Issue 14 June 2012
Professional Indemnity Our newsletter aims to highlight developments and new case law affecting the liability of professionals in a concise and readable style. We hope that you find it informative and useful.
Inside this issue: Solicitors No duty to advise beyond retainer on mortality
Damages for breach of trust
Breach of trust
Disclosure of material facts to mortgagor
Costs Elements of Part 36 Offer
Experts evidence Is expert evidence mandatory in professional negligence cases?
Valuers Methodology of valuation
Procedure/solicitors Necessary mental element for breach of fiduciary duty
Special point of interest: Solicitor’s failure to disclose ambiguous restriction on use of leasehold property results in summary judgment. See Page 3
Solicitors - when should lawyers review earlier advice? This case could ignite a useful debate over the duties of solicitors to review files in o rd e r t o e n s u re t h a t documentation prepared some time earlier has not become obsolete. The TCC opined that it would be professionally and commercially worrying if professionals were held responsible for reviewing all pre vious a dvi ce a nd services. They identified a difference between a specific retainer or commission imposing a continuing duty to keep earlier advice under review and an obligation requiring them to review and revise advice or services on commissions or retainers which were complete. However, different considerations might apply if the professional learnt that earlier work was deficient or if the solicitor were a family solicitor. A solicitor acting in a divorce for example should address the impact of this circumstance on any will. The background facts can be summarised succinctly. The Claimant, Shepherd Construction Limited (Shepherd), a national building contractor, sought substantial damages from Pinsent Masons LLP (Pinsent) and previous manifestations of the partnership (Masons and Pinsent Masons) for
omitting to update contractual documentation they had drafted some years earlier to t a k e a c c o u n t of t he Enterprise Act 2002. This impacted on ‘pay when paid’ provisions in Shepherd’s contracts. The decisive factor was the re t a i ne r. S h e p he rd ’s contentions were perceived as ‘very wide’. It asserted that the features of its ongoing relationship (multiple instructions on various projects to largely the same individuals albeit at different ma n i f e s t a t i o ns of t he partnerships) gave rise to (a) a single contract with Pinsent in whatever legal incarnation it appeared and (b) an implied duty to review and revise previous advice and documentation as necessary. The TCC concluded on the evidence that the solicitor/ client relationship was characterised by numerous informal specific commissions. But these could not be regarded as having crystallised into an implied overarching general retainer to keep under constant review prior advice. Accordingly, those parts of the claim predicated upon a single contract were struck out or disallowed. Interestingly, from a practitioner’s perspective, the TCC did not rule out in all circumstances the existence
of a duty to revisit earlier documents where a retainer/ commission has ended. Such duty will be fact dependent. Consequently, insurers may legitimately speculate if the ambit of duty needs to be amplified further. Clients often instruct firms or individuals because of their expertise in a particular field. There is an assumption that they keep abreast of developments. Accordingly, in postulating that the outcome might be different in closed cases where a solicitor learns that his earlier work was defective (presumably in the sense that it was either incorrect or merely in possible need of revision), one could argue that this implies a duty to report to those clients suggesting a ‘health check’ of key documentation. This could impose a substantial burden on firms who cannot be expected to recall the minutiae of every transaction they have advised on over a number of years, yet failure to do so could expose them to the risk of potential liability resulting in the prof ession all y wo rryin g scenario about which the TCC expressed concern. Shepherd Construction Limited v Pinsent Masons  TCC
Solicitors - no duty to advise beyond retainer on mortality Does a solicitor acting for a client need to consider the risk of death when giving advice? In finding against the claimant relatives of a deceased client the court held that, without direct knowledge of a real possibility of a client dying and/or receiving instructions to consider this issue, a client’s mortality was not a contingency which his lawyers were obliged to address. The present case featured (1) an appeal against an order dismissing a claim against the defendant solicitors, Mills & Reeve (MR) by the claimants, Swain Mason - executors and daughters of the late Christopher Swain (Swain) - and (2) a cross appeal on costs. Swain was Managing Director of Swains International plc. By 2006 he withdrew from full time management and lived mainly in Thailand, although domiciled in England and ordinarily resident in the UK for tax purposes. MR was instructed by Swain in 2006 in a multimillion pound management buy out (MBO) deal. Swain and 1 of his daughters acted as a conduit for instructions for all shareholders. At all material times MR was aware that the family was concerned about tax implications and that Swain had retired due to ill health. In early 2007, a couple of weeks after completion, Swain died in hospital having been admitted for a heart
procedure. His untimely death resulted in adverse inheritance and capital gains tax liabilities of £1.2m.
