PNBA

Newsletter

Dear PNBA Member,

As you will know, the CPD rules for established practitioners are changing from 1 January 2017. Following attendance at BSB “roadshow events” and after consideration of the BSB’s published guidance and suggested materials, a PNBA sub-committee has prepared a number of materials which it is hoped will help you in getting to grips with the new changes. These materials may be found below:

The Bar Standards Board has very recently published materials of its own on its website, including guidance, sample compliant plans, FAQs and a template plan of its own. It is recommended that you refer to those materials in addition and you are, of course free to use, for instance, the BSB’s template plan (no particular format is prescribed by the rules). It is however hoped that you will derive further assistance from the PNBA materials, which have been assembled with members specifically in mind.


Dear Member

PNBA Executive Committee Elections 2016

There is a contested election for the Executive Committee this year. We have 9 excellent candidates standing for election, 1 Silk and 8 Juniors.

See below for a ballot paper and the candidate profiles.

You have 6 equal votes to distribute as you wish among the candidates.

Please give them your support and read their profiles carefully.

Ballot papers must reach the Hon Secretary Victoria Woodbridge by 4.p.m. on Monday 12th December 2016.


Ex Chairman’s Letter

William Flenley QC

Dear PNBA Members,

As you probably know, on 6 December 2015 my term of office as Chairman came to an end and I was succeeded by Ben Hubble QC as Chair(man); Caroline Harrison QC was elected Vice-Chair(man).  I will leave it to them to decide whether they are Chair and Vice-Chair or Chairman and Vice-Chairman.  Victoria Woodbridge and Michel Kallipetis QC were re-elected as Secretary and Treasurer respectively.

I have, however, been asked to write a final letter for this edition of the newsletter.

May I, therefore, thank you, the members, for a very enjoyable period as PNBA Chair(man).  I’ll spare you any version of Tony Blair’s speeches on resigning, especially bearing in mind his fate since then, but it has been great fun to work with the committee to try to come up with topical and useful events relating to professional liability.  As well as the office-holders just mentioned, I would like to thank Lord Justice Jackson for his continuing and major support of the PNBA, and the committee for their help with organising events and responding to lots of consultations.  In particular I would like to thank Cara Guthrie and Danny Shapiro, both of whom decided to stand down from the committee in December.  Finally, I would like to thank Simon Hale for editing this newsletter.

In addition, I would like to mention three particular matters.

Consultation on Fixed Fees in Clinical Negligence Cases

First, the Department of Health is planning to launch a formal consultation in February on its proposals for fixed fees to be introduced in relation to clinical negligence claims worth up to £250,000.  You may think it significant that the consultation is being administered by the Department of Health, and not the Ministry of Justice.  The Department invited the PNBA to participate in a pre-consultation, which was sent out on about 1st August with replies due by 31st August.  I am very grateful to Caroline Harrison QC for writing our response to that, within a deadline which was not entirely convenient to barristers.

Caroline Harrison QC and Cara Guthrie will formulate our response to the formal consultation.  This consultation may well raise important issues relevant to most clinical negligence practitioners, and which may later become relevant to almost all civil practitioners.  So it is likely to be an important consultation.  Please give Caroline and Cara your views when it is launched.

Pilot Scheme for Adjudication in Solicitors’ Liability Claims

This scheme was suggested by the Professional Negligence Lawyers Association, which represents claimants.  The enthusiasm of insurers has not been quite as marked as that of the PNLA, though it appears that they do think that it may be a helpful addition to the armoury of ADR in appropriate cases.  The idea is to provide a fast method of adjudication, principally for solicitors’ claims worth up to £100,000, probably without an oral hearing.  It is modelled on the system of adjudications in construction law.

The pilot scheme was launched in February 2015 but to date parties have been able to agree upon adjudication in only one claim.  The scheme therefore appeared to be in danger of becoming an ex-scheme, but the Master of the Rolls has decided otherwise.  He has appointed Mrs Justice Carr and Mr Justice Fraser to oversee an extended pilot.  A meeting was convened in December.  The scheme is to be re-drafted to make it easier to use.  It is said that a careful examination of the existing law will reveal that unreasonable refusals to participate in adjudication may result in adverse costs orders; but in any event the two Judges are considering whether to make that more explicit in some way.  A re-launch event is being planned for April or May 2016.

It seems to me that it may be possible to reach a degree of agreement between some insurers and some claimants’ representatives on the circumstances in which this scheme might be helpful.  That, combined with further judicial support, might make it into a realistic tool for trying to resolve relatively simple disputes more cheaply than litigation and possibly more satisfactorily than mediation, which should be in everyone’s interests.  As a by-product, it might also create a source of work for senior barristers as adjudicators and junior barristers as advocates.  For these reasons, I hope you will consider recommending the scheme in some of your cases.

Upcoming PNBA events

The first event of the new year will be on 23 February when Michael Pooles QC and Adam Kramer will speak on the Court of Appeal’s recent decision on remoteness in Wellesley v Withers, and John Dagnall will speak on identity fraud and land registration.

Then in April the Peter Taylor Memorial Lecture will be given by Lord Justice Briggs, who as you may know is conducting a review into civil justice.

Book News

Lastly, may I recommend The Case Histories of Jeremy Hutchinson, by PNBA committee member Tom Grant QC.  Jeremy Hutchinson QC, who is still alive, was the leading criminal advocate of his day from the 1950s to the 1970s, appearing for example in the Lady Chatterley trial.  The book is currently available in hardback, though I understand that in February a new edition, involving one startling new piece of evidence relating to a former Lord Chief Justice, will be published in paperback.  Waterstone’s have selected it as their book of the month for February.  I can’t claim to be an independent reviewer, but my wife can, and she insisted on reading it before I was allowed to.  It’s a completely absorbing read, and a remarkable achievement for a practising barrister to have fully assimilated the historical background as well as the advocate’s perspective on the trials discussed.

Happy New Year.

William Flenley QC.


