How effective is your engagement letter in practice?

The trial judge's decision in Mehjoo v Harben Barker (published in June 2013) caused widespread consternation within the accountancy profession. And that consternation was certainly borne out by the number of Mehjoo related queries that were raised on Lockton's helpline. 

The judge in Mehjoo had decided that an accountant could be obliged to offer advice on technical issues that fell outside his or her sphere of expertise even if that advice was not requested, and that that obligation could arise independently of the accountant's engagement letter if the accountant could be seen to have been offering unsolicited tax advice during the course of the retainer. The judge found in favour of Mr Mehjoo and awarded him circa £1m. 

Harben Barker (HB) appealed the decision and the good news for the profession is that the Court of Appeal has unanimously allowed HB's appeal. 

Breach of duty – extending retainer by HB’s past actions

• HB raised various arguments as to why the appeal should be allowed but Lord Justice Patten (LJP) concentrated on whether HB had actually breached its duty. Key to LJP’s analysis was that:;
  
  
• HB was a generalist accountant  
   

•the work HB said it would carry out on behalf of Mr Mehjoo in its engagement letter was that of a generalist accountant

•HB explained in its engagement letter that it could provide more ‘extensive’ tax advice if requested by Mr Mehjoo

• Mr Mehjoo never sought further advice;
  
  
• the tax advice that HB had historically given was limited to the availability of obvious reliefs rather than the availability of esoteric tax planning opportunities that a high street practice would not be familiar with. 

The judge had determined that as HB had provided Mr Mehjoo with unprompted tax planning advice on various occasions it had impliedly varied the terms of its retainer. LJP accepted that HB had proffered unsolicited advice but drew a distinction as to the type of advice sought. The tax advice HB had failed to give (ie about a bearer share warrant scheme) required the transaction to be reformulated in order to avoid a tax liability. 

This, LJP concluded, was specialist tax advice, which one would not expect a reasonably competent generalist accountant to know. Therefore HB had not breached its duty because:

• HB had not varied the terms of its retainer impliedly;
  
  
• Mr Mehjoo had not requested specialist tax advice. 

Breach of duty – extending retainer by HB preparing for a meeting

The next question considered was whether HB had extended its retainer via its preparation for a meeting with Mr Mehjoo on 2 October 2004 concerning the sale of his shares in a business he co-owned. The judge had determined that as this meeting was arranged to discuss minimising Mr Mehjoo’s CGT liability it implied a duty to give tax planning advice at the meeting, which included advising on the non-dom status of Mr Mehjoo. 

LJP accepted that CGT mitigation was to be discussed at the meeting but once again differentiated between a generalist and specialist accountant. LJP held that it was sufficient for HB as a generalist account to simply refer to more ‘radical’ tax saving schemes and it was for Mr Mehjoo to request further information as per the terms of HB’s engagement letter. 

In respect of the non-dom status, LJP stated that the shares being sold were UK assets and that a reasonably competent generalist accountant would not be expected to know that there was a tax scheme (ie the bearer share warrant scheme) whereby Mr Mehjoo’s shares could be changed from a UK to a foreign asset. 

Therefore there was no obligation upon HB to advise on Mr Mehjoo’s non-dom status as HB believed that the tax advantages for a non-dom were not available to Mr Mehjoo on the sale of his shares in an English registered company and a ‘competent accountant would not have believed that’ a scheme existed where a UK asset could be changed to a foreign asset to bring about a tax saving. 

Summary

In support of LJP, Lord Justice Lewison referred to the classic expression of a professional's duty in the Midland Bank Trust Co Ltd v Hett Stubbs & Kent case and reiterated the guidance that courts should be wary of imposing duties on professionals ‘which go beyond the scope of what they are requested and undertake to do’. 

The Court of Appeal’s decision confirms that an accountant will not be expected to advise outside of its expertise nor be expected to provide ‘unnecessary advice’. As HB or a reasonably competent generalist accountant would not have known that UK shares could be changed to a foreign asset there was no need to advise on the non-dom status of Mr Mehjoo.    

Ian Peacock – partner (for and on behalf of Bond Dickinson LLP) 

Lockton Companies LLP is ACCA’s recommended broker for Professional Indemnity insurance. For information, please contact Lockton on 0117 906 5057.