any event, even had there been a duty to advise, deferral was not the only option.
The Claimants contended that had MR addressed the possibility of his demise the MBO would have been deferred until after Swain’s procedure.
Furthermore, to allow the claim to be advanced would have been to admit by the back door, a pleading that advice should have been given on estate planning, when a specific application to amend to incorporate a similar allegation had been rejected.
A solicitor is not obliged to spend time on issues outside his retainer Credit Lyonnais SA v Russell Jones and Walker . If in the course of his work he becomes aware of a risk or potential risk to his client, he should inform his client. The facts of the individual case will be determinative of the issue. The CA said that the principal issue was whether it was plain from the retainer that there was a duty to advise about the risk of dying shortly after completion and to consider delaying the MBO. It found that there was a continuing duty to advise against changing circumstances - ill health would therefore have been relevant. The central question was thus whether the circumstances triggered a duty to give further advice. The CA concluded that this duty was not established. MR learned about the procedure indirectly from information buried in an email chain copied to it - not from information specifically drawn to its attention. MR’s understanding was that this was a routine procedure and no advice was sought on what would happen in the event of his death. In
As to costs, an appeal court will not readily interfere with a trial judge’s discretion. Nevertheless, the Judge wrongly criticised and penalised MR for refusing to participate in mediation having steadfastly maintained that the claim was without foundation. Parties are not to be compelled to mediate and it was perfectly proper for professionals to seek to vindicate their reputation in court. The Judge’s finding on the core issue of breach of duty vindicated MR’s assessment of its case. Thus the Judge’s exercise of discretion was flawed. Exercising the discretion afresh MR was awarded 60% of its costs. As to whether a party acted unreasonably in refusing ADR see Halsey v Milton Keynes General NHS Trust . Swain Mason & others v Mills & Reeve (a firm)  CA
Solicitors - damages for breach of trust This decision confirms that breach of trust need not impugn an entire transaction. Mark Redler & Co (Redler) represented AIB Group (UK) Plc (AIB) and borrowers, Drs Sondhi, in a £3.3m remortgage transaction. Inadvertently, Redler failed to ensure that 2 accounts held at Barclays Bank (Barclays) were cleared. Accordingly, they paid left over funds of £300,000 to the Sondhis. AIB were relegated to second mortgagees and sustained a shortfall on sale of £300,000. Did damages comprise the entire advance plus interest, with credit for sale proceeds (£868,000) or the
£300,000 Barclays received as first mortgagees? HHJ David Cooke observed that breach of trust arguments proliferate in recessions as was noted in Bristol and West Building Society v Mothew . Falling markets and borrower bankruptcy spawn equitable claims against professionals whose conduct is merely negligent - and can produce fortuitous recoveries. Had Redler acted properly AIB would only have received the extra £300,000 because the security was worth less than originally believed. To identify breach of trust involves construing the retainer to determine
what authority it conferred to release funds. Express terms and implied authority are relevant. M or e ove r , c our ts w i l l onl y reluctantly find a construction suggesting that the solicitor was unsure if he was authorised to pay out or not. Redler was required to pay monies to redeem Barclays’ charge and remit the balance to the borrowers. It committed a breach of trust in not doing this. However, this did not mean the whole payment was impugned by breach of trust - just the £300,000 tranche which should have gone to Barclays. Relevant
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Solicitors - damages for breach of trust integrity, the genuineness of the underlying transaction and that it formed part of a broader financing operation. The circumstances were
distinguishable from Lloyds TSB Bank plc v Markandan & Uddin  (considered in our newsletter of March 2011 and below) where the
solicitors were honest but cavalier. AIB Group (UK) Plc v Mark Redler & Co (a firm)  Ch
Solicitors - breach of trust Hot on the heels of AIB is this appeal upholding breach of trust against solicitors, Markandan & Uddin (MU), and an order that MU repay an advance to Lloyds TSB Bank Plc (the Bank), successors in title to the original mortgagees. To recap, MU was retained to act in a mortgage loan to ‘Victor Davies’ in his purchase of a property in return for a first legal charge. The transaction was a sham with a non existent borrower and solicitor. MU committed a catalogue of errors including twice remitting funds to bogus solicitors, failing to obtain funds from Davies and completing without key documentation. These circumstances generated breach of trust for which exoneration
was unavailable under s61 Trustee Act 1925 because of MU’s unreasonable conduct.