Wellesley Partners LLP v Withers LLP

Court of Appeal (Civil Division)

11 November 2015

[2015] EWCA Civ 1146

Subject: Contract – Tort – Voluntary assumption of responsibility – Concurrent duties – Remoteness – What remoteness test applicable to tortious duties owed concurrently with contractual duties – Scope of duty – Application of remoteness test – Limitation

Summary

The Court of Appeal has recently confirmed that where concurrent duties are owed in contract and tort the remoteness test which applies to both duties is the contractual test (“reasonable contemplation”) rather than the tortious one (“reasonable foreseeability”). Thus, a more restrictive remoteness test applies to a tortious duty which is owed concurrently to a contractual one than to a stand-alone tortious duty.

Abstract

The Facts

Wellesley v Withers concerned a professional negligence claim against Withers LLP (“Withers”) for the negligent drafting of a partnership (LLP) agreement between Wellesley Partners LLP (“Wellesley”) and its new investor. Wellesley Partners was an executive headhunting firm specialising in investment banking, which was co-founded by Mr Channing (described by Floyd LJ as a “star in his particular firmament”).

The central allegation of negligence was that Mr Channing had given instructions to Withers to give the new investor an option to withdraw half its capital contribution after 42 months, whereas the LLP agreement made that option exercisable at any time within the first 41 months.

Wellesley’s case on quantum was that due to the withdrawal of the investor’s capital, it was unable to finance the expansion of its business to New York. One of the opportunities Wellesley claimed to have lost was Nomura’s planned ‘US build-out’, through Wellesley. This opportunity had arisen through Mr Channing’s connections, and was a very valuable one compared to the other opportunities alleged to have been lost.

The Decision

Floyd LJ (which whom both Longmore LJ and Roth J agreed (at [186] and [157] respectively) gave the lead judgment. On the main issue of the remoteness of the Nomura loss, Floyd LJ concluded (at [80]) that:

I am persuaded that where, as in the present case … contractual and tortious duties to take care in carrying out instructions exist side by side, the test for recoverability of damage for economic loss should be the same, and should be the contractual one”.

Applying the ‘contractual’ “reasonable contemplation” test, the Nomura loss was not too remote (at [83], per Floyd LJ). Although the Nomura contract (i) was especially lucrative and (ii) could be distinguished from the other contracts allegedly lost because it arose through Mr Channing’s connections, any distinction with those contracts was one of degree rather than kind (at [86]; to similar effect, Longmore LJ at [188] and Roth J at [179]).

The Reasons

The reasons given by their Lordships were three-fold. First, in concurrent liability cases the “foundation” of both the contractual and tortious duties is the same: voluntary assumption of responsibility. It logically follows that the extent of the damage for which a Defendant is liable should be determined on the same basis in relation to both (at [157], per Roth J).

Second, the rationale for the narrower remoteness test in contract is that the parties have the opportunity to draw special circumstances to one another’s attention at the time the contract is formed. The same is true, however, in relation to the tortious duty when concurrent duties are owed, “particularly given that the tortious duty arises out of the same assumption of responsibility as exists under the contract” (at [80], per Floyd LJ).

Third, all three of their Lordships drew attention to the ‘assimilation’ of the scope of duty questions in contract and tort which had occurred in The Achilleas [2009] 1 AC 61 and SAAMCO [1997] AC 191.

Comment

This decision follows near unanimous academic support for the suggestion which was adopted by the Court of Appeal: see, for example, Burrows and Peel, Commercial Remedies, at 35; McGregor on Damages (19th edn), at [20-009]; and Peel, Treitel on Contract (14th edn), at [20-112].

Wellesley v Withers is also consistent with a number of previous cases in which the contractual remoteness rules appeared also to have been applied to tortious duties in concurrent liability cases. These included Brown v KMR Services [1995] 4 All ER 598 (a Lloyds’ litigation case), in which the Court of Appeal applied the Hadley v Baxendale test to a claim which had also been pleaded in tort. Another example was Rubenstein v HSBC [2012] EWCA Civ 1184, in which the Claimant invested prior to the collapse of Lehman Brothers in a bond which the Defendant bank had wrongly told him was as safe as an account deposit. Rix LJ appeared to apply only the contractual remoteness test, notwithstanding that there was also a concurrent claim in negligence. In the High Court, HHJ McKenna in Obsession and Hair Day Spa v Hi-Lite Electrical Ltd. [2010] EWHC 2193 had (albeit obiter) adopted the same approach.

A number of questions, however, remain following the decision. First, what is now the remoteness test when a duty based on voluntary assumption of responsibility is established only in tort (for example where services are rendered gratuitously)? The first and second reasons given by the Court of Appeal would seem to suggest that the ‘contractual’ limit (i.e. “reasonable contemplation”) would apply. Roth J specifically left this issue open, but “incline[d] to the view” that the Hadley v Baxendale rules would apply, at least where the relationship between the parties was “equivalent to contract” (at [163]).

Second, what is the remoteness test where two Defendants owe concurrent tortious duties, but only one has a contract with the Claimant? Again, Roth J’s tentative opinion was that the ‘contractual’ limits would apply to both (at least where the Hedley Byrne duties owed were “equivalent to contract”; also at [163]).

Third, how does this decision fit with the orthodox view that different limitation rules apply to the contractual and tortious elements of concurrent claims? Longmore LJ dealt expressly with this issue (at [187]), concluding that “[l]imitation is a separate matter but rules relating to the measure of damages and remoteness have to be consistent with one another”. His Lordship did not explain why this was; McGregor has, however, squared the circle by arguing that “the exclusion of the tort remedy on remoteness grounds is geared to what risks the contracting parties have undertaken, a consideration which has no application to the availability of limitation periods” (at [22-009]).

Although the Court of Appeal was clear on the position as to limitation, it will be interesting to see how the case law unfolds in relation to stand-alone Hedley Byrne duties, and multiple tortfeasors. What should now be clear to practitioners, however, is that in concurrent liability cases there is generally no longer any remoteness advantage in pleading an alternative duty in tort.

