Judgments - Haward and others (Respondents) v. Fawcetts (a firm) (Appellants) and others

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    61.  In my opinion that concession was wrongly made, and should not have been accepted. Until the FMC scheme trustees knew that they had received seriously incorrect advice which overlooked the need for propriety in exercising fiduciary powers, they did not know that the interests of their beneficiaries, the scheme members, were being prejudiced. This lack of knowledge did not mean merely that they were ignorant of having a cause of action in negligence against the solicitors; more fundamentally and more relevantly, they did not know that they (on behalf of the beneficiaries) had suffered any damage at all. They did not know that what had happened was not a more or less technical reorganisation of two pension schemes, but an improper abstraction of funds which might (if the tax was not recovered) deprive their beneficiaries of over £7m. In short, they knew the bare facts, but they were ignorant of their real significance. Their ignorance was at a different and more basic level than that addressed by section 14A(9).

    62.  Hallam-Eames v Merrett Syndicates (1995) [2001] Lloyd's Rep PN 178 was another claim for pure economic loss. Hoffmann LJ delivered the reserved judgment of the Court (Sir Thomas Bingham MR, Hoffmann and Saville LJJ). It merits quotation at some length (at p 181):

    "In our judgment this [the judge's view of what the claimants had to know] is an over-simplification of the reasoning in Broadley and Dobbie. If all that was necessary was that a plaintiff should have known that the damage was attributable to an act or omission of the defendant, the statute would have said so. Instead, it speaks of the damage being attributable to the act or omission which is alleged to constitute negligence. In other words, the act or omission of which the plaintiff must have knowledge must be that which is causally relevant for the purposes of an allegation of negligence. There may be many acts, omissions or states which can be said to have a causal connection with a given occurrence, but when we make causal statements in ordinary speech, we select on common sense principles the one which is relevant for our purpose. In a different context it could be said that a Name suffered losses because some member's agent took him to lunch and persuaded him to join Lloyd's. But this is not causally relevant in the context of an allegation of negligence.

    It is this idea of causal relevance which various judges of this court have tried to express by saying the plaintiff must know the 'essence of the act or omission to which the injury is attributable' (Purchas LJ in Nash v Eli Lilly & Co [1993] 1 WLR 782, 799) or 'the essential thrust of the case' (Sir Thomas Bingham MR in Dobbie [1994] 1 WLR 1234, 1238) or that 'one should look at the way the plaintiff puts his case, distil what he is complaining about and ask whether he had in broad terms knowledge of the facts on which that complaint is based.' (Hoffmann LJ in Broadley [1993] 4 Med LR 328, 332).

    If one asks on common sense principles what Mrs Dobbie was complaining about, the answer is that the surgeon had removed a healthy breast. It would in our view be a seriously incomplete statement of her case to say that it was simply that the surgeon had removed her breast. This is not a matter of elaborating the detail by requiring knowledge of precisely how he had come to do the act complained of, such as this court rejected in Broadley. It was part of the essence of her complaint. Nor is it requiring knowledge of fault or negligence. The court's emphatic rejection of such a requirement is entirely consistent with characterising the act complained of (and of which knowledge was therefore required) as the removal of a healthy breast. But the judge, as it seems to us, has read Dobbie to mean that knowledge that the surgeon had removed her breast would have been enough.

    If one asks what is the principle of common sense on which one would identify Mrs Dobbie's complaint as the removal of a healthy breast rather than simply the removal of a breast, it is that the additional fact is necessary to make the act something of which she would prima facie seem entitled to complain. She was suspected of having a cancerous lump and if this had been the case, the removal of her breast would not have been a matter for complaint. Likewise Mrs Broadley's complaint was the surgeon had caused damage to her foot when he was supposed to be mending her knee. Mr Clarke QC, for the auditors, and Mr Toulson QC, for the members' agents, protested that such a principle was a back-door way of introducing a requirement that the plaintiff must have known that the defendant had been negligent (which section 14A(9) expressly declares to be irrelevant) or was by some other criterion at fault (which this court rejected in Broadley and Dobbie.) We do not agree. The plaintiff does not have to know that he has a cause of action or that the defendant's acts can be characterised in law as negligent or as falling short of some standard of professional or other behaviour. But, as Hoffmann LJ said in Broadley, the words 'which is alleged to constitute negligence' serve to identify the facts of which the plaintiff must have knowledge. He must have known the facts which can fairly be described as constituting the negligence of which he complains. It may be that knowledge of such facts will also serve to bring home to him the fact that the defendant has been negligent or at fault. But this is not in itself a reason for saying that he need not have known them."

