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Legal Matters Professional Indemnity Issue 15 December 2012

Solicitors – Reliance on advice from counsel This appeal revisits an important issue

One uncertainty was whether AL’s

for legal practitioners and insurers

former partner would have consented

namely, the extent to which solicitors may rely on counsel’s advice. As an aside, it reinforces that courts are astute in acknowledging that sophisticated clients will be deemed to understand appropriately given advice. Businessman

Alexander

Langsam

to an equity release arrangement much earlier.

Leading counsel advised a

discount of up to 50% on this point alone. Nevertheless, AL refused to

Solicitors – Reliance on advice from counsel

Upholding the first instance ruling, the

Solicitors – Liens post termination of retainer

CA found for Beachcrofts. The litigation

alleged

that

Beachcroft

LLP

(“Beachcrofts”)

delivered

carried serious risks, AL was keen to

over pessimistic advice in earlier

settle and the solicitor at Beachcrofts

against

accountants,

Hacker Young (“HY”).

These were

compromised for £1m inclusive of costs. Beachcrofts cited reliance on leading counsel in their defence.

was entitled to rely on leading counsel. The latter had been properly instructed and gave sound advice.

The CA endorsed first instance findings

The crux of AL’s claim against HY was

on (a) advisory negligence based on

a failure to advise him to seek non-

headline figures and discounts and (b)

domicile status in 1996, generating

evidentiary negligence. In accordance

potential losses of £2-3m. Both the

with

claim against HY and that against Beachcrofts were formulated as loss of chance claims, since liability and quantum depended upon evidence as to what third parties would have done in a hypothetical situation.

A

tick list of issues was identified which introduced substantial variables into loss calculations.

In This Issue

button down this evidential lacuna.

(“AL”)

proceedings

Our newsletter aims to highlight developments and recent case law affecting the liability of professionals in a concise and readable style. We hope that you find it informative and useful.

accepted

wisdom,

the

CA

declined to overturn conclusions on matters of evaluation or fact on which the trial judge formed a view, as there was no evidence that the judge was plainly wrong.

Solicitors – Causation Valuers – Causation halts claim against valuers Financial Advice – Clear instructions by consumer client clinches claim Accountants – No duty of care to third party investor Personal injury – Striking out a claim post trial


Quantum

Imponderables make settlement figures a matter of judgment on

which competent lawyers can legitimately

differ.

Selecting

conservative or generous points

in a range is not wrong nor is advice flawed merely because others might take a more robust view.

It is unnecessary to

Reliance on Counsel The majority held that the solicitor had not acted jointly with counsel.(Lord Justice Longmore said he would have formed a different view as trial judge). There was no obligation independently to form a view on all aspects and he was entitled to rely on counsel’s advice.

‘provide a spectrum of figures’.

Solicitors may rely on advice of counsel

explanation appropriate to their

not abdicate all responsibility - Locke v

However, clients need a sufficient

properly instructed although they must

understanding so they can make

Camberwell Health Authority (1991) and

acknowledged

is obviously or glaringly wrong, it must

informed decisions. The court that

AL

was

commercially aware and highly intelligent.

Ridehalgh v Horsefield (1994). If advice be rejected. It is normal and proper for solicitors without specialist experience to rely on advice, but they must not do so

The standard of care

Solicitors are not liable for mere errors of judgment on matters

blindly and must exercise independent judgement.

on which opinions of reasonably

Beachcrofts held themselves out as

Nor are they to be judged with

deployed that expertise to assess

Pettman Smith (2005). Egregious

Alexander Langsam v Beachcroft LLP

competent lawyers might differ.

professional negligence experts and

the wisdom of hindsight - Moy v

counsel’s advice.

error is needed. Moreover, advice must be geared to maximising

existing settlement opportunities rather than abstract ones.

and Paul Murray (1) Simon Hodson (2) [2012] EWCA Civ 1230

were retained by Heather French (“French”) in litigation. She ceased to be their client in May 2010 in acrimonious circumstances, thereafter acting in person. A month later French applied for an order for the release of her file. Dismissing the application the Master held that CLC were entitled to be paid for their fees. The matter went to appeal. CLC’s terms of retainer set out the rights of each party to terminate the retainer and the entitlement to fees. In accordance with the then current Code of Conduct, CLC also separately wrote to French to inform her that they would decide to stop acting ‘only with good reason and on giving you reasonable notice.’ They could also assert a lien for unpaid fees. She could terminate at any time too. Analysing

the

communications

between the parties, the CA found that the retainer ended in late May 2010 at the latest. Who terminated it