Joshua Folkard

4 New Square


Titan Europe 2006-3 plc v Colliers International Limited UK plc (in Liquidation)

Court of Appeal (Civil Division)

3 November 2015

[2015] EWCA Civ 1083

Subject:

Valuers – Acceptable margins of error – Securitisation – Title to sue – Whether title vested in claimant or in noteholders in the securitisation – Whether claimant or noteholders suffered loss – Reflective loss – Analogy with shareholders in a company

 

Summary:

A loan made in reliance upon a €135 million valuation of vast commercial premises in Germany had been securitised and sold to the claimant. It owned the securitised loan and the underlying security itself. Obiter, that claimant did have title to sue for alleged negligence in the valuation of the underlying asset, and could allege that it (and not the noteholders in the securitisation) had suffered loss as the issuer of the securities due to that allegedly negligent valuation.

However, the valuer’s valuation had in fact been within the acceptable range of values to which a reasonably competent valuer could have come when valuing the property, and was accordingly not negligent.

 

Abstract

The case concerned a very large commercial property on Fürther Strasse in Nuremberg used mainly for warehousing, (but including offices and a department store). It was occupied by the then biggest mail-order company in Germany, Quelle Alktiengeschell-Schaft (“Quelle”).

Quelle’s landlord was Valbonne Real Estate B.V. (“Valbonne”). Valbonne wanted a loan from Credit Suisse on the security of the property. Credit Suisse instructed Colliers International UK Plc (“Colliers”) to value the property. On 15 December 2005 Mr Robert Mayhew of Colliers valued it at €135 million.

Credit Suisse entered into a facility agreement pursuant to which it advanced €110 million to Valbonne on 29 December 2005. That loan was, some 5 months later, sold to Titan Europe 2006-3 Plc (“Titan”), pursuant to a process of securitisation whereby a number of loans were packaged together and a number of “Noteholders” became the ultimate beneficiaries of the loan and the securities supporting those loans.

In September 2009 both Valbonne and Quelle became insolvent. Quelle’s last payment of rent was made in December 2009. In due course Valbonne’s administrator disposed of the property for just €22.5 million.

At trial, Blair J [2015] 2 AER Comm. 479, held Colliers’ valuation to have been negligent, and assessed the true value at €103 million (thus awarding awarded damages of €32 million). As to the true valuation figure he held:

  1. i) a valuation below €100 million would not have carried any credibility in the market at the time;
  2. ii) it was open to a reasonably competent valuer to conclude that it was probable that Quelle would stay in the property after its 15 year lease had expired (10 years remained at the time of the valuation), but also that there was a real risk that it might leave. He therefore rejected the valuation methodology used by Titan’s expert witness (a Mr Preston);

iii) Colliers expert was a Mr Manley. His valuation (€125.9 million) was too high partly because his estimated rental value for the property was itself too high, but mainly because his yield calculations were “too low by a substantial margin” and he had understated the real difficulties of disposing of the building if Quelle did indeed leave when its lease expired;

  1. iv) an appropriate yield to adopt in order to apply it to the net rental income from the property was 8.5%; and
  2. v) this then led to a valuation of €103 million.

In coming to these views the judge had not found comparable transactions involving other properties to be of much assistance, due to the unique nature of the property. However, there had been 6 potentially relevant transactions and valuations of the property itself between 2000 and 2005, prior to Collier’s own valuation. In headline terms, these had been:

(i) A sale price of €102 million in 2000;

(ii) A further sale recorded at €95 million in August 2003;

(iii) A valuation at €114.7 million in September 2003;

(iv) A valuation at €125.5 million in January 2005;

(v) A further valuation at €134.5 million in March 2005;

(vi) A sale of the shares in Valbonne (which owned the property) for €127.1 million in June 2005.

Colliers’ subject valuation of €135 million was provided in December 2005. It was also accepted by the Court of Appeal that this was at a time “of generally rising property values in Germany and elsewhere, well before the fall of Lehmann Brothers and the subsequent financial crisis.”

When these figures were reproduced graphically (as they are in the Court of Appeal’s judgment) they showed that:

(i) the true value as found by the judge was some way below the majority of the sale values and valuations;

(ii) Colliers’ own valuation was within reasonable proximity of the three previous valuations/sales;

(iii) the true value contended for by Colliers’ expert Mr Manley (€125.9 million) was also very close to those three previous valuations/sales; and

(iv) Titan’s expert’s valuations of, at first, €61 million, and then later after revising his view, €76.6 million, were both significantly out of step with the other transactional evidence.

The Court of Appeal’s decision was delivered by Longmore J. Confronted with this transactional evidence, the Court found it “inconceivable that the “correct” value could be as low as €103 million.” The Court of Appeal referred to the yields applicable to each of the previous transactions, noting that they produced a range of between 6.25% and 7.92%. Adopting a yield of 7.4%, and applied to the correct rental value of €9.28 million, the Court of Appeal arrived at a true value of €118.3 million. This meant that Colliers’ €135 million valuation was – by a whisker – within the 15% bracket for error that the judge had found was applicable to the property (and against which % bracket there was no appeal).

Accordingly the appeal was allowed on liability.

A further issue arose from the securitisation of the loans. Colliers argued that it was the Noteholders who would have suffered loss, since it was the value of the Notes that was reduced as a result of the alleged undervaluation of the property, and the Noteholders had no recourse to Titan in respect of that loss. Accordingly, Colliers argued that Titan had suffered no loss, and also had no title to sue.

Although the Court of Appeal noted that “the securitisation industry in general is interested in the title to sue question”, in the light of its findings on primary liability, everything in its judgment on the title to sue issue was obiter.

In summary as to the securitisation:

(i) Titan was incorporated as a special purchase vehicle in order to act as the issuer of securities in the form of floating rate notes.

(ii) Titan purchased a total of 18 loans which made up the asset base for the securitisation pursuant to an Asset Sale Agreement. At the same time, Titan received funds from the subscribers of the floating rate notes (which were fully subscribed), and issued the Notes.

