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)

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    22.  Thus cases like Bell v Peter Browne & Co [1990] 2 QB 495 and Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172 are readily explicable as cases in which the damage was the difference between the plaintiff's position as it was and as it would have been if the defendant had performed his duty and in which it was possible to infer that the plaintiff's failure to get what he should have got from a bilateral transaction was quantifiable damage, even though further damage which might result from the flaw in the transaction was still contingent. The plaintiff had paid money, transferred property, incurred liabilities or suffered diminution in the value of an asset and in return obtained less than he should have got. But these authorities have no relevance to a case in which a purely contingent obligation has been incurred.

    23.  The only case to which we were referred which cannot in my opinion be explained in this way is Gordon v JB Wheatley & Co [2000] Lloyd's Rep PN 605, in which the plaintiff sued his solicitors for negligence in wrongly advising him that a collective mortgage scheme did not require authorisation under the Financial Services Act 1986. As a result, he was obliged by the Securities and Investment Board to indemnify investors in the scheme against losses and this eventually cost him about £676,000. He began his action more than six years after the advice had been given but less than six years after the SIB required him to indemnify the investors. The Court of Appeal held that he had suffered loss when he continued to take investments after receiving the advice. The claim was statute-barred.

    24.  If, as a result of entering into the investment transactions, the plaintiff had obtained rights against the investors which were worth less than he should have got, the case would have been similar to Bell v Peter Browne & Co [1990] 2 QB 495 and Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172, which the Court of Appeal said it was following. But, as Carnwath LJ pointed out in his judgment in this case ([2005] QB 1013, 1054) the risk of action by the SIB was not a liability arising directly from the investment transaction:

    "The enforcement powers of the SIB were quite independent of the rights and liabilities arising under the scheme. The link was at the most indirect, in that the investment in the mortgage scheme provided simply the occasion for the SIB to act."

    25.  I agree, and am inclined to think that Gordon v JB Wheatley & Co [2000] Lloyd's Rep PN 605 was wrongly decided. But otherwise, as Buxton LJ observed in Knapp's case ([1998] PNLR 172, 192) there seems to be no authority inconsistent with the opinion of the High Court of Australia in Wardley that incurring a contingent liability is not, as such, actionable damage.

    26.  I turn to the wider policy considerations discussed by Neuberger LJ in his dissenting judgment. In Wardley, the High Court said, at 175 CLR 514, 527) that it would be unjust to compel a plaintiff to institute proceedings before the existence of the loss is ascertained or ascertainable:

    "In many instances the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact upon events as they unfold becomes known or apparent and, by then, the relevant limitation period may have expired….Moreover, it would increase the possibility that the courts would be forced to estimate damages on the basis of likelihood or probability instead of assessing damages by reference to established events."

    27.  In Knapp's case, [1998] PNLR at 172, 178, Hobhouse LJ said that Wardley showed that Australia had adopted a different solution to the potential injustice caused by a strict application of the limitation period. The judges had devised a stricter test for deciding when the cause of action accrued, whereas in England Parliament had introduced the alternative three year limitation period in section 14A. In Nykredit at [1997] 1 WLR 1627, 1633, Lord Nicholls of Birkenhead said that:

    "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."

    28.  I respectfully think that the reasons of policy advanced by the High Court in Wardley 175 CLR 514 are somewhat overstated. It is often the case that a plaintiff, who has plainly suffered some damage, is obliged to commence proceedings before the full effects of his injury can be known. This frequently happens in actions for personal injury. On the other hand, I do not agree with Hobhouse LJ that Wardley and section 14A of the 1980 Act are different solutions to the same problem. They are solutions to different problems. Allowing a plaintiff three years from the date on which he knows that a cause of action has arisen does not help if a mere contingent liability is treated as damage and the plaintiff, at the end of the three years, still does not know whether the contingency will eventuate or not. On the other hand, Wardley is no answer to a case like Cartledge v E Jopling & Sons Ltd [1963] AC 758, in which the plaintiff had on any view suffered damage but did not know it.