    63.  Applying these principles, the Court of Appeal (reversing the judge) held that the claimants were not statute-barred because although they knew that they had lost large sums of money as a result of the run-off policies and RITC contracts entered into by their managing agents, they did not know that these heavy losses occurred because the business related to the US casualty market in which very large claims were being made for industrial pollution and asbestos-related risks. The claimants were ignorant of the real significance of the bare facts which they did know. The pollution and asbestos factors, which made it impossible to quantify incurred but not reported claims, were part of the essence of the complaint.

    64.  It is no coincidence, I think, that both HF Pension Trustees and Hallam-Eames were cases of pure economic loss occurring in areas (occupational pensions and reinsurance at Lloyd's) which call for specialised technical expertise. Areas of that sort are those in which it is most likely that a claimant may know the basic facts, but not know what, to an expert, they add up to.

    65.  Similar problems can arise in clinical negligence cases. In that area too the factual situations which may be contended for as cases of latent knowledge are extremely diverse, and some of them are very fact-sensitive (for instance Nash v Eli Lilly [1993] 1 WLR 782, drawing the distinction between acceptable and unacceptable side-effects of an anti-arthritis drug; Oakes v Hopcroft [2000] Lloyd's Rep Med 394, in which the claimant needed correct medical advice and legal advice before she knew that she had settled her original personal injury claim at too low a figure; and by way of contrast Davis v Ministry of Defence (26 July 1985, CA Transcript No 413 of 1985), in which the claimant received unsound medical and legal advice). But it is in the field of economic loss that a higher proportion of difficult cases is likely to arise, for reasons given by Janet O'Sullivan in an astute recent article (Limitation, Latent Damage and Solicitors' Negligence (2004) 20 JPN 218).

    66.  Nevertheless the Court of Appeal has given clear general guidance as to the principle to be applied, even if its application raises, as it inevitably will, some difficult borderline cases. The general principle is set out in the second paragraph of the passage which I have quoted from Hallam-Eames. The Court is concerned with the identification of the facts which are the "essence" or "essential thrust of the case" or which "distil what [the claimant] is complaining about." Mr Palmer QC (for the appellant firm of accountants) submitted that your Lordships should not follow Hallam-Eames, and should revert to a more starkly reductionist view of the minimum core of facts that must be within the claimant's knowledge (actual or constructive). I am not entirely without sympathy for that submission, because this area of the law has become crowded with authority, and it is sometimes necessary to remind oneself that section 14A (introduced as it was by the Latent Damage Act 1986) was intended to cover cases of latent damage (other than personal injuries) alleged to have been caused by negligence, and not causes of patent damage, even if they call for a good deal of investigation and advice before proceedings can be launched. (This is not a case where there was ever any doubt about the identity of the putative defendant; the respondents put in the forefront of their case that Fawcetts were the Haward family's long-standing and trusted financial advisers.) There may well be scope for Parliament to clarify and simplify the law, and the Law Commission has put forward some radical proposals (Limitation of Actions, Law Com No 270 published in July 2001, following on the consultation paper published in January 1998). Nevertheless the body of Court of Appeal authority which culminates in Hallam-Eames provides a reasonably clear and coherent test, and I see nothing in the legislative purpose of the Latent Damage Act 1986, or in its scheme or language, to lead your Lordships' House to depart from that line of authority. Nor is it necessary to do so, in my opinion, in order to dispose fairly of this appeal.

    67.  In her article ( p 236) Janet O'Sullivan makes this comment:

    "A further problem with the reasoning in Hallam-Eames, as Hoffmann LJ recognised, is that it comes close to saying that which is forbidden by section 14A (9), namely that time does not start to run until the claimant has knowledge that the defendant was negligent."

