Legal Matters Professional Indemnity December 2013 Issue
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Ignore an invitation to mediate at your peril Mediation requests should be taken seriously. This is particularly so following the Court of Appeal (CA) ruling in PGF II SA v OMFS Co 1 Limited, which established that an adverse costs order could result from a failure to respond to an offer to mediate.
Background The case involved a dispute over building dilapidations between landlord and tenant. The landlord claimed damages in the sum of £1.9 million against its tenant for failure to comply with its obligations regarding the condition of the leased property. The landlord made two early part 36 offers to settle, one at £1.125 million and the second superseding the first, at £1.25 million. At the same time, the landlord offered mediation. The invitation to mediate was also repeated three months later. In response, the tenant made a part 36 offer of £700,000 but the mediation requests received no response of any kind. This part 36 offer was accepted by the landlord the day before trial following a late amendment to the tenant’s defence. Ordinarily, acceptance of a part 36 offer would oblige the claimant to pay the defendant’s costs from 21 days from the date of the offer up to the date the offer was accepted. The landlord argued that the usual rule under CPR r36.10 should be departed from because the tenant had unreasonably refused to mediate. The court acceded in part to the landlord’s application and deprived the tenant of its costs for the relevant period due to its unreasonable refusal to mediate. On the other hand, the court declined to go as far as ordering payment of the landlord’s costs for that period. The relevant period amounted to seven months in this case and expenditure of
Our quarterly newsletter aims to highlight developments and recent case law in the area of professional indemnity in a concise and readable style. We hope that you find it informative and useful. In this Issue: Ignore an invitation to mediate at your peril ATE premium slashed in PPI case Court refuses to approve both sides’ disproportionate costs budgets Choose your words very carefully A question of trust Other news
a further £250,000 in legal costs by each side. Both parties appealed and the appeal and cross appeal were dismissed.
Commentary The salutary lesson is that a party cannot simply ignore an invitation to engage in ADR. If a party does not consider mediation is appropriate, it should still engage and explain
The decision provides guidance on what amounts to
clearly why not. A party should also not dismiss the
unreasonable conduct in litigation and the potential
consideration of any kind of ADR or ADR at a later date.
consequences for costs.
Any difficulties or reasonable objection to a particular
The CA extended the guidelines set out in Halsey v Milton
ADR proposal should be discussed, so that the parties
Keynes General NHS Trust (2004) where a refusal to
can narrow their differences. This also serves the policy
engage in alternative dispute resolution (ADR) amounted to unreasonable conduct which attracted a costs penalty. In Halsey there had been a refusal to mediate whereas in PGF, a thorough and serious written invitation to mediate was met with complete silence. In extending the principles, the CA held that silence in response to an invitation to participate in
of proportionality. The court placed great emphasis on the Jackson ADR Handbook, first published in 2013 and paragraph 30 of the judgment sets out the handbook’s advice to parties faced with an invitation to engage in ADR. That advice may be summarised as calling for constructive engagement in ADR rather than flat rejection or silence.
ADR amounts to a refusal. As a general rule, this was itself
The court held that a finding of unreasonable conduct by a
unreasonable conduct, regardless of whether a refusal to
refusal to engage in ADR does not produce an automatic
engage in ADR might have been justified.
result in terms of costs penalty. It is simply an aspect of
Factors which the court could take into account when assessing whether a party had unreasonably refused to mediate will include:
• The nature of the dispute
the parties’ conduct which is taken into account. In this case, the CA intended to send a stark warning; specifically encouraging others to explore and engage in ADR. This encouragement has already been heeded, following a commitment to ADR by a number of the UK’s biggest
• The merits of the case
companies. In recent weeks, many household names have
• Other attempts at settlement
signed up to the 21st Century Corporate ADR Pledge,
• The costs of mediation • Whether delay in ADR would be prejudicial e.g. the possibility of delaying the trial
drawn up by the Centre for Effective Dispute Resolution (CEDR) and the International Institute for Conflict Prevention and Resolution (CPR). The signatories agree to commit their resources to managing and resolving disputes through
• The prospect of a successful mediation
negotiation, mediation and other ADR processes.
• Whether there has been judicial encouragement to
PGF II SA v OMFS Company 1 Limited  EWCA Civ
mediate It was however possible that there might be rare cases where ADR was so obviously inappropriate that to characterise silence as unreasonable would be pure formalism. Alternatively, where the silence was a result of a failure to appreciate that the invitation had been made (e.g. due to a mistake in the office) the onus would be on the recipient of the invitation to make that explanation good. 03
ATE premium slashed in PPI case The Jackson reforms abolished recoverability of after the
the expertise to judge the reasonableness of a premium
event (ATE) premiums but defendants will still face high
except in very broad-brush terms. Also, the viability of the
premiums for pre-Jackson cases for some time.
