Liability of Tax Advisors and Lawyers

Under the direction of an experienced specialist lawyer for commercial and corporate law, an expert team of lawyers from the law firm SLB consults and represents aggrieved clients throughout Germany – institutions, legal entities and private persons – in all legal matters relating to the liability of tax advisors and lawyers. The department focused on the liability of tax advisors and lawyers provides to clients seeking justice profound professional advice; our mission is to provide candid advice to our clients on the basis of a comprehensive analysis of the relevant issues. Cases are conducted by us based on strategic planning and with dedication.

The improper performance of the tax consultancy or legal services contract by the advisor entails a series of problems and questions for the aggrieved client from both a legal and a personal perspective. The fault of the advisor, as it were, means the breach of a relationship of trust and dependency often grown over years and decades. Against this background, many aggrieved parties are reluctant to take legal action. So, it is all the more important that the aggrieved client is empowered to assess the possibilities, opportunities, risks and procedure of a legal action against the advisor.
Tax advisors and lawyers are required by law to take out an indemnity insurance covering professional malpractice. Hence, as the advisor does not need to compensate for the damage caused out of their own pocket, it is the insurance company "backing" the advisor which takes the actual decision of whether compensation for a loss suffered by the aggrieved client due to bad advice is to be made or not. Experience shows that with nearly all claims the insurers let it come down to a lawsuit. Legal actions against the advisor (not against the insurance company) must be brought to a civil court (not to a finance court). It is only in very rare cases that the aggrieved client will get compensation out of court.

Due to the diversity of the possible issues determining whether an action for damages will be successful or not, it is necessary that cases where tax advisors and lawyers are held liable to clients are attended to by specialists. This is all the more true since civil courts of first instance, with the exception of large district courts, usually do not have specialized panels for issues of the liability of tax advisors and lawyers. To be enabled to meet an advisor and the insurance company behind, which will always be represented by specialized law firms, on an equal footing it is imperative that aggrieved clients for their part engage experts "to enter the ring".

The fact that legal actions are often decided in favor of the aggrieved clients goes to show that disputes with tax advisors, lawyers and their insurers are anything but futile. Nevertheless, the defenses raised by the advisors to deny the compensation claims of their clients are extremely diverse – and, as is evident from a legal analysis by our specialists, often enough turn out to be specious arguments designed to render the aggrieved client's claim ineffective.

• For example, they often argue that consulting services – that were not given – were not owed at all by the tax advisor, or that the engagement of the tax advisor did not include the provision of the consulting services at issue. In this respect it is important for aggrieved parties to know that the case law, in particular in case of so-called permanent engagements, imposes a duty on tax advisors to instruct their clients, even without being asked to do so, with regard to tax structuring options or tax risks associated with a tax structure chosen by the clients. Frequently, tax advisors argue that the client expressly requested not to be advised on a specific set of issues. In this regard case law imposes on the advisors the burden of proof for the existence of this alleged limitation of their engagement.

• Even in case of limited engagements tax advisors are obliged to warn their clients also of bad decisions with respect to tax structuring beyond their engagement, if they are known to the advisor or are evident to an average advisor at first sight. This duty to warn imposed on tax advisors is limited only if the client seeks expert advice otherwise. And even then tax advisors must warn of any malpractice of another advisor, if they recognize such malpractice and at the same time realize or have to assume that the client may not be aware of the risk.

• It is the task of the lawyer engaged by a client to enforce a claim to present the matters of fact and law in favor of the client as broadly as possible, so that they can be considered by the court in taking its decision. Therefore, the lawyer should not be readily content with the information provided by the client, but should make efforts to obtain further information, if under the circumstances the knowledge of further facts is necessary for an appropriate legal qualification and the relevance of such facts is not immediately obvious to the client.

• Advisors often raise the defense of the statute of limitations against aggrieved clients. However, the Federal Court of Justice recently has clarified in favor of those clients that the period of limitation, which usually is three years, does not begin before the client is familiar with the circumstances substantiating the claim against the advisor, including the breach of duty. The period of limitation begins once the aggrieved client becomes aware that the lawyer or tax advisor has not followed the established practice or has failed to take measures that would have been necessary to prevent damage from a legal or tax perspective.

