Does lightning ever strike twice in the legal world? Those who practise in the field of professional negligence are looking at the skies and scratching their heads about this very question.
No one who profited from the increase in professional negligence work as a result of the recession at the beginning of the 1990s can forget the flood of litigation that washed over. In the wake of property market and corporate collapses, banks and secondary lenders found themselves in possession of a considerable stock of residential and commercial property and venture capitalists and purchasers found themselves holding shares in companies that had entered into liquidation. Within a short period of time the property and shares lost a significant part, or all, of their purported value. As is now common in our litigious society, the cry went up that someone had to be at fault for the enormous financial losses being incurred. The usual suspect was targeted – the holder of the professional indemnity policy. Valuers, solicitors and accountants were fair game.
At the outset, when valuations, reports on title and accounts were examined, certain cases stood out. What commenced as suspicions of negligence were converted into convictions of fraud. Unscrupulous borrowers and directors had combined with like-minded or at least unquestioning professionals to create dishonest applications, accounts and other documents required for the perpetration of fraud.
Once the obvious frauds had been identified, all transactions were subjected to detailed reviews in order to identify whether any blame could be attributed to a professional. It was discovered that some valuers had failed to research or pay heed to the value of appropriate comparable properties or had valued properties in areas with which they were unfamiliar. Lax practices were uncovered in solicitors' offices. Information was not properly assessed or reported to the lenders. Tens of thousands of claims were issued and the professional indemnity insurers paid out billions of pounds.
However, the professionals were not the only parties who failed to exercise reasonable skill and care. Some lenders, eager to capture market share and to lend money in an expanding market, had ignored usual loan-to-value ratios. They had acted without proper investigation as to the ability of borrowers to repay and on unheard-of income multiples.
The unprecedented boom in professional negligence litigation led to some significant reconsideration of the law that had far wider repercussions. In South Australia Asset Management Co v York Montague, the Lords took the opportunity to establish a new test for damages payable by a professional. The law's focus on identifying a cause of a loss had led judges to conclude that a negligent valuer or solicitor was responsible for all loss incurred by a lender entering into a transaction. Losses included those resulting from a general drop in values in the property market. The House of Lords decided that the correct test was to consider the scope of the duty owed in the particular case. Somebody whose duty was to provide information was only responsible for the foreseeable consequences of the information being wrong. The adviser, whose duty it was to advise as to what course of action to take, incurred a wider liability for the foreseeable consequences of the course of action being taken. In cases concerning auditor's negligence, there were also a number of leading cases concerning the extent to which duties of care could be owed to those who had not retained the auditor and causation. It seemed that much of what was new in commercial law was being developed in professional negligence.
Since the end of the 1990s, the level of professional negligence work has been steady, but not spectacular. However, there are now signs that the economic conditions which led to the boom in such work a decade ago are repeating themselves. There has been a period of rapid growth in the economy, company profits, takeover activity, share prices, property values and lending. The growth has now disappeared and been replaced by decline. When the economy is retracting and losses are being incurred, the professionals will again come under scrutiny. History and recent evidence, such as the Enron and other similar auditing scandals, suggest that there will be no shortage of candidates for defendants.