Third party claims for professional negligence

In the field of professional negligence, third party claims are more prolific than in any other area of the law of negligence. In this article we explain the nature of third party claims for professional negligence and how they can and do arise in different professional disciplines.

The term ‘third party’ is often encountered in the context of insurance. There it is used to describe an individual or entity who is neither the policyholder (first party) nor the insurer (second party) to a contract of insurance, but an independent party against whose claim for loss, damage or injury the policy is designed to protect.

Similarly, in the context of professional negligence, the term ‘third party’ is used to describe a natural person or legal entity who is not party to the contract of engagement (often referred to as the retainer) between a client and a professional, but who is nevertheless adversely affected by its operation.

The legal basis for third party claims

The legal basis for any professional negligence claim will always depend on the circumstances of the case. Potentially, however, third party claims can be made on a number of different legal footings.

When harm is suffered, it is possible (although less common) that a third party has a contractual claim for compensation, either under the Contract (Third Party) Rights Act 1999 or by virtue of a collateral warranty between the professional and the third party. It is also possible that actionable legal duties arise under statute.

However, more usually, a third party claim for compensation arises as a result of the actionable duty of care owed by all professionals in negligence, under the law of tort. The ambit of this duty is not limited to the counter-parties to the professional’s retainer and may extend to a range of third parties.

The potential for harm

It is a facet of professional life that the work product generated frequently takes the form of information or advice, both of which are commodities capable of being disseminated with relative ease. Indeed, in today’s electronic world of email, instant messaging, Twitter and Snapchat, such dissemination has never been easier, faster or potentially far reaching.

It is also a facet of professional life that the advice and information provided by professionals is usually treated as authoritative and reliable, even when it is received second or third hand. This, coupled with the expense often associated with obtaining professional advice, means that where it is obtained and paid for by someone else there can be a keen inclination to rely on it.

Finally, and in part because of the wide range of purposes for which information and advice can be relied upon, the scope and scale of financial harm that can result from erroneous information or advice provided by a professional is significant.

For all of these reasons, and in contrast to medical negligence, for example, where a surgeon may operate negligently on and cause injury to a single patient, negligent information or advice from a professional is capable of causing significant harm to thousands. It is not surprising, therefore, that third party claims are so prevalent in the field of professional negligence.

The approach taken by the courts

For almost 70 years, the courts have endeavoured to perform a delicate balancing act. On the one hand, the courts have increasingly recognised that in modern life considerable reliance is placed on professional advice by third parties, who may suffer foreseeable harm if that advice is erroneous. On the other hand, where mistakes do occur, the courts have been cautious about exposing professionals to ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class’ (per Cardozo C.J. in Ultramares Corporation v Touche).

As the case examples that follow show, the courts have not always found this balancing process a straight forward one.

Third party claims against Accountants

In a commercial context, the financial information generated by accountants and auditors is varied and extensive. It can also be exclusive in nature and, therefore, of great value not only for the purpose for which it was commissioned but for a variety of ancillary and unrelated purposes too. Accordingly, and as a body of professionals, accountants are particularly exposed to third party claims from those who have suffered financial loss.

Case example: Caparo Industries Plc v Dickman

In Caparo the claimant investor had purchased shares in Fidelity Plc after the share price had fallen on the back of poor results announcement ahead of the year end. In doing so, the claimant had relied upon the auditors’ report, which had certified that Fidelity’s accounts gave a true and fair view of its financial status.

However, the claimant subsequently discovered that Fidelity’s accounts were inaccurate, in that they overvalued stock and undervalued after-sales credits. In a third party claim for professional negligence against Fidelity’s auditors, the claimant alleged that it was owed a duty of care as (i) a potential investor in Fidelity and (ii) an existing shareholder of Fidelity (after the first tranche of shares had been purchased). Had it known the true position, the claimant alleged that it would not have purchased the shares at the price it did, or at all.

On appeal to the House of Lords (and reversing in part the decision of the Court of Appeal below), it was held that no duty of care was owed by auditors to the public at large, as potential investors. Nor was any duty owed by auditors to individual shareholders, other than to protect them from losses in the value of the shares which they held, a breach of which would be actionable by the company. Accordingly, the claim failed.