    29.  It also seems to me irrelevant that a prudent accountant, drawing up the accounts of the Compensation Fund to give a true and fair view of its assets and liabilities, would have included provision for contingent liabilities. As Lord Radcliffe pointed out in Southern Railway of Peru Ltd v Owen [1957] AC 334, 357, the principles upon which such provisions are made does not depend upon "any exact analysis of the legal form of the relevant obligation" but upon estimates of what in practice is likely to happen. A cause of action, however, connotes a legal obligation and its existence must be determined by rules of law.

    30.  In my opinion, therefore, the question must be decided on principle. 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 WLR 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.

    31.  The majority of the Court of Appeal appear to have decided the case on the basis that the Law Society did not enter into any transaction giving rise to the contingent liability. It did nothing and the contingent liability was created by the misappropriations and the previous existence of the Compensation Fund and the rules which governed its administration. 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.

    32.  It follows that in my opinion the appeal should be dismissed and that it is not necessary to consider the cross-appeal on estoppel.

LORD SCOTT OF FOSCOTE

My Lords,

    33.  I have had the advantage of reading in draft the opinions prepared by my noble and learned friends Lord Hoffmann, Lord Walker of Gestingthorpe and Lord Mance and find myself in complete accord with their analysis of the problem raised by this appeal, their comments on the relevant authorities and their conclusions. There is very little that I can usefully add. I do, however, want to add my agreement to that of Lord Hoffmann with the analysis of and comments about English law expressed by Mason CJ in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 (see paras 17 and 18 of Lord Hoffmann's opinion). I agree with Lord Hoffmann that that analysis provides the answer to this appeal.

    34.  I agree, also, with Lord Mance's conclusions that a cause of action in tort did not accrue in the Law Society's favour against Sephtons until the Law Society first received a claim on the Compensation Fund from a Payne & Co client whose money had been misappropriated.

    35.  I agree with my noble and learned friends that for the reasons they have given this appeal should be dismissed.

LORD RODGER OF EARLSFERRY

My Lords,

    36.  I have had the advantage of considering the speeches of my noble and learned friends, Lord Hoffmann, Lord Walker of Gestingthorpe and Lord Mance, in draft. I agree with them and, for the reasons which they give, I too would dismiss the appeal.

LORD WALKER OF GESTINGTHORPE

My Lords,

    37.  A claimant wishing to sue for negligence must be able to identify the time at which he suffers damage. Until he has suffered damage he cannot sue for damages (although he may possibly be able to apply for an injunction to prevent damage occurring). If on the other hand he waits too long after he has suffered damage, he may find that his claim is statute-barred. Sometimes a claimant suffers damage without being aware of it, because the damage takes the form of a latent disease, or a latent defect in a building or structure, or defective professional services whose adverse consequences take some time to become apparent. Where damage has undoubtedly occurred but the claimant is unaware of some or all of the material facts, his difficulties are alleviated (although not always entirely removed) by sections 11, 14 and 14A of the Limitation Act 1980 (the latter section, which was added by the Latent Damage Act 1986, has recently been considered by this House in Haward v Fawcetts (a firm) [2006] UKHL 9; [2006] 1 WLR 682).

    38.  The facts of this appeal include what can be called a period of latency. In annual accountant's reports to the Law Society made between 5 January 1989 and 8 November 1995 Mr Mascord of Sephton & Co. ("Sephton") negligently certified that the financial affairs of his client solicitor, Mr Payne (and in particular, his clients' accounts and trust accounts) were in order. The information in the certificates was untrue, but the Law Society did not know it was untrue, and in reliance on the certificates it did not until May 1996 (when alerted by complaints from some of Mr Payne's clients) take action which it would otherwise have taken much sooner—that is to send in an investigating accountant and, on receiving his report of a massive deficiency, to intervene in Mr Payne's practice as a sole practitioner. The investigating accountant was sent in on 14 May 1996. He reported three days later and the intervention occurred on 20 May 1996.