ATE market will be imperilled if judges attempt to rate the
The amount of the ATE premium is often a contentious issue when it comes to the question of the overall costs payable by defendants in litigation. In the recent case of Kelly v Black Horse Limited Senior Costs Judge Hurst significantly reduced the ATE premium to a quarter of the sum claimed.
financial risk the insurer faces without expert evidence. The defendant submitted that the premium should be arrived at by calculating the “burn” premium (i.e. the risk of paying out X the exposure) to which should be added brokerage and profit costs.
Master Hurst handed down a written judgment in the hope
The court had no evidence as to the information which
that it would help resolve future disputes in this area.
was given to the ATE insurers to enable them to rate the policy. Master Hurst found that given what he considered
Background In Kelly, the claimants took out a loan with Black Horse Ltd and purchased payment protection insurance (PPI)
was a meaningless risk assessment for the CFA, it was also safe to assume that the insurers were not given accurate information to rate the ATE policy.
in 2001. In 2011 the claimants sued on the basis that the
After consideration of leading authorities on ATE premiums
insurance had been mis-sold. The claim was fully defended
including Rogers v Merthyr Tydfil County Borough Council
and went to trial. After a full-day’s hearing the claimants
(2006), Motto & Ors v Trafigura (2011) and Redwing
succeeded with their PPI claim against Black Horse and
Construction Ltd v Wishart (2011), Master Hurst applied
were awarded damages of just over £11,000. The defendant
the “burn” formula, and then adopted the broad-brush
was also ordered to pay 70% of the claimants’ costs. The
approach as a cross-check. He found the ATE premium to
claimants’ total costs bill of £46,000, included both an ATE
be completely disproportionate and allowed the claimants
premium and success fee under arrangements which had
just 25% of the premium sought.
been entered into prior to 1 April 2013. In contrast, the defendant’s costs amounted to just £5,837.10.
One of the outstanding issues which came before Master
The decision will provide ammunition to all defendants
Hurst at the detailed assessment hearing was the level of
faced with disproportionate ATE insurance premiums.
the ATE premium, claimed at £15,900. The ATE insurance
The ruling changes the common perception that ATE
policy covered adverse costs and the claimants’ own
insurance premiums can only be challenged if the paying
disbursements which amounted to £1,406.20. Added to the
party can obtain expert evidence from other ATE insurers.
defendant’s costs, this meant that the insurers’ potential
Claimants may now also be required to demonstrate the
costs exposure amounted to £7,243. The premium in
reasonableness of high premiums.
dispute was therefore significantly more than the damages awarded and twice the amount of the insurers’ potential
Kelly v Black Horse Limited  EWHC B17 (Costs)
exposure. The claimants relied on the observation of Lord Hoffman in Callery v Gray (2002) that district judges do not have 04
Court refuses to approve both sides’ disproportionate costs budgets In Willis v MRJ Rundell Mr Justice Coulson was critical of the disproportionate costs budgets served by the parties. He declined to approve either budget and refused to grant a costs management order. The court did not impose alternative figures as it had no supporting evidence to do so and declined to order another costs management hearing, in the interests of costs and time. Fortunately for the parties involved, it was made clear that the absence of an approved budget did not mean that the successful party would not
Legal principles Ideally, the court would provide alternative figures where the estimates were too high and make a costs management order with a reduced but approved costs budget. However, neither party made specific criticism of its opponent’s budget (perhaps because there was little difference between them) and therefore the court had nothing to rely on in arriving at alternative figures.
“the judge did not regard the budget figures as proportionate or reasonable”
The case involved a professional negligence claim against
In reaching his decision, Mr Justice Coulson accepted that
a construction firm and proceeded under the costs
a professional negligence claim can involve additional costs
management pilot in the Technology and Construction
that other commercial disputes may not. For instance, expert
Court (TCC). This now has wider application following the
evidence will almost always be necessary to demonstrate
new costs budget rules which came into force in April 2013.
that a professional fell below the standard required. Further,
recover costs at all. The judge was, however, aware that his adverse comments would be relevant at the end of the case, when it came to costs recovery and he indicated that, in his opinion, a final recovery of around £450,000 may be appropriate.
