence, claims for dishonest assistance appear to have become more frequent, where there are allegations of dishonesty by the third party against the adviser's client. In claims of this type a third party that has established a breach of trust or fiduciary duty by the adviser's client, and that the adviser assisted in the client's breach seeks to rely upon the objective dishonesty test in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 to establish liability of the adviser for its loss. In other words, whether, taking into account the facts actually known and beliefs and suspicions subjectively held by the adviser, it was objectively honest for them to provide that assistance. Given that actual dishonesty does not need to be established, claims against solicitors who subjectively acted with honesty (and often having properly advised their client) can succeed – giving rise to arguably unjustified reputational consequences.

Scope of duty post Manchester Building Society v Grant Thornton UK LLP

Following Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20, the scope of the tortious duty of care assumed by a professional adviser is governed by the purpose of the duty, judged on an objective basis by reference to the reason why the advice is being given. The court looks to see what risk the duty is supposed to guard against and then at whether the loss suffered represents the fruition of that risk. The perceived distinction between “advice” and “information” cases has been dispensed with (see Supreme Court clarifies proper approach to SAAMCO and to determining scope of duty of care owed by professional advisers). This formulation was applied in a recent case where the High Court dismissed a lender’s claim against a valuer in relation to the valuation of security for a loan, finding that the lender had suffered no actionable loss despite the valuer’s admitted negligence: see High Court finds that lender suffered no loss despite negligent valuation of security.

Litigation funding

Litigation funders have had a turbulent few months with the recent Supreme Court decision in R (PACCAR) v Competition Appeal Tribunal & Ors [2023] UKSC 28 limiting the basis on which funders may enter into enforceable litigation funding agreements. In a professional negligence context, we have seen an increase in claims by funders and after-the-event insurers against barristers who have advised on the merits of unsuccessful claims. That often occurs where an underlying claim is unsuccessful, resulting in the funder/insurer looking for a culpable party from whom it can seek to reclaim its outlay.

As with Thornhill, the funder/insurer rarely has a contractual relationship with the barrister: the advice having been prepared for the benefit of, and in accordance with a contract with, the lay client. Whether a duty will be owed – assuming that there is no contractual relationship between the barrister and the funder/insurer – will turn largely on:

• Whether the barrister knew about the involvement of a funder/insurer when they provided their advice.
• Whether they anticipated that the funder/insurer would (acting reasonably) rely upon their advice without independent enquiry.
• Whether a purpose of the advice was to assist in onboarding a funder/insurer
• The terms on which the funder/insurer received the advice.

Irrespective of this, funders/insurers will often have an entitlement under a litigation funding agreement to pursue subrogated claims against the barrister in the name of the lay client. Given the short-term financial pressure which funders may face in view of PACCAR, we anticipate the prevalence of these cases to continue to trend upwards.

Cover for success fees under professional indemnity policies

A professional indemnity (PI) policy provides cover to an insured professional for claims arising out of the provision of (or failure to provide) professional or other services which give rise to financial loss. In the case of Royal & Sun Alliance Insurance Limited v Tughans (a firm) [2023] EWCA Civ 999, the Court of Appeal considered whether a PI policy covered a solicitor firm's liability to repay a success fee. In a decision that will be welcomed by professionals, the Court of Appeal found that the policy did cover the solicitor firm's liability. Insurers had argued that the indemnity principle precluded any cover for a liability for fees framed as a restitutionary claim and so liability for fees as part of a damages claim equally ought not to be covered, there being no reason for a distinction between the two. The Court of Appeal disagreed with this, holding that the indemnity principle does not preclude cover for a restitutionary claim for a fee that has been earned and, secondly, even if the premise were correct, the conclusion would not follow because of the real differences between a restitutionary claim and a damages claim. Where the fee had been earned and become contractually due, nothing in the indemnity principle would preclude cover irrespective of how the claim is framed. 

Solicitors Regulation Authority enforcement powers and approaches

In May 2023, the Solicitors Regulation Authority (SRA) introduced a new procedure for calculating regulatory penalties. The new system – intended to provide greater clarity as to the SRA's decision making process – contains a schedule of pre-set fines which vary depending upon the nature and impact of the breach and are calculated as a percentage of a firm's turnover or an individual's gross annual income. The SRA does, however, retain discretion to refer matters to the Solicitors Disciplinary Tribunal, even where they fall within the SRA's internal powers to fine (up to £25,000). To do so, the SRA must find that there is a realistic prospect of the tribunal making an order in respect of the allegation and that it is in the public interest to make a referral. In our experience, the SRA will continue to refer cases which fall within their internal fining powers where they give rise to considerable public interest or publicity. Moreover, where there are particularly complicated issues of law and where critical facts are disputed, particularly in multi-party investigations (eg, where both a firm and its staff are under investigation, which often results in the respondents blaming one another for the relevant failings). It continues to be the case that, for more serious breaches which tend to result in a striking-off – such as sexual misconduct which, from February 2023, the SRA considers to be "unsuitable for a financial penalty, except in exceptional circumstances" – the SRA must refer the relevant respondent to the tribunal.