way of exchange of real money for real documents that enables the purchaser to register title.
The basic equitable principle is that a beneficiary will be compensated for loss he would not have suffered but for breach. Mortgage funds are held in client account under a bare trust and until the transaction completes, solicitors can be required to restore to client account, monies wrongly paid away - Target Holdings v Redfern . Contrast with AIB above where the transaction completed and the bulk of funds were authorised to be paid out.
MU would have been entitled to pay away funds on receipt of documents necessary to register title or, alternatively, against a solicitor’s undertaking to provide them.
Completion denotes conventional completion - not registration - but completion of a genuine contract by
Loss comprised the advance with interest. Issues of contributory negligence did not arise as there was breach of trust. As this aspect is not addressed in the Trustee Act, it was not for the court to extend the law. As a footnote it was important to distinguish between the breach of trust claim and claims based on breach of contract/negligence. The extent of checks on the solicitors went to the latter and not the former. Lloyds TSB Bank Plc v Markandan & Uddin (a firm)  CA
Solicitors - disclosure of material facts to mortgagor This decision underscores that reports on title should highlight unusual provisions with ambiguous meanings which could potentially impact on a lender’s security notwithstanding that the solicitor may be correct in believing that the provision is anodyne. Platform Funding Limited (Platform) obtained summary judgment against solicitors Miller Parris (MP) in respect of non disclosure of a restriction on the use of a leasehold property in a re mortgage transaction. The borrower applied for a buy to let, interest only mortgage. The crux of the dispute was whether the lease imposed a material restriction on o cc up at io n w hic h mi gh t h a ve influenced the lending decision and which Platform said should have been reported to them.
The solicitor’s duty is encapsulated in Mortgage Express Ltd v Bowerman Partners . If, while investigating title, a solicitor discovers facts which a reasonably competent solicitor would realise might have a material bearing on the valuation of the lender’s security or some other ingredient of the lending decision, he must point this out. The test was whether such a solicitor exercising reasonable skill and care would have recognised that the clause restricting categories of occupiers of the f lat might reasonably be interpreted as imposing a material restriction - even if the court did not consider this to be the actual meaning. The Court concluded that the effect of the restriction was sufficiently
uncertain to be reportable. The obligation was to report any feature of title in particular on use and occupation which might reasonably be expected to adversely affect value and future marketability. It followed that loss incurred resisting forfeiture arising from breach of a non disclosed covenant was foreseeable. The outcome may prove to be a pyrrhic victory as summary judgment succeeded on breach of contract and tort but permission to defend was given on causation, it not having been proven that Platform would have declined to proceed had it known of the restriction. Platform Funding Limited v Miller Parris Solicitors (a firm)  MC
Costs - elements of Part 36 Offer This appeal focussed on the elements of a Part 36 Offer. The claimant was main contractor on a project near Wembley Stadium. The appellant, PHI Group Limited (PHI), the specialist design and build contractor for ‘soil nailing work’ and the respondent, Robert West Consulting Limited (RWC), consulting engineer and lead consultant. Complex proceedings ensued in which PHI and RWC were held responsible between them for the claimant’s legal costs. The discrete issue was whether an offer by PHI’s solicitors was a Part 36 Offer and even if not, as the Judge held, it was relevant to the exercise of
the Judge’s discretion on costs. Gibbon v Manchester City Council  (see our newsletter October 2010) - famously refers to Part 36 as a ‘carefully structured and highly prescriptive set of rules dealing with formal offers to settle proceedings which have specific consequences in relation to costs ...’. 36.2(2) is mandatory. The key letter failed to specify a period of not less than 21 days (within which the defendant would be liable for the claimant’s costs in accordance with rule 36.10 if the offer were accepted) or any period - for the purposes of the rule. Such omission, the CA agreed, was fatal.