At a costs management hearing the parties submitted costs budgets of £900,000 and £700,000 respectively. Both budgets therefore amounted to £1.6 million compared to a claim valued at a maximum of £1.1million. Coulson J commented:
“In other words, it will cost significantly more to fight this case than the claimant will ever recover. On that basis alone, it seems to me that the costs in the costs budgets are both disproportionate and unreasonable.” 05
allowances need to be made for the non-quantifiable but potentially serious damage to the defendant’s professional reputation. However, even allowing for these factors, the judge did not regard the budget figures as proportionate or reasonable, particularly given the relatively limited nature of the disputes between the parties.
Commentary The court was critical of various elements of the budgets, but the judgment provides useful guidance to practitioners in the preparation of their own costs budgets:
• Budgets must separate and break down costs incurred from future estimated costs
• The inclusion of a large lump sum for contingent costs is unacceptable and must be broken down. It must be clear what those sums are for and how they are calculated
• Expert’s fees must be proportionate and reflect the extent of the expert’s likely assistance in the case Mr Justice Coulson reminded the parties that the whole point of costs management is for the court to make orders to help litigants ensure costs are kept at a reasonable level. His comments on proportionality are helpful:
“…it seems to me that one test of proportionality is whether the trial is likely to be an end in itself, or merely a lesser part of the process which the parties will use in order to put themselves in the strongest position to argue that, subsequently, the other side should pay all or most of their costs. When the costs on each side are much higher than the amount claimed/recovered, the latter is almost inevitable.” Stella Willis v MRJ Rundell & Associates Limited (1), Grovecourt Limited (2)  EWHC 2923 (TCC)
Choose your words very carefully A recent case has highlighted the pitfalls of negotiating the terms of any contract, particularly the importance of including ‘subject to contract’ in settlement negotiations. Failure to use this phrase proved to be a costly error in the employment dispute in Newbury v Sun Microsystems.
Background An employee, Mr Newbury, brought a claim for US $2 million in unpaid sales commission against his employer, Sun Microsystems. A week before the dispute was set down for an eight-day trial, the employer sent a letter to Mr Newbury with an offer to settle by paying £600,000 plus a further £180,000 for legal costs within 14 days of the acceptance.
The judge rejected the defendant’s argument that its offer was ‘in principle’ only and held that for it to be so, the offer letter should include the words ‘subject to contract’.
The offer letter set out the employer’s final position and was
only open for acceptance until the end of that day. It also
The court found that the offer and acceptance letters, viewed
stated that the settlement was to be ‘recorded in a suitably
objectively, amounted to a binding legal contract despite
the terms of the settlement not being recorded formally. It
The claimant accepted the offer in writing on the same day
was perfectly possible for the parties to conclude a binding
and said that a draft agreement would be forwarded for approval. However, the parties were unable to agree on the precise terms of the order to incorporate the settlement. A dispute arose as to whether the offer and acceptance letters formed a binding contract even though the terms of the
agreement, even though it was understood between them that a formal document, recording or even adding to the terms agreed, would need to be executed subsequently. The judge rejected the defendant’s argument that its offer was ‘in principle’ only and held that for it to be so, the offer
agreement had not been formally resolved.
letter should include the words ‘subject to contract’.
Mr Newbury’s solicitors applied to the court for a declaration
Whether a binding contract is created is an objective test but
that the parties had already reached a binding contract following the defendant’s offer letter and their letter in reply. The defendant contended that the terms of the agreement were still subject to negotiation and no binding contract had been formed.
the use of the phrase ‘subject to contract’ creates a strong presumption that the parties do not yet wish to be bound. Where a contract is said to be contained in documents, it was not relevant to consider the parties’ subsequent conduct for the purpose of considering whether those documents gave rise to a binding written agreement. Lewis J held that the words “such settlement to be recorded in a suitably worded agreement” did not refer to terms still to be negotiated.
Semantics are important The case serves as a reminder that when making a settlement offer, it is vitally important to be clear on the basis on which it is made. If the offer is intended to be capable of acceptance, the offer should contain all of the terms on which a party is prepared to contract and be bound by, e.g. whether payment of the monies can realistically be made by the date stipulated.
