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)
52. I would therefore reject Sephton's submission that it was enough that the Law Society was, every time that misappropriations were made after the issue of defective accountant's certificates, at risk of having to meet claims from clients from whom Mr Payne misappropriated fundseven if that risk (of a future eventuality) is beguilingly expressed as "exposure to claims" (suggesting a present or current condition). It was in a sense a detriment, but it was not a detriment of the sort described in Forster v Outred & Co  1 WLR 86, 94 as understood and developed in the later authorities.
53. That conclusion is reinforced, in my opinion, by the public law character of the Law Society's functions as trustee of the compensation scheme, but it does not depend on that special feature.
54. For these reasons, and for the fuller reasons given by my noble and learned friends Lord Hoffmann and Lord Mance (whose opinions I have had the advantage of considering in draft, and with which I am in full agreement) I would dismiss the appeal and make the order which Lord Hoffmann proposes.
55. This is the second occasion within a short span when the House has to consider a question of limitation in the context of a claim in tort for economic loss. Haward v. Fawcetts  UKHL 9;  1 WLR 682 concerned the knowledge required for the purposes of the special time limit for negligence actions "where facts relevant to the cause of action are not known at [the] date of accrual" (cf Limitation Act 1980 section 14A). The present case raises a prior issue regarding the date of accrual of the cause of action for the purposes of section 2 of the Limitation Act 1980, which provides that "An action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued".
56. A cause of action in tort may accrue for the purposes of section 2 of the Limitation Act 1980 (formerly section 2 of the 1939 Act) before its beneficiary knew or had reason to know of it: cf Cartledge v. E. Jopling & Sons Ltd.  AC 758 (personal injury), Pirelli General Cable Works Ltd. v. Oscar Faber and Partners  2 AC 1 (latent damage to buildings) and Forster v. Outred & Co.  1 WLR 86 (professional negligence). The legislative response was not to alter the time when the cause of action is to be taken as accruing, but to introduce alternative three-year time limits running from the date of knowledge. Following the case of Cartledge, the Limitation Act 1963 introduced such a time limit for personal injuries (now reflected in section 11 of the 1980 Act). Following the 24th Report in November 1984 of the Law Reform Committee on Latent Damage (Cmnd. 9390), the Latent Damage Act 1986 inserted section 14A into the 1980 Act providing such a time limit for other actions for damages for negligence. Parliament thus re-affirmed that a cause of action for damages for negligence may accrue, without its beneficiary knowing or having reason to know of it. In the present case, the key to the accrual of any cause of action is whether there was a breach of duty which led to relevant and measurable damage.
57. The Law Society's claim is for loss sustained by its Compensation Fund in respect of a sole practitioner, Andrew Payne, who practised under the name of Payne & Co. from 1986 to 1996. The claim is against a firm of accountants ("Sephtons") retained by Mr Payne to provide the Law Society annually with accountants' reports containing the information prescribed by section 34 of the Solicitors' Act 1974. Such information goes to compliance with the Solicitors Accounts Rules of 1991 (or, prior to 1st June 1992, 1986). For the purposes of the preliminary issue before the House, it is accepted that between about January 1990 and March 1996 Mr Payne misappropriated client monies. But Sephtons, through their partner, Mr Mascord (now deceased) provided clean annual reports for each of the years of practice ending on 30th April in the years 1988 to 1995.
58. The Law Society alleges that, in reliance on such reports, it took no step to investigate or intervene in Payne & Co's practice, and Mr Payne was able to continue to misappropriate client monies and to cover up prior misappropriations by teeming and lading. The alarm was only raised in May 1996 following a complaint by one of Payne & Co's clients. The Society commissioned an inspection of Payne & Co's books of account. This on 17th May 1996 revealed a shortage on client account of at least £763,956 and that at least £50,000 had already been misappropriated by June 1991. On 20th May 1996 the Society intervened in Mr Payne's practice under section 35 and Schedule 1 of the 1974 Act. The first claim by a client of Payne & Co on the Society's Compensation Fund was made on 8th July 1996, and the first payment out of the Fund was made in October 1996. By 8th January 2003 the Fund had paid out a total of £1,245,764.11 to a number of claimants.
