Hailsham Chambers Professional Negligence Seminar

22 April 2010

Limitation goes to the Supreme Court Sephton and the law of unintended

consequences

Julian Picton QC

Sephton and the law of unintended consequences

“A contingent liability is not as such damage until the contingency occurs. The existence of a contingent liability may depress the value of other property, as in Forster v. Outred & Co [1982] 1 W.L.R. 86, or it may mean that a party to a bilateral transaction has received less than he should have done, or is worse off than if he had not entered into the transaction (according to which is the appropriate measure of damages in the circumstances). But, standing alone as in this case, the contingency is not damage.”

Per Lord Hoffmann in Law Society v. Sephton & Co (a firm) [2006] 2 AC 543.

The Accrualisers’ Mantra “It is unjust and unreasonable to expect the Plaintiff to commence proceedings before the contingency is fulfilled. If an action is commenced before that date, it will fail if the events so transpire that it becomes clear that no loss is, or will be incurred .... In such cases it is fair and sensible to say that the Plaintiff does not incur loss until the contingency is fulfilled.”

Per Australian High Court in Wardley Australia Limited v. State of Western Australia (1992) 175 CLR at 533

The Limitationists’ Credo”Within the bounds of sense and reasonableness the policy of the law should be to advance, rather than retard, the accrual of a cause of action .... This is especially so if the law provides parallel causes of action in contract and in tort in respect of the same conduct.”

Per Lord Nicholls in Nykredit Mortgage Bank v. Edward Erdman Group (No. 2) [1997] 1 WLR 1627

Forster v. Outred & Co [1982] 1 W.L.R. 86

Stephenson L.J: -

“I would accept Mr Stuart Smith’s statement of the law and would conclude that on the facts of this case the Plaintiff has suffered actual damage for the negligence of her solicitors by entering into the mortgage deed, the effect of which has been to encumber her interests in the freehold estate with this Legal Charge and subject her to liability which may, according to matters completely outside her control, mature into financial loss – as indeed it did....”

• Dunn L.J: -

“Before she executed the mortgage deed she owned the property free from encumbrances; thereafter she became the owner of a property subject to a mortgage. That, in my view, was a quantifiable loss as from that date the cause of action against her solicitor was complete because at that date she had suffered damage. The actual quantum of damages would, of course, depend on events between that date and the date when the damages had finally to be assessed but the cause of action was complete when she executed the mortgage without proof of special damage.”

 D. W. Moore v. Ferrier [1988] 1 W.L.R.

Bingham L.J: -

“If, in a contractual claim for negligence, the Court would have awarded other than nominal damages, I do not see how it can be said that an action in tort based on the same negligence would have been bound to fail for want of any damage as an essential ingredient of the cause of action.”

Sephton’s argument

• The moment that a misappropriation occurred, the Law Society came under a contingent liability in that it was probable that the client who had been defrauded would in due course make a successful claim on the Fund.

• This contingent liability fell within the formulation of “damage” established in Forster, Moore et al.

• The Law Society’s cause of action accordingly accrued when the misappropriations occurred and not when claims were subsequently made on the Compensation Fund or when the Fund paid out the claims.

Per Lord Hoffmann at paras 30 and 31: -

“In my opinion, therefore, the question must be decided on principle. A contingent liability is not as such damage until the contingency occurs. ....... No doubt in most cases in which a party incurs a contingent liability as a result of entering into a transaction, that liability will result in damage for the reasons already discussed in relation to bilateral transactions. But I would prefer to put my decision on the simple basis that the possibility of an obligation to pay money in the future is not in itself damage.”

Per Lord Walker at para 48: -

“Your Lordships have not, I think, been shown any case in which the imposition on a claim of a purely personal and wholly contingent liability, unsecured by a charge on any of the claimant’s assets, has been treated as actual loss. That would have been the position if the claimant in the Forster case had given a personal covenant guaranteeing her son’s debts (which she seems not to have done – she paid them simply to prevent enforcement of the security on her farm) and if she had not given any security over any of her own assets.”

