By Hannah Gregory & Rebecca Smith
|Published 22 July 2022
The decision of the High Court in Knights v Townsend Harrison
In this case, the High Court held that no duty of care was owed by the defendant firm of accountants in relation to a failed investment and failed tax schemes to which they introduced their clients.
The defendant firm of accountants, Townsend Harrison, introduced its clients to an investment opportunity and three tax avoidance schemes.
The claimants argued that Townsend Harrison had provided negligent advice regarding the schemes or, alternatively, that the firm had been negligent in introducing them to the schemes. They alleged that Townsend Harrison had advised they had “nothing to lose” by participating in the schemes and encouraged them to enter into the schemes.
The claimants also argued that Townsend Harrison had provided negligent advice regarding the investment and had failed to carry out due diligence.
The essence of Townsend Harrison’s defence was that although it was engaged as the claimants’ accountants, it acted as a mere introducer to both the tax schemes and the investment and did not provide any advice.
The firm denied that any duty of care arose in respect of any of the introductions and further denied that it agreed or was under any obligation to carry out due diligence in respect of the investment.
Townsend Harrison relied heavily on its engagement letter and terms of business which explained that it was not providing and could not provide advice regarding the schemes and the investment.
The Court dismissed all of the claims and held that the claimants could not make out their case on duty, breach, causation or loss and that the claimants had failed to establish the existence of a duty of care.
The Court noted that the tax schemes in question were “underpinned by legal advice from eminent leading tax Counsel” and that the claimants in this case were not risk adverse. In the circumstances, the Court concluded that it could not be fairly be said that the claimants were unsuitable persons to introduce to the tax schemes and that there were “cogent reasons” for the claimants to consider tax planning.
The Court looked at the question of whether advice was given and said that, although Townsend Harrison encouraged the claimants to consider the tax schemes, on the evidence it could not conclude that the firm went any further than this and so did not find that advice was provided.
The Court also considered whether Townsend Harrison had assumed a responsibility to advise the claimants in respect of the tax schemes or to carry out due diligence in connection with the investment.
Applying the Hedley Byrne assumption of responsibility test, the Court found that Townsend Harrison had not assumed a responsibility to advise the claimants in respect of the tax schemes or to carry out due diligence regarding the investment. In reaching this decision, the Court relied heavily on the contractual documents in place between the parties. The engagement letter and terms of business made it clear that Townsend Harrison would not recommend investments. The firm also issued Limitation of Liability Letters which explained that it could not advise as to the success or otherwise of tax planning strategies and the risks involved and asked the clients to confirm they were relying on the scheme promoter’s advice. The Court also concluded that there was no contractual agreement for, and Townsend Harrison did not assume responsibility to carry out any, kind of due diligence in respect of the investment.
On causation, the Court found that the claimants had not established that they would not have gone ahead with the tax schemes had they not been advised as alleged.
The case illustrates the importance of both comprehensive letters of engagement and limitations of liability and that the facts of a specific case could lead to a different outcome. Notably, the Court held that there could be circumstances in which accountants may have a duty not to introduce unsuitable clients to unsuitable schemes and in which an accountant may be required to provide advice regarding the scheme.
This decision is another reminder that professionals should issue detailed engagement letters which explain in clear terms what advice is and is not being provided, and then take care not to step outside the four corners of the retainer.
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