    It is indeed a striking feature of the line of authority in the Court of Appeal that (with the modest exception of the reference in Hallam-Eames to cause for complaint) the Court has firmly rejected any language which suggests, even in the least technical terms, that some fault or mishap has occurred: see for instance Sir Thomas Bingham MR in Dobbie v Medway Health Authority [1994] 1 WLR 1234 at p1243 C-D, observing that the judge was open to criticism for using, not only the expression "negligence", but also "unnecessarily" and "something had gone wrong" (the Master of the Rolls nevertheless expressed complete agreement with the judge's conclusion); see also Steyn LJ at p1247H. I respectfully doubt whether the insistence on extremely non-judgmental language is required by section 14A(9), and I think that it may in some cases ignore the realities of the situation. I respectfully agree with the views expressed on this point by my noble and learned friend Lord Nicholls of Birkenhead in paras 13 and 14 of his opinion. But in any event there is a distinction to be made between two matters: (1) the generality or specificity (see Nash v Eli Lilly [1993] 1 WLR 782, 798-799) of the language in which the essence of the claimant's complaint is to be identified and expressed, and (2) the judgmentally colourful or non-judgmentally monochrome character of that language. So long as section 14A(9) is kept well in mind, the level of generality or specificity will often (as in this case) be the more important matter for the Court to address.

    68.  My Lords, this is the first case on section 14A to reach your Lordships' House, and it is therefore appropriate to address, as I have tried to do, the issues of principle which have been raised in argument. As I understand it there is little (if any) difference in the House as to the principles. Such difference as there is relates to the facts of the case, which has the unusual feature that constructive knowledge is not an issue.

    69.  In their amended particulars of claim the respondents pleaded that they had retained Fawcetts on two occasions: in September 1994 to investigate and advise on the acquisition of a controlling interest in the company which became Haward Agriculture Ltd ("Agriculture"); and from 9 December 1994 "to assess [Agriculture's] trading performance and to advise [the respondents] in respect of the same" and in particular to review monthly accounting information. The first retainer is elaborately pleaded in paragraph 7, as expanded by paragraphs 8 and 9, and the second retainer is less elaborately pleaded in paragraphs 23 and 24. Several parts of the elaborate pleading in paragraph 7, such as Fawcetts' agreement to undertake due diligence in respect of Agriculture and to negotiate for the purchase of shares, are expressly denied in Fawcetts' defence. But assuming for the purposes of the limitation issue that all the allegations in the particulars of claim can be proved, I regard the essence of Fawcetts' retainer as to give financial advice and assistance on the acquisition of a controlling interest in Agriculture, and on the subsequent state of that company's business and further investment in it; and the essence of the pleaded particulars of negligence (paragraph 43) that Fawcetts failed to carry out their retainer properly, or (in some instances) failed to carry it out at all.

    70.  There was not in fact, in December 1994, any purchase of shares in Agriculture by the respondents. It seems that Mr Haward took up and paid for 60,000 newly-issued £1 shares at par (although the schedule of damages attributes the share purchase to W J Haward Ltd ("WJHL")). Mr Haward became chairman of Agriculture and soon after, in May 1995 (when Mr and Mrs Rose resigned) he became company secretary also. During 1995 he seems to have acquired a further 19,714 shares by purchase, presumably from Mr and Mrs Rose or Mr Coleman (a sales director who resigned in July 1995). Mr Haward remained as chairman and company secretary throughout the period with which this appeal is concerned. The respondents' pleaded case is that during this period a sum of over £1.5m was advanced to Agriculture by way of loan from the respondents and was lost, although the last balance sheet in evidence (as at 31 December 1997) shows a loan of about £1.022m from WJHL, and no loan from Mr Haward himself, or from the family trust, is apparent.

    71.  It is not however necessary to pursue these apparent discrepancies between the pleadings and the accounts. The most salient points disclosed by the accounts are the figures for Agriculture's turnover, losses and the state of its shareholders' funds during the relevant period:

£000

Turnover(Loss)Shareholders' funds (deficiency)
1994500(46)35
19951,439(266)(232)
19961,893(27)(352)
19971,652(400)(659)

    72.  Before the judge it seems to have been accepted that by 6 December 1998 at the very latest it was known to Mr Haward and the other respondents that the payments made to Agriculture (whether on taking up shares or as loans) were for practical purposes lost. This point was however in issue in the Court of Appeal (after a change of counsel on both sides) and it was also relied on (though not, I think, very strongly) before your Lordships. It seems to me that on this point the respondents are stuck with their own pleading, which asserts that the entire investment in Agriculture is recoverable as damages with interest from the respective dates of payment of each component part of the investment. They are also faced with some indisputable facts which seem to have guided the judge to his conclusion. Mr Haward was a mature businessman, even though most of his work seems to have been practical work on building sites. He was chairman and company secretary of Agriculture throughout, and he regularly attended board meetings (at which Mr Austreng of Fawcetts was also present). He saw the accounts in draft and in their final form (indeed, he signed them). The judge was right to conclude that the respondents' investment was completely lost by 6 December 1998 at the very latest. Mr Haward also knew that it was (to adapt the language of Hoffmann LJ in Hallam-Eames) "something of which [he] would prima facie seem entitled to complain." The outcome was very different from what he had expected when he acquired his controlling shareholding in 1994.

