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Judgments - Law Society (Original Respondents and Cross-appellants) v. Sephton & Co (a firm) (Original Appellants and Cross-respondents) and another and others (Original Appellants and Cross-respondents)


SESSION 2005-06

[2006] UKHL 22

on appeal from: [2004] EWCA Civ 1627





for judgment IN THE CAUSE


Law Society (Original Respondents and Cross-appellants)


Sephton & Co (a firm) (Original Appellants and Cross-respondents) and another and others (Original Appellants and Cross-respondents)



Appellate Committee


Lord Hoffmann

Lord Scott of Foscote

Lord Rodger of Earlsferry

Lord Walker of Gestingthorpe

Lord Mance




Original Appellants:

Michael Pooles QC

Derek Holwill

(Instructed by Barlow Lyde & Gilbert)

Original Respondents:

Timothy Dutton QC

Rosalind Phelps

(Instructed by Wright Son & Pepper)


Hearing date:

16 March 2006




WEDNESday 10 May 2006





Law Society (Original Respondents and Cross-appellants) v. Sephton & Co (a firm) (Original Appellants and Cross-respondents) and another and others (Original Appellants and Cross-respondents)

[2006] UKHL 22


My Lords,

    1.  Over a period of about six years ending in March 1996, Mr Andrew Payne, a solicitor practising near Solihull, misappropriated about £750,000 held in his client account. In each of the years 1988-1995 he delivered to the Law Society an accountant's report in which Mr Ian Mascord, a partner in the firm of Sephton & Co of Solihull, certified that he had examined Mr Payne's books and accounts and was satisfied that he had complied with the Solicitors' Accounts Rules 1991. Mr Mascord was negligent, if not worse, in signing these reports since he could not have made a proper examination without discovering the misappropriations.

    2.  The Law Society, which has broad supervisory and disciplinary powers over the profession, relied upon the reports by refraining from making the investigation it would have made if the reports had not been delivered or had indicated that something was amiss. Mr Payne had staved off discovery by taking money from one client to pay off another ("teeming and lading") but in April 1996 a client complained to the Law Society of delay in payment and on 17 May 1996 the Society's investigating accountant discovered the deficiency. On 20 May 1996 the Society exercised its statutory powers of intervention; Mr Payne was afterwards struck off the roll of solicitors and went to prison.

    3.  By section 36 of the Solicitors Act 1974 the Society is required to maintain and administer a Compensation Fund for the purpose of making grants for, among other things, the relief of loss caused by dishonesty on the part of a solicitor. The Society has power to make rules about the Fund and the Solicitors' Compensation Fund Rules 1995 contain "guidelines" which explain the circumstances in which grants will ordinarily be made. General principle (a) says that the "basic object of the Fund is to replace 'client's money' misappropriated by a solicitor'. General principle (b) emphasises that grants are wholly at the discretion of the Council and that "no person has a right to a grant enforceable at law" but that the intention of the Council is to "seek to administer the Fund in an even-handed and consistent manner". Claims must be made in a form prescribed by the Society (Rule 5) and delivered to the Society within six months after the loss has come to the knowledge of the applicant (Rule 6).

    4.  The first claim by a former client of Mr Payne was made on 8 July 1996 and over the following months more came in. The claims fell squarely within the object of the Fund and were duly paid. The first payment was made in October 1996 and by 8 January 2003 the Fund had paid a total of £1,245,764.11 (including interest) in respect of claims arising out of Mr Payne's misappropriations.

    5.  On 8 October 1996 the Society wrote to Sephton & Co saying that they proposed to hold the firm liable for payments which had to be made out of the Fund and which they said were attributable to the negligent reports signed by Mr Mascord. Matters proceeded slowly, not least because the whole question of whether an accountant who gives such a report owes a duty of care to the Law Society was about to be litigated in other proceedings. The Society and Sephton & Co's insurers agreed to await the outcome. In 1999 Sir Richard Scott V-C ruled in favour of the Law Society and on 29 June 2000 an appeal to the Court of Appeal was dismissed: see Law Society v KPMG Peat Marwick [2000] 1 WLR 1921.