Solicitors – Liens post termination of retainer

had an important bearing on whether

Solicitors can assert a lien over a file for

retainer by e-mail and, in accordance

unpaid fees where a client terminates

02

Carter Lemon Camerons LLP (“CLC”)

CLC was entitled to assert a lien. On the facts it was French who ended the with established authority, CLC could

the retainer during litigation. This is a

assert a lien over the documents for

matter which should be included in a

unpaid fees. Had CLC terminated the

firm’s terms of engagement.

retainer they might have been ordered


to pass the file to new solicitors who

repayments were made and the funds

apparent confirmation that the deposit

their behalf.

not forthcoming.

Thus the claim in negligence failed while

would have preserved the lien intact on Heather

French

v

Carter

disappeared. Unsurprisingly title was

that in contract succeeded with nominal

Lemon

Camerons LLP [2012] EWCA Civ 1180

Although Khan protested her innocence,

HHJ David Cooke concluded she was

Solicitors – Causation

was paid, Godiva might have proceeded.

damages.

‘incapable of belief unless supported

The Achilles’ heel of the claim against KL

in property transactions such as direct

evidence confirmed Khan’s complicity

– an aspect insurers defending similar

embroiled in a client’s dishonesty. The

losing any interest in the property by

Solicitors should be alert to irregularities

by

payments in order to avoid becoming

in a scheme to obtain funds without

solicitors here made a lucky escape.

conducting a sale in a deceased’s

Godiva sought

Mortgages damages

Ltd

for

(“Godiva”)

fraudulent

misrepresentation against Sophie Khan

(“Khan”) and breach of contract and/ or negligence against her solicitors,

Keepers Legal LLP (“KL”), arising out of a fraudulent property purchase.

name.

evidence’.

Substantive

fraudulent

The

allegations

misrepresentation

of

were

effected simultaneous exchange and completion of a property from Khan’s brother in law for £500,000. KL was told that £173,250 was paid by direct deposit. Godiva advanced the balance.

On completion KL retained monies for costs and expenses and remitted

£300,000 to the ‘vendor’s solicitors’ having been informed that this reduced sum would suffice to complete.

comprised evidential gaps on causation claims should note.

Godiva Mortgages Ltd v Sophie Khan (1) Keepers Legal LLP (2) [2012] EWHC 1757 (Ch)

proceeded had they known the full

Valuers – Causation halts claim against valuers

fees and funding costs.

Causation also features in this claim

established. Godiva would not have facts and she was liable for advance,

by Platform Funding Limited (“PFL”)

As regards KL, the judge was satisfied

that they were unaware of the fraud.

Acting for Khan and Godiva, KL

Crucially, they would not have seen

Khan’s online application form. The central

allegation

concerned

an

alleged failure to advise about the

against surveyors Anderson & Associates

(“AA”) for losses arising from a £250,000

advance to a Mr Jikiemi to purchase a flat (“Flat 25”) in a Docklands development, Hill House.

‘direct payment’ of the deposit and

PFL was a major lender to sub-prime

the advance.

reports and valuations. AA valued Flat 25

that expenses were discharged from

applicants; AA panel surveyors providing

tort and contract to inform the lender

at £275,000 in August 2006. The advance

There was a duty in

about these matters, but it could not

thus represented 90% of the value.

be assumed absent evidence on these

issues that if KL had reported properly

Godiva would have refused to proceed.

The sale was bogus; the vendor had died and his signature forged.

independent

No

In the context of a family sale with a comfortable security margin and

03


Loss having been suffered following repossession, PFL sought damages

representing the difference between

the figure reported by AA and Flat 25’s

actual value adopting the established no-transaction Australia

scenario

Asset

in

Management

South

Corp

(SAAMCo) v York Montague Ltd (1997).

AA acted in accordance with instructions

set out in a panel appointment in 2001. Individual fees were modest. Valuations needed to comply with the

RICS/ISVA specifications for valuation

and inspection of residential property for mortgage purposes contained in the RICS ‘Red Book’.

A

Mr

Barrie

(“Barrie”)

an important amendment to the Red

Over-valuation of

flats in high rise developments was identified as having been caused by,

among other factors, incentives or discounts to attract buyers which were

not identified by valuers and reflected in prices.