    73.  I am therefore inclined to think that (although his judgment is not without some defects and difficulties) the judge was basically right in his overall conclusion (para 20):

    "In my judgment, Mr Haward clearly knew all the material facts and events as they occurred. Thus, he knew of the terms of Fawcetts' retainer and he knew what he expected of them; that emerges from his witness statement and I have already noted how he relied on them. He obviously knew that money was paid—indeed he did the paying. He knew, as he appeared to accept in evidence, that he relied on Fawcetts' advice when he acquired [Agriculture] and committed himself and the other claimants to a substantial investment. He read the reports of the directors and could see the encouraging views expressed by Fawcetts in regard to the need for investment. Although he had a distinctly poor recollection of advice given by Fawcetts, it is the basis of the claim that they advised ongoing investment and it is hard to see how he could have failed to appreciate that he was spending money either on their advice or without their advice. So far as he was concerned, there was nothing of a factual nature that was latent; all was patent."

    74.  I do however think that the judge was wrong when he went on to say that he saw no material distinction between the present case and H F Pension Trustees Ltd v Ellison. That case was concerned with laymen's understanding and appreciation of legal advice on a highly technical subject, that is, the exercise of fiduciary powers under occupational pension schemes. This case is concerned with a mature businessman's understanding of financial advice on the trading activities of a small company carrying on a fairly straightforward sort of business. The relevant level of expertise is much lower. The judge made this point later in his judgment (at para 24):

    "The Act requires knowledge that the damage was attributable to the act or omission and that means knowledge that the damage is capable of being attributed to the act or omission. But the causal connection between the advice or non-advice and the damage in this case is patent and obvious, especially to a mature businessman and company director."

    By this the judge did not of course mean that the accountants were obviously negligent. What he meant was that if the pleaded allegations were proved at trial, causation would be no problem at trial (and by the same token he had no problem with the "attributable" condition). Conversely if the allegations were not proved at trial, it would be because the claimants' loss from Agriculture's undoubted and obvious failure would have been shown to have been caused, not by negligent advice (or lack of advice), but by later events not foreseeable by a reasonably careful and competent financial adviser. But the judge had to assume that the allegations were capable of being proved.

    75.  Why then did the Court of Appeal reach a different conclusion? Jonathan Parker LJ embarked on a very lengthy analysis of the authorities, much of which I would respectfully agree with. But then in paragraph 168 he made these observations:

    "In the instant case there were, on the evidence, a number of possible causes for the failure of [Agriculture] apart from Fawcetts' advice (or lack of it). Those possible causes are set out in Mr Taylor's letter dated 1 July 1998, in the passage quoted in para 45 above. Of particular significance in this connection, as it seems to me, are the claims made against Mr Brunt. In my judgment, Mr Haward was at that stage (July 1998) in the same position as the man with the disabling cough (in the example given by Sir Thomas Bingham MR in Dobbie) or as the claimant in Ali v Courtaulds [Ali v Courtaulds TextilesLtd [1999] Lloyd's Rep Med 301]. He did not know at that stage that all or part of the damage was capable of being attributed to Fawcetts' advice (or lack of it)."

    The relevant paragraphs of the letter were as follows:-

    "Mr Brunt as Sales Director has been responsible for the sales of tractors & equipment, the main area of the Company's activities. The decline in sales was thought to have resulted from a number of factors including the present uncertainties over the future of farm income, the effect of BSE, and the strong pound. Recently a further reason has come to light, namely the activities of Mr Brunt.

    By Clause 3(2) of his Service Contract, Mr Brunt is expressly permitted to carry on his existing Plant hire business known as RSI. It now appears that he has been referring the Company's customers to RSI for the hire of equipment and that the Company has suffered serious financial losses as a result. In addition he has over the last 18 months neglected his duties at HAL and concentrated on the interest of RSI, again to the serious detriment of HAL sales."

    The Lord Justice went on to conclude that it was not until May 1999 that Mr Haward acquired knowledge of acts or omissions by Fawcetts which were causally relevant for the purposes of his allegations of negligence.