(iii) Most of the proceeds from the investors were transferred to Credit Suisse to pay for the purchase of the loans forming part of the securitised pool, and the remainder was applied towards fees, expenses and reserves.

(iv) Titan and others entered into a Cash Management Agreement. This contained in Schedule 5 the Priority of Payments under the Notes. Priority was referred to at trial as the payments “waterfall”.

(v) Not all the €110m loan by Credit Suisse to Valbonne was transferred to Titan in the securitisation, but only €99,358,333, which was described as “the Senior Tranche”.

Pursuant to the terms of the original loan by Credit Suisse to Valbonne, and pursuant to these securitisation arrangements, it was not in dispute that Titan, as issuer, was the legal and beneficial owner of both the securitised loans and of the securities themselves in relation to the Senior Tranche. The Court of Appeal said it was “not at first sight easy to see why Titan…cannot sue Colliers” in these circumstances.

Colliers submitted that by the express terms of the valuation report, a cause of action was available to: “any actual or prospective purchaser, transferee, assignee, or servicer of the loan, any actual or prospective investor (including agent or advisor) in any securities evidencing a beneficial interest in or backed by the loan. This included the Noteholders, and Colliers argued that the intention had been to provide them with a cause of action. In those circumstances, it could not have been intended that Titan would have a cause of action as well. It sought to draw support by analogy from The Albazero [1977] AC 774, where the House of Lords had held against the potential double liability of a shipowner where a charterer had parted with title and risk to goods under a c.i.f contract, by holding that the cause of action vested in the purchaser under the bill of lading.

The Court of Appeal did not accept these submissions. It held, obiter:

“It is a commonplace truism of property law that the owner of property has rights of suit for substantial damages in respect of any actionable negligence, see e.g. The Sanix Ace [1987] 1 Lloyds Rep. 465 . In our judgment the same applies to rights of suit in relation to loans and the securities underlying them. The choses in action owned by Titan in this respect are just as much property as any other sort of property and Titan’s title to those choses in action entitles it to sue for substantial damages if it has a cause of action at all.”

In contrast, the Court of Appeal felt that any claim by the Noteholders was liable to be met with a defence that their loss was merely reflective of Titan’s, and thus irrecoverable under the doctrine of reflective loss as exemplified by Johnson v Gore Brown [2002] 2 A.C. 1. In this respect, the Court of Appeal considered that a Noteholder’s position was analogous to that of shareholders in relation to a company whose shares s/he owns.

Nor was it correct to say that Titan had suffered no loss:

“[Titan] suffered a loss when it acquired the loans and the securities including (on this hypothesis) the over-valued property … The price it paid for the loans was too high. Titan’s relationship with the Noteholders is analogous to that of a company with its shareholders; no one suggests that, because the shareholders may be the ultimate losers in a case of this kind, the company has not suffered a loss.”

 

Comment

The appellate decision on the true valuation is easy to understand in the face of the prior transactional evidence. The valuers’ case was assisted by the manifestly unrealistic valuation provided on behalf of the Claimant; at trial, there was significant criticism of his inexperience in valuing property in properties in Germany.

Of wider interest is the obiter part of the judgment. The Court’s analysis was relatively brief, and its conclusion leaves valuers instructed in the context of securitisations to the risk of liability to both investors and to the issuer of securities, subject to the defensive doctrine of reflective loss raised in the judgment.

Given the obiter status of this limb of the decision, and given the apparent interest among the securitisation industry in general, it seems likely that this will not be the last word. Titan has sought leave to appeal from the Supreme Court; if granted, it is possible that Colliers could seek to reopen the issue by way of a cross appeal. That said, the valuer’s liability to investors in a securitisation will always be driven, in the first place, by the exact terms of its appointment.

 

Simon Hale

4 New Square

 


Goldsmith Williams Solicitors v E.Surv Limited

Court of Appeal (Civil Division)

11 November 2015

[2015] EWCA Civ 1147

Subject:

Solicitors – Lender Claims – Construction of CML Handbook – Bowerman Duty – Contribution between solicitor and surveyor – Causation

 

Summary:

The Court of Appeal held that the terms of the CML Handbook, in particular clause 5.1.2 thereof, were consistent with (and did not exclude) a Bowerman duty upon the relevant solicitors, which had on the facts required them to report to their lender client a significant disparity between (i) a valuation provided by surveyors, and (ii) the much lower purchase price paid by the mortgagor for the property just a few months earlier.

The solicitors were in breach of that duty, but the surveyors could not claim a contribution from them because the solicitors’ breach had caused no loss. There was no evidence establishing that if the discrepancy had been reported by the solicitors, the lender would not have proceeded with the loan in any event.

 

Abstract

In September 2005, Mr David Gayler purchased a property in the Buxton area for £390,000. In November 2005, he was looking to refinance his borrowing on the property. The respondent surveyors were retained by a lender to inspect and value it. Mr Gayler untruthfully told the valuer that he had purchased the property about 6 months earlier for £600,000. The valuer valued the property at £725,000; which, as against the true purchase price, would entail an apparent increase of some £335,000 in just two months.

In December 2005, Mr Gayler applied to a different lender, The Mortgage Business (“TMB”). In his application form he this time said (again untruthfully) that he had purchased the property for £450,000 in October 2005. However, he asserted that the current value of the property was £725,000.

TMB was therefore aware that Mr Gayler was contending for a £275,000 increase in the value of the property in a few months. Despite this, the loan proceeded. TMB obtained the surveyors’ report, providing a valuation consistent with Mr Gayler’s asserted value. On 26 January 2006, an offer was issued for a loan, which Mr Gayler accepted.

TMB and Mr Gayler instructed the appellant solicitors to act for them. TMB’s instructions included the terms of the Council of Mortgage Lenders (“CML’s”) Handbook, and the Lender’s Part 2 instructions (the latter were not material to the case).