In his often-cited speech, Lord Bridge stated:

‘It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless’.

Third party claims against Construction Professionals

Like accountants, construction professionals risk a significant exposure to third party claims. In many cases, such claims are made by the subsequent occupiers of development property, both residential and commercial. Whether those claims are likely to succeed, depends in part on the type of loss which the third party has sustained. In their quest to manage the liability of professionals, the courts have awarded damages for some losses, but not others.

Case example: Murphy v Brentwood DC

In Murphy the claimant had purchased a house on a large development site that had been partly filled and levelled. To prevent settlement, independent engineers had been instructed by the developer to design special foundations. These designs had then been submitted to the defendant council, who had approved them on the recommendation of its own independent engineers.

Unfortunately, the design of the foundations for the claimant’s property was defective and cracks appeared throughout the property. Faced with estimated remedial costs of £45,000, the claimant sold the property for £35,000 less than its market value in good repair. He then commenced a third party claim for professional negligence against the council for negligently approving the original foundations design.

Both at first instance and on appeal to the Court of Appeal, the court found in the claimant’s favour. However, on further appeal to the House of Lords it was held that the loss sustained by the claimant was pure economic loss (the defect in the house having been discovered before the occurrence of any injury to person or health or damage to property other than the defective house itself) for which no duty of care was owed to the claimant by the local authority.

Whether a local authority owed a duty in respect of injury to persons or ‘other’ property was expressly left open by the court, as was whether a builder of defective property could be held responsible for the cost incurred by a subsequent owner in protecting himself from potential liability to third parties in respect of personal injury.

Third party claims against Insurance Brokers

The nature of insurance brokers’ work is such that their exposure to third party claims is much more limited than it is for other professionals. However, such claims can arise, for example, where erroneous statements are made to third parties regarding the existence of insurance cover and where a third party has a direct financial interest in a policy which has been erroneously arranged.

Case example: Punjab National Bank v De Boinville & Others

In Punjab National Bank the claimant bank had provided finance to one of its customers for the purchase and shipment of gasoil. This was on the condition that suitable insurance against political and exchange control risk insurance was effected.

When claims were subsequently made against the insurance policies, multiple disputes arose. These included claims by the bank against the insurance brokers who had arranged cover.

Both at first instance and on appeal, it was held that at times when the bank was not in a contractual relationship with the insurance brokers, it was owed a tortious duty of care by them, both personally and as corporate entities. This was on the basis that it was a justifiable increment to hold that an insurance broker owes a duty of care to the specific person who he knows is to become an assignee of the policy, at all events if (as was the case here) that person actively participated in giving instructions for the insurance to the broker’s knowledge.

Third party claims against Surveyors & Valuers

The information and advice provided by surveyors and valuers may be relied upon by a number of third parties, such as intended purchasers, intended vendors, lenders or investors, whether original or subsequent. However, establishing reliance by a third party on a particular piece of professional advice is essential for any claim to succeed and can be difficult, particularly where the advice is either preceded or superseded by other erroneous advice.

Case example: Smith v Eric S. Bush (a firm)

In Smith the claimant was the intended purchaser of a modest residential property in Norwich, for which a mortgage was required. The claimant applied to the Abbey National Building Society and, as is usual practice, it instructed the defendant firm of surveyors to undertake a valuation for mortgage purposes. However, the valuation fee was paid to Abbey National by the claimant, who signed an application which provided that a copy of the valuation report would be provided to the claimant, without any acceptance of liability.

Eighteen months after purchasing the property, bricks from the chimneys collapsed and fell through the roof into the loft and the main bedroom and ceilings of the first floor. This was due to the failure by a previous owner to support the chimney breasts in the roof following removal of the chimney breasts on the first floor.

At first instance, the court found that the surveyor had been negligent in failing to check that the remaining chimney breasts were adequately supported. Notwithstanding the disclaimer, it also awarded damages against the defendant.

