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Merret -v- Babb: When is an employee liable?


We are grateful to Law Firm CMS Cameron McKenna for the following commentary on the recent Merret -v- Babb case which examined an employee’s liability even though the employee is carrying out duties for his or her employer.

Employees will constantly be vulnerable to claims brought directly against them for advice given on behalf of their employers, after the House of Lords Appeals Committee refused Leave to Appeal in the case of Merrett v Babb.

Earlier this year, the Court of Appeal ruled that employees are personally liable for professional advice when it considered the case.

This was appealed, but after the Lords’ decision, thousands of professionals in many walks of life, including accountants, surveyors, independent financial advisers, architects and engineers, could face potentially ruining claims.

The appeal to the House of Lords – which was supported by the Royal Institution of Chartered Surveyors (RICS) – was brought by a Mr John Babb, a member of the RICS.

Following the insolvency of his former employer, Mr Babb found himself personally liable for a mortgage valuation which he had carried out more than seven years earlier.
The ruling will impact upon all sectors and professions where employees give specialist advice to clients on behalf of their employers. Professional employees will be particularly vulnerable where their firm or company:

  • has ceased trading and has no run-off cover
  • is under-insured and cannot meet the full claim
  • is unable to pay the excess due under the policy
  • is unable to obtain indemnity from their professional indemnity insurers as a result of a coverage dispute.

These risks have been exacerbated by previous Court of Appeal decisions on limitation, the effect of which has been to give claimants many more years in which to commence proceedings.

The Court of Appeal had emphasised that prudent employees – whether professional, or otherwise – would wish to ensure that their employers’ insurance covered them personally and that such employees may need to take steps to obtain personal insurance if that cover did not continue after their employment ended.

Whilst the Court of Appeal’s observations are highly germane, such insurance cover is not, as a practical matter, presently available to former employees.

Peter Maguire, a partner in the insurance and reinsurance practice of leading law firm CMS Cameron McKenna, offers expert advice to those who believe they may be at risk.

Mr Maguire, who handled the appeal on behalf of Mr Babb and RICS, says: “The refusal to allow the appeal has far-reaching and alarming implications for all professionals and employees who provide specific advice on behalf of their employer.

“The pay employees receive is not commensurate with the risk of attracting a potentially ruining personal liability, and such an exposure is unlikely to have ever been contemplated by them.

“History shows that, when losses are suffered, many clients will explore all available avenues in seeking to recover those losses from their advisers.

“Corporate failures are now at their highest level for six years and this, coupled with the highly unsatisfactory state of the law on limitation, only services to heighten the vulnerability of such individuals.”

John Armstrong, chief executive of RICS, said: “I am both surprised and disappointed. This is an issue of major public importance for all professionals, particularly as economic conditions get tougher and corporate failures rise.”

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