The solicitors obtained office copy entries for the property. These showed the true details of the borrower’s purchase: £390,000 paid in September 2005, not £450,000 paid in October 2005. The solicitors did not convey that information to TMB, nor point out the significant disparity with the valuation figure.

On 3 February 2006 the solicitors submitted a signed certificate of title to TMB, containing the usual statement that it gave the certificate set out in the Appendix to Rule 6 (3) of the Solicitors’ Practice Rules 1990 (“SPR”), as if the same were set out in full. On 13 February 2006 completion occurred and the loan was advanced.

Mr Gayler defaulted and TMB suffered loss. It claimed damages against the surveyors. That claim was settled. TMB chose not to sue the solicitors, after being confronted with the contents of the application form (in which Mr Gayler had already represented to the lender that he had purchased the property for just £450,000). However, the surveyors brought proceedings against the solicitors for a contribution under the Civil Liability (Contribution) Act 1978.

At trial, the judge (HHJ Stephen Davies) held that the solicitors had been under a duty to TMB to report the discrepancy and were in breach. He also held that but for that breach, the loan would not have been completed, on the basis that TMB would have referred the discrepancy to the valuer, who would have revised his valuation in light of the new information. He therefore granted the surveyors’ claim for a contribution.

On the solicitors’ appeal there were two issues:

(i) Did the solicitors owe the duty alleged by the surveyors?

(ii) If so, was their failure to fulfil it a cause of TMB’s loss?

The Court of Appeal upheld the decision of the judge on the duty question, but allowed the appeal on causation, thus relieving the solicitors of their liability for a contribution.

The duty issue raised the interplay between the terms of the CML Handbook, the terms of the SPR, and common law authorities (most notably Mortgage Express Limited v Bowerman & Partners), in circumstances where a solicitor is retained by both lender and borrower.

The relevant version of the CML Handbook was the 6 May 2005 edition. The leading judgment from Stanley Burnton LJ noted the express provision at clause 1.3 that:

The Lenders’ Handbook does not affect any responsibilities you have to us under the general law or any practice rule or guidance issued by your professional body from time to time.”

He further noted that under “Title”, clause 5.1.2 provided:

“If any matter comes to the attention of the fee earner dealing with the transaction which you should reasonably expect us to consider important in deciding whether or not to lend to the borrower (such as whether the borrower has given misleading information to us or the information which you might reasonably expect to have been given to us is no longer true) and you are unable to disclose that information to us because of a conflict of interest, you must cease to act for us and return our Instructions stating that you consider a conflict of interest has arisen.”

Clause 1.5 of the CML Handbook provided that the limitations contained in rule 6 (3) (c) and (e) of the SPR applied to the CML instructions. Rule 6 (3) (c) of the SPR provided that:

“A solicitor acting for both lender and borrower in a standard mortgage may only accept or act upon instructions from the lender which are limited to the following matters:”

It then went on to list in 25 sub-paragraphs the instructions upon which a solicitor could act. They included taking reasonable steps to check the borrower’s identity, checking the vendor’s solicitors were genuine, carrying out searches relating to the property, making enquiries on legal matters as reasonably specified by the lender, and reporting on matters including the purchase price stated in the transfer.

Stanley Burnton LJ noted that none of those sub-paragraphs by themselves expressly required a solicitor to report to a lender any discrepancy between the information provided by the borrower and that identified by the solicitor in the searches carried out by him, or information casting doubt on the value of the property to be charged.

Furthermore, the certificate of title given to the lender stated:

“We confirm that we have complied with your instructions in all other respects to the extent that they do not extend beyond the limitations contained in paragraph (3)(c) of rule 6 of the Solicitors Practice Rules 1990 … Our duties to you are limited to the matters set out in this certificate and we accept no further liability or responsibility whatsoever. The payment by you to us (by whatever means) of the mortgaged advance or any part of it constitutes acceptance of this limitation …”

Turning to the decision in Bowerman, which predated the CML Handbook, the Court of Appeal had held the solicitor to owe the following duty to the lender:

“… if, in the course of 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, then it is his duty to point this out.”

The appellant solicitors accepted that the discrepancy between the purchase price and the valuation (£390,000 / £725,000), and the proximity of the recent purchase (three months), were matters which they would have been obliged to report under a Bowerman duty. However, they argued that that duty was inconsistent with the terms of the CML based retainer, or indeed, was excluded by those terms.

Both Stanley Burnton LJ and Patten LJ (it was a two member panel) rejected this argument.

Firstly, clause 1.3 of the Handbook was inconsistent with its provisions being a comprehensive and exclusive statement of a solicitor’s responsibilities.

Secondly, the wording of clause 5.1.2 of the Handbook was not to be read as being limited only to cases of fraud (which the solicitors argued was the case, in view of the words: “…such as whether the borrower has given misleading information…no longer true”). Instead, clause 5.1.2:

“…recognises in words which echo the judgment of the Master of Rolls in Bowerman that reportable matters which come to the solicitor’s attention when dealing with the transaction and are not confidential to the borrower must be communicated to the lender.”

The Court of Appeal held that that was exactly what had happened in this case: the solicitor became aware of the purchase price issues, as a result of a search of the registry which it was permitted to carry out within SPR 6 (3) (c), and should have reported them.

Thirdly, this conclusion was not negated by the terms of the standard form of certificate of title. That confined the solicitor’s liability to matters which it had been instructed to carry out; but in the Court of Appeal’s view, as those instructions included the Bowerman duty if appropriate facts had come to the solicitor’s attention (as they had here), the limitations in the certificate did not relieve the solicitor of the duty or its breach.

Accordingly the duty was owed, and the judge had been correct to find that the solicitors were in breach.

However, the Court of Appeal unanimously reversed the trial judge’s findings on causation. The issue was essentially one of evidence: had the surveyors, seeking the contribution, discharged the burden of proving that but for the solicitors’ breach, the loan would not have proceeded?