    6.  Negotiations continued but the claim form was not issued until 16 May 2002. On 20 May 2002 Sephton & Co's solicitors wrote to say that they had been advised that that the limitation period had expired "long ago". The defence filed on 24 June 2002 pleaded that the claims were statute-barred. The Law Society denied that the limitation period had expired and pleaded in the alternative that Sephton & Co were estopped from relying upon the Limitation Act by representations made in the course of correspondence. Both questions were ordered to be tried as preliminary issues.

    7.  The normal period of limitation prescribed by section 2 of the Limitation Act 1980 for an action founded on tort is six years from the date on which the cause of action accrued. Since a cause of action may accrue without the knowledge of the injured party (Cartledge v Jopling [1963] AC 758) the six year period may expire before he is able to bring proceedings. In actions for negligence in which the cause of action accrues before the potential claimant knows the relevant facts, section 14A therefore prescribes an additional period of three years from the date on which he acquires such knowledge. But this provision is of no use to the Law Society because, if the cause of action accrued before the commencement of the six year period, ie before 16 May 1996, the Society knew all the relevant facts very shortly thereafter; certainly well before the commencement of the three year period on 16 May 1999. The Society can therefore bring the proceedings only if the cause of action accrued after 16 May 1996.

    8.  The preliminary issues were tried by Mr Michael Briggs QC, sitting as an additional judge of the Chancery Division [2004] EWHC 544 (Ch). He ruled against the Society on both points, holding that the cause of action had accrued before 16 May 1996 and that Sephton & Co were not estopped from relying upon a limitation defence. The Court of Appeal agreed with the judge on the second point but, by a majority (Carnwath and Maurice Kay LJJ, Neuberger LJ dissenting) reversed his decision on the first point [2004] EWCA Civ 1627; [2005] QB 1013. Sephton & Co appeal to your Lordships' House on the limitation issue and the Law Society cross-appeal on the estoppel issue.

    9.  Damage is an essential element in a cause of action for negligence. Mr Mascord was negligent when he signed his reports at various dates between 1988 and 1995 but the Law Society had no cause of action until it suffered damage in consequence of his negligence. So the critical question is when the damage happened. Sephton & Co say that the Society suffered damage whenever Mr Payne misappropriated a client's money after a negligent report had been delivered. The misappropriation gave the client a right to make a claim on the Fund and liability to such a claim was damage. The Law Society says that it suffered damage only when a claim was made. The misappropriation might have been repaid, either out of Mr Payne's own money or, more likely, by some teeming and lading. The client might not have made a claim. All that could be said was that, once there had been a misappropriation, it was likely that there would be a claim. But the Law Society could not have commenced proceedings on the basis that claims were likely.

    10.  There is, I am afraid, a good deal of recent authority on the point, which was considered at some length by Neuberger LJ in his thoughtful dissenting judgment and, slightly more summarily, by the judge and the majority in the Court of Appeal. As far back as Bell v Peter Browne & Co [1990] 2 QB 495, 502B, Nicholls LJ said that "the question of damage and the limitation period in negligence claims has been a troublesome one for some years" and later cases show that the question has not ceased to trouble. An examination of a number of cases, including a recent decision of your Lordships' House, is unavoidable.

    11.  It is not necessary to go back further than the decision of the Court of Appeal in Forster v Outred & Co [1982] 1 WLR 86. On 8 February 1973 Mrs Forster signed a mortgage by which she charged her farm to secure money which her son was borrowing to buy an hotel. The business was a failure and on 21 January 1975 Mrs Forster was called upon to pay about £70,000, which she paid on 29 August 1975. In March 1980 she issued a writ against the solicitors who had advised her in connection with the mortgage, alleging negligence in not explaining the transaction. The question was whether the action was statute barred and that depended upon whether she suffered damage when she executed the deed (more than six years before the writ) or when she was called upon to pay.

