Professional negligence: claiming a breach of contract, a breach of duty, or both

Professionals are relied upon by businesses to provide expert advice in a particular subject as they are presumed to have the qualifications and knowledge to provide the answers you require. For this reason, professionals are expected to practice their specialism with reasonable skill and care.

However, as a result of such reliance on specific consultancy, there is the possibility that incorrect advice from a third party could cause loss and unwelcome consequences to you or your business. In such cases, you may be entitled to recover the losses that have been incurred as a consequence of professional negligence. 

What is professional negligence?

Professional negligence occurs where a professional advisor fails to perform their responsibilities to the required standard of a reasonably competent person in their profession. This means the professional made a mistake and as a result the claimant suffers a loss, generally a financial loss or a reduction in an anticipated financial gain.

Is professional negligence the same as poor service?

Poor service is different from professional negligence. Poor service usually occurs due to lack of communication, slow progress or a mere error of judgment, whilst professional negligence is failure to meet the standards of expertise that you employed them for. A professional negligence solicitor can assess your case and will tell you if you are in a position to make a professional negligence claim.

Examples of professional negligence

Some examples of professional negligence are:

• An accountant who did not advise about tax relief
• A solicitor making errors when preparing a will
• An insurance broker failing to obtain policy cover that would be relevant to the fraud risk
• A financial advisor recommending an unsuitable mortgage product
• A surveyor who failed to identify structural problems with a property

Are there different types of professional negligence?

Professional negligence claims can be made against professionals from a wide range of industries. Generally, industries have their own regulatory body and their primary goal is to protect the public, doing this by setting a Code of Conduct that those industries must abide by in order to provide a professional service.

Below is a non-exclusive list in professional negligence claims against the following industries:

Lawyers (Solicitors & Barristers)

Solicitors

Solicitors are regulated by the Solicitors Regulation Authority (SRA). The SRA’s purpose is to protect the public by ensuring that solicitors meet high standards and by acting when risks are identified. All solicitors must comply with the SRA Handbook, which sets out the SRA Code of Conduct. The SRA can refer complaints to the Solicitors Disciplinary Tribunal (SDT) in which solicitors can be prosecuted for their conduct.

A firm of solicitors must appoint a compliance officer for finance and administration and legal practice, who is responsible for managing the risks of the firm’s legal services. The compliance officer must record any misconduct or breaches of compliance with the SRA Handbook, and self-report breaches promptly to the SRA. Law firms are also required to maintain professional indemnity insurance in the event of claims against them.

Barristers

The regulatory body for barristers is the Bar Standards Board (BSB). The board is responsible for enforcing standards of conduct and handling complaints against barristers. Self-employed barristers are required by the BSB to purchase their primary layer of professional indemnity insurance from Bar Mutual. 

Financial Advisors

The key legislation governing the regulation of financial professionals is the Financial Services and Markets Act 2000 (FSMA).

The main regulator for financial professionals is the Financial Conduct Authority (FCA) and it is responsible for protecting consumers and the conduct of business. The main rules made by the FCA which are applicable to financial professionals are found within the FCA Handbook.

Key Points:

• The FSA can take disciplinary actions against a financial institution that fails to comply with their rules.
• Claims can be brought through the courts or the Financial Ombudsman Service (FOS).
• Disputes through the FOS will be decided on a fair and reasonable basis and not on the basis of legal principles. The FOS is expected to consider the law, relevant rules and good practice in the financial industry, when deciding on a fair and reasonable outcome.
• The findings of the FOS are binding and the maximum award was increased to £355,000 for complaints referred to them on after 1 April 2020, about acts or omissions by firms on or after 1 April 2019.     
• The Financial Services Compensation Scheme (FSCS) acts as insurance for eligible customers when the authorised financial institution cannot pay, normally because it is insolvent. The FSCS is funded by financial services firms and the service provided is free. The compensation limit is up to £85,000.
• Most FCA regulated firms are required to have professional indemnity insurance.  