The judge below held that although there was no convincing evidence from the lender about what would have happened if it had been informed of the discrepancies, it would have been open to the solicitors to obtain third party disclosure of documents from the lender or to subpoena witnesses from the lender to assist in its defence, yet it had failed to do so. The Court of Appeal held that this had effectively reversed the burden of proof, and was wrong.

Moreover, on the evidence before the trial judge, there had been no basis to infer that if the discrepancies between the valuation and the price had been reported to TMB, it would have made a difference. This was chiefly rooted in the fact that TMB was already aware, through the application form, of a very significant discrepancy as against the £725,000 valuation figure (albeit the price was inaccurately stated at £450,000 not £390,000), and it was already aware of the recent nature of that purchase. There was no basis to say that a report by the solicitors of information highlighting what was in effect a further £60,000 of discrepancy would have made any difference at all.

Accordingly the appeal was allowed on the second ground.

 

Comment

In reaching the conclusion that it did on the duty question, the Court of Appeal expressly disagreed with the authors of two prominent textbooks: Lender Claims by Tomlinson QC and Grant (which states at paragraph 3-29 that “unless a reasonable solicitor would consider that information gave rise to a significant risk that the borrower was fraudulent or had misled the lender, s 5.1.2 is not engaged”), and Solicitors’ Negligence and Liability (3rd edition) by Flenley QC and Leech QC, at paragraph 10.67 (which argues that the provisions of the CML’s Handbook are inconsistent with the Bowerman duty).

Despite the respected views of those authors, the point must now be regarded as settled. When instructed on the terms of the CML Handbook, a solicitor must pass information casting doubt on the valuation back to the lender.

On causation, the evidential difficulties facing the surveyor as a contribution claimant were for the surveyor to overcome. The party seeking the contribution must prove causation in its claim in the same way that the original lender would have needed to prove it. The fact that the quality of the evidence that is available to the contribution claimant may be weaker is that party’s problem, and if needed, the claimant for contribution will need to seek third party disclosure and/or bring the necessary witnesses to Court. A co-defendant settling a claim against it, but with an eye on a future claim against another co-defendant, would do well to carefully evaluate what evidence the lender actually has before settling, and to establish what assistance the lender can or will voluntarily give in relation to any contribution action.

There is no appeal to the Supreme Court by the surveyors.

 

Simon Hale

4 New Square


CHALLENGING AND UPHOLDING LITIGATION FUNDING ARRAGEMENTS, AND THE LIABILITIES OF FUNDERS

JEREMY COUSINS QC

Until very recently a person supporting litigation in which he had no legitimate concern without just cause or excuse was guilty of the criminal misdemeanour of maintenance, of which, per Lord Denning MR in Trendtex Trading Corporation & another v Credit Suisse [1980] 1 QB 629, a “particularly obnoxious form” was champerty where the maintainer sought to make a profit for himself by sharing in the proceeds of litigation.

In response to the perceived public policy of affording access to justice, largely driven by the need to accommodate widespread withdrawal of legal aid, the courts have gradually relaxed the common law rules of maintenance and champerty (which by express statutory provision survived decriminalisation with the Criminal Law Act 1967) as to invalidating contractual provisions. This relaxation, over the last three decades or so, has been for the purpose of ensuring access to justice, not so as to afford a new vehicle for making profit to those sitting on available funds. Therefore, where any arrangement, or the conduct of it, might threaten the integrity of our system of justice, the threat to the validity of funding arrangements remains very real and current. The scope for undermining and challenging a funding arrangement, or on the other hand supporting it, will therefore turn on the issues of access to justice and the compatibility of the arrangement with the integrity of the justice system.

The task of someone advising as to whether a funding arrangement is vulnerable to attack, or is securely based, is not helped by the width of the source material in which the guidance is contained. Usually the public policy issues are considered after a trial on an application under s51 of the Senior Courts Act 1981 for a costs order to be made against a third party. The scene was well described (at para 8 of his judgment) by HH Judge Mackie QC, sitting as a High Court judge, in Merchantbridge & Co v Safron General Partner 1 Ltd [2011] EWHC 1524, unusually a case concerned with funding a defence rather than a claim:

“It is clear from the authorities cited that the Court of Appeal sees these applications as requiring a summary procedure not over complicated by reference to or by over-analysis of case law. The process is not however straightforward for at least two reasons. First the cases to which I have been taken make it clear that it is for the appellate courts to establish guidelines and parameters for the exercise of the discretion by first instance judges. That guidance is to be found in at least nine of the appellate cases (one Privy Council and eight Court of Appeal) to which I have been taken. These are:—

(i) Hamilton Al Fayed (No 2) [2003] QB 1175 (May 2002) ;

(ii) Gulf Azov Shipping v Idisi [2004] EWCA Civ 292 (March 2004) ;

(iii) Dymocks Franchise Systems v Todd [2004] 1 WLR 2807 (July 2004);

(iv) Goodwood Recoveries Ltd v Breen [2006] 1 WLR 2723 (April 2005) ;

(v) Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055 (May 2005) ;

(vi) Petromec Inc v Petroleo Brasileiro [2007] 2 Costs LR 212 (July 2006) ;

(vii) Sims v Hawkins [2007] EWCA Civ 1175 (November 2007) ;

(viii) Dolphin Quays Developments Ltd v Mills [2008] 1 WLR 1829 (April 2008) ; and

(ix) Oriakhel v Vickers [2008] EWCA Civ 748 (July 2008).

Secondly, the appellate guidance is contained in cases where the facts are often unusual and the relevant considerations diverse. Some observations relied upon by Counsel in this case are very specific to those facts and circumstances. A further factor is that in some respects “the law has moved a considerable distance” – see Petromec at paragraph 11 and the earlier cases are not always still as authoritative as they were. It seems to me that the aspects of the principles most relevant to this application are as follows.”

The task is, in one sense, even more complicated today than it was at the time of the decision in Merchantbridge because of the growth in the case law in the intervening period, and the continuing tendency of the law to move on. On the other hand, the endorsement of third party litigation funding by Sir Rupert Jackson in his Review of Civil Litigation Costs Final Report is likely to influence the development of policy for some time to come.