59. Accountants such as Sephtons owe the Law Society a duty of care when preparing reports under section 34 of the Solicitors Act 1974. This was confirmed on 29th June 2000 by the Court of Appeal in Law Society v. KPMG Peat Marwick  1 WLR 1921. The Law Society had already instructed solicitors in August 1996 with regard to possible proceedings against Sephtons. A letter before action was sent to Sephtons on 8th October 1996. But no claim for negligence was issued until 16th May 2002. A further claim alleging fraudulent misrepresentation was issued on 2nd December 2002. Sephtons raised the question of limitation in May 2002, and preliminary issues were ordered in respect of these claims in April 2003. The House is only concerned with the preliminary issue relating to the claim for negligence.
60. Any cause of action by the Society for negligence accrued when the Society first suffered any "actual" damage of a relevant and measurable kind bearing in mind the measure of damage applicable to the wrong in question: see Forster v. Outred & Co.  1 WLR 86, 94 and Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd. (No 2)  1 WLR 1627, 1630D-F, 1631D and 1632D per Lord Nicholls of Birkenhead in a speech with which all other members of the House agreed. The Law Society submits that this only occurred when in October 1996 it first resolved to make a payment out of its Compensation Fund to one of Mr Payne's former clients. Possible fall-back dates for the Society are July 1996 when it first received a claim from such a client or 20th May 1996 when it first intervened in Mr Payne's practice. Sephtons submits that actual loss was sustained each time that the Society received from Sephtons a clean but negligently prepared report and relied upon it by allowing Mr Payne to continue to practise uninterrupted; alternatively, that it was sustained when Mr Payne first misappropriated further client monies after the Society had received such a report and relied upon it by allowing Mr Payne to continue in practice. If the Law Society is right, then any cause of action for negligence arose within six years prior to its issue of a claim. If Sephtons are right, the Law Society's claim for negligence is time-barred. The three year period in section 14A cannot assist the Society, since it knew the relevant facts no later than 1996.
61. The Compensation Fund is a statutory grant-making fund first established under the Solicitors Act 1941, and now established under section 36 of the Solicitors Act 1974. It is funded by a levy on practising members of profession. When it was first established in 1941, there was no requirement of professional indemnity insurance in respect of solicitors - this was only introduced by the 1974 Act - and there would in any event have been obvious obstacles facing any insurance-based scheme operating to protect clients and the public in respect of dishonesty or misappropriation of monies by sole practitioners. There is no necessary equation between the redress available by a grant out of the Fund and that available in circumstances covered by professional indemnity insurance: see R v. Law Society, ex p. Mortgage Express Ltd.  2 All ER 348, 361H-J per Lord Bingham of Cornhill CJ.
62. Under section 36(2), the Society may make a grant out of the Fund for the purpose of relieving loss or hardship where satisfied (a) that a person has suffered or is likely to suffer loss in consequence of dishonesty on the part of a solicitor, or his employee in connection with his practice or a trust of which he was trustee or (b) that a person has suffered or is likely to suffer hardship in consequence of failure on the part of a solicitor to account for money which has come into his hands in connection with his practice or any such trust or (c) that a solicitor has suffered or is likely to suffer loss or hardship by reason of his liability to any of his firm's clients in consequence of some act or default of any of his partners or employees in circumstances where but for the liability of that solicitor a grant might have been made out of the Compensation Fund to some other person.
63. In deciding whether or not to make a grant out of the Fund, the Society has under section 36 a discretion, though one which is susceptible to judicial review to ensure that it is exercised on rational and intelligible grounds: see R v Law Society, ex p Mortgage Express Ltd.  2 All ER 348 and R v Law Society, ex p Ingman Foods Oy AB  2 All ER 666. In the former case, the Society exercised its discretion to limit the payment of compensation to that part of loss incurred through entering into a transaction on security brought about by a solicitor's dishonesty which could be attributed to such dishonesty, as opposed to a subsequent fall in the market. It did this, although a solicitor's duty is, in contrast to a valuer's, not confined to obtaining or advising on adequate security. The court upheld the exercise of discretion. The breadth of the discretion and the fact that its exercise depends on the policies and circumstances at the time of any claim on the Fund appear from the judgment of Lord Bingham of Cornhill MR at p 360:
In the latter case, Latham J upheld the Society's exercise of discretion to refuse a payment to an applicant whose recklessness the Society regarded as justifying a 100% reduction.