    39.  Claims on the Law Society's compensation fund (established under section 36 of the Solicitors Act 1974 and regulated by the Solicitors' Compensation Rules 1995) began to come in soon afterwards, and by 8 January 2003 the Law Society as trustee of the compensation fund had paid out over £1,245,000 in meeting claims by Mr Payne's clients. Yet for various reasons (including the case of Law Society v KPMG Peat Marwick, decided by the Vice-Chancellor in October 1999, [2000] 1 All ER 515, and by the Court of Appeal in June 2000, [2000] 1 WLR 1921) the Law Society's claim form against Sephton was not issued until 16 May 2002 (that is six years less four days from the intervention in Mr Payne's practice). The period of latency (giving a further three years from the claimant's date of knowledge) could not assist the Law Society in contending that the claim was not statute-barred. It could resist Sephton's limitation defence only by establishing either (i) that by 16 May 1996 it had not yet suffered any damage as a result of Sephton's negligence; or (ii) that Sephton was estopped from relying on the limitation defence. Those are the issues in Sephton's appeal and the Law Society's cross appeal respectively. Mr Michael Briggs QC (sitting as a deputy judge of the High Court, Chancery Division) decided the first issue in favour of Sephton. The Court of Appeal by a majority (Carnwath and Maurice Kay LJJ, Neuberger LJ dissenting) allowed the Law Society's appeal on the first issue. On the second issue both lower courts rejected the Law Society's argument based on estoppel.

    40.  On the first issue (the only issue on which the House found it necessary to hear argument) the opposing contentions can be simply stated. The Law Society contends that even though it knew (from the moment when its investigating accountant reported on the true state of the solicitor's accounts) that it was facing the prospect (or risk) of having to pay heavy compensation in due course, it did not suffer actual damage in the eyes of the law until it resolved to make its first payment out of the compensation fund to one of the solicitor's former clients. In putting forward this contention the Law Society relies partly on its public law function in administering the compensation fund, but it also puts its case on broader grounds. Against that Sephton contend that the Law Society was worse off from the time of each new misappropriation following the issue of successive untrue certificates (and knew it was worse off from the moment of the investigating accountant's report as to the true facts). The need to wait for claims on the compensation fund to be made and settled, in order to quantify the damage, did not mean that damage had not already been suffered.

    41.  This last point is plainly right, in the limited sense that a claimant does not have to wait for final quantification of his damage. It is a commonplace of negligence actions of all sorts that a cause of action may arise long before it is possible to quantify precisely the damages eventually recoverable. But there are other situations in which the correct legal analysis is that, however great may be the prospect (or risk) of economic loss, actionable damage has not yet occurred (just as there are situations in which there is grave and obvious risk of personal injury or damage to property, but actionable damage has not yet occurred).

    42.  Mr Pooles QC (for Sephton) pointed to the decision of this House in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627 as authority for the general inclination of the law to treat a cause of action as arising sooner rather than later. Lord Nicholls of Birkenhead said, at p 1633,

    "Further, 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."

    The House also approved (see p 1630) the formulation by Mr (Murray) Stuart-Smith QC previously approved by the Court of Appeal in Forster v Outred & Co [1982] 1 WLR 86, 94,

    "What is meant by actual damage? Mr Stuart-Smith says that it is 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. They are all illustrations of a kind of loss which is meant by 'actual' damage."

    In this passage Sephton naturally places emphasis on the words "any detriment." The Law Society emphasises "capable of assessment in money terms." In any event the passage, although approved by high authority, cannot be construed as if it were a statute.

