Hincks v Sense Network

When does an unfavourable reference amount to negligent misstatement?

It is commonly accepted that when a person applies for a job, they will usually be asked to provide a reference from their previous employer. By the same token, employers are usually willing to provide a reference for an employee leaving their employment and doing so is standard practice.

How much detail should the employer include in a reference? Following an upward trend of claims being brought by new employers in respect of misleading positive references given by ex-employers, it has become standard practice for ex-employers to offer purely factual references to avoid such litigation.

The recent case of Hincks v Sense Network Ltd, heard by Mrs Justice Lambert in the High Court, involved a claim for negligent misstatement brought by Mr Hincks after more than just a factual reference was given about him which rendered him unable to find future employment. This case serves as a warning to employers when including negative opinions in a reference.

The facts

Mr Hincks was a financial advisor who worked for CIFS as an Independent Financial Advisor (IFA). CIFS was a small company not authorised to conduct activities authorised by the Financial Conduct Authority (FCA). As such, CIFS acted as one of the Appointed Representatives of Sense Network Ltd, which was authorised by the FCA.

Various concerns were raised about Mr Hincks’ work which resulted in Mr Hincks being required to obtain pre-approval from Sense Network before giving certain advice, re-registering clients or completing transactions. Mr Hincks failed to comply with those pre-approval rules. As a result, he was suspended from giving financial advice, undertaking transactions or seeing clients (i.e. IFA duties) in December 2013 whilst an investigation into his files took place and the necessary remediation was implemented.

Mr Hincks was allowed to recommence undertaking certain IFA duties in the autumn of 2014, but he remained subject to the pre-approval process formerly in place. Once more, it was alleged that Mr Hincks failed to comply with the pre-approval rules. Sense Network investigated his failures and Mr Hincks was orally summoned to a meeting, although it was accepted by both parties that Mr Hincks was not aware in advance what the meeting would be about.

Following the meeting, Sense Network terminated Mr Hincks’ authorisation to act as an IFA and his engagement with CIFS ended as a result. Mr Hincks appealed against this decision, but his appeal was rejected on paper, without any further meeting.

Mr Hincks applied for various positions as an IFA with other firms and two requested a written reference from Sense Network.

The reference was prepared by the person who had conducted the investigation meeting and decided to terminate Mr Hincks’ authorisation. It contained various negative statements and opinions, it referred to his suspension and that the “investigation concluded that, in spite of the explanations offered by Mr Hincks, it was reasonable to conclude that he had knowingly and deliberately circumvented the agreed process.”

Mr Hincks brought a claim against Sense Network for negligent misstatement on the basis that the opinion stated in the reference was wrong and was based on the internal investigation which was a “sham and prejudged investigation”, which had been conducted in bad faith. Mr Hincks contended that where a negative opinion is expressed on the conclusion of an investigation, the reference writer has an obligation to be satisfied that the investigation was reasonably conducted and procedurally fair.

High Court ruling

The Court ruled in favour of Sense Network and held that there are “formidable difficulties” associated with requiring a reference writer to inquire into the procedural fairness of earlier investigations. When an investigation was undertaken months or years before a reference is requested, the reference writer may have very limited, if any, access to the relevant information and as such, this would place considerable burden on the reference writer.

The Court gave some guidance in respect of the standard of care required by a reference writer, (recognising that the nature of the level of care would be dictated by the specific facts of each case), specifically:

• conduct an objective and rigorous appraisal of facts and opinion, particularly negative opinion, whether those facts and opinions emerge from earlier investigations or otherwise;
• take reasonable care to be satisfied that the facts set out in the reference are accurate and true and that, where an opinion is expressed, there is a proper and legitimate basis for it;
• when an opinion is derived from an earlier investigation, take reasonable care in considering and reviewing the underlying material so that the reference writer is able to understand the basis for
  the opinion and be satisfied that there is a proper and legitimate basis for the opinion; and
• take reasonable care to ensure that the reference is fair and not misleading, either by reason of what is not included or by implication, nuance or innuendo.

Furthermore, the Court confirmed that there is no duty on the reference writer to examine the procedural fairness of the underlying investigation, save for where there are “red flags”, which prompt further enquiry.

Analysis

In light of the findings in this case, reference writers should be aware of the potential implications if they prepare a reference advancing a negative opinion and the standard of care they should take when doing so. They should satisfy themselves that the facts in a reference are accurate, that opinions derived from an investigation are legitimate and ensure that the reference is fair and not misleading.

It would be advisable to say that reference writers should satisfy themselves that anything put in a reference can be supported by evidence and that there is a sound, legitimate basis for including such information.

Hempsons’ Employment Team can assist with compiling, reviewing and advising on references, whether given or received, and any potential legal implications that may arise as a result.

The Employment newsbrief is available in full here.