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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