    43.  In Nykredit the expression "worse off" was used by Lord Nicholls (in discussing the authorities mentioned at p1634E and H) and by my noble and learned friend Lord Hoffmann (at pp1638D and 1639D: in the last reference the phrase is "financially worse off"). This latter formulation seems to me to be preferable, if I may respectfully say so, since the colloquial phrase "worse off" (like "detriment") is imprecise. A bank or building society which (in reliance on a negligent valuation) lends £1m on a property said to be worth £1.5m but actually worth £1.25m is in a sense worse off (or has suffered a detriment) in that it has a margin of security of only one-fifth of the sum secured, rather than one-third. But so long as the borrower's covenant is good, it has suffered no loss. That (together with the identification of the relevant loss: see Lord Nicholls at p 1630F and Lord Hoffmann at p 1638C-H) is the whole point of Nykredit: see Lord Nicholls at pp1631B-F and 1632C-E and Lord Hoffmann at p1639B-D. The Court of Appeal had reached a similar result in First National Commercial Bank Plc v Humberts (a firm) [1995] 2 All ER 673, a decision referred to with approval by the House in Nykredit.

    44.  In First National Commercial Bank, Saville LJ made some observations, at p 679, which I find helpful:

    "At the hearing and in the judgment much reliance was placed on the cases where the claimant entered into a transaction which through a breach of duty owed to the claimant provided the claimant with less rights than should have been secured, or imposed liabilities or obligations on the claimant which should not have been imposed. Examples of these cases are: Forster v Outred & Co (a firm) [1982] 1 WLR 86, Iron Trade Mutual Insurance Co Ltd v J K Buckenham Ltd [1990] 1 All ER 808 and Bell v Peter Browne & Co (a firm) [1990] 2 QB 495. In all those cases, however, the court was able to conclude that the transaction then and there caused the claimant loss, on the basis that if the injured party had been put in the position he would have occupied but for the breach of duty, the transaction in question would have provided greater rights, or imposed lesser liabilities or obligations than was the case; and that the difference between these two states of affairs could be quantified in money terms at the date of the transaction."

    45.  The three cases cited by Saville LJ in this passage were all cases where the client had through the negligence of his professional adviser ended up with a package of rights less valuable than he was entitled to expect—damaged or defective goods, to pursue the metaphor, rather than the undamaged and serviceable goods which he should have got. In Forster it was a mortgage (securing the existing and future liabilities of the claimant's son, who later went bankrupt) burdening the claimant's previously unencumbered freehold property. In Iron Trade Mutual, it was a reinsurance policy which was voidable for misrepresentation or non-disclosure. In Bell it was a beneficial interest in one-sixth of the proceeds of sale of a former matrimonial home which was defective as a result of what Nicholls LJ, at p 502, called "failure (a)" and "failure (b)":

    "(a) The solicitors' failure to see that the parties' agreement was recorded formally in a suitable declaration of trust or other instrument and (b) their failure to protect the plaintiff's interest in the house or the proceeds of sale by lodging a caution. As to failure (a), clearly the damage, such as it may have been, was sustained when the transfer was executed and handed over. At that point the plaintiff parted with title to the house, and became subject to the practical inconveniences which might flow from his not having his wife's signature on a formal document."

    Nicholls LJ went on to hold that failure (b) also caused immediate loss even though the defect (if recognised, which was unlikely once the solicitor had closed the file) could have been avoided, at some expense, at any time while the house remained unsold. A similar approach was taken (to a voidable fire insurance policy) by the Court of Appeal in Knapp v Ecclesiastical Insurance Group Plc [1998] PNLR 172.

    46.  It is unnecessary to multiply examples of "transaction" cases but D W Moore & Co Ltd v Ferrier [1988] 1 WLR 267 calls for mention, since it has been cited in many later cases. A solicitor was instructed to prepare an agreement providing for the introduction of a new working director into an insurance business carried on by a company. His instructions called for the new director to enter into a restrictive covenant which would take effect on his leaving the business. Through careless drafting the covenant was ineffective. The agreement (entered into in 1971 and renewed with the same defect in 1975) continued until 1980 when, on the director's departure from the business, the covenant was found to be defective. The company issued a writ against the solicitors in 1985. The Court of Appeal upheld the judge's decision that the claim was statute-barred. Neill LJ said, at p 278,

    "The plaintiffs suffered damage 'because [they] did not get what [they] should have got.' The plaintiffs' rights under the two agreements were demonstrably less valuable than they would have been had adequate restrictive covenants been included."

