Australia: Professionals should clearly outline the scope of the retainer and stay within its confines

In brief - Avoid misunderstandings which can lead to claims

The recent decision of the England and Wales Court of Appeal in Mehjoo v Harben Barker (A Firm) & Anor [2014] EWCA Civ 358, whilst not binding in Australia, provides useful guidance for professionals on the importance of defining the scope of a professional's retainer in a formal retainer letter, and the circumstances where the retainer may, or may not, be extended.

Minimisation of CGT on the sale of shares

Mr Mehjoo was a dual Iranian/British national who retained a firm of chartered accountants, Harben Barker ("HB"), to provide general accountancy services and general tax advice. In 1999 Mr Mehjoo signed an engagement letter with HB to that effect.

The engagement letter included a stipulation that HB would provide tax planning advice if requested. In subsequent years, from time to time HB proactively volunteered tax planning advice, and advice on Mr Mehjoo's business and personal financial affairs, despite not having been asked to do so.

In 2004, Mr Mehjoo was in the process of selling his shares in a business. On 2 October 2004, he held a meeting with HB to discuss measures for minimising capital gains tax (CGT) on the sale. The claim by Mr Mehjoo was that HB failed to identify and advise that he may have been entitled to non-domicile status which carried significant tax advantages, and that as a result he should seek specialist advice on schemes such as a Bearer Warrant Scheme which could have avoided any CGT liability altogether. Ultimately, other attempts by Mr Mehjoo to avoid CGT proved unsuccessful.

English High Court decision at first instance: retainer had been extended by the proactive volunteering of advice

In Mehjoo v Harben Barker (A Firm) & Anor [2013] EWHC 1500 (QB), Justice Silber considered whether HB's retainer extended to CGT and tax planning advice (despite no express request for such advice) and whether HB had a duty to advise on the possibility that Mr Mehjoo was entitled to non-domicile status and ought to seek specialist advice in that regard.

His Honour found that HB's unsolicited tax advice from 1999 onwards had varied and expanded the retainer beyond the initial engagement letter. As a result, HB was required to consider Mr Mehjoo's best tax position and give appropriate advice as to how he could reduce his tax liability, even if no such advice had been expressly requested. This extended to the 2 October 2004 meeting, when HB was under an obligation to consider Mr Mehjoo's best tax position.

His Honour held in the alternative that, even if the obligation had not arisen earlier, the fact that HB was preparing to discuss CGT minimisation methods with Mr Mehjoo at the 2 October 2004 meeting meant that HB was under an obligation to identify and advise Mr Mehjoo on possible methods to minimise his tax liability.

Accordingly, his Honour concluded that HB was liable to Mr Mehjoo for failing to identify that he very likely had non-domicile status, that this carried tax advantages and that he should have been advised to take specialist tax advice.

Concerns that retainer could extend beyond scope of engagement letter

Understandably, his Honour's decision caused alarm throughout the accounting profession in England, with suggestions that an accountant could be obliged to identify issues and offer advice on specialised areas outside their expertise (even if that advice was simply to seek further advice), regardless of whether such advice had been requested by a client.

Further, there were concerns that a retainer could be expanded beyond an engagement letter as a result of unsolicited advice being provided by an accountant during the course of a retainer.

English Court of Appeal decision: retainer had not been extended to such specialised tax issues

HB appealed Justice Silber's decision and the Court of Appeal found unanimously in HB's favour. The lead judgment of Lord Justice Patten focused on whether in the circumstances HB owed a duty to Mr Mehjoo. His Honour found that no duty was owed as alleged, and therefore there had been no breach.

The primary basis behind Patten LJ's decision was that his Honour distinguished between the unsolicited tax advice which HB had previously provided - which his Honour considered to fall within the general accounting services set out in the 1999 engagement letter - and the type of tax issue which Mr Mehjoo alleged HB had failed to identify in relation to non-domicile status, which was a "much more sophisticated form of tax planning".

Accountants not obliged to advise on claimant's non-domicile status

His Honour also stated:

The reasonably competent accountant setting out to advise Mr Mehjoo of the tax consequences of the sale would not, in my view, have been under any obligation to raise for discussion the claimant's domicile unless it was relevant to the CGT liability on the disposal. The accountant would have known that it gave Mr Mehjoo no tax advantages in relation to the sale of the BFL shares unless the situs of the shares could be changed. As this was something which HB neither knew or could have been expected to know was achievable, there was no reason to mention the matter still less a liability in negligence for not having done so.

