Accountability highlights the legal and industry news affecting accountants and other professionals on a range of liability risk management issues.
In this month's edition professional liability group members, Emma Carr, Hannah Novak and Emilia Piskorz take a look at the following:
Don't forget causation...
The case of Hirtenstein v Hill Dickinson LLP  provides a useful reminder that negligence must also cause loss if a claim for damages is to be successful.
A number of allegations of negligence were made against Hill Dickinson, many of which were not proven. Where negligence was established the claimant was unable to prove the negligence had caused him to suffer a loss and as a result only nominal damages were payable.
This claim involved the purchase of a yacht by Mr Hirtenstein in July 2010, for the sum of €4.5 million. He first expressed an interest in the yacht in March 2009 and between March 2009 and July 2010 the possible purchase price of the yacht fluctuated - at its highest it was offered for sale at €12.95 million and Mr Hirtensetin himself had expressed an interest to purchase the yacht for US $8 million in June 2009.
On 12 July 2010 the yacht was offered to Mr Hirtenstein on an 'as is where lies' deal for £4.5 million 'right now'. He was told the reason for the quick sale was that the purchaser 'just wants out'. Hill Dickinson was instructed to act for Mr Hirtenstein on the sale on 13 July, contracts were exchanged on 15 July and the sale completed at 14:14 (UK time) on 16 July 2010. Less than an hour later the starboard engine of the yacht failed.
The contract of sale drafted by the solicitors was based on the standard form of agreement approved by the Mediterranean Yacht Brokers Association (MYBA). Amendments were made to the standard terms, one of which Hill Dickenson mistakenly believed meant that a personal guarantee had been given in respect of a warranty by the seller company as to the condition of the yacht. Hill Dickenson confirmed this to Mr Hirtenstein after contracts had been exchanged, although before completion.
Following failure of the yacht's starboard engine Mr Hirtenstein made arrangements for the yacht to be transported to Florida. Two new engines were installed and other repair works were carried out. Claims for damages were prepared on behalf of Mr Hirtenstein against the seller of the yacht in the first instance, until its liquidation in March 2011, and then under the personal guarantee.
In early June 2011 Hill Dickinson realised that the terms of the personal guarantee did not in fact cover any breach of warranty given by the seller and they informed Mr Hirtenstein that a claim under the personal guarantee had no prospect of success as a result.
Mr Hirtenstein subsequently commenced proceedings against Hill Dickinson for professional negligence. He alleged they were negligent in failing to obtain a personal guarantee under which a successful claim could have been made for loss resulting from the defective condition of the yacht. Mr Hirtenstein also contended that had he been told there was no such personal guarantee he would not have proceeded with the sale.
Having regard to all of the circumstances, the Commercial Court found that Hill Dickinson had not been negligent in failing to seek a personal guarantee backing a warranty as to the condition of the yacht. The relevant circumstances included:
- Mr Hirtenstein did not instruct Hill Dickinson to seek a personal guarantee;
- The background to a previous aborted sale of the yacht involved the personal guarantee being heavily negotiated;
- The transaction had to be completed within three days;
- Mr Hirtenstein was keen to close the deal as soon as possible.
However, the court went on to say that if Hill Dickinson thought there was no realistic prospect of getting a personal guarantee as to the yacht's condition they should have advised Mr Hirtenstein of this fact.
If Hill Dickinson had not negligently and mistakenly believed that the condition warranty was covered by a personal guarantee they would no doubt have sought such a guarantee. However the court found that there was no real or substantial chance that a personal guarantee would have been given. Furthermore, on the evidence the court found that Mr Hirtenstein would have purchased the yacht in any event - even if he had known no personal guarantee would be forthcoming.
The Commercial Court concluded that Hill Dickinson's negligence did not cause the claimant to purchase the yacht without a personal guarantee as to the yacht's condition and it followed that Mr Hirtenstein had suffered no loss for which he was entitled to recover damages.
This case is a very useful reminder of the importance of causation in any negligence claim - even if a defendant has admitted negligence, liability for damages will not always follow. A claimant must show that the negligence has caused the loss being claimed and if that cannot be done damages will not be recovered.