    12.  Stephenson LJ recorded (at p 93) the submission of Mr Stuart-Smith QC, for the defendants:

    "When she signed the mortgage deed she suffered actual damage. By entering into a burdensome bond or contract or mortgage she sustained immediate economic loss; her valuable freehold became encumbered with a charge and its value to her was diminished because she had merely the equity of redemption, varying in value at the whim of her son's creditors."

    13.  Later (at p 94), he recorded Mr Stuart-Smith's submission on the meaning of the "actual damage" needed to complete a cause of action in negligence:

    "Any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases."

    14.  Stephenson LJ said (at p 98) that he accepted Mr Stuart-Smith's statement of the law. The ambiguity in these passages (in an unreserved judgment in an interlocutory appeal) arises from the inclusion of the words "it includes liabilities which may arise on a contingency" in the second quotation. As appears from the first passage, the thrust of Mr Stuart-Smith's argument was that the mortgage, although the liability which it secured was contingent, had the immediate effect of depressing the value of Mrs Forster's farm. But the reference to contingent liabilities in the second passage could give the impression that merely incurring a possible future liability (for example, by giving a guarantee or indemnity unsecured upon any property) counted as immediate damage.

    15.  Dunn LJ also appears to have accepted the argument in the first quotation from Mr Stuart-Smith's argument. He said, at p 100:

    "As soon as she executed the mortgage the plaintiff not only became liable under its express terms but also - and more importantly - the value of the equity of redemption of her property was reduced. Before she executed the mortgage deed she owned the property free from incumbrances; thereafter she became the owner of a property subject to a mortgage. That, in my view, was a quantifiable loss and as from that date her cause of action against her solicitor was complete."

    16.  The broader interpretation of Forster v Outred & Co was unanimously rejected by the High Court of Australia in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514. The principal judgment of Mason CJ and Dawson, Gaudron and McHugh JJ) is a masterly exposition of the law which deserves careful study. The State of Western Australia sued under a statute creating liability for misleading conduct, claiming that on 26 October 1987 it had been induced by the defendant's misrepresentation to indemnify a bank against loss on a loan to a company in difficulties. The indemnity was called in November 1988 and the State paid $22.5m in December 1989. Proceedings were commenced on 24 October 1990, within the three year limitation period provided by the statute, but the State applied on 14 January 1991 to amend to plead an additional misrepresentation on 25 October 1987. This was more than 3 years after the execution of the indemnity but less than three years after it had been called and paid. The High Court decided that the State suffered no damage while its obligation under the guarantee remained contingent. Damage occurred only when it was called.

    17.  The High Court said, at pp 529, 531, 532, that Forster v Outred & Co was explicable:

    "by reference to the immediate effect of the execution of the mortgage on the value of the plaintiff's equity of redemption …. It has been contended that the principle underlying the English decisions extends to the point that a plaintiff sustains loss on entry into an agreement notwithstanding that the loss to which the plaintiff is subjected by the agreement is a loss upon a contingency. For our part, we doubt that the decisions travel so far. Rather, it seems to us, the decisions in cases which involve contingent loss were decisions which turned on the plaintiff sustaining measurable loss at an earlier time, quite apart from the contingent loss which threatened at a later date…. If…the English decisions properly understood support the proposition that where, as a result of the defendant's negligent representation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred."

    18.  I say at once that I am in complete agreement with this analysis, which provides the answer to this appeal. By virtue of the terms of the Solicitors' Compensation Fund Rules 1995, Mr Payne's misappropriations gave rise to the possibility of a liability to pay a grant out of the Fund, contingent upon the misappropriation not being otherwise made good and a claim in proper form being made. Such a liability would be enforceable only in public law, by judicial review, but would still in my opinion count as damage. But until a claim was actually made, no loss or damage was sustained by the Fund. I must however consider certain other authorities and contrary arguments.