Axa Insurance Limited v. Akther & Darby Solicitors & Others [2009] EWCA Civ 1166

Arden L.J: -• “In my judgment, the true ratio of Sephton is that there has to be measurable loss

as defined in Wardley for time to begin to run for limitation purposes. On this basis what has to be shown is additional loss, and that loss does not have to be of a kind previously considered in the case law.”

Longmore L.J: -• “The most than can be said in the present case is that the loss suffered by the

claimant insurers is contingent upon the claim, which is (ex hypothesi) likely to fail, actually failing. But that does not make the case a case of a mere contingent liability because the claimants have entered into a flawed transaction which they ought not to have entered into. To my mind that is the damage which the claimants have suffered and that occurred at the time of the inception of the policies.”

Lloyd L.J (dissenting): -• “I have found this case far from easy to decide, not least because the application of

the decision in Sephton seems to me to produce a result which is at odds with that which one would anticipate, in terms of the commercial and economic reality of NIG’s position.”

Rationalising Sephton• In cases where, as a result of the negligence of the professional advisor, the claimant is

exposed to a pure contingent liability, time starts to run when the contingent liability materialises.

Example: Law Society v. Sephton • In cases where the value of an existing asset is immediately reduced or extinguished as a

result of the negligence of the professional advisor, time starts to run from the date on which the value is first reduced.

Examples: Forster v. Outred, Bell v. Peter Browne & Co [1990] 2 Q.B. 495, Hatton v. Chafes [2003] P.N.L.R. 24

• In cases where the claimant enters into a transaction with a third party as a result of the negligence of his adviser which, but for that negligence, he would have entered into on better terms, time starts to run from the date on which the claimant entered into the transaction.

Examples: D. W. Moore & Co v. Ferrier, Knapp v. Ecclesiastical Insurance Group plc [1998] P.N.L.R 172

• In cases where, but for the professional adviser’s negligence, the claimant would not have entered into the transaction at all, time starts to run when any benefit to the claimant derived from the transaction is outweighed by the detriment created by the transaction.

Examples: Nykredit, First National Commercial Bank plc v. Humberts [1995] 2 All ER 673

Conclusions• If your objective is to accelerate the accrual of a

cause of action, then avoid Sephton at all costs. If confronted with it, focus your efforts on locating a loss additional to the alleged contingent liability.

• If your objective is to survive a strike out on limitation grounds, then invoke Sephton and argue that the loss claimed is a pure contingent liability.

• There is plenty in the judgments in Axa to assist with either argument.

“This matter comes before the Court on the Claimant’s motion … the latest in a series of Gordian knots that the parties have been unable to untangle without … the courts … it is ordered that the motion is denied. Instead the Court will fashion a new form of ADR, to wit at 4pm on Friday, Counsel shall convene at a neutral site agreeable to both parties … and shall engage in one game of “rock, paper, scissors”. The winner of this engagement shall be entitled to select the location for the deposition …”

Avista Management v Wausau Underwriters

Solicitors’ liability for breach of undertakings

Laurie West-Knights QC

Head of Commercial Group

Hailsham Chambers

• Sue on it, if contractual

• Use the powers of the SRA

• Use the summary jurisdiction of the Court over its officers

An undertaking is a statement made by you or your firm [in your capacity as a solicitor] to someone who reasonably relies on it, that you or your firm will do something or cause something to be done, or refrain from doing something [or cause something not to be done]. Code of Conduct

The summary jurisdiction to enforce undertakings is a manifestation of the powers of the Court over solicitors as its officers. Now statutory: 50 SCA 1981

37. …..why on earth can you not use the negotiations to establish the truth of the what the concluded contract means? Not to do so would strike my mother as "barmy". Perhaps I should simply say it strikes me as illogical.

41 There is little point in expanding upon these reasons for I am outnumbered, nay outgunned, by the commercial colossi seated either side of me. I prefer the instincts of the youthful Stanley Burnton J. before he became corrupted by the arid atmosphere of this Court. It goes to prove what every good old-fashioned county court judge knows: the higher you go, the less the essential oxygen of common sense is available to you. So I am unrepentant. With, of course, great respect to my Lords, I dissent.