No need to follow earlier erroneous accounting policies
In Shafi v Rutherford  the court unusually intervened in an expert determination and dismissed the appeal of an earlier decision that had found the determination not to be valid or enforceable as the expert accountant had erred in considering himself bound to follow an erroneous policy simply because it had been adopted in earlier accounts.
The parties jointly owned a dental practice but had agreed that the claimant would sell her 50% share in the practice to the defendant. The parties disagreed, however, on the value of the company's assets and liabilities and whether the prepared accounts complied with the terms and policies of their agreement. As a result they appointed an expert accountant to resolve the issue and to determine the amount to be paid for the defendant's shares.
The expert accountant concluded that equipment leases and finance leases had been incorrectly treated as operating leases in the early accounts (which had formed the basis of the share value) and had been given a lower liability as a result.
Having identified this error however, the expert then went on to conclude that the earlier accounts had formed the basis of the sale agreement and as there was no mechanism under the agreement for him to amend those accounts, it was therefore outside the scope of his instructions to correct that error. He therefore proceeded on the basis of the accounts as they were in determining the amount to be paid for the Claimant's shares.
The defendant did not accept the expert's determination on this basis and the claimant consequently sought a declaration that the defendant was bound by the determination. The Court declared the accounts should have taken into account the proper treatment of the leases and declared the determination to be invalid and unenforceable. The claimant appealed.
The Court of Appeal dismissed the appeal and agreed with the judge that the question of how the leases were to be treated, and the impact on the accounts, were within the scope of the expert determination and the specific wording of the letter of instruction. The expert had, therefore, committed an error in deciding that he was prevented from applying the correct accounting policy.
The Court of Appeal could see no reason why the parties would have wished to carry forward erroneous accounting treatment of liabilities. Instead, the accounts should reflect, at least so far as the liabilities were concerned, the reality of the situation. Accordingly, having dismissed the appeal, the earlier order directing a fresh determination remained.
The court will rarely intervene in an expert determination but in this case the defendant successfully demonstrated to the court that the accountant had erred in considering himself bound to follow an erroneous policy simply because it had been adopted in the past. The case illustrates one of the limited grounds on which an expert determination may be set aside.
Disclosure obligations must be taken seriously
The Court of Appeal's decision in Smailes v McNally  helpfully reminds us of the need to make a reasonable search for documents when giving standard disclosure and highlights the very significant consequences for failing to do so when ordered by the court.
The case concerned a claim by the liquidator against former officers of an insolvent company for fraudulent trading and trading while insolvent. Disclosure was ordered and the Liquidators served their disclosure list in June 2012.
The defendant said the disclosure exercise had not been properly conducted and the court made a further order that the liquidators' disclosure was to take place in April 2013. The liquidators, who by then had changed solicitor, applied for an extension of time for disclosure. The extension was granted but only on the basis that unless disclosure was given by the due date the claim would be struck out - an 'unless' order.
When the liquidators' list was finally produced it mistakenly omitted highly relevant key documents referred to as "scripts" which, upon discovery of the omission, the liquidators then disclosed.
At first instance, the court held that the liquidators were not in breach of the unless order requiring them to give standard disclosure.
On appeal by the defendant, the Court of Appeal disagreed. They said then when giving standard disclosure, a party was required by CPR 31.7 to make a reasonable search for documents falling under CPR 31.6. In this case, there had a been a clear failure by the Liquidators to conduct any, or any reasonable search, for the documents taking into account the factors relevant in deciding the "reasonableness" of a search as set out under CPR 31.7.
- the disclosure amounted to some 6,000 documents;
- there were serious claims of dishonesty and fraud being alleged, however, there had been several previous disclosure failures by the liquidators; and
- the "scripts" were in the liquidators' own office and were easily supplied upon discovering the omission;
- the liquidators knew the documents were relevant and had promised to disclose them.
The Court of Appeal held that the question of compliance with an unless order was not a matter for discretion. The liquidators had failed to disclose relevant documents in their possession and that did not warrant an inference that a reasonable search had been made - although the court did accept that the liquidators had acted in good faith.
This case is unreported and as a result there is only a summary available. However, the decision provides a useful reminder of the need to make a reasonable search for documents when giving standard disclosure, the need to ensure all documents required to be disclosed are so disclosed and the very significant consequences that can flow if a party fails to provide disclosure as ordered.
Experts in the firing line...
