It's important for accountants who provide services outside a formal contractual framework to think about their exposure to claims
Accountants providing services outside a formal contractual framework, such as “loss leader” exercises undertaken for business development purposes, would do well to think about their exposure to claims. In a recent Court of Appeal case, the court found that a professional architect who provided friends with professional services gratuitously and without a contract was liable having failed to act with reasonable care and skill.
In Lejonvarn v Burgess, an architect was asked by her former neighbours, a couple whom she had been friends with for over ten years, to assist in a garden landscaping project, (including “mood-lit flower beds”), at their £5m North London home. She agreed to help as a favour, although she hoped to provide subsequent work in respect of the design elements of the project on a paid basis. However, before the project completed, the couple became unhappy with the quality and progress of the work, the relationship soured and the architect’s involvement ended. The couple then sued her, claiming their friend’s work was defective and she was liable to them for damages. The architect was left defending a claim for £265,000 without any PI insurance cover.
The judge concluded, against the architect, that despite not charging her friends for the services, they were nevertheless being provided “in a professional context and on a professional footing”. The court emphasised that “this was not a piece of brief ad hoc advice of the type occasionally proffered by professional people in a less formal context”. It was a significant project, approached in a professional manner, with services provided over a relatively long period and involving considerable commitment on both sides. In addition, the professional consultant had hoped to receive payment for follow-on design services.
On appeal, the Court of Appeal agreed with the judge that the parties’ relationship was “akin to a contractual one” and that therefore the architect did owe a duty of care to the Claimants.
Professionals who undertake services negligently will be liable if they are found to have owed a duty of care, if the damage suffered comes within the scope of that duty, and if no other defences apply. They are an exception to the general rule that economic loss is not recoverable from defendants who have committed a tortious act, e.g. wrongfully causing damage to property.
In deciding whether a professional owes a duty of care, the test now usually applied and which was applied in Lejonvarn, is the “assumption of responsibility” test. Applying this test, where a person assumes responsibility to perform professional or quasi-professional services for another who relies on those services, the relationship between the parties is itself sufficient to give rise to a duty on the part of the person providing the services to exercise reasonable skill and care.
The defendant unsuccessfully argued that the judge should have applied a different test, one that has been applied by courts in other cases involving professionals, namely “the threefold test”, which requires the court to consider: (i) whether the loss was reasonably foreseeable; (ii) whether there was a sufficient relationship of proximity, and in particular (iii) whether in all the circumstances it is fair, just and reasonable to impose a duty of care.
The defendant argued that in circumstances where she was not being paid for the work, it was not fair just or reasonable to hold her liable. The Court of Appeal disagreed, commenting that the assumption of responsibility test was particularly useful where there was a fiduciary relationship or where, as here, the defendant voluntarily provided services in circumstances where she knew that the claimant would rely on her advice.
Accountants are frequently asked by their clients for ad hoc advice at short notice and without an expectation of a fee being charged. This case adds to the list of cautionary tales illustrating the perils of carrying out work for free and that duties may arise in the absence of a contract.
Accountants can take some comfort from the fact that this case does not undermine the likelihood that ad hoc, free advice does not necessarily give rise to professional liability. However, they should beware of any situation where such advice may be relied upon. They can, and should, always take minimal steps to protect their position, such as a note on file or an email which records that it has been made clear to the client that they should not rely on the advice without further work being undertaken, and a formal retainer being entered into.
Richard Highley is a partner and Deirdre Lyons Le Croy is a solicitor at international law firm DAC Beachcroft.