Introduction
The tort of negligence provides a legal remedy for individuals who have suffered harm as a result of another person's carelessness. It is not concerned with any careless act, but only with those where the law imposes a duty on a person to take care. When this carelessness occurs within a professional context, such as a client relying on an accountant's advice, the claim falls into the specific area of professional negligence. In this situation, the general principles of negligence are adapted to address the special relationship between a professional and their client, and the nature of the harm, which is often purely financial. This essay will explain the general concept of negligence, outline the specific elements required to establish a claim for professional negligence against an accountant, and finally, discuss the possible legal consequences that follow a successful claim.
a) The concept of negligence in tort law
Negligence can be defined as the breach of a legal duty to take care, resulting in damage to the claimant (Rogers, 2010). For a claimant to succeed in a negligence action, they must prove three essential elements on the balance of probabilities. First, that the defendant owed them a legally recognised duty of care. Second, that the defendant fell below the standard of care required, thereby breaching that duty. Third, that the defendant's breach of duty caused the claimant's damage, and that this damage was not too remote a consequence of the breach.
The modern concept of the duty of care originates from the landmark case of Donoghue v Stevenson [1932] AC 562. In this case, Lord Atkin established the 'neighbour principle', stating that: "You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour." A neighbour was defined as anyone "so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected".
While this principle provided a foundation, the courts have since developed a more structured approach to determine the existence of a duty of care in new situations. The current leading test was set out by the House of Lords in Caparo Industries plc v Dickman [1990] 2 AC 605. This case established a three-stage test, requiring a court to consider:
- Foreseeability of harm: Was it reasonably foreseeable that the defendant’s actions could cause harm to the claimant?
- Proximity of relationship: Was there a sufficiently proximate relationship between the claimant and the defendant? This can mean physical closeness, but in most cases, it refers to a legal closeness, such as a contractual or other special relationship.
- Fair, just and reasonable: Is it fair, just, and reasonable in all the circumstances for the law to impose a duty of care on the defendant? This allows the court to consider wider policy implications, such as the risk of opening the "floodgates" to an indeterminate number of claims.
These three elements form the essential framework of any negligence claim. However, when the harm is purely economic loss and arises from professional advice, the courts apply these principles in a more specific way.
b) The elements required to establish professional negligence
The scenario of a client suffering financial loss due to an accountant's careless advice is a classic example of professional negligence. To establish a claim, the client must prove the same three elements of duty, breach, and causation, but the content of these elements is tailored to the professional context.
Duty of Care
In cases of negligent advice or services causing purely economic loss, the courts are generally more reluctant to find a duty of care than in cases involving physical injury. The key case that established the possibility of such a claim is Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. The House of Lords held that a duty of care could arise where a 'special relationship' existed between the parties. This relationship is created where one party, the adviser, possesses special skill or knowledge and voluntarily assumes a responsibility to the other party, the advisee, who then relies on that advice.
In the context of an accountant and a client, this assumption of responsibility is almost always present. By agreeing to provide financial advice for a fee, the accountant is clearly assuming responsibility for the advice given, knowing that the client will rely upon it to make financial decisions. The client's reliance is also reasonable in these circumstances. Therefore, a duty of care between an accountant and their client is usually straightforward to establish. The Caparo test also supports this, as the harm (financial loss) is foreseeable, there is a proximate relationship (the client-adviser relationship), and it is considered fair, just, and reasonable to impose a duty on a paid professional to take care in their work.
Breach of Duty
Once a duty of care is established, the claimant must show that the defendant breached it by failing to meet the required standard of care. For a professional like an accountant, the standard is not that of an ordinary person. The test for the standard of care expected of a professional was established in Bolam v Friern Hospital Management Committee [1957] 1 WLR 582. McNair J stated that a professional "is not guilty of negligence if he has acted in accordance with a practice accepted as proper by a responsible body of professional men skilled in that particular art."
This means that an accountant's advice is not judged against the standard of the most brilliant expert in the field, but against the standard of the ordinary, competent accountant. To prove a breach, the client must show that the advice given was so flawed that no reasonably competent accountant would have provided it. It is not enough to show that other accountants might have given different advice. However, the courts have a final say. In Bolitho v City and Hackney Health Authority [1998] AC 232, the House of Lords clarified that the professional practice relied on by the defendant must be based on a logical and defensible basis. A court can reject a body of professional opinion if it is not a reasonable one. Thus, if a supposed 'common practice' is itself negligent, following it will not be a defence.
Causation and Remoteness of Damage
Finally, the client must prove that the accountant's breach of duty caused their financial loss. This involves two aspects: factual and legal causation.