Insurance Companies

Insurance professionals follow the same dispute route as the financial professionals because they are governed by the FCA. The FCA’s thematic review of insurance professionals contributes to the development of a theme, where the FCA places greater scrutiny over product value in the general insurance market.

The thematic review is intended to provide further clarity on the expectation from insurance companies in general insurance distribution. This means that insurance companies must understand their client’s business, the client’s insurance requirements and the insurance that they are placing for their clients. In addition, they must ensure that the client understands the insurance product that it has procured and bring to their attention the onerous aspects of the insurance policy.

The Insurance Act 2015, which came into force in 2016, places a duty on the policyholders to disclose all material fact and information about the business, not misrepresent the business and not provide misleading information. For this reason, the insurance companies have a duty to understand and highlight the impact that the Insurance Act has on policies that it is placing for its client.

Accountants

The Financial Regulatory Council (FRC) is an independent disciplinary body for accountants and accountancy firms and operates a disciplinary Accountancy Scheme (AS) for the profession. The AS has oversight over six chartered accountancy recognised supervisory bodies. Currently, those relevant to regulation in England and Wales are:

• The Institute of Chartered Accountants for England and Wales (ICAEW)
• The Association of Chartered Certified Accountants (ACCA)
• Chartered Institute of Management Accountants (CIMA)
• Chartered Institute of Public Finance and Accountancy (CIPFA)

Key Points:

• The six chartered accountancy bodies are self-regulated. This means that they directly regulate their individual firm members, including their members’ conduct. However, some of those bodies have entered into arrangements with the FRC to investigate cases of suspected professional misconduct of important issues effecting the public interest. The decision whether to investigate is made by the Conduct Committee and is done under the AS.
• Although each professional accountancy body has its own insurance scheme requirements, all members are required to have professional indemnity insurance.
• There are plans by the government to replace the FRC by a new regulator, the Audit, Reporting and Governance Authority (ARGA). It was recently confirmed that ARGA will commence in the second quarter of 2023. The government’s aim with this reform is to improve transparency, as well as a desire to see enhanced assurance through greater focus on internal controls and the way in which companies are run, while also increasing accountability for directors.

What does ‘standard of care’ mean in relation to professional negligence?

In most professional negligence claims you will be alleging a breach of contract as well as breach of duty, or both. The reason for this is because professional negligence can be based on a breach of clause in the contract made between the professional and the claimant, as well as a breach of duty of care owed by the professional to the claimant in the tort of negligence. Professionals can also owe fiduciary duties to their clients. This discussion will explain the standard of care in relation to contract and tort.

How is the standard of care determined differently in contract and tort?

Although the professional may own a standard of care in both contract and tort, different tests apply in determining this. The contract may impose an absolute obligation on to the professional, whilst tort will examine if the professional acted reasonably.

It’s advisable to determine at an early stage which standard of care applies to your dispute and the time limit barriers, as discussed below. Both factors will have an impact on your decision and dictate if you’re entitled to start proceedings in contract or tort or both.

Standard of care in contract law

In contract, the standard of care may be expressed in the contract itself or be implied by statute. The contract is the source of the professional duties owed to you, as it sets out the scope of the professional’s duties and obligations. Usually, the contact is in writing and should clearly set out the extent of the work to be carried out by the professional.

Where the contract is not in writing, it may be difficult to establish what the professional’s duties and obligations are. The Supply of Goods and Services Act 1982 (SCSA 1982) makes it clear that where the professional is acting for a business, it must provide a service to its client with reasonable care and skill. This means that the professional must possess and exercise reasonable skill in the same way his peer or a sufficient responsible body would have exercised in similar circumstances. 