The approach to construction and interpretation of an undertaking follows the general approach applicable to documents

Where there is ambiguity in an undertaking, it will generally be construed against the solicitor who gave it

If the undertaking is not performed, the recipient can apply to the Court for an order enforcing it. On that application the Court can exercise its discretion, if it thinks fit, to require the solicitor to perform the undertaking. Thereafter, the appropriate step, in default of compliance, is an application to commit

Because the application is made under the inherent jurisdiction of the Court empowering it to control its officers by making orders enforceable against them personally, common law questions of consideration, statutory formalities and limitation, do not arise. Delay can justify a refusal to grant relief if it renders the making of an order unfair and unjust

There is no absolute right on the part of the recipient of an undertaking to have it enforced. The Court must be satisfied that the relief being sought can properly be granted in the exercise of its discretion, a question which raises similar questions to those that arise on an application for relief by way of an order for specific performance

No Court will make any order against a party when the step in question is impossible to carry out, but impossibility has a clear meaning, which goes beyond difficult, embarrassing or expensive. It applies where the act in question can properly be said to be impossible and, in such a case, compensation can be ordered in place of specific compliance

As with a claim for equitable relief against a person, the Court can be asked to take into account, on an application for enforcement of an undertaking the fact that undue hardship would be caused by the making of the order in question, but facts sufficient to support such a step have to be sufficiently extreme that they justify the conclusion that the order sought would be unfair, unconscionable and unjust

A variety of arguments have been deployed by defendants seeking to avoid the consequences of giving undertakings and failing to perform them, but the importance of undertakings means that the Court will be reluctant to allow a solicitor to escape from their consequences save in the most exceptional of cases

Relevant Authorities• In re Grey

[1892] 2 Q.B., 440

 

• Re a solicitor

[1966] 1 WLR., 1604

 

• Udall-v-Capri Lighting

[1988] Q.B., 907

 

• John Fox-v-Bannister King and Rigbeys

[1988] Q.B., 925

 

• Taylor-v-Ribby Hall Leisure Ltd

[1998] 1 WLR., 400

 

• Citadel Management-v-Thompson

[1999] 1 FLR., 21

 

• Reddy-v-Lachlan

[2000] Lloyds PN 858

• Hole and Pugsley-v-Sumption

[2002] Lloyds PN 419

 

• Angel Solicitors-v-Jenkins O’Dowd and Barth

[2009] EWHC Ch., 46; [2009] 1 WLR., 1220

 

• L Morgan and Co-v-Jenkins O’Dowd and Barth

[2008] EWHC Ch., 3411 and 3574;

Blackburne.J. October 2nd 2008; Henderson.J. November 19th 2008

 • Investors Compensation Scheme-v-West Bromwich

Building Society

[1998] 1 WLR., 896

 • Hall-v-Vernon

(1899) 34 S.E., 764 (Supreme Court of Appeals of the State of West Virginia)

 • Pasedina Holdings pty ltd-v-Khouri

(1977) 1 BPR., 9460 (Supreme Court of New South Wales)

  • “Tis Folly”; Ryan Clement

[2009] Sol Jo 153 (7) 14; May 5th 2009

 • “A recipe for litigation?”; Malcolm Dowden and Elinor

Clark

159 NLJ., 418; March 20th 2009

 • “Dangerous Sports; Solicitors Undertakings in

Conveyancing Transactions”

Adrian Pay and Shelley White; PNBA Law Review May 2009

Summary

• Look at Solicitors’ Negligence and Liability, Flenley [QC] and Leech for more

• Take great care not to make promises qua solicitor; it could cost you more than an insurance claim.

Solicitors’ liability for breach of undertakings

Laurie West-Knights QC

Head of Commercial Group

Hailsham Chambers

Lenders’ claims and breach of warranty of authority

Joshua Munro

Why is this form of liability so popular?

• Not fault-based.

• No parallel liability in negligence so contributory negligence not relevant: Vesta v Butcher [1989] AC 852.

• Impostors are thick on the ground.

Origins• Law of agency.• A sustains loss as a result of an intermediary, B, claiming

to be the agent of C with authority to act on C’s behalf.• Paradigm case: principal A enters into a contract via B

where he is under the impression as a result of what B has said or done that B is the agent of C and can bind C. If C is entitled to repudiate the contract because of B’s lack of authority A can sue B for a breach of B’s warranty of authority provided A relied on the warranty to his detriment.

