Professional Negligence Claim Fails Where High Court Unilaterally Raises Issue of Ilegality

​In English v O'Driscoll [2016] IEHC 584 the plaintiff sued a firm of accountants for professional negligence. Without the issue being raised by either party, the trial judge held that the underlying investment scheme was illegal and accordingly, he could not hold that there was professional negligence in such circumstances. The case raises interesting questions regarding the scope of judicial investigation and the circumstances in which a Court is obliged to consider an issue even when the parties have not pleaded it.

Background

Mr English invested IR£2.25 million in a tax based investment scheme relating to fishing boats which allowed him to set off his income against the purchase of the boats thereby reducing his personal income tax bill.

The investment scheme, if it had gone according to plan, would have seen Mr English get his IR£2.25 million investment back at the end of a five year period with a tax benefit of IR£798,000. However, the fishing enterprise ran into financial difficulties early on in the arrangement and Mr English, some years later, initiated proceedings against the accountancy firm which handled the investment. 

Raising an issue of illegality (unilaterally)

The claim of professional negligence was focused on whether one of the partners in the accountancy firm was professionally negligent in relying solely on the vendor's valuation of the fishing boats rather than an independent valuation (which it was claimed would be significantly lower). However, the Court took a very different view and examined an issue not raised by the parties: whether the investment scheme amounted to an attempt to incorrectly claim capital allowances from the Revenue Commissioners.

The Court cited the case of McIvenna v. Ferris & Green [1955] IR 318 where it was held:

“No court ought to enforce an illegal contract or allow itself to be made the instrument of enforcing obligations alleged to arise out of a contract or transaction which is illegal, if the illegality is duly brought to the notice of the Court, and if the person invoking the aid of the Court is himself implicated in the illegality. It matters not whether the defendant has pleaded the illegality or whether he has not. If the evidence adduced by the plaintiff proves the illegality the Court ought not to assist him."

The Court raised the issue of illegality at the end of the evidence of the witnesses and before legal submissions were exchanged.

Decision

Twomey J held that the investment was designed to unlawfully obtain capital allowances and for that reason found that the accountancy firm could not be held to be negligent in giving financial advice and services in relation to such an illegal scheme. The Court held "in cases where there is a possibility of the Revenue being defrauded and where there is nobody in Court representing the taxpayer, as will often be the case, it is this Court's view that it is the duty of the Court to be alive to illegal transactions, since the parties themselves are unlikely to call evidence which might damage their case and may even seek to conceal their true intentions".

Twomey J was of the view that both Mr. English and the partner in the accountancy firm dealing with the scheme knew that there was a fraud at the heart of the investment plan – the overvaluation of the shipping vessels. Twomey J remarked upon the failure of the accountant to give evidence postulating that a likely reason was that his only credible defence to the evidence of his knowledge of the true nature of the scheme, would be to allege that Mr English was also aware that the scheme was a sham and a fraud. The difficulty with such a defence was that it was likely to lead to the avoidance of any insurance policy in place to meet the claim.

The Court noted that Mr English did not allege fraud against the main characters in the investment scheme as to do so could raise possible questions about his own knowledge of the plan. He also instituted proceedings on the last day before the six year time limit ended and did not seek to have the matter heard until 15 years after the date of investment. By that stage all capital allowances from the Revenue Commissioners had been obtained. Twomey J observed that "a likely reason for the delay in Mr English first instituting proceedings and secondly in prosecuting his claim, was his desire to ensure that the Revenue were not in a position to recover capital allowances from him, since he knew that his proceedings were going to disclose that he had incorrectly claimed capital allowances".

Costs

In a supplementary judgment dealing with costs the Court held that since both the plaintiff and defendant had an active role in the duplicitous investment scheme, costs should not be awarded to either side. Since the accountant did not plead the illegality of the scheme he could not complain that he had to pay his own legal costs.

The case is currently under appeal before the Court of Appeal and is due to be heard in March 2019. 

For further information please contact Ciaran Joyce.

Date published: 24 April 2018