Single typo costs Companies House £8m

Companies House liable for mistakenly saying Company had been wound up

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Background

Companies House has been held responsible for the financial collapse of Taylor & Sons Ltd, of Cardiff, a 124 year old engineering company. On 20 February 2009, Companies House mistakenly recorded on the register that a winding up order had been made against it. But there was a typo; it was an entirely unconnected company with a very similar name, “Taylor & Son Ltd” that had been wound up. After 3 days the error had been corrected. By then it was too late.

Companies House had sold the records to credit reference agencies. Customers and suppliers wouldn’t trade with the blameless and solvent Taylor & Sons Ltd; they lost business, income and credit. Within two months the business, which employed 250 people collapsed and it was forced in to Administration.

 

Negligent Misstatement

 The Co-Owner and managing director of Taylor & Sons Ltd, Philip Sebrey took proceedings against Companies House, an executive agency of the Department of Business, Innovation and Skills. His claim was based on the law of negligence, which has been developing continuously since the leading 1963 Case of Hedley Byrne v Heller[i], extending the law of negligence. Where a careless statement is made which causes economic loss, the victim can claim damages. That now includes cases involving the careless exercise of statutory powers.

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Decision

After a 4 year battle, the claim for compensation succeeded. Sebry v Companies House [2015] EWHC 115[ii]. Although damages have not yet been decided, the claim is for approximately £8m.

The Judge, Mr Justice Edis said that the long standing 3 stage test in Caparo[iii] applied:

  • Forseeability: this was “obvious”
  • Proximity: the duty was owed to one individual company whose identity was readily discoverable. To say that it was also owed to every other company on the Register is only to say for example that a hospital owes a duty to each patient which it treats, and may come to owe duties to many thousands of people in the course of a year. Whilst true, this is not a reason for denying that the hospital ever owes any duty. Very large organisations such as hospitals who impact on the wellbeing of a very large number of people owe a very large number of duties to a very large number of people. The class is limited and its members ascertainable at the stage when treatment is given
  •  Whether it is fair, just and reasonable to impose a duty: The Judge could find no proper ground on which to conclude that it would not be fair, just and reasonable to impose a duty to avoid foreseeable harm to a sufficiently proximate victim.

Conclusion

“…..the Registrar owes a duty of care when entering a winding up order on the Register to take reasonable care to ensure that the Order is not registered against the wrong company. That duty is owed to any Company which is not in liquidation but which is wrongly recorded on the Register as having been wound up by order of the court. The duty extends to taking reasonable care to enter the Order on the record of the Company named in the Order, and not any other company. It does not extend to checking information supplied by third parties. It extends only to entering that information accurately on the Register….”

Ultimately, Edis J could see no legal principle or policy excusing Companies House for its negligence. Where there is a legal wrong, there ought to be a remedy. If Companies House had escaped liability, Mr Sebrey would have had no redress. The previous understanding of the law has been applied, and moderately extended under the doctrine of “incrementalism”.

For liability to be established, a claimant has to prove that it suffered losses directly as a result of reliance on a negligent misstatement. An executive agency carrying out a statutory function was not immune. However, the liability in these particular circumstances did not extend to other, less proximate or easily identifiable parties, including lenders and employees.

 

[i] [1963] 2AC 465

[ii] http://www.bailii.org/ew/cases/EWHC/QB/2015/115.html

[iii] Caparo Industries v Dickman [1990] 2 AC 605

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Professional Negligence: Court of Appeal underscores “reliance” essential for Negligent Misstatement

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Hunt & Ors v Optima (Cambridge) Ltd & Ors [2014] EWCA Civ 714

Overturning a judgment of the Technology & Construction Court, the Court of Appeal has decided that architects’ certificates  provided after the purchase of property could not be the foundation for negligent misstatement claims. The case restores the legal position limiting the duties of professional advisors. It also provides a helpful summary of the key components of claims against professionals, especially where consultants such as architects or surveyors are providing reports that are likely to be relied on by third parties, like purchasers, lenders and developers.

Background

The Claimants had bought flats on long leases. Later, serious defects were identified, and the Claimants sued the developer and a firm of architects for negligent misstatement. The developer had instructed the architects to inspect and certify the flats had been built to meet building regulations and that there were no defects. The reports were for consideration by the purchasers and their lenders within the conveyancing process. However, most of the certificates were not actually signed off until after exchange of contracts and for most of the purchasers, after completion.

 

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Original Decision

The judge at first instance held that the architects owed two freestanding duties of care in

  • carrying out the inspection of the flats with an architect’s skill and care
  • preparing accurate certificates.

This put a duty of care on the architects during the assessment stage, but before any report or representations. The judge found it no obstacle that the signed certificates were received by the purchasers only after exchange of contracts. The case appeared to widen professional duties more generally than previously understood.

Court Of Appeal’s Decision

Clarke LJ in giving the leading judgment said the earlier decision

‘…takes inadequate account of certain key principles….. reliance must follow representation…’.

Negligent misstatement

The CoA found that both reliance on the statement must be proved and further, that loss was suffered in consequence of the reliance. Here however, the purchasers could not have relied on the certificates when they exchanged contracts, because the certificates had not been completed by then.

Clarke LJ said that this

would involve imposing …. a duty to inspect arising out of statements which, at the time when the duty arose, they had not made“.

There was no separate duty owed to the purchasers for “negligent inspection”.

Warranty

Although the architects plainly owed contractual duties to its client, the developer, there was no implied contractual or tortious duty between the architects and third parties. The certificate itself stated that it was not a promise or guarantee. However, it is salutary to note that the architects did not apply for permission to appeal the awards made against them in favour of those purchasers who did receive certificates prior to proceeding with their purchase.

Conclusion

  • The previous understanding of the law has been reinstated. For liability to be established, a claimant has to prove that it suffered losses directly as a result of relying on a professional’s negligent misstatement.
  • The court was reluctant to imply collateral warranties between professionals and third parties.
  • Professional firms’ Terms & Conditions should specify that any duty is limited to providing the final report and does not extend to preparatory work.
  • Solicitors acting for purchasers (and lenders) must ensure such certificates or reports are finalised and signed before any contracts are exchanged or loan completedn completed.

 

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