• Measure of loss is the usual contractual measure. A is entitled to be put in the position in which he would have been if the warranty had been true and if the contract had bound C.

Nota Bene:

1. doctrine designed to apply in a contractual situation;

2. must have been a representation by a putative agent he is authorised to act for a principal;

3. such a representation may be express or implied;

4. the warranty must have been relied upon ie counter-party must have been induced to contract on the faith of the warranty;

5. irrelevant whether the agent vouching his authority has exercised reasonable care;

6. irrelevant whether the person relying on the warranty has exercised reasonable care;

7. the measure of loss is designed to afford compensation sufficient to place A in the position he would have been in had he had the counter-party which he supposed he had.

Implied contract reasoning is well entrenched Collen v Wright (1857) 8E&B647:

“The obligation arising in such a case is well expressed by saying that a person professing to contract as agent for another, impliedly if not expressly, undertakes or promises the persons who enter into such contract, upon the faith of the professed agent being duly authorised, that the authority which he professes to have does in point of fact exist”

CA in OBG v Allan [2005] QB 762 at [87]:

“An innocent third party, with whom the agent has purported without authority to make a contract or to reach a settlement of outstanding liabilities under a contract, will be able to hold the agent liable for breach of the warranty of authority which the law decided long ago should be implied to give a remedy in such a situation (see Collen v Wright (1857) 8 E&B 647). Liability for breach of warranty of authority is strict. It does not depend on whether the agent has been negligent or not...”

The measure of loss

• Habton Farms v Nimmo [2004] QB1, CA approving McGregor on Damages, viz:

“1311. Given an enforceable contract had the agent had authority and given a solvent principal, the damages will be based on the measure of damages that the plaintiff could have recovered in an action for breach of contract against the principal had the principal been bound, and this will generally give him damages for the loss of his bargain”

Development beyond the contractual model• Eg in litigation: Yonge v Toynbee [1910] 1 KB 215. Strict liability if

client does not exist, dies, is struck off, or goes mad. • But there are limits...• CA in SEB Trygg Liv Holding Aktiebolag v Manches and Others

[2006] 1 WLR 2276 - a solicitor warrants he has a client who exists and has given authority to commence proceedings but does not warrant he has correctly named his client. Does not warrant the accuracy of his instructions or that the client has title to sue or that he is solvent either.

• Uncertainty over the correct measure of loss: Fernee v Gorlitz [1915] 1 Ch 177 cf Skylight Maritime SA v Ascot Underwriting Ltd [2005] PNLR 450 at para [16].

Property claims: an orthodox case

• Solicitor can be liable to a counter-party for breach of warranty if not authorised to contract on behalf of the client (whether acting for purchaser or vendor).

• Solicitors do not ordinarily have ostensible authority to enter property contracts: James v Evans [2000] 3 EGLR 1 at 5C-E.

• Contractual measure will apply ie what might have been recoverable from the supposed principal if he had failed to complete: Suleman v Shahsavari [1988] 1 WLR 1181.

• If the supposed principal would have been insolvent or would have

had a defence that can be prayed in aid by the agent: Singh v Sardar Investments Ltd [2002] All ER (D) 243.

Property claims: Penn v Bristol & WestPenn v Bristol & West Building Society [1997] 1 WLR 1356: solicitor for

H and, supposedly, W on sale of home. Fraud by H. W’s signature forged: sets aside contract and transfer.

• No liability of solicitor to purchaser because purchaser in league with husband.

• Can the solicitor be liable to the purchaser’s lender even though the solicitor’s principals were not purporting to contract with that lender?

• CA say yes as warranty of authority given to lender via its own solicitors; lender had relied on it and had given consideration for it by entering into a collateral contract of loan to the purchaser necessary to bring the transaction to fruition.

An alarming result as (1) solicitors liable to a party which did not purport to contract with their principal; (2) the warranty was inferred from the mere fact of the solicitor holding himself out as authorised to act for the supposed clients in correspondence.

