Court of Appeal considers scope of duty in buyer-funded developments case

On 5 January 2026, the Court of Appeal handed down judgment in Afan Valley Ltd v Lupton Fawcett LLP [2026] EWCA Civ 2 (the “Judgment”). The case concerned allegedly negligent advice by lawyers in connection with the regulatory implications of certain proposed buyer-funded property development schemes (the “Schemes”). Some twenty-two Schemes, and £68,000,000 of investor monies, were involved.

The defendant law firm had applied for summary dismissal of the claims against it, principally on grounds that the claimants could not demonstrate any recoverable loss. The defendant succeeded on this application before Mr Justice Sheldon (in April 2024) and, when the claimants appealed, before the Court of Appeal. RPC acted for the defendant.

The judgment will be of interest to professionals and insurers as an example of the application of the scope of duty test, as refined by the Supreme Court in Manchester Building Society v Grant Thornton [2021] UKSC 20 (“MBS”).

The background

The Judgment was in respect of the defendant’s summary dismissal application. Accordingly, there were no factual findings and the arguments proceeded on the assumption that the underlying facts pleaded by the claimants were correct. The defendant denied any negligence or breach of duty. The following account is derived from the Judgment and is intended to summarise its main aspects.

The defendant had been instructed to advise the claimant companies as to whether the Schemes were “collective investment schemes” (“CISs”) within the meaning of ss. 345 and 417 of the Financial Services & Markets Act 2000 (“FSMA”).

If the Schemes were CISs, then it followed that they were unauthorised CISs. That in turn meant that they would attract the consequences of s.26 FSMA.

In short, s.26 FSMA provides a form of statutory rescission remedy for investors, but only if the investor chooses to invoke it. The investor could instead decide to enforce the contractual promises made by the other party (here, the applicable claimant selling the property unit to the investor).

The claimants alleged that the defendant should have advised at a much earlier stage that the Schemes were, or might be CISs, and if such advice had been given then they would never have gone ahead.

The Schemes were unsuccessful, the claimant companies became insolvent in 2018, and it was also alleged by them that the Schemes had been operating together as a dishonest ‘Ponzi’ scheme.

The claimants’ case on causation and loss

As noted, the claimants argued that, but for the matters complained of, they would never have promoted the Schemes, they would never have received the investors’ monies, and they would not have attracted civil liabilities to investors under s.26 FSMA.

They calculated those s.26 liabilities as totalling around £63m (£68m of investor receipts, less £4.7m of returns paid to investors). There were other, smaller heads of loss too, but the s.26 liabilities were the claimants’ main head of damage and the main object of argument on appeal.

The defendant’s arguments

The first strand of the defendant’s argument (in support of the summary dismissal application) was a simple one: on the claimants’ case they had, but for the matters complained of, received £68m, and they now allege that they must return the same amount to the investors under s.26 FSMA. They were therefore no worse off. This was called the “£ in £ out” point.

The second strand of the defendant’s argument followed the decision in MBS. The defendant argued that it had been asked to advise on whether the Schemes were CISs and, following MBS, the duty of care it therefore undertook to the claimants was a duty in respect solely of that question, and not in respect of the wider implications of pursuing the Schemes (e.g. their commercial wisdom). The implications of the Schemes being CISs were limited to the various risks to which the claimants were exposed under FSMA. The only such pleaded risk that was said to have eventuated was exposure to investors under s.26 FSMA. The £ in £ out point answered that.

The Judgment

The claimants’ response to the £ in £ out point was, first, to argue that whenever a Scheme sale completed the applicable claimant then had to pay commission and transactional costs out of the investor’s monies, meaning that it was rather less than £68m ‘in’, but still £68m ‘out’, and therefore the defendant was liable for the shortfall.

The claimants also argued that they had suffered loss because the Schemes were intended to generate profit in the medium to long-term (a point that the Court of Appeal found to difficult to follow (para. 57), and that appeared to contradict the claimants’ case that the Schemes were also pursued as a dishonest Ponzi scheme (para. 73)).

The claimants also argued that they were obliged to pay “compensation” to investors under s.26, in addition to returning the investors’ monies, again said to undermine the £ in, £ out point. 

In summary, the Court of Appeal accepted the defendant’s arguments that the claimants had to give credit for their receipt of the £68m (paras. 53-54); and concerning MBS and scope of duty (paras. 62-64), ie that the defendant’s duty was limited to the consequences of the Schemes being CISs (and therefore did not include their wider commercial implications), and that the only pleaded consequence was exposure to s.26 liabilities.

That meant that losses flowing from commissions, transactional costs etc, were not within the scope of the defendant’s duties as they were not consequences of advice about the CIS status of the Schemes (para. 71).

As for the claimants’ argument that the Schemes were only intended to be profitable eventually, the Court observed that this was contradicted by their Ponzi case and, in any event, would make the defendant responsible for all the consequences of operation of the Schemes, rather than for those attributable to them being CISs (para. 74).

As for the claimants’ argument that there was some form of additional head of damage for “compensation” under s.26, this failed on a pleading issue (para. 89), but the Court went on to consider its merits as if it had been fully pleaded, and concluded that the availability of compensation under s.26 would not have entitled an investor to bring a more valuable claim than the investor already had, in deceit, against the claimants (para. 92). The Court also noted that the investors could bring contractual claims against the companies that were “at least as valuable to them as the claims they in fact have…under s.26 FSMA” (para. 95).

This conclusion about scope of duty and MBS was further supported by the application of a counterfactual cross-check (paras. 69, 70, 90), i.e. to ask what would have happened if the Schemes had not in fact been CISs, to which the answer was that the investors would have been in the same position (save for no s.26 claims), with the same ability to bring claims in contract and in tort against the claimants. As the Court of Appeal noted, “…it is only if [the claimants’] s. 26 claims were greater than the tortious and contractual claims that they have anyway that Lupton Fawcett's (assumed) negligence in failing to advise that the Schemes were CISs would make any difference to [them]”.

Conclusion

It is commonplace for professional advisers to provide clients with what is sometimes known as ‘perimeter advice’ on regulatory issues. For example, does a proposed transaction or scheme come within the scope of FSMA? What are the consequences of it does? What happens if it goes ahead, the adviser calls it wrong, and it turns out to be unauthorised activity?

It is however rarely the role of such advisers to give advice on the commercial viability of the transaction or scheme: that is usually for the client alone to assess, as in this case.

In such situations, and with the benefit of hindsight, it can be easy for clients to say that if only they had known about the regulatory implications of the proposed venture then they would never have gone ahead (and assuming there had been incorrect advice about those implications).

The Afan Valley decision demonstrates that proving this kind of but-for causation may be a necessary condition of a viable claim, but is not sufficient on its own. Claimants must also grapple with, and promptly and fully plead, their case on the MBS “structured framework” going to scope of duty (para. 60). They must give credit for any benefits they receive as a result of going ahead with such schemes (e.g. receipt of investors’ monies). They cannot usually expect to recover wider forms of loss, e.g. going to commercial viability, as the perimeter adviser’s exposure will typically be confined to harm caused by the eventuation of risks that fall within the adviser’s scope of duty, i.e. regulatory implications, not commercial ones. And, finally, if such a claimant can pinpoint some head of damage that is a ‘regulatory implication’ then it will still not avail the claimant if that implication adds nothing to other forms of exposure that the claimant has to investors, ones that are not regulatory in nature and instead derive from the contractual promises made, or the manner of promotion or operation of the venture.

The decision in Afan Valley shows these well-established legal principles in action.