Requirements imposed by the law of torts

To bring a successful professional negligence claim, in tort you need to demonstrate that all three of the requirements below apply:

1. Duty of care: A professional owes a duty not to cause harm to their client. For example, when a professional provides advice to their client, they must ensure that the client understands the risks involved and that the products are suitable for the needs of the client. In addition, it is necessary to demonstrate that there has been an assumption of responsibility towards the claimant and that a specific relationship exists between you and the professional.
2. Breach of duty: This, put simply, means that the professional in question has fallen below the standards of a reasonable, competent professional. This in turn means that negligence would occur only if the professional made an error which no reasonable member of that profession would have made, in the same circumstances.
3. Causation: The loss suffered must have been caused by a negligent act. If the loss would have occurred regardless of the negligence advice, then you may not have a claim in tort. It’s not enough to establish that you might have received negligent advice, you must also show that you relied on such advice.

Is there a time limit for professional negligence claims?

Time limits for professional negligence claims are determined either by statute or by an exclusion or limitation clause in the contract.

Statutory time limit

The Limitation Act 1980 (LA 1980) sets out the timeframe within which proceedings need to be started. The primary limitation period for causes of action in contract and tort is six years. The six-year period starts on the date that the cause of action occurs. However, the limitation period position between contract and tort is different:

• In contract, the cause of action occurs as soon as the contract is breached, irrespective of when damages are sustained. For example, if a solicitor made an error in the contract when you exchange a contract to buy a house, it will be the date of exchange of contracts. However, the date of breach may be more difficult to ascertain where the breach of contract consisted of an omission, for example, when an accountant failed to advise about tax relief. The court’s position might be that the omitted act should have been carried out within a reasonable time.  
• In tort, the cause of action occurs when all elements are present – duty of care, breach of duty and damage. The difficulty in this case is that in some circumstances the cause of action only occurs when the claimant sustains damage, which may or may not be the same date as the breach of duty.

Non-standard scenarios

Sometimes the claimant might be unaware that they have suffered damage until after the expiry of the six-year period. To meet this problem, Section 14A of the LA 1980 provides a secondary limitation period. The time limit in these instances is three years from the date the claimant had knowledge of the negligence. The knowledge could be either actual or constructive. ‘Constructive knowledge’ means knowledge that you have reasonably been expected to acquire. However, when discovery of the loss was because of negligent advice from a professional more than 15 years ago (referred to as the 15-year longstop), then the claimant won’t be able to make a claim.    

Another potential scenario is when the defendant deliberately concealed knowledge that he acted negligently. This applies in situations where the professional committed a deliberate breach of duty in circumstances where it was unlikely to be discovered. The limitation period is six years from when the claimant discovered the concealment.

Exclusion or limitation clause in the contract

For contract disputes, an exclusion or limitation clause must be incorporated in the contract and brought to the attention of the claimant before the contract is concluded. As a general rule, a professional cannot restrict or exclude their liability for loss and damage resulting from their negligence.   

In the case of loss or damage resulting from negligence, liability can be restricted, provided the exclusion or limitation clause satisfies the Unfair Contract Terms Act 1977 (UCTA) reasonableness test. This means that the clause must be fair and reasonable to be effective and the court must consider the bargaining power of each party to the contract.

The use of an exclusion clause which excludes liability for breach of contract, or claims to permit a contractual performance substantially different to what was expected or to allow inadequate service, are prevented by UCTA. 

It’s also important to note that it is not possible to exclude or restrict liability for death or personal injury resulting from negligence.

In summary, calculating the limitation period for a professional negligence dispute can be a complicated process. The issues relevant to these types of disputes are not straightforward and if in any doubt, it’s advisable to consult a specialist professional negligence solicitor as soon as possible.

How to apply the pre-action protocols for professional negligence disputes

Currently there are two protocols designed to deal with professional negligence disputes:

• The Professional Negligence Pre-Action Protocol (professional negligence PAP)
• The Construction and Engineering Disputes Pre-Action Protocol (CEDPAP)

The professional negligence PAP applies (but is not limited) to claims against solicitors, barristers, accountants and tax advisors. Whilst the CEDPAP applies to claims against architects, engineers and quantity surveyors.   

What’s the primary purpose of the protocols? 