“...parties may choose to make a ‘without prejudice’ offer outside the part 36 regime for a number of reasons...” On the other hand, if the intention is for the offer to simply be a starting point for negotiations, the offer must be expressed as ‘subject to contract’. The offer will then be conditional on the execution of such an agreement and allows for subsequent negotiation of terms. Many offers are made by way of part 36 to allow for the automatic costs protection provided. However, parties may choose to make a ‘without prejudice’ offer outside the part 36 regime for a number of reasons, including the wish to make a drop hands or costs inclusive offer or to put the other side under the pressure of a very tight deadline. It is worth remembering that semantics are also very important when using the phrase ‘without prejudice’. A ‘without prejudice’ offer cannot be disclosed at all to the court whereas an offer which is made ‘without prejudice save as to costs’ cannot be disclosed to the court during the substantive proceedings, but the court may have regard to it when exercising its discretion as to costs. The former phrase should therefore be used sparingly, if at all. Malcolm Newbury v Sun Microsystems  EWHC 2180 (QB)
A question of trust In Ikbal v Sterling Law the claimant purchaser was the
against S for breaches of trust and duty of care. He claimed
victim of a property fraud at the centre of which was an
reconstitution of the trust fund (money paid to S for purposes
impostor vendor. The claimant sued his former solicitors for
of the purchase) by repayment of the completion monies of
breach of trust and breach of duty. The court held that it was
£315,000, or equitable compensation and damages.
necessary in every breach of trust case to identify what the terms of the trust on which the defendant received funds were. It was necessary then to consider whether, on the facts, what happened was sufficient to discharge the trust, subject to any application by the solicitor for relief under s61 of the Trustee Act 1925.
The judgment S had acted wholly inadequately with matters postcompletion by failing to chase up the non-provision of the TR1 form. The form ought to have been chased vigorously by post and telephone. A failure to despatch the TR1 immediately was a serious breach of the Law Society’s Code for Completion by Post (the postal code). Further,
The defendant solicitors, Sterling Law (S), acted for the
any suspicion that F did not hold a duly executed TR1 at
claimant, Mr Ikbal, in a property transaction. The claimant
completion should have led S to report matters to the SRA.
bought a property in Hackney without mortgage finance
On the evidence, S had not enquired about the TR1 form
and this is therefore not a mortgage fraud case. The
before November 2010 and the claimant was never informed
transaction proceeded in a conventional way until, following
of any problem in relation to completion.
the supposed completion, the vendor’s solicitors Fernando & Co (F) failed to send the TR1 transfer document to S. F appeared to be a genuine firm. The full purchase price of £350,000 was remitted to F but the money disappeared. It transpired that F employed one or more dishonest people who had been working with a client purporting to be the owner of the property. Weeks later the Solicitors Regulatory Authority intervened in their practice. S failed to notify the claimant of any problems in relation to the TR1. On the strength of his solicitor’s assurance that completion had taken place with the transfer of funds in July 2010, the claimant commenced renovation of the property. The property was unoccupied and derelict requiring extensive renovation. The claimant only became aware that his ownership of the property was in doubt when he learned of possession proceedings brought by the actual owners
In considering the breach of trust claim, the judge raised the following questions: (i) whether there had been a breach of trust (ii) if so, whether the claimant was entitled to the sum claimed or to some lesser sum subject to (iii) any application by the defendant for relief under section 61 of the Trustee Act 1925. The evidence established that use of the postal code had not been expressly agreed between the solicitors. The defendant’s payment of the completion monies to F was unauthorised and a breach of trust. Applying established case law, there was a breach of trust by the defendant when the funds were appropriated by F on what ought to have been completion. Where completion did not occur, the trust on which the defendant received the £315,000 could only be discharged by genuine completion or return of that sum.
in November 2010. Following the failure of the completion
With regard to the appropriate remedy, the court considered
of his property transaction, the claimant brought an action
four recent decisions, usefully summarised in the judgment:
“In Lloyds v Markandan the claimant recovered the full
form was a very serious breach of duty. Breach was also
amount which had been entrusted to the solicitors, who did
admitted in that S had failed to advise the claimant that in
not obtain relief under s61. In Nationwide Building Society
the absence of a TR1, he could not apply to become the
v Davisons (2012), the claimant recovered at trial the full
registered owner of the property.
amount which had been entrusted to the solicitors, but the solicitors’ appeal succeeded in obtaining relief under s61. In AIB Group (UK) plc v Mark Redler & Co (2013) the claimant’s claim to recover the full amount entrusted to the solicitors failed, partial recovery being allowed and the solicitors not seeking relief from it. In Santander UK plc v RA Legal Solicitors (2013) the claimant recovered nothing, relief being granted.”