 

POLICY, VULNERABILITIES AND PROTECTIONS

  • The sanctions

 

Funders have very good reasons for not wishing to overstep the mark of what is permissible. First, if a claim fails, they are in any event liable for costs under s51, but, at least on the current state of the law, those costs are capped by the extent to which the funder has contributed to the costs of the litigant whom he has funded; see the decision of the Court of Appeal in Arkin v Borchard Lines [2005] 1 WLR 3055); the benefit of that cap will be lost where an arrangement is found to be champertous for reasons explained by the court in Arkin at para 40 (see below). For a practical example of the loss of the cap, see Merchantbridge, especially the reasoning at para 46.

Secondly, however, a champertous agreement will be unlawful and unenforceable, so that if a funded claim succeeds and a substantial recovery is made, the funder’s entitlement to share in any proceeds (and to recover costs) would be jeopardised. This would defeat the whole object of participation in funding.

 

  • Two limbs of policy

There are, of course, many potential bases upon which an arrangement can be attacked. For example, if a funder is backing a claim for an ulterior purpose, as was the case in Simpson (assignee of Catchpole) v Norfolk & Norwich University Hospital NHS Trust [2012] QB 640, where Mrs Simpson, for reasons of a personal campaign in relation to MRSA risks in hospitals, took an assignment of rights from Mr Catchpole who had a potential claim against a hospital; the Court of Appeal held that the assignment was of a bare right to litigate unsupported by a personal interest of a kind sufficient to justify proceedings. Assigning a claim simply with a view to enabling another to litigate and to profit would savour of champerty. Note that in this case, from the constitution of the claim, it was possible for the champerty point to be taken and pursued before any trial. This will often not be the case.

Today, however, I wish to focus upon two limbs of policy identified in the decided cases which may render a funding arrangement vulnerable to attack. They emerge from the decision of the Court of Appeal in Arkin (as well as other cases) at para 40:

“40. The approach that we are about to commend will not be appropriate in the case of a funding agreement that falls foul of the policy considerations that render an agreement champertous. A funder who enters into such an agreement will be likely to render himself liable for the opposing party’s costs without limit should the claim fail. The present case has not been shown to fall into that category. Our approach is designed to cater for the commercial funder who is financing part of the costs of the litigation in a manner which facilitates access to justice and which is not otherwise objectionable. Such funding will leave the claimant as the party primarily interested in the result of the litigation and the party in control of the conduct of the litigation.” (Emphasis added)

First, then, if the claimant is not the party primarily interested in the result of the litigation, the action may well be held to be champertous. Quite clearly where the claimant is in reality little more than a nominee for a funder, so that the funder stands to take all of the “winnings”, it must be likely that the funding arrangement will be held to be champertous. Similarly, absent some very good reason, where the funder stands to take more than half of the proceeds, there must be a significant risk that a court would hold that “the real party” is the funder. A useful test was posed by Lord Brown in the Privy Council case of Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, at para 25, namely whether the non-party “is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes.” These questions will be very dependent on particular facts and impression. Where a funder may have to incur great cost relative to a modest subject matter, which might never be capable of being litigated without great resource, it might be possible to justify a high percentage share in favour of a funder. Where the costs are low in relation to the prospective reward, especially where the profit might be very large, a risk of a finding of champerty must be greater, even where the percentage “share” taken by the funder is well under fifty per cent.

The relationship between the investment, work and effort made by the funder to the share that the funder might take from proceeds was specifically considered by the Court of Appeal in R (on the application of Factortame) v Secretary of State for Transport, Local Government and the Regions (No 2) [2003] QB 381. In that case Grant Thornton were prepared to provide services (but by way of back up not expert witnesses) in establishing quantum in exchange for an 8 per cent share of the final settlement received; it was in this sense that they provided funding. The Court of Appeal considered the propriety of this percentage and its justification, including by reference to the danger that it might incentivise “inflaming” a claim:

“85 The greater the share of the spoils that the provider of legal services will receive, the greater the temptation to stray from the path of rectitude. The 8% that was agreed between Grant Thornton and the claimants was not extravagant. Grant Thornton had not wished to contract on this basis, but had agreed to do so under pressure from the claimants. They, understandably, viewed a reasonable percentage of their recoveries as more satisfactory than an open-ended commitment to pay for the services provided on an hourly basis. Grant Thornton had originally been persuaded to agree 8% as a cap, but by the time the agreements were drawn up this had crystallised into a firm figure. Mr Swabey said that he was very relieved when he heard that the percentage agreed was 8% as he considered that this was very reasonable on the basis of the potential damages as he saw them at the time. As he pointed out, the formula agreed had the added advantage of apportioning the fees between the claimants in a manner that appeared equitable.

86 Our view of the 8% agreement was that it should have appeared attractive not merely to the claimants but to the Government, who would ultimately be liable to pay the costs if the claims succeeded. The Government would, in any event, only be liable to pay reasonable costs, which would be likely to be assessed on an hourly rate basis. Thus, for the Government the 8% would be likely to operate as a cap.

87 The prospect of receiving 8% of recoveries would have provided a motive for Grant Thornton to inflame the damages, though not to the extent that a larger proportion would have done. As to the likelihood of their yielding to this temptation, we consider that Mr Hancock was justified in emphasising the fact that Grant Thornton are reputable members of a respectable profession whose members are subject to regulation. We do not believe than any reasonable onlooker, or indeed the minister, would seriously have suspected that the fact that they were to receive 8% of the recoveries would tempt Grant Thornton to deviate from performing their duties in an honest manner. Had this not been the case, we do not consider that there would have been much scope for Grant Thornton to influence the outcome of the assessment of damages.