    76.  I cannot, with respect, follow this reasoning. The respondents' pleaded case was that they had lost large sums of money invested in Agriculture. They lost that money because Agriculture became hopelessly insolvent and no one was prepared to throw any more good money after bad. The calamitous failure of the business no doubt had many causes, probably including all the factors mentioned in the letter quoted above. But the respondents' pleaded case was that Fawcetts had failed to perform their professional duty and that this was legally causative of the respondents' loss. Whether their case will succeed at trial, if it comes to trial, will depend on the judge's findings as to what the scope of the duty really was; whether Fawcetts performed it properly; and whether (or to what extent) the failure of the business (and the consequent loss of the respondents' investment) was caused by unpredictable factors which no reasonable professional person could have been expected to take into account in his advice. The need to investigate and determine these issues at trial cannot alter the identification of "the act or omission which is alleged to constitute negligence." It might have been different if (for instance) the respondents had engaged one professional to investigate and advise on the company's books, another professional to investigate and advise on the competence and honesty of the company's existing and proposed workforce (including Mr Brunt), and yet another professional to investigate and advise on the general state of the agricultural machinery market in the west country. But that is not this case.

    77.  For these reasons I think that Jonathan Parker LJ erred in equating Mr Haward's position to that of the claimant in Ali v Courtaulds Textiles Ltd [1999] Lloyd's Rep Med 301 and that of the imaginary claimant described by Sir Thomas Bingham MR in Dobbie v Medway Health Authority [1994] 1 WLR 1234, 1240. In those two cases the claimant did not know whether his physical disablement was attributable to his working conditions, for which his employer was responsible, or to some more or less natural cause such as ageing. He was therefore in a state of ignorance on a fundamental point, and his ignorance could be dispelled only by a medical expert. I see no useful parallel with Mr Haward's situation. The relationship between a man's working conditions and his natural ageing as competing causative elements in his deafness is quite different, to my mind, from the relationship between a financial adviser's alleged professional incompetence and the various factors which eventually lead to the collapse of the business on which he advises.

    78.  At the end of his judgment the judge referred (as I understand it, for completeness only) to evidence and submissions as to when the respondents first knew that they had a claim against Fawcetts. Mr Pooles QC (for the respondents) made some telling criticisms of this evidence, especially a draft letter dated 8 December 1998 (but never sent). But I regard these criticisms as irrelevant because the whole of this discussion was directed to the wrong question: knowledge of the existence of a claim in negligence. The whole of the respondents' written evidence (witness statements by Mr Haward himself, Mr Taylor and Mr Quinney) was directed to this (irrelevant) question. Thus the relevant part of Mr Haward's witness statement was headed in bold, "When I first became aware that I might have a claim against Fawcetts", and this is the theme reiterated in paragraphs 26, 28, 29, 30 and 31. The date when the respondents knew that they had a worthwhile cause of action against Fawcetts was not the starting date within the meaning of the statute.

    79.  The respondents' last-ditch argument, as I see it, is that even if the respondents knew of the loss and knew what advice Fawcetts had or had not given, they did not know the reasons why Fawcetts had not given the right advice—for instance, whether it was because Mr Austreng had not gone into the books thoroughly enough, or had failed to verify trading stocks, or had failed to draw the obvious conclusions from information which was available to him. But the judge considered this point and dismissed it. He said (para 21),

    "I do not accept that the act or omission referred to can include such matters as failing to do the necessary homework. That is not the act or omission of which a claimant has to have knowledge but is rather a particular, which may make the act or omission a negligent act or omission. As Purchas LJ put it at page 799 in Nash:

    'It was not, in our judgment, the intention of Parliament to require for the purposes of s11 and s14 of the Act proof of knowledge of the terms in which it will be alleged that the act or omission of the defendants constituted negligence or breach of duty. What is required is knowledge of the essence of the act or omission to which the injury is attributable.'"

    The importance of isolating what is essential has of course been emphasised in later authority to which I have already referred.

    80.  I see nothing wrong with the judge's assessment of this point. It does not seem to have received any attention in the Court of Appeal (see the fairly full summary of counsel's submissions in paras 131-144 of the judgment of Jonathan Parker LJ). Nor does it appear in the respondents' printed case in your Lordships' House. I would treat it as rightly abandoned. To require that a claimant had a detailed knowledge of how and why the defendant failed in his duty of care (for instance, why in Hallam-Eames the managing agents had plunged so deeply into the US casualty market) would go beyond the settled principles mentioned in paras 10 and 11 of Lord Nicholls' opinion, and would tilt the balance too far in favour of dilatory claimants.

 
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