Property claims: Penn: après moi le deluge?As a result of Penn:• solicitors potentially liable for breach of warranty of authority not only to

the principal on the other side of the transaction but also to a lender lending money to that principal;

• taken at face value it means liability extends to all persons the solicitor knew or should have known might foreseeably rely on the warranty and to whom it can plausibly be said the warranty was given.

CA also state that the measure of loss was not what could have been recovered from the wife if the warranty had been true, and on the supposition she wished to proceed; the lender could recover all losses flowing from having advanced money on the strength of the warranty.

Property claims: Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 582 at pp612-3; Cooke v Borsay

Re-mortgage: solicitors acted both for the lender and, apparently, for W who had not authorised the solicitors at all. Another fraud. Another worrying development.

• Chadwick J:

• Solicitors not liable to the lender under their contract of retainer because terms did not impose strict liability.

• No reason why the solicitor could not be liable for breach of warranty of authority insofar as purporting to act as agent for the borrower. Penn applied.

Property claims post- Penn and Bristol & WestThe position reached:

1. a solicitor purportedly acting for one party to a property transaction may be liable to the counter-party if it turns out he does not have authority to represent his client (or enter a contract on his behalf) and if the counter-party sustains loss in reliance on the warranty;

2. the solicitor can be liable in that way whichever side of the transaction he is on eg whether for vendor or purchaser;

3. the transaction can also be a loan contract eg a solicitor purportedly acting for a borrower can be liable to the lender even if the solicitor was also contracted to the lender and is not liable under that retainer to the lender;

4. the solicitor can also be liable to a party who was is a counter-party to the transaction but who is merely lending money to a counter-party (typically the purchaser).

Property claims: is this progress?• why should this inflexible form of quasi-contractual

liability apply where A was not looking to enter a bargain with C at all?

• why should it apply where contractual relations exist between A and B and where that contract is inconsistent with the implied warranty of authority?

• is the doctrine suited for the kind of multi-factorial situations which arise in property transactions nowadays?

• does its development in this field support or subvert fundamental contractual principles?

Property claims: a case for the defence

Midland Bank v Cox McQueen [1999] Lloyd’s Rep PN 223. Solicitors instructed by the bank on the recommendation of H to explain loan documentation to W. H passes off an imposter as W and W is not bound by the documentation. Solicitors sued in negligence and for breach of warranty based on a certificate by the solicitor that the documents had been explained to W and she understood them fully and had signed voluntarily.

• CA adopt the same approach to the construction of the solicitors’ ordinary obligations as to the certificate containing the warranty of authority.

• Held: the bank had not intended to ask for and the solicitors had not intended to give a guarantee against fraud which could not be detected with reasonable care.

Property claims: current issuesTwo questions.• Does the solicitor warrant that he has a client who goes

by the name of X or does he vouch for the identify of the client ie “I warrant that I act for (the real) X”?

• How is all this affected by the CML standard terms? Is a solicitor retained pursuant to those terms going to be liable for breach of warranty of authority to his lender client or to a party on the other side of the transaction?

• Would Bristol & West and Penn be decided the same way in a CML case?

Excel Securities PLC v Masood and Others• Lender’s claim for summary judgment v. solicitors - arising out of

identity theft. • Not a CML case. Solicitors acting for borrower not lender. Lender

has own solicitors.• Imposter adopts identity of a real individual named James Goulding

to extract moneys from Excel by deception. James Goulding said to be resident at 108 Midland Road, Luton sought a loan of £910,000 to acquire additional properties offering as security a property registered in his name at 17 Richards Place, Chelsea, London SW3 2LA.

• Lender conducts its own identity checks.• Fraud uncovered after loan made with large losses incurred.• Solicitors alleged to be in breach of warranty having warranted they

acted for Mr Goulding the owner of 17 Richards Place when they had no such client.

Excel Securities PLC v Masood and Others (cont’d)HHJ Hegarty QC:• in a context like that in Penn or Bristol & West there could be no doubt as to the identity

of the person for whom the solicitor was purporting to act, namely the wife of the person instructing him, and in such a case there would be a warranty the client was that person.

