Court of Appeal upholds decision that no duty owed to investors by barrister advising scheme promoter

The Court of Appeal handed down judgment today in David McClean & Ors v Andrew Thornhill KC [2023] EWCA Civ 466, unanimously dismissing the appeal.  Herbert Smith Freehills Partner Will Glassey and Associate Henry Saunders acted for the successful Defendant Andrew Thornhill KC.

BACKGROUND

The Claimants were investors in three film finance schemes which were promoted by Scotts Atlantic Management Limited (“Scotts“) in 2002 – 2004.  The schemes were intended to attract sideways loss relief, entitling investors to offset the schemes’ losses against their personal income.

Each prospective investor was required to warrant that they had taken appropriate professional advice and “only relied on the advice of, or has only consulted with, [their] own professional advisers with regard to the tax, legal … and other economic considerations” related to the investment.

The schemes could only be promoted to investors by IFAs, through the schemes’ information memoranda (the “IMs“).  The IMs said that Scotts’ “understanding” was that the schemes would attract relief but that prospective investors should “consult their tax advisers.”

Before issuing the IMs, Scotts obtained advice from Mr Thornhill KC on the tax consequences of the schemes.  He advised that the schemes met the requirements for sideways loss relief; i.e. that the proposed activity would amount to trading commercially with a view to profit.  Many years later (2016), in a very different tax environment, HMRC issued a closure notice in respect of the first scheme, which concluded that the requirements were not met.  As a result, the Claimants settled their tax liabilities in respect of the three schemes with HMRC.

The Claimants alleged that Mr Thornhill KC, whilst being Scotts’ adviser, assumed a duty of care to them: he endorsed the IMs; he consented to himself being identified as tax adviser to Scotts; and he consented to his opinions being provided to prospective investors (via their IFAs) upon request.  They alleged that Mr Thornhill KC negligently advised that relief would materialise and failed to identify a significant risk of the schemes being successfully challenged.  They said that had Mr Thornhill advised differently, they would not have invested.

On 8 March 2022 Zacaroli J handed down judgment dismissing the claim, finding that Mr Thornhill KC did not owe a duty to the investors (as opposed to his client, Scotts) and that his advice was not negligent in any event.  Our summary of that decision can be found here.

The Claimants who invested in the second and third schemes appealed to the Court of Appeal.

DECISION

In judgment handed down on 28 April 2023, the Court of Appeal dismissed the appeal. Simler LJ wrote the substantive judgment, with which the Chancellor and Carr LJ agreed.

Duty of Care
The Claimants argued that this was a prospectus-type dispute and that – in circumstances where Mr Thornhill KC effectively formed part of the sales team with Scotts – the situation was analogous to the statutory regime applying to an issuer of prospectuses in shares and debentures; which, in broad terms, requires the issuer to have reasonable grounds for believing the content of the prospectus to be true. The court described this argument as “untenable“, in circumstances where the schemes were unregulated, and Parliament had expressly limited the scope of the statutory prospectus regime. The IMs did not make factual representations as to the tax consequences, instead containing what were deliberately and carefully described only as Scotts’ understanding and expectation as to the tax outcome.

Contrary to the Appellants’ submission that Mr Thornhill KC had been acting as part of a sales team rather than as a barrister, the Court of Appeal agreed with Zacaroli J that Mr Thornhill KC’s conduct “was clearly within the typical role of a barrister” and said that:

“In these circumstances, absent good reason to the contrary, the default expectation was that investors would not simply rely on what they were told about Mr Thornhill’s advice, but would, with the help of their IFAs (and other tax advisers where relevant), make their own assessment of the risks of the transaction and an independent decision as to whether to enter into it.”

The Court considered whether Mr Thornhill KC assumed a duty of care to the claimant investors, applying the assumption of responsibility test set out in NRAM v Steel [2018] UKSC 13. The Court concluded that it was “objectively unreasonable for investors to rely on Mr Thornhill’s advice without making independent inquiry in relation to the likelihood of the [schemes] achieving the tax benefits; and Mr Thornhill could not reasonably have foreseen that they would do so.”

The Court was influenced in reaching that conclusion by the fact that:

The schemes were unregulated and could only be promoted via IFAs “who owed professional obligations of their own to each investor.” That was the context in which the Claimants would see the relevant IM.
The IM “was the only means through which Mr Thornhill’s advice to Scotts could be obtained by third parties” and it “expressly required those investors to take and rely on their own tax advice relating to the Scheme.” Whilst IFAs might use Mr Thornhill KC’s advice as a starting point, they were required to analyse risk for their client and “not merely duplicate the advice given by Mr Thornhill.“
Whilst Scotts and the Claimants had a common interest in tax relief materialising, they were counterparties in a commercial transaction entered into at arm’s length. The principle of caveat emptor applied and “it was presumptively inappropriate for investors to rely on anything said by Scotts’ adviser.” They had not paid him, met with him or communicated with him.

The Court rejected the appellants’ submission that it was necessary for Mr Thornhill KC to know that the investors were taking advice from an “equivalent” adviser – i.e. a tax Silk; the Court accepting, as had Zacaroli J, that the investors warranted that they had taken their own tax advice, and that it was perfectly acceptable for Mr Thornhill to know that that would be provided either by expert IFAs or other experts to be identified by the IFAs should they not have that expertise themselves.

Breach
The approach which Mr Thornhill KC had adopted in his advice – which followed the approach taken by the House of Lords in Ensign Tankers [1992] 1 AC 655 – was described by the Court as “reasonable and not negligent”. The Court held that Zacaroli J was entitled to conclude as he did that a reasonably competent tax silk could have advised that relief would be allowed.

The Claimants argued that Mr Thornhill KC’s unequivocal advice (i.e. that there was “no doubt“) that the schemes would be trading was negligent. Simler LJ was not convinced that Zacaroli J had squarely addressed this issue and concluded that “no reasonably competent tax silk could have expressed such an unequivocal view”. This was of no practical consequence, given the Court’s conclusions on duty and causation.

Causation
The Claimants’ case on causation also failed. They argued that Mr Thornhill should have ensured that they were given a warning that there was a “significant risk” of a successful challenge to the Schemes by HMRC; and that had he done so, they would not have invested.

The Court held that the prevailing tax law at the time required a far less severe warning, which, the Court held (again upholding Zacaroli J), the claimants would have ignored even if given: the Claimants did not come close to making out their case on causation, said the Court.

COMMENT

The case does not make new law. Both Zacaroli J and the Court of Appeal rejected novel arguments as to how a duty might have arisen. But what we are left with is a conventional application of the principles set out in NRAM v Steel: in order for a professional to assume a duty to a non-client recipient of advice, it must have been: (a) reasonable for the recipient to rely upon it; and (b) reasonably foreseeable to the professional that the recipient would do so.

The decision does emphasise the fact-sensitive nature of that analysis, which necessarily requires a consideration of the relationship between the parties, the circumstances in which the recipient obtained the advice, the communications which surrounded the sharing of the advice, and whether it was reasonable for the third party to rely on the advice without independent enquiry.

Herbert Smith Freehills (Will Glassey and Henry Saunders) successfully defended Mr Thornhill KC in the appeal, instructing Tom Adam KC and Max Schaefer of Brick Court Chambers.

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