Does professional indemnity extend to personal advice? Penny Lewis and John Eastlake explain current law

Has the rubicon been crossed in professional indemnity opening up a potential raft of claims from corporate clients?

Two pre-Christmas decisions, Patrick Wade & Jean Wade v Poppleton & Appleby and William Johnson v Gore Wood & Co, collectively raise the stakes for the advisory profession.

In the first instance decision in Poppleton & Appleby, the scope of a firm of insolvency practitioners' retainer was examined. A central issue was whether duties were owed to a corporate client and company directors, or extended to shareholders and directors in a personal capacity.

Rejecting the insolvency practitioners' argument that they were representing only the corporate entity, the court found that Poppleton had acted for the claimants in a personal as well as official capacity.

Accordingly, it owed a duty to advise them on their position. Why was this? Various reasons were given - notably, a letter to the claimants was addressed to them as "directors and shareholders", the claimants believed they were being advised personally and the court appeared to accept that the advisers should have understood and met client expectations. These factors plus circumstantial evidence supported the court's conclusion.

Fact sensitive though this decision may be, there are wider implications. The absence of an engagement letter undermined the defence case and emphasised that a proper letter identifying the client and clarifying terms would help avoid dispute later.

This case should be read in conjunction with Gore Wood, which revisited recoverability of damage post SAAMCO v York Montague Ltd [1997]. The court of appeal held that solicitors who negligently advised a company on the timeframe for litigation were liable for various losses suffered by its managing director and main shareholder. These included tax liabilities and cost of borrowings.

Having accepted that the personal retainer extended to Johnson as the company's guarantor, and as effective sole shareholder, the solicitors became exposed in damages for losses that fell to Johnson by virtue of his shareholding in, and position with, the company.

While Caparo v Dickman [1990] remains good law - the acid test being whether loss is the kind in respect of which the duty of care was owed, there are concerns that a scintilla of knowledge about a client's personal affairs could precipitate exposure to otherwise unforeseen damages.

Solicitors with commercial clients beware; this is a potential catch-22 situation. Can transactional advice be given in a vacuum? Where advice might have commercial implications, the dilemma is whether to address them or not inquire about the wider picture lest you become responsible for a range of losses if matters go awry.

  • Penny Lewis and John Eastlake are with Plexus Law, a division of Parabis Law