• it did not follow that in every case an agent must be regarded as warranting the identity of his client and not merely the fact that he has authority to act on the client’s behalf.

• the fundamental reason for the warranty was to ensure A was protected against the risk that B did not have the authority which he claimed but an agent would not normally be deemed to warrant any particular attributes of the principal or other aspects of the transaction in which the agent claimed to be acting on a principal’s behalf.

• the obligations undertaken by a professional are usually limited to the exercise of reasonable care so special facts or clear language required to impose a stricter obligation.

• necessary to have regard to the specific circumstances which arise in any particular case in order to determine the extent of the warranty given.

• an objective question to be determined by reference to the circumstances prevailing and known to the parties at the time when the warranty was deemed to have arisen.

• considerations like those in Midland Bank Plc v Cox McQueen may be relevant.

Excel Securities PLC v Masood and Others (cont’d)

• Excel a commercial lender which had undertaken its own checks to guard against identity theft and had decided to lend at a time when it was aware of the risks of identity theft.

• The solicitors would ordinarily be expected to exercise reasonable skill and care only and they had carried out their own identity checks which had led them, like Excel, to accept that their client was the person he represented himself to be.

• No express warranty or undertaking sought by Excel.• Not reasonable to hold solicitors had impliedly warranted the identity of their client or his

title to the property in question. All they had done was to warrant they had authority to act on behalf of a client who identified himself as Mr Goulding and claimed to be the registered proprietor.

• Penn etc distinguishable because there could have been no real question as to the identity of the person on whose behalf the solicitor was claiming to be acting, namely W.

• “For my part, I can see no justification why risks of this kind should be transferred from the shoulders of a commercial concern such as Excel on to those of a professional firm such as BM Solicitors”

• Case now off to CA after the judge gave summary judgment for the solicitors.

Excel Securities PLC v Masood and Others: the post-mortem

• Professor Francis Reynolds addresses the PNBA.• In the context of a contract relating to the disposition of land

(including the charging of the land) the solicitor should be taken to warrant that he acted for the named person on the assumption that he was the owner of the land.

• To hold that the warranty was only that the solicitor had authority to act for a person going by the name of Mr X who claimed to be the same individual as the person who appeared to be the registered owner took the whole force of the warranty away.

• General considerations of the kind dealt with in Midland Bank v Cox McQueen ought not to count.

• The same approach should follow if there is a co-existing retainer between the agent and the lender based on negligence liability. Chadwick J. in Bristol & West got that right.

Impact of the CML Terms• Solicitor acts for borrower and lender and CML terms apply in latter

retainer.• CML Handbook specifies the identity checks which such a solicitor is

obliged to undertake and requires the solicitor to file a certificate of title in the form approved by the Solicitors’ Code of Conduct 2007.

• By that certificate the solicitors certify they have checked the identity of the borrower and anyone else required to sign the mortgage deed by reference to the documents stipulated.

• Certificate cites that the solicitors’ duties are limited to the matters set out in the certificate and they accept no further liability or responsibility whatsoever.

• The Code prevents a solicitor going any further than “taking reasonable steps to check the identity of the borrower (and anyone else required to sign the mortgage deed or other document connected with the mortgage)”.

• Money Laundering Regulations too...

Impact of the CML Terms (cont’d)• Can a solicitor be liable for breach of warranty of authority to a lender where his own contract

with that lender is limited in these ways?

• For Professor Reynolds and Chadwick J. the terms of a solicitor’s contract with the lender are conceptually distinct from the warranty given when bringing together a contract between lender and borrower.

• Surely scope for a contrary view: reasoning of the kind deployed in Midland Bank v Cox McQueen as a means of curtailing any liability of a collateral kind referable to the solicitor’s role as agent for the borrower.

• An instance of particular contractual terms defining precisely what risks the solicitor is prepared to accept and thereby modifying the warranty?

• HHJ Behrens in Halifax Plc v Brookes Parry (2000) (unreported) accepted this (although not a CML case).

• On this basis, Cooke v Borsay might be distinguishable in a case where the solicitor acts for a lender pursuant to the CML terms while also acting for a borrower who is purchasing or re-mortgaging.

