Professional Liability

An In Brief Introduction

Under the law of negligence a manufacturer can be liable for defective products which it puts into circulation.  Similarly, negligence law also applies to the provision of services, which in the context of professional liability specifically means the services involved in giving professional business advice.  The law’s development in this area has mainly concerned cases involving accountants, but the principles can be equally applied to other professionals such as lawyers or surveyors.  In common with other aspects of negligence law, there are a number of elements which must be satisfied before liability can be established.  The most crucial of these is that a duty of care exists between the service provider and the injured party.   

Liability for Negligent Statements

Liability for negligent statements is an increasing area of law.  Following various developments in case law, including decisions being overruled, the courts have established that generally there must be some relationship or proximity between the maker of a negligent statement and the injured party.  A contractual relationship is not necessary, but liability is restricted to what is reasonable.  To prevent just anybody from making a claim two criteria ought to be considered.  First, the injured party must be known as a user of professional statements.  Second, the professional who makes the statement must know what the statement will be used for.  For example, an accountant negligently overvalues a company’s assets.  The accountant also knows that the company is in financial trouble, and that it is searching for investors.  An investor is found who the accountant knows is willing to merge with the struggling company solely on the basis of its value as determined in the overvalued financial statements.  Ultimately, the merger is not successful.  In this situation a duty of care exists between the accountants and the investor, and the accountant is liable for the investor’s losses.  Both criteria are satisfied.  The accountants know that the investor uses professional statements.  They also know what the overvalued financial statements will be used for, namely the merger. 

Avoiding and Excluding Liability

Professional Guidelines

One of the most appropriate ways for professionals to avoid liability is for them to adhere closely to the guidelines and recommendations issued by their respective regulatory bodies.  Following professional procedures which are accepted as proper practice by those skilled in a particular art may well be sufficient to avoid liability, even if there is a contrary view about what constitutes proper practice.  (See, for example, McNair, J in Bolam v Friern Hospital Management Committee [1957])   Although concern has been expressed that some professions might be able to set their own standards, an accountant, for example, who fails to follow guidelines such as the Financial Reporting Standards, unless there is adequate justification, will be seen as being in breach of their duties. 

Unfair Contract Terms Act 1977

It may also be possible, under s2(2) of the Unfair Contract Terms Act 1977, to exclude liability, but only if the exclusion is reasonable.  Under s11(1) of the same Act,  reasonableness is decided according to the circumstances as they were when the contract was made.

A professional may also want to limit their liability to a specified sum.  To do so successfully, under s11(4) of the 1977 Act regard must be given to the resources which would be expected to be available for the purposes of meeting liability and how far it is possible to get insurance cover.  Consequently, taking out the maximum insurance cover which is reasonable in the circumstances and which isn’t so costly as to inflate professional fees, then limiting liability to that amount, should be reasonable.

Professional Negligence Insurance

A wide range of professional indemnity policies are now available.  Often, the insured party bears the risk up to a certain sum, with the remainder covered by the insurer.  Policies also often cover liability to clients under contract and liability to non-clients in tort.

Companies Act 2006

Under s548 of the Companies Act 2006 a company and its auditors are allowed to enter into an agreement which limits the auditor’s liability for damage caused to the company when auditing accounts.  The agreement must be fair and reasonable and must be approved by the company’s members.  The agreement must also be disclosed in the company’s accounts and the director’s report.

Limited Liability Partnerships

Limited liability partnerships are now possible under the Limited Liability Partnerships Act 2000.  A limited liability partnership’s liability as a whole is limited to the capital provided by the partners.  An individual partner’s personal liability is best illustrated by example.  Smith and Jones LLP is an accounting firm.  Smith negligently prepares accounts knowing that an outsider will rely on them.  The firm is liable up to the total of its assets and Smith is liable with his or her private assets.  Jones is not liable (unless he or she prepared the accounts jointly with Smith).  In practice, however, Smith’s assets should not be at risk because it should be clear that he or she acts as the firm’s agent when preparing the accounts.

Current Position

Following the decision in Caparo Industries v Dickman [1990] and two other important cases the current position can be summed up as follows: Auditors do not owe a duty of care to potential investors, nor to potential investors who are already shareholders in a company (their duty is to shareholders as a whole, not to individual shareholders); auditors are liable, however, if they know who will rely upon their statements and for what purpose, and in this situation there is a duty of care owed to the user of the statements.  In addition, Coulthard v Neville Russell [1997] appears to extend liability to omissions.