    19.  My second quotation from the judgment of Stephenson LJ in Forster v Outred & Co [1982] 1 WLR 86, 94 was approved by this House in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627, 1630, but the House did nothing to resolve the ambiguity which I have identified. There was no need to do so because the context was altogether different. In Nykredit the surveyor's negligent valuation had led to the plaintiff obtaining what turned out to be inadequate security for his loan. There was no question of a contingent liability; the issue was whether a cause of action arose immediately or when the amount he was owed exceeded the value of his rights under the transaction (borrower's covenant plus security). The House decided that it was the latter. This was entirely in accordance with the principles discussed in the Wardley case, where, in a passage to which Lord Nicholls of Birkenhead referred, at p 1634, Brennan J said, at 175 CLR 514, 536:

    "A plaintiff may suffer economic loss or damage in a number of ways: by payment of money, by transfer of property, by diminution in the value of an asset or by the incurring of a liability. Whether loss or damage is actually suffered when any of these events occurs depends on the value of the benefit, if any, acquired by the plaintiff by paying the money, transferring the property, having the value of the asset diminished or incurring the liability. If the plaintiff acquires no benefit, the loss or damage is suffered when the event occurs. At that time, the plaintiff's net worth is reduced. And that is so even if the quantification of that loss or damage is not then ascertainable. But if a benefit is acquired by the plaintiff, it may not be possible to ascertain whether loss or damage has been suffered at the time when the burden is borne - that is, at the time of the payment, the transfer, the diminution in value of the asset or the incurring of the liability. A transaction in which there are benefits and burdens results in loss or damage only if an adverse balance is struck."

    20.  Nykredit therefore decides that in a transaction in which there are benefits (covenant for repayment and security) as well as burdens (payment of the loan) and the measure of damages is the extent to which the lender is worse off than he would have been if he had not entered into the transaction, the lender suffers loss and damage only when it is possible to say that he is on balance worse off. It does not discuss the question of a purely contingent liability.

    21.  Next, there are a number of cases in the Court of Appeal which involve transactions, with both benefits and burdens, into which the plaintiff entered as a result of the negligence or breach of contract of the defendant. None of these cases concerned purely contingent obligations. It is only necessary to observe that in such bilateral transactions the answer to the question of whether damage has been suffered may be different according to whether the liability is for the consequences of the defendant not performing his duty or (as is usual in claims for misrepresentation) the consequences, or some of the consequences, of the plaintiff entering into the transaction. If the liability is for the difference between what the plaintiff got and what he would have got if the defendant had done what he was supposed to have done, it may be relatively easy, as Bingham LJ pointed out in D W Moore & Co Ltd v Ferrier [1988] 1 WLR 267, to infer that the plaintiff has suffered some immediate damage, simply because he did not get what he should have got. Thus in Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172, where the plaintiff paid a premium for a voidable fire insurance policy because his insurance broker had failed to disclose material facts, the Court of Appeal held that he had suffered immediate damage because he "did not get what he should have got", namely a policy binding on the insurers. On the other hand, if the damage is (as it was in Nykredit [1997] 1 WLR 1627 and First National Commercial Bank plc v Humberts [1995] 2 All ER 673) the difference between the defendant's position after entering into the transaction and what it would have been if he had not entered into the transaction, the answer may be more difficult. Despite the breach of duty, the transaction may on balance have originally been advantageous to the plaintiff and some evidence may be necessary to show when he was actually in a worse position. The judgment of Mason CJ and his colleagues in Wardley drew attention to this distinction at 175 CLR 514, 530-531:

    "Another element in some of the English decisions…is the conclusion that, because the subject matter of the agreement lacked the qualities which it had been represented as having, that subject matter was therefore less valuable than it would have been if the representations had been true. That conclusion is acceptable in cases in which the contract measure of damages is appropriate but it is not acceptable here where the contract measure of damages does not apply. The application of that measure of damages [sc the difference between the value of what the plaintiff got and what he would have got if the defendant had performed his duty] may, in some situations, enable a court to conclude more readily that the plaintiff first suffers loss or damage on entry into an agreement."