The Red Book was amended to require

legitimate incentives to be factored in a

new build valuation exercise as part of

a ‘holistic approach’. Other items to be considered were the market in the area,

prices realised for similar new property on other developments, second-hand market and other relevant information.

his

company, Atrex, operated a scheme to purchase all 84 flats from the developer, Persimmon. These were dishonestly

marketed,

a

matter

which formed the basis of criminal proceedings.

Barrie simultaneously

bought and sub-sold properties at profit to purchasers such as Jikiemi that he found with buyers utilising topped up paying for stamp duty and solicitors’ costs.

Collusion by

solicitors, Bluestone, facilitated the frauds.

Meanwhile, valuers were

misled by overvalued comparable data supplied by Barrie and provided to Persimmon’s marketing team. The

court

concluded

that

AA’s

valuer failed to consider a range of material which he might have sought. However, had he done so they would not have yielded evidence that his valuation was too high. In particular the court accepted that it would have been impossible to ascertain any information about incentives. There was no readily ascertainable way of ascertaining the market value of flat 25 in July 2006.

04

via

sub-prime mortgages which Barrie

Shortly before the valuation there was Book (June 2006).

Jikiemi’s purchase formed part of a wider fraud

To ascertain this

using the definition of market value in the Red Book (as amended) would

have involved a detailed inquiry of a kind not within the scope of AA’s

instructions. The claim was therefore dismissed. Thus the valuation was undertaken without reasonable skill,

but the result would, on the balance of probabilities, have been the same

had he exercised reasonable skill and care.

Causation

PFL’s loss arose and was caused by

extraneous

factors;

dishonesty,

Bluestone’s

information

to

Barrie’s

collusion

and the provision of disingenuous marketing team.

valuers

by

the

Platform Funding Limited v Anderson & Associates Limited [2012] EWHC 1853 (QB)

Financial Advice Clear instructions by consumer client clinches claim This

case

concerned

negligent

financial advice given by HSBC Bank

Plc (“HSBC”) to Adrian Rubenstein (“Rubenstein”) in 2005.

The claim

ultimately succeeded first, because of Rubenstein’s classification as a consumer (a ‘private person’) within the Financial Services and Markets

Act 2000 and second, because he delivered a clear brief to HSBC.


The moral is that a financial adviser dealing with a consumer must ensure that advice meets his needs and that both he and client understand recommendations.

At first instance the court found: • A contract for advice was made • HSBC fell within the second category of SAAMCo as providing

Rubenstein,

a

solicitor,

asked

HSBC to recommend a short term investment for the £1.25m proceeds

of sale of his home. Two stipulations were made (a) a yield exceeding standard bank deposits and (b) nil capital risk. Curiously,

the

financial

adviser,

suggest a deposit account, but an AIG Premier Access Bond described

as analogous to an instant access deposit account with the only risk

being the ultimate risk of default which was no risk at all.

AIG’s enhanced variable rate bond (“EVRF”). In September 2008, shortly

before Lehman Brothers’ collapse, he sought to exit from it. AIG placed moratorium

volume

of

of

an

on

withdrawals requests,

thereafter announcing closure of the EVRF.

procedural and substantive rules of the FSA’s Code of Conduct of

Rubenstein suffered a

loss of £180,000 there being only an entitlement to a share of a fund

which, unbeknown to him, was invested in products which (cash apart) fluctuated with the market.

payment.

Where COB rules apply to investment

advice to a private person, the principles

in contract and/or tort are guided by the purpose of the statute, namely to afford

with rules designed to ensure advisers understand clients and clients, risk.

Business Rules - These required Relevant principles are contained in SAAMCo and other authorities on the

are understood

• With packaged products banks must recommend the most

scope of duty in contract and tort such as The Achilleas (2009). The CA noted

that as Marsden misunderstood the

suitable package or make no

product and was negligent – it was not ‘a

recommendation

• It was wrong to equate EVRF’s with cash deposits and not consider

• Rubenstein was misled and suffered loss of a foreseeable type

promising context’ in which to conclude that loss was too remote.

