Clients engage solicitors to obtain advice that is legally precise and commercially realistic. However, there is a tension between the need for accurate guidance and the reality that the advice given may represent only one of a number of possible interpretations of the law.
It is a well-established principle that, in certain circumstances, solicitors have a duty to warn clients that their interpretation of a statutory or contractual provision might be wrong. A solicitor who fails to provide an adequate "health warning" to accompany advice which may be subject to challenge is at risk of a negligence claim.
A solicitor's advice can be wrong but not negligent, provided that the advice given falls within the boundaries of that which could have been provided by a reasonably competent solicitor in that field of expertise. However, even if the advice is correct, a failure to warn the client that the view expressed might be wrong could be deemed to be negligent. The duty to warn therefore represents somewhat of a contradiction – a solicitor's advice can be correct but negligent (for failing to warn), and wrong but not negligent (because, whilst wrong, it was not negligently wrong, and a warning was provided).
The recent Court of Appeal decision in Barker v Baxendale Walker [2017] EWCA Civ 2056, handed down on 8 December 2017, has helpfully provided further guidance on this issue.
The facts
The Claimant, Mr Barker, sought to mitigate a significant capital gains and inheritance tax exposure on the sale of shares in his company. He sought advice from his solicitors, Baxendale Walker, who advised him that, provided that Mr Barker was an excluded beneficiary, an off-shore Employee Benefit Trust ("EBT") could be set up, from which Mr Barker's family could benefit after his death. This advice was based on Baxendale Walker's interpretation of Section 28 of the Inheritance Act 1984.
Some years later, this structure was challenged by HMRC, who determined that the EBT failed because Mr Barker's family should have been excluded from the trust even after Mr Barker's death (the "post-death exclusion construction"). Having taken further advice, Mr Barker settled with HMRC, and then issued proceedings against Baxendale Walker in negligence.
In essence, the claim was based on Baxendale Walker's alleged failure to provide to Mr Barker either a "general health warning" that an aggressive tax-avoidance scheme may be subject to challenge by HMRC, or a specific "high level warning" that Baxendale Walker's interpretation of the statute might be incorrect. Mr Barker argued that, had a warning been given, he would have adopted an alternative course of action and thereby avoided paying a substantial sum to HMRC.
First instance decision
At first instance, Roth J concluded that the defendant firm had an obligation to provide a "general health warning" to Mr Barker because, as an aggressive tax-avoidance scheme, the EBT structure was likely to be subject to challenge by HMRC. The failure to give such a warning was negligent.
However, Roth J determined that there was no need for the firm to give a specific "high level warning", in part because he considered that the firm's analysis of the statute was correct and in part because he believed that such a warning was tailored with the benefit of hindsight.
On the facts, Roth J concluded that Mr Barker's claim failed for want of causation (having determined that, even had a "general health warning" been given, Mr Barker would nonetheless have proceeded with the scheme).
Court of Appeal decision
Mr Barker appealed the decision, on the basis that Roth J was wrong to conclude that the failure to give a specific "high level warning" was not negligent. It was not alleged that the firm was negligent in the interpretation – the appeal centred around the failure to warn.
Asplin LJ, sitting in the Court of Appeal, gave the leading judgment overturning the first instance decision. Her view was that the interpretation of the relevant statute was "very unlikely" to be correct and, as it gave rise to ambiguities, a specific "high level warning" should have been given. The relevant test is whether a reasonably competent solicitor in the position of the defendant firm would have given a specific warning given the "significant risk" that the interpretation was wrong and that the structure adopted could be successfully challenged.
The Court of Appeal held that, even where a solicitor's interpretation was likely to be correct, there could still be an obligation to draw to the client's attention the risk of an alternative interpretation, and that it could be negligent to fail to do so. Asplin LJ noted that: "The lawyer...must evaluate the legal position and determine whether in all of the circumstances, he should advise his client that there is a significant risk that the view he has taken about the substantive matter in question may be wrong". She further observed that "Roth J was wrong to conclude that where the solicitor's interpretation of the particular provision is likely to be correct it is difficult to see that they would also be in breach of a duty to warn unless the arguments were finely balanced. Although the question of whether there is real scope for dispute or a significant risk turns in substantial part upon the strength of the arguments for and against the particular construction, it also depends upon all of the relevant circumstances."
Practical application
In light of this decision, practitioners and their insurers should note the following:
- The circumstances where a solicitor has an obligation to issue a warning to a client that a court may adopt a different interpretation are very fact-specific. It is not the case that solicitors are obliged to caveat all advice (indeed, doing so may give rise to ambiguities which could form the basis of a negligence claim).
- The likely construction of the provision in question is highly relevant to the evaluation of whether a warning is required.
- There must be a "significant risk" that the advice or interpretation may be wrong in order for there to be a duty to provide a warning. If the construction is clear, the "significant risk" threshold will not be met.
- A solicitor's interpretation might be found to be correct (or, at least, not negligent), but that does not provide a defence if the "significant risk" threshold is met, and a "correct" solicitor may still be negligent for failing to warn.
- There is no separation between the advice and the duty to warn; the warning that the view taken may be wrong forms part of the advice.
In conclusion, in circumstances where the legal position is unclear, or where there is a significant risk that an interpretation may be challenged, solicitors have a duty to provide a balanced view to their clients by identifying the alternative interpretation and giving an appropriate warning that their view may not ultimately be the preferred interpretation. Whilst each case will turn on its facts, the general principle is that the greater the risk that a particular interpretation may be subject to challenge, the more likely it is that the duty to provide an adequate warning will be engaged. Solicitors must be alive to the risk of an alternative construction and advise accordingly before clients embark on a course of action in reliance upon the particular advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