The primary purpose of the protocols is to allow potential claimants to resolve their dispute without involving the court. As a general rule, court proceedings should be your last resort. Failure to comply with the protocols could result in the court imposing cost sanctions, so it’s vital to take their requirements seriously.

(i) The process under the Professional Negligence Pre-Action Protocol

The timeframes and steps that parties should take are as follows:

Preliminary Notice

• The claimant should notify the professional in writing of the intention to start a claim. The Preliminary Notice letter should contain brief details of the claim and the financial value (if known).

• The letter should remind the professional to contact its professional indemnity insurers.

Most professionals carry insurance cover that ought to cover both the damages you would claim from the professional and the legal costs of the case. Reminding the professional to contact their professional indemnity insurers will enable you to establish at an early stage if the professional has insurance and if not, whether the professional has the means to pay compensation. 

Letter of Claim

• The Letter of Claim should set out a clear, chronological summary of the facts leading to the dispute, including copies of any key documents, confirmation of whether or not an expert has been appointed and an explanation of the legal argument that will be relied upon in support of the case. 

• The Letter of Claim should show how the financial loss is calculated and an indication of the financial loss suffered as a result of the negligence. If details of the financial loss cannot be supplied, the claimant should explain why and state when it will be in a position to supply this information.

• The claimant should ask the professional to pass a copy of the letter to its professional indemnity insurer. 

The claimant is encouraged to consider adjudication. Reasons must be given if there is no intention to refer the dispute to adjudication. On the other hand, if the claimant wishes to adjudicate then they should propose three adjudicators or seek a nomination through an adjudicator nomination body (ANB). The professional negligence adjudication scheme has been launched by the Professional Negligence Bar Association (PNBA) to deal with claims against all non-clinical professionals.

It’s important to remember that even though the Letter of Claim does not have the same status as a Statement of Case, in the event of future proceedings, any material differences between the Letter of Claim and the Statement of Case can be considered by the court when costs are being considered.

Letters of Acknowledgment to the Preliminary Notice and Letter of Claim

The professional is obliged to acknowledge receipt within 21 days of receiving both the Preliminary Notice and the Letter of Claim. Although at this stage there are no requirement for further action, it is advisable that the professional take steps to gather and retain all relevant documents to use as evidence should a dispute occur and notify his insurers.

Investigation Period

• Within three months of the date that the Letter of Acknowledgement was provided, the professional should respond in detail to each of the arguments within the Letter of Claimwith either a Letter of Response or a Letter of Settlement, or both.

• In the event extension is required, the professional should contact the claimant to explain the cause of the problem and confirm when it expects to conclude its investigations.

• The claimant should agree to any reasonable request for an extension. 

During the three-month period, it’s advisable to carry out proper investigation of the claim by obtaining evidence and proof witnesses. The professional should also consider whether the Letter of Claim complies with the Professional Negligence PAP. They should do this by examining what evidence is provided for the allegations, and requesting further information from the claimant in the event of non-compliance or lack of supportive evidence. 

Letter of Response

• The Letter of Response should make it clear whether liability is admitted in whole, in part or whether it is denied. If liability is denied, the professional should explain why, by reference to the specific allegations that have been made against it.
• If the professional disputes the claimant’s version of events, then it should provide its own version of events together with additional documents that it intends to rely upon.  

At this stage it might be appropriate to raise the possibility of alternative dispute resolution (ADR), either in the Letter of Response or as a separate without prejudice letter.

Letter of Settlement

• If the professional accepts liability, then the Letter of Response should be accompanied by a Letter of Settlement. The Letter of Settlement is usually in the form of without prejudice letter or without prejudice save as to costs.

• When a Letter of Settlement is sent to the claimant and it appears that progress can be made with correspondence, then court proceedings should not commence until six months after the Letter of Acknowledgment, to give the parties an opportunity to negotiate a solution.

• If the parties fail to reach a solution after the six-month period, they should agree within 14 days whether the period should be extended and for how long, and identify the issues in dispute that can be agreed. Only when an extension of time is not agreed, will the claimant be allowed to start court proceedings.

