Barker v Baxendale Walker - I could be wrong, but I may be right

In December 2017 the Court of Appeal handed down its decision in Barker v Baxendale Walker reversing the decision of Roth J. The case concerned a tax avoidance scheme using an employee benefit trust which had been devised for the claimant by the defendant solicitor. Various tax experts, including a tax specialist QC advised the scheme was effective. However, it was challenged by HM Revenue & Customs and, following further (contrary) advice, the claimant taxpayer settled HMRC’s assessments to tax. The claimant complained that he ought to have been warned by the defendant about the risk associated with the scheme but had not been so warned.

Roth J held that the defendant’s construction of the relevant statutory provision on which the efficacy of the scheme hinged was correct and that his failure to warn of risks associated with the scheme was not a breach of duty on his part. By contrast, the Court of Appeal concluded that the defendant’s construction of the statutory provision was “very unlikely” to be correct and, unsurprisingly against that background, concluded that the defendant was in breach of his duty in failing to warn of the associated risks. That was even less surprising because the Court of Appeal also observed that the defendant’s advice on the statutory provision and the efficacy of the scheme was “too good to be true”.

However, the main interest of this case is the Court of Appeal’s observations about a cluster of cases concerned with construction of statutes and contracts. A sobering fact which emerges from these cases is that it is possible for the defendant solicitor’s construction to be correct yet he or she can still be in breach of duty because of a failure to warn of the risks associated with reliance on that conclusion.

The cases in question (in which the reversal of the decision of the judge at first instance by the Court of Appeal is an alarmingly common feature) are:

• Queen Elizabeth’s School Blackburn v Banks Wilson (2001) – which concerned the construction of a restrictive covenant and where the Court of Appeal (reversing the judgment below) concluded that the claimant ought to have been warned of the “real prospect of dispute” over its meaning (which had been challenged by the counter-party).
• Levicom v Linklaters (2011) – which concerned the construction of a “non-compete” clause in a share sale agreement where the Court of Appeal concluded (overturning the judgement below) that the solicitors’ construction of the clause was negligently wrong as was their advice on the claimant’s recoverable loss.
• Hermann v Withers (2012) – a first instance judgment where it was held the solicitors’ advice on construction of a statute although wrong was not negligent but the solicitors’ failure to warn of the scope for argument was negligent.
• Balogun v Boyes Sutton & Perry (2017) – another case where the Court of Appeal overturned the judgment below concluding that the solicitor’s advice on construction of a sub-lease was probably correct but he had negligently failed to warn of the risk of problems arising from it.

The Court of Appeal’s decision in Barker provides some helpful guidance on this tangle of case law. The court started by observing that that the question whether a solicitor is obliged to explain the risk that a court may come to a different interpretation from that which the solicitor has advised is correct is highly fact sensitive and that if the construction of the provision is clear the threshold of “significant risk” will not be met and the solicitor will not need to warn that his advice may turn out to be incorrect.

However, it is quite possible for the solicitor’s advice on construction to be correct but he is still under a duty to point out the risk that he is wrong (oddly, the court cited Levicom as an example but that was a case where it concluded both that the advice was negligently wrong and the failure to warn was also a breach of duty). It is more likely there will be a duty to advise on risk if litigation is on foot or the point has been raised by the counter-party (as in Queen Elizabeth’s School). Finally, “the issue is not one of percentages or whether opposing possible constructions are ‘finely balanced’ but is more nuanced”.

The observation that claims of this type are highly fact sensitive reflects the fact that, as these cases show, there are few areas of the law more capable of dispute that the construction of contracts and statutes. The extent of disagreement, even between judges (as the history of these appeals demonstrates), is considerable.

Any solicitor advising in this area needs to proceed with great care and, even if convinced of the correct construction, should probably warn of the possibility it may be disputed – and disputed successfully. That duty becomes even higher (unsurprisingly) if there is litigation on foot or if a dispute has arisen. The fact that there is other opinion supporting the solicitor’s conclusion is, in this harsh world, unlikely to assist them.