Factual causation is assessed using the 'but for' test, established in Barnett v Chelsea & Kensington Hospital Management Committee [1969] 1 QB 428. The client must prove that "but for" the accountant's negligent advice, they would not have suffered the loss. For instance, they would need to show that had they received competent advice, they would not have made the loss-making investment.
Legal causation, or remoteness, requires the loss to be a reasonably foreseeable consequence of the breach (The Wagon Mound (No 1) [1961] AC 388). In cases of negligent financial advice, financial loss is clearly a foreseeable type of damage.
A crucial principle in professional negligence cases concerning financial loss is the 'scope of duty' principle, established in South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 (known as SAAMCO). This principle was recently clarified by the Supreme Court in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20. This principle limits a professional's liability to losses that fall within the scope of their duty. The central question is to identify the purpose of the advice or information being provided. Was the professional giving 'advice' (advising on what course of action to take) or 'information' (providing a specific piece of information to help the client make their own decision)? If the professional was only responsible for providing information (e.g., a property valuation), they are only liable for the financial consequences of that information being wrong, not for all the financial consequences of the client entering into the transaction. In our scenario, if the accountant advised the client to make a particular investment, their duty would likely be seen as an 'advice' duty, and they could be held liable for all foreseeable losses resulting from that investment.
c) The possible legal consequences if negligence is proven
If a court finds that a claim for professional negligence is successful, the primary legal consequence is an order for the defendant to pay damages to the claimant. The purpose of damages in tort is compensatory. As stated by Lord Blackburn in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, the aim is to restore the claimant to the position they would have been in had the tort not occurred. In the case of the client who suffered financial loss, this would mean a monetary award calculated to cover the losses that directly flow from the accountant's negligent advice.
However, the amount of damages awarded can be reduced if the defendant can successfully argue a partial defence. The most common defence in this context is contributory negligence. Under the Law Reform (Contributory Negligence) Act 1945, if the court finds that the claimant contributed to their own loss through their own carelessness, it can reduce the damages by a percentage that it thinks is just and equitable. For example, if the client failed to provide the accountant with all the relevant financial documents, or acted hastily against a partial warning from the accountant, their damages might be reduced.
Beyond the legal award of damages, there are other significant consequences for a professional found to have been negligent. These include:
- Professional Sanctions: The accountant could face disciplinary proceedings from their professional regulatory body, such as the Institute of Chartered Accountants in England and Wales (ICAEW). This could result in a fine, suspension, or even being struck off the professional register.
- Reputational Damage: A finding of negligence can cause severe damage to the professional reputation of the accountant and their firm, potentially leading to a loss of clients and business.
- Increased Insurance Costs: Professionals are required to have professional indemnity insurance to cover claims of negligence. A successful claim will almost certainly lead to a significant increase in the cost of this insurance for the accountant or their firm in the future.
Conclusion
In summary, the tort of negligence provides a vital means of redress for a client who has suffered financial loss due to the carelessness of a professional adviser like an accountant. To succeed, the client must navigate the specific application of the core principles of negligence to their situation. This involves establishing that the accountant assumed a responsibility and therefore owed a duty of care, that the advice given fell below the standard of a reasonably competent accountant, and that this breach directly caused the client's financial loss. If these elements are successfully proven, the primary legal consequence is an award of compensatory damages, although the professional may also suffer significant reputational and disciplinary repercussions. The law thus seeks to balance the protection of clients who rely on expert advice with the need to set a fair and reasonable standard for professionals in the performance of their duties.
References
Horsey, K. and Rackley, E. (2021) Tort Law. 7th edn. Oxford: Oxford University Press.
Rogers, W.V.H. (2010) Winfield and Jolowicz on Tort. 18th edn. London: Sweet & Maxwell.
Cases
Barnett v Chelsea & Kensington Hospital Management Committee [1969] 1 QB 428.
Bolam v Friern Hospital Management Committee [1957] 1 WLR 582.
Bolitho v City and Hackney Health Authority [1998] AC 232.
Caparo Industries plc v Dickman [1990] 2 AC 605.
Donoghue v Stevenson [1932] AC 562.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.
Livingstone v Rawyards Coal Co (1880) 5 App Cas 25.
Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20.
Overseas Tankship (UK) Ltd v Morts Dock and Engineering Co Ltd (The Wagon Mound (No 1)) [1961] AC 388.
South Australia Asset Management Corp v York Montague Ltd [1997] AC 191.
Legislation
Law Reform (Contributory Negligence) Act 1945.