64. The present case falls within category (b) in section 36(2), that is failure to account causing clients of Mr Payne to suffer or be likely to suffer hardship. From the moment when Sephtons first issued any report in alleged breach of duty, the Law Society was exposed to the possibility that Mr Payne would as a result be able to continue to misappropriate client monies. From the moment that Mr Payne did this, the Law Society was exposed to the possibility that a client would as a result suffer or be likely to suffer hardship, and might make a claim which the Law Society, as a matter of public law, would have to consider under its grant-making discretion and might, depending on the circumstances, have to meet to avoid the risk of a successful application for judicial review. These considerations, in Sephtons' submission, are enough to mean that the cause of action accrued at one or other of the times which it advances.
65. During the course of oral submissions Sephtons also referred to the delay which their negligence is alleged to have caused in the investigation of Mr Payne's practice and activities, and suggested that this alone would have added to the cost of eventual investigation. But Mr Michael Briggs QC, sitting as an additional judge at first instance, was not satisfied that the delay had involved the Society in any increased costs or loss. So it is unnecessary to consider that aspect further. Further, the duty presently alleged by the Society is to the Society's Compensation Fund, not to the Society as regulator, and I express no view as to whether increased investigation costs could as such ever constitute relevant loss.
66. The Law Society submits that mere exposure of the Fund to a possibility of loss is not sufficient. The loss must be relevant and measurable. Sephtons' reports and Mr Payne's misappropriations did not cause the Society to enter into any transaction or lead to any change in its legal position or to any legal liability on its part. Until one of Mr Payne's clients suffered or was likely to suffer hardship and made a corresponding claim on the Fund, the Society had no duty even in public law in relation to any such misappropriation. Even then, it had no liability in private law, and its only duty was to assess and respond to the claim on a rational and intelligible basis having regard to the purposes for which the statutory Fund is established. Accordingly, in the Society's submission there was no relevant and measurable loss until 20th May 1996 or later.
67. There is considerable case-law concerning situations where a person's legal position has, through negligence, been altered to his immediate, measurable economic disadvantage, and it has been held that a cause of action accrued although the beneficiary neither knew nor had any reason to know about its existence. In Forster v. Outred & Co.  1 WLR 86 a mother, in reliance on negligently given advice, executed a mortgage over her home to secure her son's borrowings, thereby immediately diminishing her home's value. In D. W. Moore & Co. Ltd. v. Ferrier  1 WLR 267 due to solicitors' negligent advice, the claimant company took on Mr Ferrier under contractual agreements which failed to prevent him, if he left, from establishing his own competing business. The claimant's "rights under the two agreements were demonstrably less valuable than they would have been had adequate restrictive covenants been included" (per Neill LJ at p.278G). "Instead of receiving a potentially valuable chose in action they received one that was valueless" (per Bingham LJ at p.279H). In Baker v. Ollard & Bentley (unreported), 12th May 1982 (cited in D. W. Moore & Co. Ltd. v. Ferrier  1 WLR 267), the claimant due to solicitors' negligence acquired a less valuable interest in a house held on trust for sale, rather than a separate and saleable interest in its first floor. In Bell v. Peter Browne & Co.  2 QB 495, after a marriage breakdown, a solicitor's negligence led to the husband putting the matrimonial home into his wife's name, without any accompanying document being prepared or any caution lodged to protect the one-sixth interest which the wife had agreed that the husband should have on any sale of the house. His resulting equitable interest was "clearly less valuable" than an interest secured by a charge or protected by a deed of trust (per Beldam LJ at p. 510F); further, even though his equitable interest could have been protected at any time until the wife sold the home, that would have involved at least some costs recoverable in damages from the defendant (per Nicholls LJ at p. 503G).
68. In Knapp v. Ecclesiastical Insurance Group plc  PNLR 172, the Court of Appeal examined the previous case-law in detail. It concluded, consistently with prior first instance decisions, that, where a fire insurance policy was, due to an insurance broker's negligence, voidable for non-disclosure, the insured's cause of action accrued on its placing. The insured were regarded as suffering some measurable loss on placing, although the fire and the insurers' avoidance lay in the future. Hobhouse LJ at p.186D cited with approval Saville LJ's explanation of the case-law in First National Commercial Bank plc v. Humberts  2 All ER 673, 679b-d:
69. A similar line of authority establishes that the cause of action against a solicitor whose negligence deprives his client of a claim which the solicitor was engaged to pursue accrues when the claim becomes time barred or liable to be struck out for want of prosecution (thereby obviously eliminating or reducing the value of any claim): Hatton v. Chafes  EWCA Civ 341; Polley v. Warner Goodman & Street  EWCA Civ 1013;  PNLR 784.