There were two risks (1) institutional

default and (2) exposure to market movements

• HSBC would have realised that underlying assets were not confined to Treasury bills or similar

which

Rubenstein

was

unaware of and which he wished to avoid. It was the ‘sine qua non of the investment’ that capital was preserved.

instruments The cause of loss was diminution in value

unprecedented

withdrawal

favour, save in respect of the ex gratia

carefully balanced consumer protection

of statutory duties including

alternatives

Rubenstein proceeded to invest in

because

• Negligence in advice and in breach

clear communication so that risks

Mr Marsden (“Marsden”) did not

a

advice not merely information

On appeal the CA found in Rubenstein’s

HSBC accepted that flawed advice

was given, but the court found loss

was caused by unprecedented market turmoil

which

and too remote.

was

unforeseeable

Nominal damages

were awarded in contract.

An ex

gratia payment from AIG was credited against recovery.

of assets in which the EVRF was invested rather than fear of default by AIG. It was

HSBC’s duty to protect Rubenstein from

such exposure to market forces. Having

put him into the scheme, the situation was unlike SAAMCo’s mountaineer’s knee. Thus, when economic downturn occurred,

HSBC

could

not

escape

responsibility because market loss was unexpected.

05


No point could be taken because the investment continued for three years.

This, in terms of a cash deposit, was not significantly different from an indefinite period of about a year. Marsden knew

the investment would continue until Rubenstein purchased a new property

and he could have clarified whether it

was necessary to review his advice. With

statutory protection the court is likely to side with consumers on such issues.

Adrian Rubenstein v HSBC Bank PLC [2012] EWCA 1184

Accountants - No duty of care to third party investor an accountant’s duty of care to third a contract

between accountants and their client limiting liability. successfully judgment

KPMG LLP (“KPMG”)

applied

for

dismissing

a

summary claim

The tort claim was based on an

several removes from KPMG’s client.

the three fold test in Customs &

(“Dragon”), traded in the grey market

Bank Plc (2006).

the purchase price which it would

has led to three approaches (a) was

VAT as ‘input tax’ within s24(1) of

(b)

critical and KPMG were instructed

justice

aspect.

duty is

Arrowhead was an investment fund at

assumption

KPMG’s client, Dragon Futures Ltd

Excise Commissioners v Barclays

in mobile telephones paying VAT on

that whether a duty of care exists

reclaim from HMCR.

Recovery of

there an assumption of responsibility

the Value Added Tax Act 1994 was

foreseeability, proximity and ‘fairness,

in September 2003 to advise on this

established or (c) whether the alleged

In early 2004 Dragon negotiated a

This was a bold attempt to extend party investors despite

Background facts

by

of

whether and

cases.

responsibility

and

Lord Mance said

a

threefold

test

reasonableness’

of

was

‘incremental’ to previous

loan facility with Arrowhead referring

Emphasising

year, following HMRC challenge,

duty

default on Arrowhead’s loans with

situation was ‘a relationship having

the

that

Dragon ceased to trade. This led to

of

$52.6m inclusive of interest owing at

all the indicia of contract save

December 2011.

consideration’. The test is objective.

The claim

KPMG’s relationship with Dragon

against KPMG in negligence were

in an engagement letter and terms

With

responsibility

the

found

is

to KMPG’s involvement. Later that

existed.

court

context

everything,

no

assumption paradigm

For present purposes allegations

was governed by contract set out

was owed to them.

assumed correct.

and conditions. The letter excluded

The decision represents a salutary

Arrowhead argued that KMPG owed

Arrowhead

Capital

Finance

Limited

(“Arrowhead”) on grounds that no duty

reminder to professionals to review letters

of

engagements/

terms

of

business and to recognise the risks posed by third parties who should be reminded that they are not clients, that no duty is owed to them and that they should obtain independent advice.

06

a duty of care to indirect investors because they knew that (a) Dragon relayed assurances KPMG gave to

Dragon (b) their presence promoted investor confidence and (c) whilst unaware of the financing structure,

they understood that VAT reclaims were of vital importance.

liability for indirect or consequential economic

losses

and

terms

of

business excluded third party rights.

Consequently, it was ‘inconceivable’ that reasonable businessmen could

believe KPMG voluntarily assumed unlimited

responsibility

towards

potential investors, particularly ‘at

several removes’. Nor was there any engagement letter or direct contact with Arrowhead.


Turning to the three fold test, knowledge

November

may be sufficient to found a duty, but

proceedings having been brought

that advice is passed to third parties this is more likely with consumers in

ordinary transactions than in a carefully structured

known risks.

business

context

with

2004

when

appeals

against HMCR were dismissed. The over six years later, any claim would have been statute barred.

responsibility was not found, namely

to confer unlimited liability towards third parties which were unavailable to

clients. KPMG would have refused to accept such responsibility if asked.