If a letter is non compliant, the party is at the mercy of the court instead of being able to rely on the costs consequences in the rule. Not all deviations vitiate those c ons e que nc e s, but the C A suggested that with a claimant’s offer, where the rule provides for indemnity costs and additional interest on the judgement sum, the court should not award additional interest unless the offer is fully compliant. On the facts the Judge wrongly approached the exercise of his discretion which was therefore exercised afresh. PHI Group Limited v Robert West Consulting Limited  CA
Experts evidence - is expert evidence mandatory in professional negligence cases? This decision offers practical guidance to parties in professional negligence claims where no expert evidence has been adduced and sheds light on the possible circumstances in which expert evidence might not be required. These issues arose in the context of an abortive strike out application by the claimant, ACD (Landscape Architects) Limited, (ACD). The application was adjourned to consider tardy evidence submitted by the defendants, Robert Overall and Cookham Construction Limited. The defendants raised issues of breach of contract and negligence in response to ACD’s claim for unpaid fees. The strike out application was bro ught on g rou nds that the defendants’ claim was unsupported by expert evidence - Pantelli Associates Ltd v Corporate City Developments No2 Ltd . Pantelli established that such evidence was necessary
save in cases of solicitors’ negligence and some exceptional cases. The Judge however envisaged circumstances where expert evidence might be regarded as a disproportionate expense or superfluous:
a statement of truth might be adequate; if matters are at an early stage particularly where the amounts in contention are small; there is a prospect of mediation/ resolution. Where not provided, an explanation should be offered to enable the court to consider its response. Where a party considers that expert evidence should be provided, it was ‘heavy handed’ to issue a strike out application. More cost effective is to raise the matter at a case
management conference, not as a contentious matter, but one on which the parties would welcome observations. On the facts, expert evidence was desirable and if the application had been pursued because of the initial absence of expert evidence it would have largely been successful. Thus ACD was awarded its costs. Of secondary interest was an order for disclosure of a draft Expert report referred to in a Witness Statement prepared in anticipation of the strike out, the Court taking the view that extensive reference to the content of the report meant that privilege was deemed to have been waived in it. It was this evidence which had led to ACD’s decision to abandon its strike out. ACD (Landscape Ar chitects) Limited v (1) Robert Overall (2) Cookham Construction Limited  TCC
Valuers - methodology of valuation In this case the court drew back the veil on valuation technique. The First Claimant, Paratus AMC Limited (Paratus), provided loans for residential properties. The Second Claimant, RMAC 2005 NS1 Plc, was a Special Purpose Vehicle used to buy packages of secured loans from Paratus. The defendant surveyors, Countrywide Surveyors Limited
(Countrywide) were panel valuers. The Claimants asserted loss and damage in respect of a valuation of a purpose built flat. Valued at £185,000 in 2004, it was sold in 2008 for £123,500. The Judge concluded that the valuation process involves to a degree the exercise of judgment
involving the assessment of numerous factors. It is largely an art rather than a science. Experienced valuers instinctively know a property’s worth on inspection; subsequent consideration of information concerning other properties confirms or modifies that initial opinion. Continued on page 5...
