Accountability - April 2014

03 April 2014

The Court of Appeal has been busy over the last couple of months. Three of its decisions are highlighted in this edition.

Legal update

Court of Appeal confirms supremacy of retainer

In the case of Mehjoo v Harben Barker [2014] EWCA Civ 358 the Court of Appeal overturned the earlier decision of the High Court, in which high street accountants - Harben Barker - were held liable for a failure to advise their client, Mr Mehjoo, on his non-domicile status and the significant tax advantages that status could bring in respect of the sale of his shares in his business.

The Court of Appeal said that under the terms of their retainer with Mr Mehjoo they were only responsible for providing him with general tax planning advice, they were not required to give him specialist tax advice unless that advice was specifically sought by Mr Mehjoo.

Advice as to Mr Mehjoo's 'non-dom' status and the potential tax savings he could make as a result was regarded as specialist advice. Harben Barker had discharged their duty to Mr Mehjoo by advising him on the general tax position arising on the sale of his shares and telling him that there may be more specialist tax saving schemes available - which Mr Mehjoo did not investigate further.

When can you bring a court claim which has already been the subject of a decision by the Financial Ombudsman Service (FOS)?

According to the Court of Appeal decision in Clark v In Focus Asset Management [2014] EWCA Civ 118, only where the claim arises out of a completely different set of facts or where the complainant has rejected the FOS decision. No longer are financial services firms and their insurers facing "double jeopardy" in relation to claims which have already been determined by the FOS.

The FOS determines complaints by consumers and small businesses against financial services firms up to a value of £150,000. Once a final decision has been given by the FOS, which is accepted by the complainant, that decision is binding upon the firm.

The Clarks complained to the FOS that they had lost more than £300,000 through negligent advice given by In Focus Asset Management (In Focus). The FOS awarded the Clarks the then maximum FOS limit of £100,000 but recommended that In Focus pay the full compensation. The Clarks accepted that award but In Focus (unsurprisingly) declined to pay them more than £100,000. The Clarks took the money and brought a claim against In Focus in the High Court for the balance.

In Focus applied to strike out the claim relying on the doctrines of res judicata and merger, which preclude a party from bringing a second set of proceedings for a cause of action which has already been determined by a tribunal. Mr Justice Cranston declined to strike out the claim at first instance on the basis that the FOS was not a tribunal for these purposes and that a complaint to the FOS was not a "cause of action" so that the doctrines did not apply.

His decision was overturned by the Court of Appeal, with the leading judgment being given by Lady Justice Arden. In giving her judgment, she disagreed with Cranston J on a number of points.

  1. Arden LJ held that the FOS was a tribunal. Its complaint handling process gave parties the opportunity to argue their case before a decision was reached and was not, therefore, purely administrative. Moreover, the fact that Article 6 of the European Convention of Human Rights (the right to a fair hearing) applied to the FOS was persuasive albeit not determinative of this issue.
  2. Arden LJ also held that the facts underlying a complaint to the FOS might also constitute a cause of action. It was irrelevant that the remedy for that cause of action might not be available to a court and that the FOS determines complaints on a "fair and reasonable" basis (see Dispute Resolution: Complaints Sourcebook ("DISP") rule 3.6.1). The court needed to look at the substance of the matter.

In Arden LJ's view, Parliament had not intended that FOS complainants should be in any different position to other claimants who brought proceedings in order to litigate the same matter twice. Accordingly, she concluded that if a firm could show that a complainant relied on a set of facts in his FOS complaint which were in substance the same as those that formed the basis of his court case, and if the complainant had accepted a FOS award based upon that complaint, the later court case was liable to be struck out. The Clarks did not get a second bite at the cherry.

This is a welcome decision for financial services firms in guaranteeing to some degree the finality of FOS decisions. The FOS is not a suitable forum for resolving higher value and complex claims and this decision goes some way to reinforcing that while also sending out a warning to complainants that they should not try to use the FOS as a means of raising a fighting fund in order to pursue a larger claim.

The moral of the story for claimants is not to complain to the FOS where their claim is likely to exceed £150,000 and to reject any award if they want to sue for more through the courts. Whether this reduces the number of claims referred to the FOS, already a stretched resource, remains to be seen.

Always a privilege (or maybe not)

The decision of the Court of Appeal in Rawlinson & Hunter Trustees SA and Ors v Akers & Anr [2014] EWCA Civ 136 has highlighted the difficulties in establishing litigation privilege in relation to internal reports, particularly those obtained by liquidators.