On appeal, both the Court of Appeal and the House of Lords approved the award. In doing so, the latter observed that the relationship between the claimant and defendant was akin to a contract and that the defendant had assumed responsibility to the claimant, as well as to the mortgagee. It also observed that the surveyor knew or ought to have known that the claimant would only contract to purchase the property if the valuation was satisfactory and that the claimant might suffer injury or damage or both if it did not exercise reasonable skill and care.

Third party claims against Solicitors

Whereas reliance by a third party is a key ingredient to establishing liability on the party of surveyors and valuers, the same is not always true of third party claims against solicitors. Moreover, third party claims against solicitors can arise as a result of the unique status of solicitors as officers of the court and/or as a result of an undertaking given to a third party.

Case example: White & Another v Jones & Another

In White, and following the resolution of a family row, the defendant solicitors were instructed by the claimants’ father to prepare a new will for him, under which the claimants would both be beneficiaries. Regrettably, however, little was done by the defendant to comply with its instructions and the claimants’ father died without a new will having been prepared.

The family were unable to agree on how the claimants’ father’s estate should be divided and in due course a prior will, which did not benefit either of the claimants, was admitted to probate. The claimants then commenced a third party claim against the defendant, asserting that its delay in preparing a new will amounted to professional negligence.

At first instance the court rejected the claim. However, it was later allowed by the Court of Appeal and, upon further appeal, the House of Lords. In the latter, it was held that where, as the solicitor can reasonably foresee, his/her negligence may deprive an intended beneficiary of an intended legacy in circumstances where neither the testator nor his estate will have any remedy against the solicitor, the duty of care owed to the testator should be recognised as extending to an intended beneficiary by virtue of an assumption of responsibility to them. Otherwise, a lacuna would exist in that the party owed the duty of care in contract and tort suffered no loss and the third party who suffered the loss was owed no actionable duty.

Third party claims against Emerging Professionals

The term ‘emerging professionals’ is intended to apply to those individuals working in modern, often unregulated, professions. Such professions are not only extremely diverse, but are growing in size and ambit, particularly in the IT sector. As such, it is difficult to offer general comment on the application of the law to them, the work undertaken by this category of professionals being equally diverse. However, it may be noted that the courts have been increasingly prepared to recognise duties to third parties by the traditional professions and there is no reason to think that emerging professionals will be treated any differently.

Case example: Duncan Investments Ltd v Underwoods 

In Duncan the defendant estate agents had been retained by receivers to sell a portfolio of properties. The claimant had expressed interest in the properties and was advised by the defendant as to the minimum sale price that each was likely to achieve on resale within 6 months. For the properties eventually purchased, the defendant advised that the aggregate minimum sale price was £547,500. In reliance on this advice, the claimant purchased 15 properties for the aggregate sum of £465,200.

On resale, the properties did not achieve the sums anticipated and the claimant commenced a third party claim for professional negligence against the defendant. As it turned out, the true aggregate value of the properties was only £415,250.

The court held that the defendant had owed the claimant a duty of care when advising on resale values, since it had known both that the defendant would rely on its advice in deciding what to offer and that it was unlikely to obtain other independent valuation advice.

Conclusion

To recover compensation for professional negligence, and in the absence of a clear contractual relationship, third party claimants will often have the additional burden of satisfying the court that a duty of care is owed to them. Depending on the nature of the harm suffered, this burden can be more or less onerous.

Where the harm is purely financial the task is often greatest, although where the circumstances of the claim are indistinguishable from those of other claims where a duty has previously been upheld, it is far from insurmountable. Even where the court is being asked to fashion a duty in new circumstances, this does not present a bar, as each successful new such case demonstrates. Furthermore, and in other cases where statutory duties exist, the task may become simplified.

Therefore, where businesses or private individuals have suffered harm as a result of the mistaken information supplied, advice given, action taken or omissions perpetrated by a professional person who they have not directly appointed under a retainer, they should not assume that they have no right of recourse against that professional. Instead, they should seek independent legal advice.

Further legal assistance

As professional negligence specialists, we act for clients nationwide to resolve claims against a wide range of professionals.

If you would like to arrange an initial consultation with us, free of charge or commitment, please do not hesitate to contact us on 0800 195 4983 or by email at mail@pnclegal.com.

As you can discover here, at PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.

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