Impact of the CML Terms (cont’d) • What about Penn?

• The argument is less strong when the solicitor has no contractual relationship with the lender asserting a breach of warranty of authority, as in Penn.

• Arguable that the standard terms of modern conveyancing and the imposition of universal statutory and regulatory obligations such as with regards to money-laundering means that solicitors are understood to warrant no more than that they have undertaken appropriate checks as per the applicable regulatory and statutory obligations to establish they are duly authorised by a client having an identity as claimed?

• Professor Reynolds thought Penn was wrongly decided, but not for this reason.

Self-protection

What can solicitors do to protect themselves?

• Not a lot unless the law changes - although always sensible to be extremely careful about checking for whom they act.

• Theoretical possibility of issuing notice that not guaranteeing that the client is who he says he is. That would modify the warranty: Suleman v Shahsavari [1988] 1 WLR 118 at 1184G-1185D.

• Doubtful whether this would be at all sensible in practice.

What questions should you pose when facing a breach of warranty claim?

• Was the warranty given to / can it be relied upon by the person seeking to invoke it – this may turn not just on the wording and the context but also on whether the solicitor knew or should have known that person would be induced to act in reliance upon it;

• What precisely was warranted – it may be arguable the warranty should be differently construed or that it was excluded or modified in some way, perhaps reducing it to an obligation to make specified checks, or to use reasonable care;

• Was the solicitor retained by the person seeking to invoke the warranty - if so, it could be argued that the terms of the retainer are inconsistent with the terms of the warranty such that no warranty or only a modified warranty should be implied;

• Was the identity of the client of crucial importance – if not - eg the borrower seeking to raise finance to buy further properties as in Excel - then, subject to the fate of Excel, you can argue that the warranty does not extend to the identity of the client but is limited to a promise that the solicitor acts for a client who claims to have that identity and/or to be the owner of a particular property or properties;

• Be wary of claimants seeking to rely upon and even extend Penn so as to allow third parties who were not the principal contracting party to invoke the doctrine: short of the Supreme Court Penn is unlikely to be overturned but it is open to argument whether Penn should be extended any further;

• Remember that it is always necessary for a lender to prove reliance, which is not straightforward - whether it can be proved may turn on precisely what was warranted;

• Are you feeling very adventurous - if so, you might argue that developments in the regulatory and legislative spheres and standardised conveyancing obligations all mean that it is no longer appropriate to regard solicitors as warranting anything more than they have a client whose identity they have checked as stipulated by the applicable standard terms, statutory rules and professional regulations.

Disclosure Issues and Quinn v Law Society

Eva Ferguson

Topics

• Quinn v The Law Society (Peter Smith J, [2009] EWHC 2588 (Ch)). Now on appeal to CA

• Pre-action disclosure: CPR Part 31.16

Quinn Insurance v The Law Society

ISSUES FOR INSURERS

1.Access to documents following intervention?

2.Inspection of privileged/confidential documents prior to a claim being made?

Facts

• C insured 2 partner firm• October 2007 Intervention• Numerous claims made by lenders

concerning transactions in which Mr O had acted. Many more in the pipeline

• Small firm but large sums• Mr O was refused indemnity – dishonesty• Mr I – rights reserved - no dishonesty

alleged at time

C’s Part 8 Application

• Required: “access to all such documents of [the Firm] as the D has in its possession or control including without limitation all accounting records to consider whether under the policy the C is obliged to indemnify or obliged not to indemnify Mr I”

• The Problem: this included documents which were- from files not relevant to any existing claims- privileged/confidential

The Micawber factual premise

C’s premise: “extraordinary that, when a small firm has been subject to such investigation one of the two partners should have succeeded in plundering millions of pounds from lenders through abuse of the client account without the other partner … having been aware of (and therefore condoning) what was going on.”