In order for litigation privilege to apply to a particular document, litigation must exist or be in reasonable contemplation and the document must have come into existence for the dominant purpose of obtaining information or advice in connection with or assisting in the conduct of that litigation.

This decision arises out of the claim for damages brought against the SFO by the Tchenguiz brothers for allegedly unlawful raids, arrests and investigations. The issue before the court was whether five reports which had been prepared by a firm of accountants on the instructions of liquidators of a separate company, were subject to litigation privilege. The judge at first instance, Mr Justice Eder, had concluded they were not. The Court of Appeal upheld his decision with Lord Justice Tomlinson giving the lead judgment.

The Court of Appeal recognised that the decision as to whether or not a particular report attracted litigation privilege was complicated where the report had been commissioned by a liquidator who had statutory duties to collect assets and settle liabilities including identifying what legal proceedings might be brought or defended.

However, the court was clear that liquidators cannot simply assume that because the contemplation of litigation was one aspect of their role, every document they produced would be covered by litigation privilege; this would depend on the dominant purpose of each document and that test would be applied strictly. A document would only attract litigation privilege if the dominant purpose for which it had been created was to assist in litigation between the liquidators and a third party rather than, for example, to investigate which problem loans were recoverable for the purposes of assessing a company's financial position.

In this case, all five documents did not attract litigation privilege. While one of the reports had been prepared to enable counsel to advise on potential claims and, therefore, came close to satisfying the dominant purpose test, no proceedings had been issued for over two years. The Court of Appeal held there was a failure to establish that litigation was in reasonable contemplation at the time the report had been produced. The dominant purpose test had not been satisfied and the report was not protected by litigation privilege.

At first instance, Mr Justice Eder had caused some consternation by seeming to suggest that if the purpose of commissioning a report was to conduct an exercise that the liquidators had to carry out then even if litigation was in contemplation that purpose would be independent of the possible need to take recovery action. Helpfully, the Court of Appeal did clarify that just because a document has more than one purpose, those purposes did not have to be independent. Nevertheless, it was still for the person claiming privilege to show that litigation was the dominant of the dual purposes.

Rawlinson has not changed the underlying test for litigation privilege but it has illustrated that the courts will adopt a strict approach to the dominant purpose test. It also suggests a possible new approach to the question of whether litigation was in "reasonable contemplation". While proceedings do not have to be commenced in order for this test to be satisfied, this decision suggests that the court may require some convincing if they are commenced years later.

Liquidators should not assume that a document will attract litigation privilege. They can, however, improve that prospect by ensuring a separate report is created to deal with separate issues and where a report is prepared in furtherance of pending litigation, that this is stated clearly at the outset with details as to the nature of the litigation which is in contemplation. Moreover, that litigation should be commenced (if possible) within a reasonable timeframe.

If there could be uncertainty as to whether a report is being prepared in contemplation of litigation, consider whether to instruct a lawyer to carry out the investigatory work. This is because the report is then more likely to be covered by legal advice privilege as advice sought from and provided by a lawyer.

Notice of an expert's intention to retire must be given promptly

The case of Clarke v Barclays Bank plc and another [2014] EWHC 505 (Ch) has highlighted the importance of notifying the court promptly if an expert retires or withdraws from a case.

Mr Clarke brought a claim in 2010 against his mortgagee, Barclays, for having sold his property at a gross undervalue. Barclays joined the surveyor as a third party, claiming that it had relied upon their advice. The case management directions permitted each party to adduce expert evidence (limited to one expert per party) and provided for the sequential exchange of expert reports, with Barclays and the surveyor responding to the claimant's report once it had been finalised.

The parties served expert evidence in accordance with the court's directions. However, on 3 May 2013, the claimant's solicitors were informed by the claimant's original expert that he was retiring and consequently withdrawing from the case. The claimant withheld this information until 27 November 2013, when his solicitors notified the other parties. At this point, he had instructed a second expert and was granted permission to rely upon the new expert evidence in February 2014.

In the High Court, Mr R Hollington QC overturned the first instance decision and stated that it was "wholly improper" for the claimant to withhold the information beyond a reasonable period. Had the claimant applied promptly for directions, there was "little doubt" that the court would have been sympathetic, because the expert's retirement was outside of his control. Under the Civil Procedure Rules Practice Direction 23A, the claimant was under an obligation to apply for further directions very soon after 3 May 2013.