70. In all these cases except Forster v. Outred  1 WLR 86 the defendant failed to preserve or procure for the claimant an asset (including a particular chose in action) which could and should have been preserved or protected by proper performance of the defendant's duty in relation to the transaction affecting the claimant's legal position. In Forster v. Outred the claimant's case was that, but for the defendant's negligence, she would never have entered into the transaction at all. But in that case, by doing so, she clearly depreciated the value of her house in a measurable way. However, while a defendant's failure to preserve or protect a particular asset by proper performance of his duty in relation to a particular transaction may readily be seen to have caused measurable loss, negligence causing a claimant to enter into a transaction which he would not otherwise have entered may not immediately, or indeed ever, cause measurable loss to any particular asset.
71. In a number of authorities the court has made clear that a claimant does not necessarily suffer loss merely by being caused by negligence to enter into a transaction to which he would not otherwise have agreed. This does not of course mean that a claimant may not suffer measurable loss through negligence without entering into any transaction which changes his legal position - take e.g. the situation of a defendant entrusted with deeds or valuables who simply loses them. The basic proposition was however firmly stated by Ackner LJ in UBAF Ltd. v. European American Banking Corporation  QB 713, 725:
72. This passage was taken up in the reasoning of the High Court of Australia in Wardley Australia Ltd. v. The State of Western Australia (1992) 175 CLR 514, 527-8, where the majority judgment adopted the passage in initial comments on the concept of loss or damage and explained that:
73. The same point is confirmed by the Nykredit case  1 WLR 1627 where property was acquired as security on the basis of negligent valuation advice. Lord Nicholls of Birkenhead said at p.1631C-D:
As to when the lender first sustained measurable, relevant loss, Lord Nicholls said at p.1631D-E that the basic comparison was between the amount lent plus interest, and the value of the rights acquired, namely the borrower's covenant and the true value of the overvalued property, but that a further enquiry fell to be made in the light of the House's decision in Banque Bruxelles Lambert SA v. Eagle Star Insurance Co. Ltd.  AC 191 that a valuer is only liable for the adverse consequences attributable to any deficiency in the valuation. He went on at p.1632A:
He added at p.1632C-G:
74. In Wardley Australia Ltd. v. The State of Western Australia (1992) 175 CLR 514 the State was allegedly led by misrepresentations by Wardley about Rothwells Ltd., to grant to the bank an indemnity, which it would not otherwise have granted, in respect of a facility granted by the bank to Rothwells Ltd. The bank suffered loss and made a claim on the indemnity which the State settled by making a substantial payment. The issue arose whether the State's cause of action against Wardley accrued when the indemnity was granted or when it was called upon. The High Court held that the indemnity generated "an executory and contingent liability" and that the State "suffered no loss until that contingency was fulfilled and time did not begin to run until that event" (p 534). The High Court indicated that the contingency was fulfilled and the State incurred a liability to the bank "if and when the Bank's relevant 'net loss' was ascertained and quantified, subject to the making of a claim for payment by the Bank" (pp.524-5). In considering Forster v. Outred and other English decisions decided up to 1992, the majority said in their judgment at p.531:
They added that, if the English authorities stood for the wider proposition, they did not agree with them.
75. Wardley was considered in Knapp  PNLR 172. Hobhouse LJ viewed it at p.178A as adopting a different approach to the English approach. Buxton LJ at p.192A-D endorsed the rejection in Wardley of any proposition that
The rejection in Wardley and by Buxton LJ of any such proposition is consistent with the English authorities discussed in paragraphs 71 to 73 above. Since the State's liability through entering into the indemnity was purely contingent on whatever might happen to Rothwells and the bank facility and no particular State asset was depreciated in value on entry into of the indemnity, I think that the same result as the High Court reached in Wardley should also be reached in this jurisdiction.