The importance of retainer letters
Court strikes out claim that an adviser owed a duty to point out a claim against a former adviser.
The High Court has struck out a claim made against an investment adviser where it was alleged that they had failed to advise that the Claimant had a claim against a former adviser. The Court in striking out the claim relied upon the scope of the engagement letter finding that it was prospective in nature and so did not require the adviser to consider past advice. The judgment is a further example of the importance of engagement terms in setting out and limiting the scope of an adviser's retainer. It also distils the factors a Court will take into account when deciding whether or not to expand a professional's duty of care beyond the engagement letter.
In August 2000 the Claimant – Paul Denning - instructed Alexander Forbes Financial Services Limited (AF) to provide advice in relation to the transfer of his final salary benefits. AF recommended that the Claimant transfer his final salary benefits to a personal pension plan with Scottish Equitable (the First Transfer). AF continued to advise the Claimant and in February 2007 recommended a further transfer to a "Phased Unsecured Income Plan" (the Second Transfer).
In August 2008 the Claimant instructed the defendant – Greenhalgh Financial Services Limited (GFS). It was common ground between the parties that the Claimant did not instruct GFS to review the First Transfer. GFS' engagement letter and accompanying Fee Agreement provided that GFS was not authorised or qualified to give legal advice and referred to arranging future transactions for the Claimant. However, GFS were given a folder containing AF's advice in relation to the First Transfer.
Before GFS had completed their initial review of the Claimant's financial position, the Claimant complained to AFS and then to FOS about the Second Transfer. Before FOS his complaint expanded to include the First Transfer. FOS rejected the complaint in relation to the First Transfer on the basis a complaint was out of time.
The Claimant subsequently issued proceedings against GFS alleging that they should have identified and raised with the Claimant his claim against AF so that the claim could have been made in time for limitation purposes.
What happened in the proceedings between the Claimant and GFS?
The essence of the Claimant's case on duty was that it was obvious that any advice to transfer from a final salary pension scheme was negligent; GFS had a copy of AF's advice on the First Transfer and this was enough to have put them on notice of a claim against AF which they should have raised with the Claimant.
The Claimant adduced expert evidence supporting his position and relied on the decision in Credit Lyonnais v Russell Jones & Walker . This case was in the context of a solicitors' negligence claim where the Court found the solicitors responsible for a failure to advise on the time critical nature of a payment required under a break clause in circumstances where it had been instructed to advise on the exercise of the break option. In the decision, Justice Laddie used an analogy with a dentist to explain circumstances where a professional's duty may extend beyond the terms of their retainer: "… If a dentist is asked to treat a patient's tooth and, on looking into the latter's mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly…".
In the claim between GFS and the Claimant, Justice Green set out the features of the Credit Lyonnais which in his view led to a finding that the solicitors owed a duty beyond their retainer in that case: (1) the totality of the information required by the professional to give the advice it was alleged should have been provided was before the professional concerned, (2) the issue overlooked was one which was patent on the facts of the instruments being reviewed and it became evident from the performance by the retainer, (3) the matter that should have been advised upon was something for which the professional was being paid and would not entail "extra work", (4) the dentist analogy highlights the sort of matters that the professional should assume a responsibility to advise upon and (5) Credit Lyonnais is not supportive of the proposition that, in cases where the professional reads documents that he is not asked to read and he discovers a risk to the client upon reading those documents, the professional assumes a duty to advise the client of that risk.
In applying these principles, Justice Green found that the relevant facts for GFS and the Claimant were (1) GFS' retainer was prospective, (2) GFS was never asked to advise on the First Transfer, (3) GFS was not equipped with sufficient information to advise on the First Transfer, (4) GFS was never paid to advise on the First Transfer, (5) there was no commercial or factual connection between the First Transfer and the advice GFS was asked to give and (5) the advice it is said GFS should have provided was in large part legal in nature and this was carved out of their engagement letter. As a result, the claim was struck out.
The case highlights the importance of an adviser's retainer which the Court will look to in the first instance when considering whether or not an adviser owed a duty to advise on a particular issue. The decision also provides comfort to professionals that, even if they are provided with lots of information and issues arise when reviewing that information outside of their retainer, provided the engagement terms are sufficiently clear and concise, the professional will not necessarily owe a duty to advise on those wider issues.
In a world of ongoing adviser charges and the need – emphasised by the FCA's current suitability review – to demonstrate ongoing suitability, we can expect further divergence between the legal position on the one hand and the regulatory position, probably adopted by FOS, on the other.