Barker v Baxendale Walker Solicitors (A Firm) [2017] EWCA Civ 2056: case note

Transcription

1 Barker v Baxendale Walker Solicitors (A Firm) [2017] EWCA Civ 2056: case note 1. All paragraph numbers, unless otherwise stated, refer to Barker v Baxendale Walker Solicitors (A Firm) [2017] EWCA Civ Introduction 2. All individuals are fallible. For this reason, it is trite law that, in negligence, individuals need not behave perfectly, but rather need only behave reasonably. However, it is also established law that, in certain circumstances, legal practitioners may be under a duty to advise their clients that their legal opinion, reasonably held, may nevertheless turn out to be wrong (Queen Elizabeth s Grammar School v Banks Wilson [2002] PNLR 14; Balogun v Boyes Sutton and Perry [2017] PNLR 20). By a judgment given on 8 December 2017, in Barker v Baxendale Walker Solicitors (A Firm) [2017] EWCA Civ 2056, the Court of Appeal has again considered when precisely such a duty may be owed. Facts 3. In 1998, the Claimant, Mr Barker, advised by his Defendant solicitors, had transferred his company shares into an employee benefit trust ( EBT ). The EBT provided that, upon the death of Mr Barker and his wife (but not before), trust monies could be applied for the benefit of the Barkers children. By this scheme, Mr Barker hoped to pass on the financial benefits of his shares to his children, while avoiding payment of capital gains tax and inheritance tax ([9] [10]). 1

2 4. The relevant legislation provides (in summary) that, to obtain the desired tax benefits, EBTs cannot be used to benefit individuals who are connected with a participator in the underlying company (Inheritance Tax Act 1984, s.28(4)). Here, both parties agreed that: (i) (ii) (iii) Mr Barker was a participator; At the time of the transfer, his children were connected with him; and At any later time of application (once Mr Barker was dead) his children would no longer be connected with him ([22] [25]). 5. Crucially, the 1984 Act is arguably ambiguous as to the precise point in time at which the existence of a connection will render such a transfer liable for tax. In Barker, each party respectively advocated the following possibilities: (i) The initial time of transfer ( the Transfer Interpretation ); or (ii) The later time of application of the trust monies ( the Application Interpretation ) [26]. 6. The Defendant had adopted the Application Interpretation, and duly advised the Claimant that the transfer would avoid tax ([9], [59]). The Defendant apparently did not even anticipate the Transfer Interpretation ([73]). Unsurprisingly, HMRC adopted the Transfer Interpretation, and it pursued the Claimant for unpaid tax and interest accordingly ([17]). On receiving legal advice from alternative sources that the Transfer Interpretation was probably correct, the Claimant paid HMRC over 11 million in settlement ([18] [19]). He then instigated the instant professional negligence proceedings against the Defendant. 2

3 Legal arguments 7. At trial, the Claimant accepted that reasonable, competent, solicitors could have concluded that the Application Interpretation was correct ([59]) (as the Defendant in fact had). However, he argued that there had nevertheless been a significant risk that, contrary to their opinion, the Transfer Interpretation was correct, and the Defendant should have advised him accordingly ([2]). Both parties agreed that the matter should be judged by reference to the Bolam test: whether reasonably competent solicitors could have acted as the Defendant had acted ([49]). At first instance, Roth J made the following findings: 7.1. The Defendant should have provided a general health warning that, the scheme being a tax avoidance scheme, there was an inherent possibility HMRC would challenge it and a corresponding possibility that the scheme would fail. However, upon receiving such a warning, the Claimant would have proceeded anyway ([4]); 7.2. The Transfer Interpretation was not obvious or likely ([21]) Where (as here) a solicitor s interpretation is likely to be correct, he probably has no duty to warn that his interpretation could be wrong unless the arguments are finely balanced. Here, the arguments were not finely balanced, and the Defendant had thus not been obliged to give the specific warning contended for by the Claimant ([21]). However, had such a warning been given, the Claimant would not have proceeded. 8. The Claimant pursued his case to the Court of Appeal, arguing (in summary) that he had been entitled to a specific warning of a significant risk (in addition to the general health warning accepted by Roth J). The Court of Appeal unanimously allowed the appeal, holding as follows: 3

