26/03/18. When should a solicitor provide a warning to their client that the advice they are giving may not be correct? That question was addressed by the Court of Appeal in the case of Barker v Baxendale Walker.
The case concerned the tax planning advice given by Baxendale Walker Solicitors (“BWS”) who held themselves out as tax specialists. Following an investigation by HMRC, Mr Barker on advice from his solicitors (no longer BWS) settled with HMRC for £11,296,477.24. Mr Barker then issued proceedings against BWS alleging professional negligence.
At trial, Roth J agreed with BWS’s construction the legislation. That notwithstanding, he also found that BWS had acted in breach of duty in failing to provide a general health warning that, because Mr Barker was entering into a tax avoidance scheme, there was a possibility that it would be challenged by HMRC and that, if this happened, it would be necessary to defend the arrangement in legal proceedings. This finding did not found a successful claim for Mr Barker as the Judge determined that such a general health warning would not have prevented Mr Barker entering into the scheme; only what the Judge called a “high level warning” about the alternative interpretation of the relevant statutory provisions would have deterred Mr Barker. Roth J held that there was no breach of duty in not giving a high level warning as “I find it difficult to see that solicitors whose interpretation is likely to be correct are nonetheless in breach of duty for failing to warn the client that they might be wrong. That may perhaps be the position where the argument is finely balanced, so that any reasonably careful lawyer (of appropriate expertise) should have been alert to the significant possibility of a contrary view”.
On appeal Mr Barker did not allege that the statutory interpretation arrived at by BWS was negligent, but contended that their negligence lay in the failure to provide the high level warning that this interpretation might not be correct. The high level warning is referred to in the appeal judgment as a “specific warning”.
The appeal judgments considered the proper interpretation of the tax legislation in substantial detail, ultimately disagreeing with Roth J’s interpretation and accepting the interpretation advanced on behalf of Mr Barker. However, there is also detailed consideration and discussion of when a solicitor’s failure to warn their client of the risk that they may be wrong will amount to negligence.
Following consideration of previous authority, the Court of Appeal held that a warning should be given where there is a “significant risk” about the construction of the provision. Asplin LJ considered that the following principles could be discerned in such cases:
The question of whether a failure to explain the risk that a court may come to a different conclusion to the solicitor is highly fact sensitive.
If the construction of the provision is clear, it is very likely that the threshold of “significant risk” will not be met and no warning will be required.
A solicitor can be correct about the construction of a provision, or at least not negligent, but nevertheless be under a duty to caveat their advice with a warning of the risk of being incorrect.
It is more likely that a reasonably competent solicitor would advise as to that risk if litigation is already on foot or the point has already been taken.
The issue cannot be reduced to percentages and is more nuanced than whether the constructions are “finely balanced”.
This final point is an express rejection of Roth J’s conclusion that where a solicitor’s interpretation of a provision is likely to be correct there would be no duty to warn unless the arguments were finely balanced. Asplin and Patten LJJ agreed in their judgments that whilst the question of significant risk “turns in substantial part” on the arguments in favour of the competing interpretations the broader circumstances are also an important factor in the assessment.
Specifically, in relation to Mr Barker’s case, whether there was a significant risk was a product of both the likely construction of the statutory provision (on which the Court of Appeal disagreed with Roth J) and on the factual circumstances. The relevant factual circumstances in this case included that this was an aggressive tax avoidance scheme that if successful would result in a very large payment of tax being avoided. Asplin LJ concluded that this meant that there was always a likelihood of a dispute which should have been taken into consideration. Notwithstanding the fact that the point had not been taken elsewhere at the time of the advice being given “it would have been obvious to any reasonably competent solicitor practising in this area that there was a real risk that HMRC would take the … point at some stage and if necessary, would pursue it through the tribunal and court system”. Patten LJ added that “A careful and competent assessment of the rival arguments on construction (which was never undertaken) would in my view have disclosed that there was at the very least a significant possibility that [the alternative construction would be held to be correct]”. He also agreed with Asplin LJ that the degree of risk also required consideration of the likelihood of challenge by HMRC and the degree of judicial and other scrutiny that the scheme would receive.
Asplin LJ also made clear that the situation in such cases differs from the situation of a doctor discussing risks with a patient as considered in Montgomery v Lanarkshire Health Board. Whereas a doctor discussing risks with a patient is not determined by medical learning, and therefore falls to be considered separately to the duty to diagnose and treat the patient, the legal advice is “the very service which was being provided and which was being relied upon. There can be no separation between the advice and any appropriate caveats as to risk. They are one and the same.” As such the question falls to be considered under the Bolam test of the standard of a reasonably competent professional acting in accordance with a responsible body of opinion rather than the Montgomery test of the materiality of risk.
At first instance Roth J had found assistance in the fact that a “series of tax specialists” had not arrived at the interpretation advance on behalf of Mr Barker. However, this approach was criticised by Asplin LJ. The series of advisers “who considered the EBT for different purposes and at different times were at best an unrepresentative group. Even if it had been relevant to consider the standards applied by a body of expert professional opinion, they were not such a body.” On the facts of the case it was also noted that such an approach failed to take into account the opinions of other professionals received by Mr Barker who agreed with the interpretation advanced on his behalf at trial. It was also noted that there was no expert evidence before the court.
This case provides important clarification on when it will be negligent for a solicitor not to provide a warning that their advice on a point might be wrong. Critically, the circumstances where a warning will be required cannot be reduced to cases where the prospects of an interpretation being correct fall below an arbitrary threshold. Rather, broader circumstances must be taken into account. These will include the likelihood and consequences of a dispute arising.
Further, even where the advice is ultimately correct it can be negligent not to have provided a warning. This has important consequences that can be demonstrated by imagining slightly different facts to those of the instant case. Had BWS’s interpretation been correct and Mr Barker succeeded against HMRC at trial he would still have had a good claim against BWS for any irrecoverable costs incurred against HMRC if – as Roth J found as a fact – a specific warning would have resulted in him taking a different course.
It is also of interest that the Court of Appeal distinguished between clinical negligence cases to which Montgomery would apply from cases concerning solicitors. Although the Court of Appeal expressly did not comment on other professions in the course of the judgment, for most professionals the relevant risks will be closely related to the advice being given and will be a matter of the professional skill of the practitioner rather than any broader consideration. It would therefore seem that professionals outside of the medical sphere will not have advice on risks considered on materiality of risk under Montgomery but under the normal Bolam test. Montgomery has been referred to in a recent first instance decisions concerning a solicitor’s advisory obligations to a client entering into a transaction and the duty of a bank to explain the financial implications of a decision to change from borrowing on a variable interest rate to a fixed rate. It will be interesting to see whether Montgomery will come to be confined to clinical negligence cases or whether a distinction will be drawn based on the type of advice being given.
When advising clients, professionals would be wise to err on the side of setting out the sort of careful and competent assessment of the rival arguments referred to by Patten LJ. This will provide clients with full advice and, when coupled with an assessment of the consequences of the alternatives being correct, the information with which to make informed decisions.