It was not reasonable to fail to chase the TR1 or to use the correct procedure for the postal code. However, relying on the Nationwide decision, the court found that the unreasonable behaviour was not connected to the loss for which relief was being sought and therefore granted relief from liability for the £315,000 completion monies. Although there had been a breach of trust, the solicitor had proved that he had acted honestly for the purposes of s61. He also
Please note that further information on these decisions can
acted reasonably for the purposes of s61 only because
be found in our previous editions.
of the lack of causal connection between the defendant’s
The court distinguished the instant matter from cases where completion does actually take place. The court clarified that “while the authorities show that the history in cases of actual
behaviour and loss. Relief from liability was accordingly granted. The judge did comment that were it not for the causation point, he would refuse relief.
completion will result in an award of compensation reflecting
Nevertheless the claimant was entitled to damages for
the loss which the claimant would not have suffered but for
breach of duty of care and was awarded £45,379 in
the breach, they do not show that if completion does not
damages for breach of common law duty in relation to
occur, compensation will be awarded on that basis.”
various expenses incurred.
The judge concluded that in cases in which completion does not occur, then the beneficiary can still require the solicitor
to restore the amount which has been lost from the trust
This case furthers the recent case law on breach of trust
fund. Subject to relief of liability under s61, the claimant
cases in the conveyancing context. It amply illustrates that
had a valid claim for full restitution and was entitled to the
the court will deploy s61 in cases where there are clear
completion monies in the sum of £315,000 and interest.
causation arguments. However, as indicated above, reliance no
on s61 is not guaranteed and the courts will look at each
encouragement to the argument that if fraudsters would
case on its merits, taking account of all the relevant factors,
have succeeded by another route, there should be no
including questions of honesty.
restitution. The court held that there was “no support
Ikbal v Sterling Law  EWHC 3291 (Ch)
for the proposition that the fact that the loss would have happened anyway deprives the claimant of the right to full recovery of the sum paid away. Such cases are also, often crucially, subject to section 61, which will afford relief to many solicitors who work conscientiously but themselves fall victim to the fraudsters.” The court then considered the common law breach of duty claims. The defendant’s failure to follow up the TR1
Other News Disclosure of confidential lending policies
Mitchell costs budgeting appeal dismissed
In a recent unreported case of Ward Hadaway v DB UK
Following the much publicised case of Mitchell v News
Bank Limited (2013), solicitors defending a professional
Group Newspapers (2013), the Court of Appeal (CA) handed
negligence claim by the mortgage lender in relation to buy-to-
down its judgment on 27 November 2013. In the High Court,
let mortgage transactions, failed to obtain disclosure of the
Master McCloud applied a mandatory sanction for failure to
lender’s credit process guide. In pre-action correspondence
file a costs budget on time with the result that the claimant,
the bank had disclosed its business underwriting guidelines
MP Andrew Mitchell, was limited to a budget comprised of
which contained its lending policy. This document referred
court fees only. The sanction is viewed as particularly harsh
to a credit process guide (CPG) which was described as
and the judgment from the CA hearing on 7 November was
the key credit policy document and which took priority over
the guidelines in case of conflict. The claimant submitted that the CPG should be disclosed as it was obviously relevant to causation, but the bank refused because it was commercially sensitive and was not relevant to individual lending decisions.
Although further guidance on the courts’ approach to costs budgeting is welcomed, the court’s dismissal of the claimant’s appeal sends a particularly harsh warning to parties to ensure compliance with the court rules and timetables. The CA refused relief from sanctions stating that
The court dismissed the appeal because the defendants
the new more robust approach post Jackson, will mean that
had not shown that the document supported their case or
from now on relief from sanctions should be granted more
damaged the lender’s case on causation. We await a copy
sparingly than previously.
of a full written judgment to determine whether the decision has wider implications for disclosure of lending policies.
The CA concluded with the following statement: “Although it seems harsh in the individual case of Mr
Mitchell’s claim, if we were to overturn the decision to refuse
In our September 2013 edition, we commented on the case
culture would receive a major setback.
of Feltham v Bouskell where a Leicester firm of solicitors was held liable in negligence for failing to prepare a will where there were doubts about the testamentary capacity of the client. The decision is subject to an appeal and it is understood that the hearing in the Court of Appeal will commence on 13 or 14 March 2014 and we shall report further in due course.
relief, it is inevitable that the attempt to achieve a change in
In the result, we hope that our decision will send out a clear message. If it does, we are confident that, in time, legal representatives will become more efficient and will routinely comply with rules, practice directions and orders. If this happens, then we would expect that satellite litigation of this kind, which is so expensive and damaging to the civil justice system, will become a thing of the past.” Parties to litigation have therefore been warned.
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