By allowing the claimant to rely on the second report, Barclays and the surveyor would suffer "serious prejudice" because they had responded, as directed, to the original report, and the claimant would be able to prepare his second report in the light of their evidence.

The claimant had proposed mediation on several occasions and the judge inferred that he had withheld the information in an attempt to settle on favourable terms and to avoid disclosing information that may undermine his negotiating position. The judge stated that any mediation that had gone ahead would have been conducted on false premises.

The judge also considered the case in the light of Mitchell v News Group Newspaper Ltd [2013] EWCA Civ 1537 and noted that the court should enforce procedural discipline and should seek to be a "tough but wise, not an officious or pointlessly strict, disciplinarian."

The claimant's conduct was held to be a serious abuse of the court's process and accordingly he was denied permission to rely on the second expert's report, despite expert evidence being central to his case. The clear message is that litigants should swiftly notify the court and other parties if their expert withdraws, or face the risk of being unable to rely on further evidence.

Industry news

Chartered Institute of Taxation (CIOT) issues helpful guidance on how tax advisers should act in difficult situations

On 24 April 2014, CIOT issued updated guidance intended to assist and advise members on their professional conduct in relation to taxation.

It provides guidance, including practical advice about ethical and legal issues, in relation to a number of specific tax situations, in respect of which the tripartite relationship between a member, client and HMRC is important.

The guidance covers updated information on tax planning, tax avoidance and tax evasion and on the new General Anti-Abuse Rule (GAAR). The guidance explains the five fundamental principles which govern the conduct of all members:-

  • Integrity
  • Objectivity
  • Professional competence and due care
  • Confidentiality
  • Professional behaviour

It applies those principles to various taxation services, giving clear guidance on advising clients how to comply with their tax obligations and giving guidance on how to deal with difficult situations should they arise. This will include circumstances such as a client being reluctant to correct an irregularity in their tax affairs, being reluctant to give full disclosure to HMRC or receiving an excessive payment.

HMRC have acknowledged that the guidance is an acceptable basis for dealings between members and HMRC.

ACCA releases guidance on enhancing the value of the audit committee report

The Association of Chartered Certified Accountants (ACCA) has released guidance for audit committees on how to enhance the usefulness of their reports for investors.

Under the FRC's UK Corporate Governance Code, (the Code), audit committees are required to consider their relationship with the external audit process. This includes, for example,

  • making recommendations to the board for the appointment, reappointment and removal of external auditors;
  • reviewing and monitoring the independence and objectivity of external auditors and the effectiveness of their audit; and
  • developing policy on the engagement of the external auditor to provide non-audit services.

The Code also prescribes minimum reporting requirements for the audit committee to demonstrate to members how it has carried out its responsibilities. Audit committees are therefore required, in the company's annual report, to:

  • report on significant issues they have considered in the financial statements and how these have been addressed;
  • to explain how they have assessed the effectiveness of the external audit;
  • and how auditor independence and objectivity is safeguarded where non-audit services are provided.

ACCA's guidance recognises that audit committees are coming under increasing pressure both from regulators and investors to provide more detailed, bespoke audit reports demonstrating how they have fulfilled their duties and ensured the effectiveness of the audit process, rather than producing boilerplate of limited utility.

The guidance considers the requirements set out in the Code, as well as likely changes to the Code as a result of the Competition Commission's recommendations published in October 2013. These include mandatory re-tendering of FTSE 350 audits every ten years; prohibition of 'Big Four' only audit clauses; and strengthening the audit committee's role by reserving the external audit tender and fee negotiation process to them.

The guidance then goes on to consider in detail how audit committees of a sample of FTSE 100 companies are discharging their duties and meeting investor demand for more tailored, transparent and meaningful reports. It concludes with a useful checklist for audit committees on producing a 'model report'.

Final approval given for ICAEW to regulate probate services and licence alternative business structures (ABS)

The Lord Chancellor has given the final approval required by ICAEW in its bid to be a regulator of probate services and a licensing authority for alternative business structures. Appropriately qualified ICAEW members will soon have the ability to offer probate services and/or create a new ABS, bringing together ICAEW chartered accountants with solicitors and other professionals to offer a range of legal services.

ICAEW believe this move will be good for competition in the legal services market, while allowing its members to offer a wider range of services to their clients.

A limited number of accountants have already taken steps to secure an ABS licence, including the legal arm of PWC. This is no doubt just the start of accountants entering the legal market, building on their legal capabilities in the services they can offer.


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