Lifecycle of a tech startup series: Intellectual Property
Negligence claims against professionals, such as financial advisors, solicitors, accountants and surveyors have been on the rise in recent years, and numbers are expected to continue to grow. This is due to an increased reliance on the advice of professionals (in both a personal and business context), claimants’ raised awareness of their legal rights, and the increasingly complex nature of work carried out. Further, in tough economic times, financial losses are often more evident.
It has always been the case that to succeed in a claim for professional negligence the claimant must prove three basic elements: that the professional owed a duty of care, that they acted in breach of that duty, and that the breach was the cause of loss to the claimant.
It is clearly established that the professional is only liable for the loss attributable to the failure which made him negligent. In other words, if the loss would have occurred in any event, even had the professional not been negligent, the professional will not be responsible for that loss.
Recent Case Law
This principle has been most recently applied in the case of Clack v Wrigleys Solicitors LLP  EWHC 413 (Ch).
In this case, Mr Clack agreed to lend the sum of £600,000 for a period of six months to his acquaintance Mr Brudenell, on the security of 30 shares (out of 100 issued shares) in a company ‘Z’. Mr Clack instructed Wrigleys to draft the loan and security documents. Mr Brudenell claimed that he was the owner of the shares in Z, although he failed to produce a share certificate in his name, or a register of members showing that he was a shareholder. Despite this, the loan was completed and the money transferred to Mr Brudenell. Unfortunately, Mr Brudenell only repaid £66,665 and was made bankrupt.
The shares in Z were in fact owned 50/50 by another individual and a company wholly owned by Mr Brudenell. When Mr Brudenell was made bankrupt, the shares were charged to other creditors, Mr Clack’s charge was unenforceable and he had no means of recovering his loan.
Mr Clack issued a claim for professional negligence against Wrigleys in relation to their failure to advise him that to proceed with the loan without having seen the share certificate or register of members would run the risk of the security being ineffective.
The court ruled that Wrigleys had been negligent in their failure to give this advice. It accepted that if Wrigleys had advised Mr Clack that he should obtain these documents before advancing the loan, then Mr Clack would have insisted on seeing them; Mr Brudenell would have been unable to produce them; and Mr Clack would not have proceeded with the loan; and therefore Mr Clack would not have lost the amount that he did in fact advance.
However, it did not follow from this breach of duty that Mr Clack was entitled to recover his full loss. Because Wrigley’s negligence related to advice concerning a particular feature of a transaction, and not concerning whether to proceed with a transaction as a whole, the court held that the assessment of quantum should proceed on the fictional basis that Mr Clack would have made the loan with an effective charge. Therefore, the court had to consider what loss Mr Clack suffered only as a result of having no security over the shares, and ruled that he may only recover the losses that resulted from the ineffectiveness of the security.
Since the evidence showed that the shares in Z were in fact worthless, Mr Clack was awarded only £30,000 on account of director’s fees that he might have earned in pursuit of his rights under a deed of undertaking that had been provided by the other individual shareholder in company Z.
The court ruled that Mr Clack’s loss was attributable to the risks inherent in the transaction, which he took on himself, and not to the breach of duty; because the loss would have arisen even if the security had been effective, the loss was his to bear.
This case is a useful reminder to claimants and their lawyers in professional negligence claims that it is necessary to fully analyse whether the professional is liable for the loss complained of. It is not uncommon for parties to rush into these claims because the breach of duty is clear, even though the biggest obstacle to overcome is often whether the breach caused the loss.
It is likely that in the foreseeable future more claims will fail at this hurdle than for any other reason, especially as it is a particularly relevant feature in negligence claims against property and financial professionals during a recession.
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