Professional indemnity: shielded from the fall-out

Given the volume 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 that requires some consideration is the scope of the retainer,
which underpins most professional relationships.

One case reported last year is instructive because it clarifies the
importance of getting the basic framework right from the outset of a contractual
agreement. In the case of JP Morgan Bank (formally Chase Manhattan Bank) v
Springwell Navigation Corp [2008], 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 more than 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 JP Morgan Bank. During the 1990s Springwell borrowed
increasingly large sums of money from JP 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 JP Morgan, for damages of $700m (£469m),
alleging that an advisory relationship existed with it and that it ­ the bank’s
client ­ should have been advised that this was not an appropriate investment.
Further, it was Springwell’s case that even if JP Morgan had no duty to provide
advice, Springwell alleged that it had been misled by statements that the
investment opportunities were suitable.

JP Morgan claimed it did not have an advisory relationship with Springwell
and the Polemis family, who it 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
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 JP Morgan had no duty to give advice it 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

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.

Avoiding professional negligence claims

  • Set out clearly what advice is being sought and then ringfence it
  • When offering advice, do not exceed the boundaries agreed and always ask
    yourself the question: ‘Am I holding myself out as being a general adviser?’

    If so, this could potentially expose you to litigation
  • If your firm is limiting its liability, make sure that the clause is likely
    to be upheld by the courts as being reasonable. If need be, take professional
    advice on the same
  • If you are notified of a possible case then make sure that your broker is
    advised at the earliest opportunity to avoid any possible allegation of late
  • When making a notification, ensure your notification is unambiguous. If you
    are unsure whether a claim situation has arisen, then take your broker’s advice.

Nichola Evans is a partner and Helen Davis a solicitor
at Browne Jacobson

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