Unhelpful, bland assertions, unconvincing, lacking in detail, superficial and tentative, nervous and inexperienced, inadequately briefed...
These are just a few examples of a judge's scathing comments on an expert witness' performance in a Technology & Construction Court (TCC) case. Such comments are a stark reminder of the importance of choosing the right expert and ensuring that he understands his/her duties to the court.
The case of Weatherford Global Products Limited v Hydropath Holdings Limited and others  concerned the manufacture and supply of a product (the Clearwell product) to be attached to oil pipes with the aim of preventing the build-up of scale. Concerns arose as to the safety of the Clearwell product. Weatherford developed its own product and subsequently brought a claim against Hydropath for breach of warranty.
Expert evidence was called, firstly on the issue of whether the Clearwell product complied with the required regulations and whether it was fit for purpose, and, secondly, on whether Weatherford had used confidential 'Clearwell' information when developing its own product.
On the issue of the safety of the Clearwell product, one of Hydropath's experts was described as 'nervous and inexperienced' and his report did not comply with the requirements set out in Part 35 of the Civil Procedure Rules. He also had a change of opinion on the second day of trial but did not explain his reasons. The other expert was inexperienced and according to the court 'inadequately briefed'.
On the confidential information issue Hydropath's expert was criticised for bland assertions and failing to analyse or explain the conclusions he had reached. The court also commented that it was evident the expert had not been provided with copies of a number of key documents.
On both issues the TCC preferred the evidence of Weatherford's experts and found in its favour. Weatherford succeeded in its claim for breach of warranty and the claim against it for using 'Clearwell' confidential information was not made out.
This case highlights the impact poor performance by an expert can have on a case, particularly where the technical nature of the matters in dispute means that the court's decision will often largely depend on the credibility of each party's experts.
All experts have the right to be adequately briefed by those instructing them and an expert should not shy away from seeking further information, further instructions or clarification if that is necessary to fully understand the brief they have been given.
Likewise an expert should ensure those instructing him are informed of any change of mind - and the reason for that change. There should be no surprises.
For a full analysis of the decision in this case see Experts in the firing line.
New guidance for experts in civil cases
In August the Civil Justice Council issued 'Guidance for the instruction of experts in civil claims 2014' (the 'Guidance'). The purpose of the Guidance is stated as being 'to assist litigants, those instructing experts and experts to understand best practice in complying with Part 35 of the Civil Procedure Rules (CPR) and court orders'.
The Guidance came into force on 1 October 2014 and it replaces the 'Protocol for the Instruction of Experts to give Evidence in Civil Claims' - annexed to Practice Direction 35 of the CPR .
A lot of what is covered in the Protocol is repeated in the Guidance, although the Guidance has been updated to reflect the changes to the CPR brought about as a result of the Jackson reforms. In summary some of the main changes include experts being informed about the following:-
- the need to deal with cases proportionately;
- where proceedings have been started, whether there is a specific budget for the expert's fees;
- that parties must provide an estimate to the court of the costs of the proposed expert evidence;
- that expert's fees and expenses may be limited by the court;
- the need for experts of like disciplines to receive the same factual material.
- the procedure where sequential exchange of expert reports has been ordered, including guidance for preparation of a joint statement in such circumstances;
- that when preparing a joint statement each expert must confirm they have not been instructed to avoid reaching an agreement;
- payment of expert's fees contingent upon the nature of the expert evidence or the outcome of the case is strongly discouraged;
- the ability of the court to order experts of like discipline to give their evidence concurrently - or participate in 'hot-tubbing';
- the fact that sanctions might apply because of failures to comply with the CPR, the Practice Direction or court orders;
- when a matter has been settled.
Following the Guidance should reduce the risk of issues arising with expert evidence - such as some of those that occurred in Weatherford v Hydropath.
 While the Guidance has appeared in the latest update to The White Book 2014 (containing the CPR) it has not yet been formally implemented. We understand it will be in force very shortly.
HMRC consultations on sanctions for offshore tax evasion
As part of its strategy for tackling offshore tax evasion, HMRC has launched two new consultations looking at strengthening civil sanctions and introducing a new strict liability criminal offence.
Tacking offshore tax evasion - strengthening civil deterrents
HMRC is seeking views on options to strengthen civil sanctions for those evading tax by hiding taxable income, gains and assets offshore.
