Monitoring and managing client risk is part of the day-to-day activities of most professionals. We all should consider each course of action from every potential angle to ensure our client’s position is protected. But the importance of also playing your role in mitigating the risks to yourself and to your organisation cannot be overstated. Many professional indemnity claims and complaints arise not from technical mistakes or inappropriate advice,but from poor risk management and administration.
In recent years, a number of landmark cases on the scope of a professional’s duty to their client have made it more important than ever to consider how risks can be avoided or mitigated by more careful consideration being given before issuing contract terms to a client.
Developing law on scope of duty
For almost 24 years, South Australia Asset Management Corp v York Montague Ltd (popularly known as “SAAMCo”) has been the leading authority on the “scope of duty principle”, i.e. the principle that, for damages to be recoverable for negligence, there must be a link between the loss suffered by a client and the scope of the duties owed to them by the (allegedly) negligent party.
The impact and, at times, the application of SAAMCo has been difficult to predict and, after two and a half challenging decades, the true importance of the scope of a professional’s duties was reconsidered by the Supreme Court in Manchester Building Society v Grant Thornton LLP (“MBS”). The court cast aside the “information” versus “advice” distinction, which had previously been used to distinguish between cases where a professional was responsible for an entire course of action and ones where they were responsible only for losses related to the particular information provided. Instead, the Supreme Court reiterated that the focus had to be on precisely identifying the matters for which the professional had assumed responsibility.
This landmark case revamped the SAAMCo principle by placing it into a newly expressed six-part test for determining liability for negligence:
- Is the loss or damage actionable in negligence?
- What are the risks to the client in relation to which the defender has a duty of care? (the “scope of duty” question)
- Did the defender breach their duty of care?
- Is the loss for which damages are sought the consequence of the defender’s negligence?
- Is there a sufficient nexus between the particular element of the loss for which damages are sought and the scope of the defender’s duty of care? (the “duty nexus” question)
- Is any element of the loss too remote from the defender’s negligence, or does it have another legal cause?
This test, in which the scope of duty principle is embodied in parts 2 and 5, applies to all forms of negligence. In the context of professional negligence, part 2 requires the court to consider the relationship between the professional and their client and to consider exactly what risks the professional’s advice was intended to protect against. Part 5 then requires consideration of whether a particular loss falls within the scope of that duty.
Limit scope
There are lessons to be learned from MBS and similar cases in terms of explicitly stating exactly what work will and will not be carried out, and under what circumstances, in the course of providing services to your client.
The key starting point is to establish in clear terms what you are undertaking to do for your client. Thereafter, work out what is not intended to be included as part of your instruction. These elements are the foundation of assessing the scope of your duties to your client.
Consider, in particular, whether there is a risk that it might be argued you were obliged to warn your client about certain risks or issues which are beyond the nature of the work actually being undertaken. If so, think about expressly excluding advice on such areas from the scope of the services being provided.
Any limitations on and exclusions of liability should be expressly set out in the letter of engagement in clear and explicit terms. Ambiguous terms are likely to be construed by the courts in favour of the weaker negotiating party (more likely the client rather than the professional), so consistency with the limitation clauses and wider contract must be ensured. Terms and conditions must also be reasonable in all the circumstances (including the identity of your client and nature and extent of your relationship with them), to avoid falling foul of regulations on unfair contract terms.
All professional firms should also ensure that limits of liability are reasonable and have discussions with the client in advance of any cap being agreed or in some cases, imposed.
Importantly, revisit your letter of engagement, appointment or other contract on a regular basis during the course of your instruction in order to avoid “mission creep”. Ensure the terms of business you originally issued remain fit for purpose as the instruction develops. Keep meticulous and consistent records of all discussions around the scope of your work and ensure evidence of those discussions is put to your clients in writing wherever possible.
A version of this article was originally published in The Journal of the Law Society of Scotland in May 2022.