Rejected:- The belief that ‘something will turn up’ is insufficient - “it is predicated by a false assumption of dishonesty of

every partner in a small firm”

Law Society stance

“The Society is a public body subject to public law duties. These govern its decision whether to allow access to documents and if so on what terms. The Society is legal custodian of the documents and with responsibility to deliver them to the solicitor’s former clients or to their order and in the meanwhile to preserve client confidentiality and the integrity of the files. Its primary concern must be to protect the interests of the solicitor’s former clients. The solicitor may have a legitimate interest in obtaining access to the files as a necessary preliminary stage before taking action to protect and enforce his right of recovery of sums due to him. The Society should have regard to that interest and balance that interest against the perceived interests of the former client” per Lightman J in Dooley v The Law Society (The Times 16.1.2002)

So: refused blanket request; provided documents where claims already made and thus privilege not an issue

Quinn’s Primary Argument

• Quinn, as primary insurer, entitled to a role in the regulatory procedure akin to that of the Law Society

• Rejected– Not intended by the statutory regime – Purpose of application not in public interest

unlike regulatory role of Law Society– Rights as Insurer of a solicitor cannot override

Insured’s client’s rights of confidence and privilege

Quinn’s Secondary Argument

Rights under the Insurance Policy

“6.2 Notice and Claims ProcedureIn the event of any occurrence which may give rise to liability under this Policy, and regardless of the likelihood or probability of a claim being brought under this policy: a) the Insured shall: (1) Notify the [insurer] immediately you become aware of any incident or as soon as practicably possible … and as soon as possible thereafter, provide any other documentation that the [insurer] may require with regard to the occurrence. ..(4) Give all such information and assistance as [the insurer] may require”

Rejected:

• Law Society not party to the Insurance Contract

• Solicitor’s own working papers no longer its own [para 12 Sched 2 Solicitors Act 1974]

• Access to these depend on application of Dooley– Duty to balance interests of solicitor (or insurer)

vs former client and to preserve confidentiality

• No grounds for requiring the Law Society to provide access– Had already provided documents where

privilege waived– Request not specific enough– No fraud exception– Privilege of the client remains paramount

• As a matter of construction could not rely on clause 6.2(4)(a) – conflict

• CPR 31.17?– No claim against Mr I– Privilege of clients would still be an obstacle

The Problem for Insurers Pre-Claim

• Can Insurers review sample files to ascertain the extent of a suspected wide-spread fraud?

• Can Insurers review privileged material when circumstances notified?

• Policy term alone cannot override confidentiality/privilege

• ‘Claims made insurance’ an exception to confidentiality?

• Quinn gives no support to this argument

Summary

• Where claim made against Insured, Insurer can access documents whether or not there has been intervention

• Where claim not made, access to Insured’s own documents following intervention will depend on Dooley

• Where claim not made, and exceptions do not apply, very difficult to access Insured’s client’s documents which are confidential and privileged, whether or not there has been intervention

CPR Part 31.16

CPR 31.16

Disclosure before proceedings start(1)This rule applies where an application is

made to the court under any Act for disclosure before proceedings have started

(2)The application must be supported by evidence

CPR Part 31.16

(1) The court may make an order under this rule only where –

(a) The respondent is likely to be a party to subsequent proceedings.

(b) The applicant is also likely to be a party to those proceedings.

(c) If proceedings had started the respondent’s duty by way of standard disclosure would extend to the documents or classes of documents of which the applicant seeks disclosure…

(d) … disclosure is desirable to dispose fairly of the anticipated proceedings … assist the dispute to be resolved without proceedings … save costs.

CPR Part 31.16

Black v Sumitomo (CA, [2002] 1 WLR 1562)

- Discretion is not confined. Judicial gloss of Rix LJ.

- “likely to be a party” does not mean on the balance of probabilities a claim will ensue

- “may well be a party” if proceedings ensue.

CPR Part 31.16

• Then:– Jurisdictional threshold (which is low – real

prospect that it satisfies one of the conditions). Need to show real prospects of success.

– Discretionary decision: nature of loss complained of; identification of the issues raised by the complainant etc

CPR Part 31.16

• Professional Negligence Pre-action protocol

- To a degree, mirrors pre-action disclosure- “The parties should supply promptly at this

stage and throughout whatever relevant information or documentation is reasonably requested” (B4.3)

- “No party is obliged under paragraph B4.3 to disclose any document which a court could not order them to disclose in the pre-action period” (C5.1)