Given the difficulties faced by HMRC in detecting off-shore non-compliance, the Government view is that there is a case for increasing the costs payable by 'evaders' when they are caught. The consultation is seeking views on extending the scope of the offshore penalties regime and other civil sanctions to cover:-
- inheritance tax;
- inaccuracies in category 1 or 2 territories where the proceeds are hidden in higher category territories;
- a new offshore surcharge where offshore assets have been deliberately moved to continue evading tax;
- extending the 20 year assessment time limit where offshore assets have been deliberately moved to continue evading tax;
- increasing the quantum of offshore penalties to reflect the number of times offshore assets have been deliberately moved to continue evading tax; and
- updating the existing offshore penalties regime to reflect the new global standard in tax information exchange.
Tackling offshore tax evasion - a new criminal offence
The government has also announced its intention to introduce a new strict liability criminal offence. This consultation seeks views on the design of this offence.
The government believes criminal sanctions should form part of its stance on tackling offshore tax evasion - to act as a deterrent and to show that the stance being taken is tough. The government is intending to introduce a strict liability offence for the failure to declare taxable income and capital gains arising offshore.
The effect will be a simpler offence which will be more serious than a civil penalty but with less serious criminal sanctions than existing criminal offences, due to its strict liability nature, i.e. that it will not matter what the 'evader' intended, all that will matter is that the 'evader' failed to correctly declare income or gains.
The consultation states that the government's aim is to develop a new offence:
- whose applicability can be readily determined, both by taxpayers and by the courts;
- which is retained for use against conduct which causes significant revenue loss;
- which is limited to individuals' conduct in relation to their personal tax affairs;
- which will fit in the context of new agreements to share tax information automatically.
The consultation document seeks views on:
- the scope of the offence - for example questions are raised as to whether it should cover inheritance tax, whether it should apply only to income and gains that arise offshore and whether it should only apply to investment gains;
- measures to ensure the proportionality of the offence - i.e should there be a de minimis threshold, should the threshold be governed by guidance or statute etc?
- the level of sanction which should be attached to the offence;
- any legal and operational safeguards and any statutory defences that could be put in place.
The deadline for comment on the consultations is 31 October 2014.
FRC LAB Insight Report
Various changes made by the government during the 2013 reporting cycle provided companies with an opportunity to make improvements to their accounts through clearer and more precise reporting. Some companies have taken this opportunity and the Financial Reporting Council (FRC) has produced a report of the improvements made based on the observations of the Financial Reporting Lab (the Lab - set up and funded by the FRC to help improve the effectiveness of corporate reporting).
These improvements were focused on the following four areas: communication channels, content, materiality and layout. Addressing each in turn the report provides recommendations for enhancing reporting in these areas.
The FRC states that matching communication channels to audiences is crucial. This can be achieved by targeting reports to match the users' needs. For example, the Lab observed that some companies had started to send standalone strategic reports to shareholders either with or without supplementary material instead of sending a full annual report.
In terms of content, the Lab noted that it was crucial that companies report on actions rather than processes. Investors are interested in being told about the action taken by a committee, for example, to resolve an issue rather than a description of what they generally do. Otherwise, it is recommended that companies look into focusing the level of sustainable reporting, removing standing information from the annual report, reducing shareholder information to a minimum and tailoring directors' biographies by making them more focused on key recent experience and relevant skills. Reducing the detail presented in the financial review section of a report is seen as key to making reports more digestible and concise.
The report encourages companies to consider materiality in order to improve clarity and conciseness. This involves companies reviewing elements contained within reports which are no longer required or are no longer relevant. Examples of such information are disclosures relating to the financial crisis. Other recommendations include improving the quality of accounting policy disclosure i.e. by positioning those of significance in prominent positions within the report and removing immaterial notes to financial statements which are often very lengthy.
Finally, the report encourages companies to consider the layout of financial reports to ensure that they are logical, user friendly and that duplication is minimised. This can be achieved by making effective use of the chairman's, chief executive's and financial director's reports and by using cross-referencing and sign posting throughout the report in order to reduce duplication and improve the legibility of a report.
Our professional liability experts can advise accountants and other professionals on these and a range of other liability risk management issues.