(ii) Alternative Dispute Resolution (ADR) & the Professional Negligence Pre-Action Protocol

Even after proceedings have been issued, the courts encourage parties to engage in ADR. For any party that unreasonably refuses to engage in ADR there is a risk of cost penalties, even if that party succeeds at trial. The Professional Negligence PAP recommends the below forms of ADR:

Mediation

Mediation is a conciliatory process aimed at resolving a legal dispute with the help of an independent mediator. The consolidation takes place in a private forum and the process is confidential. It is a preferred method for professional negligence disputes as it often leads to a successful resolution of the dispute on the day of the mediation.

Adjudication

Since May 2019, the PNBA, a voluntary adjudication scheme, deals with professional negligence disputes. It is open to claims against all non-clinical professionals. The objective is to provide cheap and swift means to enable the parties to agree a solution to their dispute with the assistance of a nominated Adjudicator. If the decision of the Adjudicator is favourable and the parties accept the decision, then it becomes final and binding. If the decision is unfavourable, the parties have the opportunity to either go to court or arbitrate.

Arbitration

Both parties need to agree to resolve the dispute through arbitration unless there is an arbitration clause in the professional letter of engagement. The process is private and confidential. The decision of the arbitrator is binding. Arbitration can be as formal and as costly as litigation and for this reason is not considered as a first step in attempting to resolve a professional negligence dispute.   

Early Neutral Evaluation (ENE)

During Early Neutral Evaluation (ENE) an independent evaluator is appointed to assess the dispute and give a non-binding viewpoint on the merits of the dispute to the parties. Along with this, an evaluation of the strength of the evidence will be provided to address the legal issues at hand and enable the parties to better understand how the dispute might fall at trial (if considered). The intention is that the parties use ENE as the foundation for settlement negotiations.

Ombudsmen schemes

There are several ombudsman services that can help in resolving claims of professional negligence, depending on the type of the dispute. Their role is to provide a professional code of conduct and maintain a framework for client redress and compensation that exist alongside the courts. These are usually cost-free and once a decision by the relevant ombudsman is accepted, the complainant cannot sue for any shortfall in the courts.

Another aspect to consider is the compensation award by the Ombudsmen – the Legal Ombudsman cannot award compensation more than £50,000 and the Financial Ombudsman no more than £355,000 (and note that the latter limit is dependent upon the time when the case was brought to them).  

Professional negligence is a complex area of law. Deciding which route is best for you depends on your particular circumstances. A dispute resolution solicitor will advise you which ADR option is reasonable for your dispute and in your best interests.     

(iii) The process under the Construction & Engineering Disputes Pre-Action Protocol

The timeframes and steps that the parties should take are as follows:

Contractual requirements

As a first step it is important to check the relevant contractual documents to establish if there is an ADR clause and whether the ADR clause is mandatory or optional. If the requirement is mandatory, all steps required should be completed before commencing the CEDPAP. Failure to do so may result in the court ordering specific performance to complete the prescribed steps before reverting to litigation.

Letter of Claim

The Letter of Claim should include information about the basis of the claim and the nature of the relief sought. This is to allow the parties to consider their own position and their strategy in dealing with the dispute. However, unnecessary and disproportionate costs incurred during the pre-action stage is not considered favourably by the court.

Professional’s response

The professional must acknowledge a letter of claim within 14 days of receipt and provide a letter of response within 28 days.

Once the letter of claim is received, it’s important to check your insurance policy on how and when to notify them that a claim will be made against you. Failure to comply with the insurers’ notification policy could result in insurers declining policy cover or to issue a claim for breach of a notification notice. It is advisable to inform your insurers as soon as you receive the letter of claim.   

Counterclaim

The claimant should provide a response within 21 days of the professional’s Letter of Response.