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Valuers - methodology of valuation In assessing other information, the Court preferred Land Registry data as a reliable and complete resource to determine increases in residential property values to mathematical calculations based on a correlation between area and price. Advice from the Royal Institution of Chartered Surveyors suggested that it was unsafe to rely on the original price of a new property as setting a base to which the effects of the rising market
could be applied.
appropriate in a buoyant market.
Finding that the true value of the property was £175,000, the court held that Countrywide’s valuation was high but not negligently so, as it fell within an acceptable range which might have been given by a competent valuer exercising reasonable skill and care. See - Merivale Moore plc v Strutt & Parker  and K/S Lincoln and others v CB Richard Ellis Hotels Ltd . A more generous band was
Had the claim been made out however, because of the ‘egregious nature’ of the lack of care involved in enquiries of the borrower, the Court would have discounted 60% of the loss on grounds of contributory negligence. (1) Paratus AMC Limited (2) RMAC 2005 NS1 Plc v Countrywide Surveyors Limited  Ch
Procedure/solicitors - necessary mental element for breach of fiduciary duty This judgment, like AIB above, is penned by HHJ David Cooke. Plexus Law represented the successful appellant solicitors, Abensons. Mortgage Express (ME) alleged that Abensons failed to report salient features of 2 sets of transactions (effectively back to back sales and repurchases) entered into by their borrower client in 2004 and 2005. Had they done so, ME said it would have declined funding. The claim, framed originally in contract and negligence, was amended to add breach of fiduciary duty, a move Abensons challenged on appeal on grounds of limitation. ME argued that the breach of fiduciary claim was not pleaded at the outset because they did not have the necessary ammunition before receiving Abensons’ ledgers which were disclosed late. The principal issue under Appeal was whether the fiduciary claim would sidestep a limitation defence. At first instance the Master considered that no limitation defence was available because the fiduciary claim required ME to demonstrate a deliberate breach
of duty; as a corollary, if established, this would evidence deliberate concealment preventing time running by s32 Limitation Act 1980. For this purpose the Master was prepared to accept that failure to report matters to a client constituted deemed deliberate concealment. On appeal the Judge disallowed the amendments. There would be prejudice because the Master was wrong to hold that there were no circumstances in which the amendment would not deprive Abensons of a limitation defence. Claims for breach of fiduciary duty are not expressly provided for in the Limitation Act and it was accepted that they should be approached in a manner analogous to claims in contract and tort. The key question was whether breach of fiduciary duty requires a deliberate act. Since there is no settled authority on this point Mortgage Corporation v Alexander Johnson (a firm) , it could not be said that every breach of fiduciary duty has been deliberately committed. As
required to amount to ‘deliberate commission of a breach of duty’ in s32 (2), the law was clarified by the HL in Cave v Robinson Jarvis & Rolf . Accordingly, a limitation defence will only be blocked by s32(2), if the defendant was aware at the time of the breach of duty that what he did/ omitted to do amounted to breach of duty. In order to establish liability, ME needed to establish that Abensons were conscious of an obligation to do or not to do something, but felt inhibited from doing so because they were acting for the borrower. Acting in ignorance (even if this were negligent) of any obligation to ME, would be insufficient. This case reinforces the need for practitioners to address the full range of causes of action, including the more esoteric, such as breach of fiduciary duty, before proceedings are issued particularly if limitation will expire imminently. Mortgage Express (an unlimited company) v Abensons solicitors (a firm)  Ch
Contact Information If you have any queries or require advice on any of the matters discussed in this issue, please contact:
Peter Court T: 0844 245 5208
Nigel Plant T: 0844 245 5251
Jeremy Newman T: 0844 245 5262
If you have any suggestions for future issues, please email jason.o’email@example.com
www.plexuslaw.co.uk The content of this newsletter is merely informative and should not be relied upon as a substitute for legal advice. We hope you have enjoyed this issue of Legal Matters. However, if you do not wish to continue receiving the publication please email : firstname.lastname@example.org, providing your name, company name and address. Plexus Law is a trading name of Parabis Law LLP, a limited liability partnership registered in England under number OC315763 and is authorised and regulated by the Solicitors Regulation Authority.