Professional Negligence

An important rule for professional advisers

Be aware of what you don’t know

In a climate where tax avoidance and tax mitigation schemes, particularly those involving offshore planning, is exciting much press interest a recent High Court decision caused more of a stir than might otherwise be expected, particularly amongst professionals in the wealth management business.

The case of Mehjoo v Harben Barker, and its lengthy judgment of (reputedly) over 66,000 words, may not constitute a judicial endorsement of complicated tax avoidance schemes, as implied by some coverage, but does contain valuable lessons for all professional advisers.

Background

The case was brought by Mr Hossein Mehjoo against his long-standing accountants Harben Barker claiming damages for Harben Barker’s professional negligence during the sale of Mr Mehjoo’s shares in his clothing business.

Mr Mehjoo was born in Iran and, after moving to the UK, built up a successful clothing business which he ultimately sold in 2005 for approximately £22 million, with his share of the proceeds amounting to around £8.5 million. After entering into an unsuccessful scheme to mitigate his 10% capital gains tax (CGT) liability, Mr Mehjoo claimed against Harben Barker on the basis that they were under a professional duty to give him tax planning advice, even if not specifically requested to do so, and that they should have realised the potential tax advantages that flowed from Mr Mehjoo’s non-domiciled tax status.

The nature of the retainer

A major issue in the case was the nature of Harben Barker’s retainer as evidenced by their letter of engagement and, crucially, by a pattern of conduct established over a period of years. Harben Barker’s letter of engagement was general in its terms and was held not to impose any obligation on them to give advice on tax mitigation without request.

However, throughout their professional relationship the partner in the firm which dealt with Mr Mehjoo had pro-actively given his client advice on the tax consequences of his business and personal dealings. In particular at a meeting in October 2004 the accountants had advised Mr Mehjoo on mitigating the CGT that would arise on the sale of the company’s shares.

The judge found that this course of dealing over a period of time had implied a term into the contractual agreement between Mr Mehjoo and his accountants that they would provide tax planning advice without a specific request. Silber J went on to say that the October 2004 meeting alone would give rise to a duty to advise regardless of prior conduct.

It flowed from this duty to advise on tax planning that Harben Barker had a further duty to advise Mr Mehjoo that he probably had non-domiciled tax status, which could lead to significant tax benefits, and that they should then have referred Mr Mehjoo for specialist advice on how best to take advantage of this. This Harben Barker did not do and Mr Mehjoo was awarded substantial damages of £1.2 million.

What are the lessons for professional advisers?

This case may be yet appealed but the lessons that can be drawn from it for all professional advisers as it stands are:

  • ensure that the course of your professional dealings does not contradict the letter of engagement and inadvertently imply additional terms into it
  • be aware of what you don’t know and refer the client for more specialist advice if the circumstances warrant it.

To read the full judgment click here.

For more information, please contact:

Stuart Farr, Birmingham, Alex Jakubowski, Bristol, or Owen Williams, Southampton.