This allowed Patten LJ to find that there had been no expansion of HB's retainer by the time of the 2 October 2004 meeting. His Honour stated:

... HB were not and had never held themselves out to be specialist tax planners; and had never given Mr Mehjoo advice of that sort. It is therefore surprising to say the least that ... they should be taken to have assumed a positive duty to give advice of that kind. The judge's conclusion that such a duty had arisen by the time of the 2 October meeting is not, in my view, sustainable.

No general duty to refer a client to a specialist for advice

Patton LJ also confirmed that there is no general duty to refer a client to a specialist for advice. Rather, the duty to refer a client to a specialist is determined by having regard to the terms of the retainer in all the circumstances which were known or should reasonably have been known by the accountant, where the accountant should reasonably have appreciated that the client needed his advice and guidance in respect of the tax liabilities to which entry into the transaction would expose it.

The circumstances include the client's relevant business experience and the ready availability of and likely recourse to other advice.

The position in Australia: clarity in the terms of the retainer is critical

The Court of Appeal's decision in Mehjoo appears to be heavily dependent upon Patten LJ being prepared to draw a line between the unsolicited tax advice which HB had previously provided; and the advice as to potential non-domicile status (and obtaining further specialised advice in that regard) which HB had allegedly failed to give.

Whilst Patten LJ commented that "it is often dangerous as well as unhelpful to draw analogies with other types of profession", the case is useful in affirming that a professional's duty is established by the scope of his or her retainer and the limits of his or her expertise, with no general duty to refer the client to a specialist in the absence of the factors discussed above.

In Australia, the scope of an accountant's duty to their client is determined primarily by the retainer, making clarity regarding the terms of that retainer critical (noting that duties may also be implied by the general law or by statute).

Claim against solicitor advising prospective guarantor of loan

However, Australian courts have on occasion considered a professional's retainer to be more open-ended than the English court did in Mehjoo. For example, Provident Capital Ltd v Papa [2013] NSWCA 36 was a claim against a solicitor advising a prospective guarantor of a loan.

The NSW Court of Appeal found that the solicitor was under a duty to identify and point out the speculative nature of the enterprise for which the loan was being obtained, and to advise the prospective guarantor in strong terms to seek further advice as to whether the loan could be properly serviced.

Courts not unanimous in determining the scope of a professional's duties

In short, it could be said that both Mehjoo and Provident Capital were cases concerning whether a professional was required to identify possible issues - strengths, weaknesses, opportunities and threats - that warranted further specialist advice, and to advise a client to seek that advice.

In Mehjoo the possible issue was potential non-domicile status and tax advantages flowing from that. In Provident Capital it was the viability of a business to be supported by a loan being guaranteed.

In Mehjoo it was essentially found that there was no obligation to identify the possible issue; in Provident Capital it was found that such an obligation existed.

Many professions at risk of claims that the retainer has been extended

There can be many situations where a professional may - in an attempt to "value add" in good faith - stray beyond the scope of his or her retainer or expertise, and expose himself or herself to an allegation that the retainer has been varied or extended, as was the case in Mehjoo. For example:

• solicitors giving quasi-business advice in the course of providing legal advice
• architects creating the impression (eg through loose terminology) that they are responsible for overseeing, supervising or ensuring the work of builders, when in fact they are undertaking no more than a contract administration role
• engineers with structural and geotechnical expertise who may be retained as an expert in one discipline on a project but seek to offer advice in respect of the other discipline
• migration agents involving themselves, for example, in the recruitment of sponsors for the purposes of a sponsored visa application

Communicating clearly with clients about the scope of the retainer and any changes to it

The bottom line is that cases such as Mehjoo reiterate the importance of:

• clearly outlining the scope of a professional's retainer from the outset
• diligently staying within the confines of that retainer
• clarifying - preferably in writing - with clients the extent to which that retainer has been expanded (or reduced) due to circumstances, conduct, or the client's request
• being prepared to inform clients of the boundaries of the retainer which the professional is not prepared to go beyond
• but also understanding your client, including their relevant business experience, and the availability of and likely recourse to other specialist advice

That way, a professional can stand the best chance of avoiding misunderstandings which lead to claims - a helpful reminder for both professionals and their insurers alike.