• Aggrieved clients frequently also face the defense that they had not disclosed certain circumstances to their tax advisor or lawyer, so that qualified advice could not be provided at all. This argument usually disregards the fact that according to the case law it is one of the advisor's basic duties to accurately clarify the facts of the case. Legal assessments made by the client (e.g. when using legal terms) must not be relied upon by the tax advisor. In this respect, the advisor is required, according to the case law of the Federal Court of Justice, to clarify the underlying circumstances that are relevant to the legal assessment by consulting the client and requesting the client in good time as well as clearly and unambiguously to provide relevant documents. Further, it must be assumed as prima facie evidence in favor of the client that the client would have provided to the advisor the necessary information, if the advisor had fulfilled his/her duty to provide clear information to the client.

• Moreover, the tax advisor or lawyer cannot simply base their defense on the argument that the legal position of the aggrieved client was uncertain. According to the case law, advisors are obliged in case of an uncertain legal position to inform their clients on the duties arising for the clients due to the uncertain legal position in order to enable them to assert their rights and interests and to avoid bad decisions on their own responsibility. In this context, the tax advisor, for instance, is not exonerated by the tax authorities having accepted an improper tax treatment for years.

• The tax advisors' duty to provide to their clients comprehensive advice in tax matters implies that tax advisors are obliged to review a civil law contract drafted by a lawyer to verify whether the contract design serves the interests of the client in tax matters.

• Another common defense of advisors is to assert that there was at least some contributory negligence of the aggrieved client. However, the case law has long ago clarified that the defense of contributory negligence of the person seeking advice usually cannot be based on the assertion that the person seeking advice would have been able to understand the facts of the case even without outside assistance with appropriate efforts. According to the Federal Court of Justice, even if the client (e.g. in the capacity of the managing director of a limited liability company) has some knowledge in tax or legal affairs, the client must be able to rely on the advisor employed correctly handling the relevant issues without a review.

• Tax advisor generally have a contractual obligation to their clients in so far as the accurate presentation of the tax affairs to the tax authorities is concerned. Tax advisors may be under the contractual obligation to their clients to prevent them from neglecting their own obligations under public law to the tax authorities. This particularly applies if the tax affairs are multi-faceted and non-transparent to ordinary persons. In this case, it is the duty of tax advisors not only to exploit tax advantages in favor of their clients, but also to prevent the clients from exposing themselves to criminal prosecution by exceeding the limits of the fiscal framework. The tax advisors' duty to protect their clients usually exists in case of negligent acts of clients, but not in case of intentional acts of clients. If it remains open, as for example in summary proceedings, whether clients have acted intentionally, tax advisors who have made incorrect statements in tax returns are usually obliged to compensate for the damage incurred by their clients due to the fine imposed on them.

• Another defense not permitted is the reproach that the aggrieved client failed to bring an appeal against a negative decision of, for example, the tax authorities, if such appeal was hopeless. If the appeal is not hopeless, while the success is not certain, the aggrieved client may make the lodging of an appeal subject to an indemnification of the tax advisor from costs.

The above brief abstract of possible circumstances goes to show that the legal issues in connection with the assertion of compensation claims against tax advisors and lawyers are multi-faceted and complex. At the same time, the case law which has been developed by the Federal Court of Justice and has to be observed by the lower courts goes to prove that the lines of argumentation put forward by the advisors or their insurers often do not stand up to a profound legal analysis and that the aggrieved clients definitely stand a good chance of overcoming the categorical refusal of the opposing party to pay damages.

In order to be able to achieve this goal, aggrieved clients should retain specialists with profound legal know-how and extensive experience as lawyers in the field of liability of tax advisors and lawyers to enforce their claims, and this all the more as the professional indemnity insurance companies behind the advisors always engage specialists to "enter into the race" ob behalf of their policyholders. It is therefore essential for aggrieved clients that the lawyers representing them have the necessary experience and expertise.

SLB`s team of specialists for cases where tax advisors and lawyers are held liable to clients act under the direction of the lawyer Emil Brodski.

With his professional experience from 18 years as a lawyer and a considerable set of legal disputes on behalf of aggrieved clients, Emil Brodski is very familiar with the typical problems and pitfalls in disputes relating to the liability of tax advisors and lawyers. He and his team successfully represent demanding clients in this complex field throughout Germany.