    Similarly, Bingham LJ said, at p 279:

    "On the plaintiffs' case, which for purposes of this issue may be assumed to be wholly correct, the covenants against competition were intended, and said by the defendants, to be effective but were in truth wholly ineffective. It seems to me clear beyond argument that from the moment of executing each agreement the plaintiffs suffered damage because instead of receiving a potentially valuable chose in action they received one that was valueless."

    47.  A variation on the "transaction" cases, but one that to my mind shows essentially the same approach, is when a client instructs a solicitor to bring an action for damages. His claim is a chose in action and it is in effect entrusted to the solicitor to bring it to maturity. The solicitor is liable for making his client's chose in action valueless if he carelessly allows it to become statute-barred (or "doomed to failure" because a striking-out application would be bound to succeed: see Clarke LJ in Hatton v Chafes (a firm) [2003] EWCA Civ 341, 13 March 2003, para 23; also Sir Anthony Evans at para 82).

    48.  In all these cases the claimant has as a result of professional negligence suffered a diminution (sometimes immediately quantifiable, often not yet quantifiable) in the value of an existing asset of his, or has been disappointed (as against what he was entitled to expect) in an asset which he acquires, whether it is a house, a business arrangement, an insurance policy, or a claim for damages. Your Lordships have not, I think, been shown any case in which the imposition on a claimant 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 Forster [1982] 1 WLR 86 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.

    49.  I do not find it necessary to enter into a detailed discussion of the decision of the High Court of Australia in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514. But I respectfully agree with the comment in the judgment of the plurality (Mason CJ, Dawson, Gaudron and McHugh JJ, at p 531),

    "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."

    The footnote to the last sentence refers to Forster and Moore.

    50.  Of all the cases cited to the House the only one that causes me any difficulty is the decision of the Court of Appeal in Gordon v J B Wheatley (a firm) [2000] Lloyd's Rep PN 605. In that case the claimant operated a private mortgage scheme through a number of companies which he controlled. The claimant's case was that his solicitors failed to advise him properly about the requirements of the Financial Services Act 1986. The Securities and Investments Board began an investigation into his companies in May 1992 and alleged that the scheme was an unauthorised (and so unlawful) collective investment scheme. In September 1992 the claimant was advised (by other solicitors) to sign an indemnity making himself personally liable for any losses suffered by investors under the scheme, and in due course he became liable for over £676,000. Kennedy LJ (with whom Kay LJ agreed) reviewed the authorities at some length, but the actual grounds of the decision, at p 612, are rather briefly stated. Kennedy LJ rejected the submission of counsel for the claimant that he was, when the various investments were made, "only potentially worse off"; Kennedy LJ said that after the investments were made the claimant was exposed to a risk of an order under section 6(2) of the Financial Services Act 1968, and

    "that was a liability, albeit a contingent liability, a fetter on his assets, from which on his case he would have been protected if the first defendant had exercised proper care."

    He then went on to observe,

    "If the first defendant was negligent in the way that is alleged (ie by failing to advise the claimant how to set up his scheme so that it was not capable of being considered a collective investment scheme, or failing to advise him to seek authorisation pursuant to the 1986 Act) then, for the reasons I have given when reviewing the authorities, I must conclude that the claimant did sustain actual loss sufficient to complete his cause of action, as Mr Steinfeld submits, when each investment was made."

    51.  I think that the first part of this reasoning cannot be sustained. The claimant's risk of being subjected to an order under regulatory legislation cannot to my mind be termed a contingent liability or a fetter on the claimant's assets. The other way of expressing the ground of decision is more sustainable, on the basis that the claimant had got from his solicitor a defective scheme rather than one which was proof against regulatory attack. Even so, it seems to me close to the borderline. I see no good reason to stretch the "defective product" analogy to cover every situation in which a professional or commercial adviser carelessly gives inadequate advice and so produces a state of affairs which carries the risk of future loss; and to do so would be contrary to the unanimous decision of this House in Nykredit [1997] 1 WLR 1627.

 
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