Limitation

What constitutes damage in claims for

financial

Mortgage

loss?

Bank

-

Plc

v

Erdman Group Ltd (1997).

Nykredit Edward

On the

basis that Arrowhead would not have proceeded but for KPMG’s

negligence, there needed to be actual measurable damage (entering

a transaction by making a loan does not necessarily suffice) plus a

comparison between the loan and value of rights acquired. Such rights consist generally of the covenant to repay and security value.

Dragon’s

on

VAT

the

security

claims.

These emphasise

a distinction between concocted claims

The SC confirmed that it is in the public

interest for the court to have jurisdiction to

strike out a statement of case under CPR

Personal injury - Striking out a claim post trial

3.4(2) for abuse of process or under its inherent jurisdiction, even after the trial of

Insurers brought this application as a

an action where the court has been able to

armoury to combat a growing incidence

and quantum.

the court strike out a statement of case

exceptional circumstances.

which the court held the defendant liable

It was difficult to conjecture circumstances

test case to add an extra weapon to their

make a proper assessment of both liability

of fraudulent personal injury claims. Can

of principle, it should only do so in very

However, as a matter

as an abuse of process after a trial at in damages and, if so, when is such power exercisable? Acknowledging the power exists, the Supreme Court (“SC”)

emphasised its reluctance to invoke this remedy.

The facts of the case are to a degree academic. workplace

Fairclough

Summers

suffered

a

Injury while employed by Homes

Limited

(“FH”);

it emerged late in the day that he dishonestly inflated his claim.

where this would be proportionate, but they might include a massive attempt

to deceive the court but the award of damages would be small.

The SC reviewed the court’s inherent

jurisdiction in abuse of process cases pre-

CPR, finding the power was invoked even

though it might extinguish substantive rights and after trial - Hunter v Chief

Constable of the West Midlands Police (1982) and National Westminster Bank plc v Rabobank Nederland (2006).

The ability to repay loans was dependent

BAA Limited (2009).

Arrowhead Capital Finance Limited EWHC 1801 (Comm)

same reason that an assumption of

Ul-Haq v Shah (2009) and Widlake v

and exaggerated ones.

(In Liquidation) v KPMG LLP [2012]

It was unfair to impose a duty for the

as it was bound by CA authorities.

of

Thus,

Arrowhead sustained actual damage

when making the loans or, at latest,

Permission was not granted to bring

contempt proceedings and the CPS decided against prosecution. Moreover,

the court was prevented from striking out the claim as being tainted by fraud,

The SC also approved comments in Masood v Zahoor (2009) concerning misconduct so serious that it is an affront to the court to permit someone to continue

07


Contacts If you have any queries or require advice on any of the matters discussed in this issue, please see contact details below: Peter Court Partner T: 0844 245 5208 E: peter.court@plexuslaw.co.uk Nigel Plant Partner T: 0844 245 5251

prosecuting their claim whilst warning that it should be very rare to strike a

case out rather than dismiss it on the merits.

The language of the CPR supports the jurisdiction to strike a claim out

for abuse of process irrespective of whether this affects a substantive claim. It neither qualifies the power

nor limits time; the sole requirement is to observe the overriding objective.

E: nigel.plant@plexuslaw.co.uk

Additionally, the right to a fair and

Jeremy Newman Partner T: 0844 245 5262

Convention on Human Rights is

E: jeremy.newman@plexuslaw.co.uk If you have any suggestions for future issues, please email karen.scott@parabis.co.uk

public hearing in the European not absolute. Limitation must be proportionate and in pursuit of a

legitimate aim. As for a judgment, this is a possession within Article 1 Protocol 1. To deprive someone of

this must be in the public interest and proportionate.

It was clear that the SC prefers

conventional remedies. Dishonesty

can be reflected in damages, costs, interest for

penalties,

contempt

Defendants 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: toni.maguire@parabis. co.uk, providing your name, company name and address.

and

can

proceedings

prosecution.

also

make

Calderbank offers - Fox v Foundation Piling Ltd (2011). Illustrating

the

point,

the

SC

concluded it was inappropriate to

strike down Summers’ claim. Despite

dishonesty, he suffered serious injury

and the balance was struck in his favour.

Fairclough

Homes

Limited

Summers [2012] UKSC 26.

v

T: 0844 245 4000

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