UK: Actuaries’ duties to third parties

A recent case has considered the extent to which advisers owe a duty of care to third parties who rely on their advice.

When an adviser is sued by a client for negligent advice, the client is relying on a contractual relationship with the adviser. However, when a third party who claims to have relied on the advice sues the adviser, the position is more complicated. So when is a third party entitled to rely on such advice?

The recent case of Precis v Mercer is the latest in a long line of legal cases on this issue. The Court’s decision in this case might come as a (small) relief to the actuarial profession, and advisers in general, and will also be of interest to trustees of pension schemes.

The law has long recognised that, in appropriate circumstances, a duty of care can be owed by an adviser to a third party. In order for a duty to exist the Courts have said that there needs to be a "special relationship" between the parties and an "assumption of responsibility" by the adviser.

Case law has developed general guiding principles to establish when such a duty of care is owed. The three main factors the Court looks at are whether damage was forseeable, the proximity of the relationship between the parties and whether it would be just, fair and reasonable to impose a duty.

Using this test, the Courts have reached the following decisions:

• A building society surveyor owes a duty of care to a borrower who relies on that survey in purchasing a property

• Auditors of a public company do not owe a duty of care to shareholders or potential investors

• A solicitor preparing a will owes a duty of care to the intended beneficiaries and can be sued by them where his negligence causes them to lose their bequest

• A financial adviser owes a duty of care to his client’s dependants.

In this case, the defendant, Mercer produced an actuarial valuation report for one of the pension schemes of Stoves Group plc. Mercer admitted that this valuation was negligently produced such that the deficit of £1.3 million, as stated in the report, should have been £4.5 million.

The claimant, Precis, approached Stoves to make an offer for its issued shares. As part of their due diligence on Stoves, their solicitors were sent the valuation by Mercer. Precis argued that they had relied on the valuation figures in setting their offer price for Stoves.

When they discovered the figures were wrong, they brought an action for negligence against Mercer.

The central question in this case was whether there was an assumption of responsibility by Mercer when it provided the valuation to Precis. The Court confirmed that, when providing information to a third party, there could be an express or implied assumption of responsibility to that third party. The Court also noted that there is no comprehensive list of guiding principles to help the Courts determine when an assumption of responsibility can be said to arise and therefore all the relevant circumstances needed to be considered.

The Court of Appeal decided that Mercer had not assumed responsibility for, and so did not owe a duty of care to, Precis. The most compelling factor in Precis’ claim was that Mercer knew that there was a corporate transaction in contemplation. Precis claimed that Mercer’s knowledge of the transaction meant that they had assumed a responsibility to them. However, the following facts, mitigated against Mercer assuming responsibility:

• There was no pre-existing relationship between Mercer and Precis - in fact Mercer’s relationship was with the opposite party in the transaction. Furthermore, Precis did not communicate directly with Mercer.

• Mercer performed a merely administrative task; it provided historic information that it had already produced for its client. Mercer was not asked to review the information, and was unaware of the exact nature of the transaction. It was also noteworthy that Stoves could easily have provided the valuation report to Precis themselves, in which case no question of duty would have arisen.

• The purpose for which Mercer provided the information would have been to enable its client to meet Precis’ request for due diligence information, not to enable Precis to rely on the information.

• The report itself stated that it had been prepared for a particular purpose (reviewing the contribution rate) and could only be relied on by third parties for that purpose and with the consent of the actuary.
• Precis failed to take its own actuarial advice.

Each case will, of course, turn on its own particular facts, but the Courts will look at previous cases for guidance when coming to a decision.

When considering whether an actuary has a duty of care to a third party who is not its client, the Courts are likely to consider the following questions:

• Was the advice used for the purpose for which it was given or communicated?

• What was the relationship between the adviser, recipient of the advice and any relevant third party?

• What was the state of knowledge of the adviser? (a duty can only be owed in respect of transactions or types of transactions of which the adviser has knowledge)

• Did the recipient of the advice in fact rely on the advice, as opposed to acting on his/her own judgement?

Actuaries and other advisers should therefore be aware of these tests when making their advice available to third parties. There are still no certain answers on third party duties, and the law will continue to develop on a case-by-case basis. However, this case helps to outline the factors which the Court will consider when these cases come before it.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 27/06/2005.