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Group action dismissed – barrister owed no duty of care to investors in film finance schemes

April 01, 2022

In McClean and others v Andrew Thornhill QC [2019] EWCH 3514 (Ch), the High Court dismissed a £40m claim brought by investors in film finance tax schemes.  Zacaroli J held that Andrew Thornhill QC owed no duty of care to investors and his advice in relation to the schemes was not negligent. The judgment includes helpful guidance on the duty of care owed by professional advisers and the application of both limitation periods. The case will be of particular interest to professional indemnity insurers, litigation funders and parties in various other film finance claims.

 

Background

Mr Thornhill QC, a specialist tax barrister, was instructed to provide tax advice by the promoters of three film finance schemes. The schemes’ investors issued claims against Mr Thornhill after they were pursued by HMRC for a substantial tax liability, which arose when the schemes failed to achieve the intended tax benefits.

 

Duty of Care

The Court found that Mr Thornhill owed no duty of care to investors. In particular:

  • Mr Thornhill was named as a tax adviser to the promoters not the investors. 
  • The Information Memoranda contained specific wording which “clearly advised” potential investors to consult their own tax advisers, and investors had warranted in Subscription Agreements that they had only consulted their own independent advisers. Importantly, Zacaroli J noted that potential investors would only think to have access to Mr Thornhill’s Opinions (which contained the advice in issue) through the Information Memoranda where they were referenced.
  • Applying the objective test in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, the Court concluded that it was not reasonable for the claimants to rely on Mr Thornhill’s advice “without making their own independent enquiry”. However, it was reasonable for Mr Thornhill to assume that the investors had consulted their own tax advisers before relying on his opinion.
  • Mr Thornhill did not owe a duty of care to warn potential investors that there was a significant risk that his advice might be incorrect. The Court found that no such duty existed, but if it had, it could not extend to advising potential investors on the risk of relying on Mr Thornhill’s advice. 

 

Breach

Zacaroli J held that the views expressed by Mr Thornhill were consistent with those of a reasonable QC. The Judge analysed the relevant tax authorities and HMRC practice at the relevant time, noting that it was reasonable for Mr Thornhill to have adopted the approach set out in Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1992] AC 655. Zacaroli J identified a change in approach by the courts from 2011 onwards, including the Court of Appeal’s decision in Samarkand Film Partnership No. v HMRC [2017] EWCA Civ 77 which provides the “modern approach” for assessing whether the purchase and leasing of a film constitutes a trade.

 

Reliance and Causation

The claimants failed to establish that investors would not have subscribed to the schemes had Mr Thornhill provided sufficient risk warnings. Zacaroli J emphasised that every claimant had invested into the schemes despite the disclaimers in the Information Memoranda, which Mr Thornhill had endorsed. Therefore, the claimants were unable to show that the investors would have acted any differently in the circumstances.

Unfair Contracts Terms Act 1977 (UCTA) The Court held that UCTA did not apply to the Information Memoranda and warranties contained in the Subscription Agreements which stated that investors had only taken independent tax advice. In any event, the terms were reasonable. Importantly, Zacaroli J categorised these disclaimers as basis clauses rather than limitation or exclusion clauses, making them exempt from UCTA. Claimants in similar circumstances may therefore find it harder to establish a duty of care.

 

Limitation

Zacaroli J held that all claims were time barred under the primary six-year limitation period. In keeping with the established position for negligence claims, the claimants’ cause of action accrued from the relevant date of investment, and not when their claims for tax relief were later rejected by HMRC.

As to whether the claimants could benefit from an extension to the limitation period under section 14A of the Limitation Act 1980 on the basis that certain facts relevant to the cause of action were not known until three years before the claim was issued, the Court found that only one of the ten sample claimants were time barred. 

Unusually, claims in respect of one of the three schemes were time-barred under section 14B of the Limitation Act 1980, which provides a 15-year overriding time limit for negligence cases. 

Norton Rose Fulbright is acting on a number of other group action film finance disputes currently before the English courts. 

 

The authors would like to thank Esme Malley for her assistance in preparing this post.