23 June 2005
Offering your expertise to friends or relatives can seem a harmless favour. But if the information you give is wrong or insufficiently detailed, you can find yourself in trouble, warns Dick JenningsAs a purchaser, how often are you asked for professional advice by friends, business acquaintances - or even suppliers? Daily, no doubt. So frequently, you cease even to notice. And usually you say something to help. We all do.
You should, however, exercise caution. Two new Court of Appeal judgments emphasise the dangers. One involved a huge company; the other, an individual. Both involved a dispute over the idea of a "duty of care".
The underlying law is clear enough. The celebrated 1932 case of Donoghue v Stevenson (about the decomposed snail in a ginger beer bottle) held that in appropriate circumstances a person is said to have a duty of care to another, such that if they negligently fail to take that care they are liable for the damage. The law of "negligence" was born.
In 1964, Hedley Byrne v Heller extended the concept into white collar negligence: when a person has some special skill, which another relies upon, there can arise a duty of care as to how that skill is exercised. This is so even if the advice is given gratuitously, so long as there is an "assumption of responsibility" by the adviser.
Personal liability For example, suppose your local school, looking for free help from parents, asks your advice on setting up the building contract for a major new development.
You are more concerned about eating that prawn vol au vent without mishap while holding a wine glass, but you are also conscious (and flattered) that your advice will be relied upon. So you bang on about competitive quotes and professionally drawn specifications and fixed price contracts, but unfortunately don't mention that the tender needs advertising in the Official Journal of the European Union as a public-sector contract. The result is a six-month delay in the project, and significant financial loss. You could be personally liable for that loss.
In Precis (521) Plc v William M. Mercer, the buyer of a business tried to recover damages from Mercer, the well-known pensions experts and actuaries, for negligently misstating the target company's pension fund deficit.
As usual in business acquisitions, the buyer had supplied the target's owners with a long list of written questions designed to winkle out key information about the target's strengths and weaknesses. (We corporate lawyers term it a "due diligence" exercise.)
The target sent the pensions questions to its adviser Mercer, which responded both to its client and to the buyer and sent, as requested, a copy of its most recent actuarial report on the pension fund. Unfortunately the arithmetic in the report was wrong, and the reported £1.35 million fund deficit was in fact £4.5 million.
Duty of care Obviously that was negligent, and Mercer had breached a duty of care to its client. But it was the buyer, not Mercer's client, who suffered loss by (arguably) paying too much for the target business as a result. So the question is: did Mercer, in choosing to supply a copy as requested, assume a duty of care to the buyer?
The Court of Appeal answered "No". Mercer had copied its report to the buyer only because its own client had asked it to. It was sent as historic information, not current advice. The buyer could have sought their own expert advice on the pension fund (and was advised by their own lawyers to do so) but chose to save the money.
On facts not greatly different though, Mercer would have been liable - as witness this case having reached the Court of Appeal. That the buyer was on the other side of the transaction from Mercer, and with its own set of professional advisers, would, surprisingly perhaps, not itself have saved Mercer from a multi-million pound liability.
A costly mistake At least Mercer is a well-established business with deep pockets. In James v Butler (see The Times, 19 May) the defendant was a private individual, a building labourer who had agreed to help his neighbour, Mr. James, build his conservatory. He had agreed to supply five days' labour for £300. Unfortunately a rafter, which Butler thought he had screwed in place, fell on James, hitting him in the face and causing him to lose an eye.
Although it had originally been ruled that Butler was not responsible, the Court of Appeal held that he hadn't any reasonable excuse for such an elementary error and was liable for his negligence.
Claims that James was partly responsible himself for the accident were rejected. Those of us who have paid through the nose for a "proper" builder, precisely to avoid dangerous and costly mistakes being made, may feel that James was allowed to have his cake and eat it.
Butler now has to pay damages of £45,000, possibly the first defendant in history to be liable in negligence for not screwing something up. He must also be bearing considerable additional legal costs, although The Times doesn't give a figure. He wasn't insured, and has said that he will have to sell his home.
Tread carefully For purchasing professionals about to advise the local school, or help a fellow MCIPS on our own time, that indeed is the biggest point: activities such as these are not carried out on behalf of our employers, so we don't have their indemnity nor their insurance. If we are held liable for negligence, the cost will be out of our own pockets.
Best stick to giving advice in areas we patently know nothing about - how your friends can patch up their marriage, how AC Milan could have avoided defeat, that sort of thing. Because, strangely, it's by giving advice in the area we do know a bit about, and hence that others might rely on our word in, that we can get into trouble. Do it carefully, or not at all.
Dick Jennings is at the specialist purchasing law firm RDY Jennings & Co (www.jenningslaw.co.uk)