4 8.1. The question of whether a solicitor is bound to warn of a significant risk that he might be wrong, is heavily fact sensitive. Even where the solicitor is likely to be correct, it does not necessarily follow that there will probably be no such duty unless the arguments are finely balanced, and Roth J was wrong to conclude otherwise ([61] [62], [71]) Here (reversing Roth J), the Transfer Interpretation was very likely to be correct ([42]) Here, the Defendant did owe a duty to give a specific warning to the Claimant given: the likely true construction of the legislation; The nature of the tax avoidance scheme being marketed to the Claimant; and The large sums involved ([65] [67]). Discussion 9. The High Court and Court of Appeal judgments spent considerable time assessing which Interpretation was more likely to be correct. However, the beating heart of the Court of Appeal s judgment is probably not its legislative analysis, but rather the perception that the Defendant had marketed to the Claimant a product an aggressive tax avoidance scheme which ran contrary to the purpose of the 1984 Act, and which might appear, on the face of it to be too good to be true ([65], [75] [77]). 10. Indeed, reasonable, competent tax specialists should know that, since Ramsay v IRC [1982] AC 300, the courts have been reluctant to uphold artificial financial transactions designed merely to frustrate the purpose of tax legislation. Tax specialists should view with healthy scepticism any legislative interpretation permitting such frustration, and with corresponding respect any reasonable argument permitting a more orthodox conclusion. In a short concurring judgment, Patten LJ (agreeing with Asplin and Henderson LJJ) further concluded that the Defendant would still have owed the pleaded 4

5 duty even if the arguments for the Transfer Interpretation had only been finely balanced ([93]), and it is submitted that, for the reasons above, he was plainly correct to do so. 11. Furthermore, at first instance, Roth J had derived comfort from the fact that various other professionals who had had occasion to advise in the matter had agreed with the Defendant that the Application Interpretation was correct. In the Court of Appeal, however, Asplin LJ declared that this was irrelevant. Her Ladyship s reasoning was that such professionals did not even represent a body of professional opinion for the purposes of the Bolam test ([27], [68]). 12. In the author s opinion, this stance is not unexpected. Even in clinical negligence proceedings, the courts are arguably showing increasing reluctance to accept as definitive the views of medical professionals merely because they are the views of such professionals (See, for example, Muller v King's College Hospital [2017] QB 987). Furthermore, in non-clinical professional negligence proceedings, the courts have traditionally been far more willing to judge such professionals normatively, by what the court considers reasonable, rather than descriptively, by what their peers consider reasonable (see, for example, Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] Ch 384, 402; Patel v Daybells [2002] PNLR 6, [41]. 13. Asplin LJ did reject an attempt by the Claimant s counsel to interpret the Bolam test in light of the clinical consent decision in Montgomery v Lanarkshire Health Board [2015] AC 1430, holding that legal advice was part of the very service being provided and thus intrinsically covered by the Bolam test ([63] [64]). However, this ruling had little practical significance. The fundamental consequence of Montgomery in clinical consent cases is to impose a normative test as to the advice which a patient 5

6 is entitled to receive free from consideration of what other medical practitioners considered appropriate. Here, Asplin LJ simply applied the Bolam test in a similarly normative way, without assistance from Montgomery. Conclusions 14. Ultimately, Barker probably breaks no new ground. Previous case law established that solicitors may, in certain circumstances, be under a duty to advise their clients of a significant risk that their legal analysis is wrong; Barker confirmed that that test is highly fact specific and applied it to the instant facts. 15. Nevertheless, Barker is a clear warning to legal practitioners that legal advice is not given in a vacuum. Practitioners should be aware of relevant commercial considerations and the way the court is likely to respond to them and in the particular field of advice about tax avoidance those considerations will include, as here, HMRC s likely interest in the large amount of money at stake, the underlying purpose of the relevant tax legislation, and whether the interpretation relied upon by the adviser for the scheme to work was at odds with the legislation s purpose. 16. The case is notable in that it appears that courts are finding increasingly unpersuasive any argument that fellow professionals agreed with the professional defendant. It follows that in professional negligence proceedings, legal practitioners should be fully prepared to justify why the professional defendant was normatively right (or wrong), irrespective of who happened to agree or disagree with her views. 6 MICHAEL PATRICK