David McClean & Ors. v Andrew Thornhill KC

The Court of Appeal dismissed the appellants' appeal against Zacaroli J's dismissal of claims in negligence arising from failed film finance tax schemes. The court applied the assumption of responsibility test for negligent misstatement (derived from Hedley Byrne and explained in Steel v NRAM Ltd ([2018] UKSC 13)) and held that no duty of care was owed by the respondent to non‑client investors. Key reasons were the terms and context of the Information Memoranda (IMs), express warranties and checklist obligations requiring investors to obtain and rely on their own professional advice, and the regulatory and commercial setting of unregulated, adviser‑mediated offers.

The court also reviewed the judge's factual and legal analysis of breach and concluded that, on the law and facts existing in 2002–2004, a reasonably competent tax silk could have adopted the approach taken by the respondent (principally the Ensign Tankers approach that film exploitation can be a trading activity). Although the Court of Appeal considered that, had a duty to the investors existed, a competent opinion should have acknowledged the factual variety of cases and the risk of challenge by HMRC, this did not alter the outcome because no duty was established.

Background and parties:

• The appeals arise from claims by investors in limited liability partnerships (SAD2 and SAD3) organised to exploit film distribution rights. The schemes were marketed by Scotts Atlantic Management Limited using an Information Memorandum which referred to the respondent as taxation adviser; copies of his opinions were made available on request.
• The appellants claimed the respondent, a senior tax silks, owed them a duty of care in advising on and endorsing the tax consequences of the schemes and that negligent advice caused them loss when HMRC later challenged the tax treatment.

Procedural posture: The claimants issued proceedings in 2018. Ten sample claims were tried before Zacaroli J ([2022] EWHC 457 (Ch)). The judge dismissed the claims. The claimants appealed to the Court of Appeal ([2023] EWCA Civ 466).

Relief sought:

• Damages for negligent advice and negligent misstatement said to have induced investment in the Schemes; alternatively relief for failure to warn of risk of HMRC challenge.

Issues framed by the court:

1. Whether the respondent owed a duty of care to non‑client investors for advice given to the promoter and for statements endorsed in the IMs.
2. Whether a reasonably competent tax silk could have given the advice and endorsements in the terms the respondent did.
3. If duty and breach were established, whether causation, reliance and loss were made out (including individual assessment of sample claimants).
4. Limitation arguments, including interaction with sections 14A and 14B Limitation Act 1980 and whether causes of action accrued on subscription or later.

Court’s reasoning and conclusions:

• On duty: applying the assumption of responsibility test (Hedley Byrne and the analysis in NRAM), the court held that, although many factors pointed towards potential liability (special skill, knowledge the advice would be available to investors, the marketing context), the IMs, subscription agreements and checklists plainly directed prospective investors to obtain and rely on their own professional advice and contained warranties to that effect. The Schemes were unregulated and subscription required intermediated access through authorised financial advisers. On this factual and documentary matrix it was objectively unreasonable for investors to rely on the respondent without independent inquiry and it was not reasonably foreseeable he would be relied on in that way. Accordingly no duty arose.
• On breach: the court accepted the judge’s detailed factual findings and his legal approach. It held that, on the authorities and the state of the law in 2002–2004 (notably Ensign Tankers), a reasonably competent tax silk could have advised as the respondent did. The court did observe that, had a duty to non‑clients existed, competent advice would at least have acknowledged that no two cases are identical and that HMRC challenge was a realistic risk; but that observation did not establish negligence given the absence of a duty.
• On causation and reliance: given the absence of a duty, the court did not need to disturb the judge’s detailed findings that the appellants had not relied on or would have acted differently absent the respondent’s opinions.
• On limitation: the judge’s conclusions that causes of action accrued on subscription and the application of Limitation Act provisions (including the long‑stop in s.14B preventing claims relating to SAD1) were accepted for present purposes; section 14A preserved most claims relating to SAD2 and SAD3.

Outcome: the appeal was dismissed. The Court of Appeal concluded the judge had been entitled to find no duty of care and that, on the facts and law, the respondent’s approach was one a reasonably competent tax silk could have adopted.

Appeal dismissed. The Court of Appeal held that no duty of care was owed by the respondent to non‑client investors because, applying the assumption of responsibility test (Hedley Byrne and Steel v NRAM Ltd [2018] UKSC 13), the Information Memoranda, subscription warranties, checklists and regulatory/commercial context made it objectively unreasonable for investors to rely on the respondent without independent inquiry and it was not reasonably foreseeable he would be so relied upon. The court also held that, on the law and facts existing in 2002–2004, a reasonably competent tax silk could have taken the approach the respondent did (drawing on Ensign Tankers), and the judge’s findings on causation, breach and limitation were not displaced.

Appeal from the High Court (Chancery / Business & Property Courts) – Zacaroli J, [2022] EWHC 457 (Ch). Appeal heard in the Court of Appeal, Civil Division, judgment reported at [2023] EWCA Civ 466.