Pre-Action Meeting

• The parties must meet within 21 days after receipt of the Letter of Response or 21 days after receipt of the claimant’s Letter of Response to the Counterclaim (provided the claimant intends to respond to a counterclaim). The aim of the meeting is for the parties to agree what the main issues of the dispute are, to identify the root cause of the disagreement, and consider how to resolve the dispute without recourse to litigation.

• If litigation is unavoidable, the parties should seek to agree if expert witnesses are required and the extent of disclosure of documents.   

• The parties may agree longer periods of time with any of the prescribed steps, however, no extension can exceed 28 days in the aggregate. In document-heavy matters or in multi-party disputes it might be difficult to gather the necessary evidence in time. If this is the case, the parties have the option to agree in writing to opt out of the CEDPAP, with an agreement to opt back in at a later date.  

It is essential when you become aware of the possibility of a dispute to consult your document retention and management policy. Typically, construction and engineering disputes are document-heavy and the expectation by the CEDPAP to disclose all relevant documents to enable each party to understand the other’s case makes quick access to the relevant documents crucial. If a party refuses to provide documents during the CEDPAP stage, the court may exercise its discretion to grant an order for pre-action disclosure.

How to prove professional negligence

For a professional negligence dispute to be successful you will need to identify if you have grounds for the claim and the losses involved. To succeed in your claim, you must prove:

• That you were owed a duty of care by the professional. Most professionals will ask clients to agree and sign a contract before commencing work and this will contain details of what services were agreed to provide and compare this to what was actually done. This will enable you to determine if there is a breach of contract and whether it may lead to a parallel claim for breach of contract and breach of duty.
• The professional breached that duty of care in failing to deliver their services to the standard of a reasonably competent professional in that profession. You will need to demonstrate that the services provided by the professional fell below the standards of a reasonable professional, having regard to the standards normally expected in that profession. To prove this, you will require expert evidence. This expert evidence tends to be a report prepared by another professional and it will look to highlight what the correct advice or conduct should have been.

The measure of skill and care in contractual claim (as discussed above) is slightly different to that of a tort claim in that the case is looking to ascertain what would be deemed as reasonable care and skill. The measure in a tort claim is an objective test that looks to ascertain what a reasonable person might expect.

• As a result of that breach, you suffered loss. The losses must be proved to be as a consequence of the professional negligence and not due to error or bad service. The court will examine if the damage would have occurred, even though the professional acted in a negligent way and whether other factors intervened which eventually led to the negligent result. 

What do damages amount to following a professional negligence claim?

The aim of damages

The aim of damages for professional negligence is to put the claimant back to the position it would have been in if the professional was not negligent. For breach of contract this means putting the claimant in the position that they would have been in had the contract been performed. For breach of duty this means putting the claimant in the position they would have been had the tort not been committed.

The test for damages

The test requires the careful identification of the nature of the advice that ought to have been provided. The claimant will have to prove that it would have followed such advice to achieve a better outcome. 

The importance of an objective assessment

It’s also worth noting that 2021 saw a significant legal decision being reached by the Supreme Court in this field (Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20) and which means that an objective assessment of what the claimant was seeking advice on, what the professional agreed to give advice on, and whether the scope of duty that the professional accepted was intended to extend to cover the losses that were being considered and sought to be addressed.

Calculating damages

When calculating damages, you will need to determine the actual profit made by the claimant against the profit the claimant could have made had the breach of duty not occurred. In evaluating any loss of profit, it’s advisable to take into consideration:

• The loss you suffered falls within the professional’s duty of care. It must not go beyond the liability assumed or undertaken. For example, if the professional’s contract is not of a general kind, but rather asks for information on a specific aspect of the transaction, the professional will not be liable to the claimant for losses relating to aspects of the transaction on which it did not provide information.
• You may not recover damages for any loss which could have been avoided by taking reasonable steps to minimise loss or taking any unreasonable steps which may have increased loss. However, you can recover loss incurred in taking reasonable steps to mitigate.
• If you suffer damages partly as a result of your own fault, the damages recoverable will be reduced.