The latest decision from the Court of Appeal provides support for advisers to rely on the scope of a written retainer, says Robert Morris
Last year the High Court’s decision in Mehjoo v Harben Barker  EWCA Civ 358, made headlines; some of the more lurid suggested that it set a precedent positively requiring accountants to advise clients on tax avoidance.
In fact, the decision was not so far reaching but it did give cause for concern because it illustrated that firms can be held liable for failing to advise on issues that fall outside of their written retainer if, over a period of time, they provide services beyond those originally agreed; and generalist firms could be liable to clients for failing to refer them to more specialist advisers in circumstances where it was apparent that specialist advice might be of benefit.
The High Court’s decision was appealed and the Court of Appeal has recently given its judgment, a decision which will alleviate the concerns mentioned above to a degree.
Nevertheless, there remain lessons to be learned for advisers in managing the scope of their retainers with clients.
Mr Mehjoo originated from Iran but moved to the UK and became a successful businessman. Harben Barker acted as Mr Mehjoo’s accountants for many years and provided accountancy services and general tax advice.
In 2005 Mr Mehjoo sold his business and made a capital gain of some £8,500,000. After application of Business Asset Taper Relief, this gain was subject to 10% Capital Gains Tax. It was this CGT liability that Mr Mehjoo sought to claim from Harben Barker.
High Court decision
Mr Mehjoo’s claim succeeded in the High Court last year when it was decided that Harben Barker’s written retainer (only one was ever produced, in 1999, and was never revised) did not oblige them to provide Mr Mehjoo with advice on minimising his tax liabilities unless he specifically requested it. Furthermore, the court accepted that Harben Barker did not hold themselves out as having specialist expertise in tax planning.
Nevertheless, through their conduct over many years, during which time they volunteered advice on several tax planning issues, the court found that Harben Barker had assumed a duty to advise Mr Mehjoo on tax planning in relation to the sale of his business.
The court held that Harben Barker should have volunteered advice to Mr Mehjoo that:
- he was (or was likely to be) non-domiciled;
- this carried with it certain tax advantages; and
- that he should seek specialist advice on whether his non-domicile status might enable him to minimise or eliminate the CGT that he would otherwise incur on the sale of his business.
The High Court concluded that had Harben Barker advised Mr Mehjoo in this way, he would have obtained specialist advice and would then have entered into a bearer warrant scheme (a form of off-shore tax avoidance scheme, which has since been rendered ineffective by legislation). In this way, the court decided, he would have avoided paying any CGT.
Court of Appeal decision
The Court of Appeal’s decision focused on two issues:
- Did Harben Barker vary the terms of their written retainer through their conduct and to what extent?
- Were Harben Barker obliged to volunteer advice to Mr Mehjoo that he should seek specialist advice elsewhere, even though he did not specifically ask for such advice?
The Court of Appeal concluded that Harben Barker did act outside the scope of their written retainer by volunteering advice on how to avoid unnecessary and unforeseen tax consequences in respect of certain transactions. In doing so their conduct had varied the terms of their retainer to the extent that Harben Barker were obliged to provide general tax advice on routine tax issues. However, this did not amount to an assumption of a duty to advise on the sophisticated tax planning that formed the basis of this claim.
The Court of Appeal concluded that although Harben Barker knew that Mr Mehjoo’s potential non-domicile status might have certain tax benefits, they were unaware (and it was reasonable for them to have been unaware) that his non-domicile status might enable him to reduce or eliminate the CGT on the sale of his business. Accordingly, in the absence of any express instruction from Mr Mehjoo, they were not under a duty to advise him to seek specialist advice.
Thus, the appeal was allowed and Mr Mehjoo’s claim failed.
What this means for advisers
The Court of Appeal’s decision emphasises a reluctance to impose duties on advisers that go beyond what they are specifically requested, or agree, to do. In other words, the decision provides support for the ability to rely on the scope of a written retainer.
In addition, the case makes it clear that a generalist firm is not obliged to refer clients to specialist advisers unless there is a good and apparent reason to do so (for example, being aware that non-domicile status opened up additional routes for CGT mitigation).
A generalist firm is not obliged to refer clients to specialist advisers unless there is a good and apparent reason to do so
Notwithstanding the above helpful points, firms are still well advised to revise their retainer letters on a regular basis – and to avoid straying too far from the agreed retainer with the advice they are actually giving. In this case Harben Barker did stray from the terms of their written engagement and in doing so assumed additional duties that they may not have been wholly conscious of. Whilst the court was ultimately satisfied that they hadn’t gone so far as to impose a duty that caused a liability in this case, this was a question of degree. Had Harben Barker held themselves out as having tax planning expertise, for example, the Court may have been more willing to conclude that they were liable.
In addition, a duty still exists on generalist advisers to refer their clients to specialists where there is a good reason to do so. Failing to refer a client on in such circumstances not only risks a claim that a referral should have been made but also increases the possibility of the adviser straying into an unfamiliar area and inadvertently providing inaccurate advice.