88 Grant Thornton had an important input into the preparation of the computer model—indeed on the claimants’ side they provided almost all the input. But this was a task which was being carried out in conjunction with the Ministry of Agriculture Fisheries and Food experts—indeed we were told that the latter claimed to have had the major responsibility for this work. The skeleton argument submitted for the minister described the position as follows:

“The importance of the model should not be underestimated. It was a large, complicated and sophisticated spreadsheet. The evidence before the costs judge reveals a dispute, irrelevant for present purposes, as to which party had the most significant involvement in its development … However, one of the Secretary of State’s experts was a statistician, Mr Hall. He produced the model which was used at the trial, gave a ‘neutral’ explanation and demonstration of its workings to the judge during the openings, participated in expert meetings at which it was discussed (and to a substantial extent agreed) and gave evidence about it. The claimants … did not call an expert statistician. Their fisheries experts, and in particular Mr Banks for the [Thomas Cooper] claimants, discussed and to a substantial extent agreed principles with the Secretary of State’s fisheries expert. It was [Grant Thornton] on behalf of the [Thomas Cooper] claimants who were responsible for considering whether those principles were properly and adequately reflected in the model and for explaining its working.”

89 The task of producing a suitable model was plainly being carried out as a joint operation involving both sides, and in a manner that was transparent. It does not seem to us that this was an area where any lack of objectivity on the part of Grant Thornton could be expected to impact on the assessment of damages.”

In the circumstances of the case, taking into account the reputability of Grant Thornton, the efforts which they would make, and the nature of the task, there was nothing extravagant about the remuneration to be heard. There was no danger, in this case, that Grant Thornton was becoming the real claimant. Note, however, the court’s anxiety to test the remuneration and its incentive to “talk up” an award, against a range of other considerations. What is very clear is that a percentage based scheme, involving input on the preparation of the material to be put before the court, could be objectionable if the percentage were to be unduly high, or the trustworthiness of the participating funder might not be clear cut. This, in a case where claims management company with a poor reputation was similarly incentivised, the danger to the integrity of the justice system might produce a different result. This is a clear area of risk for some funding models.

Secondly, a funder must be careful not to become the party in control of the litigation. This is well recognised in the case of the Association of Litigation Funders of England & Wales’ Code of Conduct for Litigation Funders (January 2014), which provides at para 9 that a funder will not “seek to influence the Funded Party’s solicitor or barrister to cede control or conduct of the dispute to the Funder.” (The Association is not a statutory body, and a funder does not need to be a member.) This guidance serves as a timely reminder to all funders. Taking control of litigation is likely to render an arrangement champertous, and therefore funders must ensure that in substance as well as in form they do not do so. Merchantbridge is a good example of where persons who effectively controlled litigation were held liable for costs.

It is unlikely that a funder will cross the line as to what is permissible simply by taking an active interest in the funded litigation; for example, by attending conferences, making suggestions as to which experts should be considered, questioning advices from counsel, or suggesting that additional statements from witnesses might be needed. Participation of this kind did not put the funder in Gulf Azov Shipping Co v Idisi [2004] EWCA Civ 292 on the wrong side of the line. There is, however, a fine line that divides what may be permissible from what is not. A funder may not like a choice of counsel or expert, but it is not for the funder to make final decisions on these points, otherwise he will be taking control of the litigation. To express views in a forceful manner may be acceptable, but to make a veiled threat as to termination of funding if those views are not heeded could be seen as tantamount to taking control. The funding agreement itself might purport to confer powers that demonstrate that the funder is in control.

Those wishing to challenge funding arrangements may, in future, and especially in large commercial cases where much money is at stake, seek to become more active in investigating, both before, as well as after, trial what the funding arrangements are. As Simpson demonstrates, a case where the funding arrangements infringe the rules of champerty can be struck out. As funding becomes more important and well-publicised, there must be good prospects that defendants and their insurers will be innovative in searching for opportunities to deal a decisive blow to claims at ever earlier stages.

 

  • Disclosure

 

The opportunity to obtain disclosure of funding arrangements can arise upon the making of an application for costs following the making of an order for costs against a party; see Flatman v Germany [2013] 1 WLR 2676, CA. In that case the Court of Appeal expressly approved the judgment of Blake J in Thomson v Berkhamsted Collegiate School and others [2009] 6 Costs LR 859, where issues of funding also arose upon a third party costs claim against funders. The approach adopted by Blake J (see para 17 of his judgment) was that what he termed ancillary orders (disclosure, cross-examination etc) should not be ordered if a third party costs order was not likely to be made, nor should they be ordered if the case was so strong that they were not needed. Having considered the strength of the case for a third party costs order, he concluded that it stood a reasonable prospect of success, and that its best prospects depended upon the extent to which control and decision taking could be demonstrated. He continued at para 33:

“The defendant submits that it can only demonstrate the element of control, interference, and assumption of responsibility in the litigation if it knows what communications the interested parties have had with the solicitors, counsel or expert witnesses in the case. In my judgment, such material, if it exists, is likely to be relevant, and depending on volume, timing, and substance, may well be highly probative of the central disputed issue in the application. It has never been suggested that there was no such correspondence, although the interested parties state that they have no records of written or electronic communications in their possession.”

Blake J recognised that potentially issues of privilege could arise, but he held, at para 36, that these would not be a barrier so far as third party funders were concerned:“Having regard to the general principles as to when legal advice or litigation privilege arises, in my judgment, it would not normally exist in communications between a solicitor and a third party to the claim that were not immediately connected with the witness statement of that third party or the giving of legal advice to the claimant.”

Having considered issues of proportionality as well, he concluded that disclosure should be given, and gave directions with a view to identifying relevant non-privileged documents.

The opportunity to obtain a disclosure order as to funding arrangements even before a costs order has been made is another matter. It will be more difficult for challenges to funding arrangements to be deployed pre-emptively, but in some cases it may become apparent from the circumstances that there is likely to be some objectionable feature that may be champertous. To justify disclosure, this would need to be raised on the pleadings, and there would need to be a proper evidential basis to justify any order for disclosure; a fishing expedition in support of a weak case will not be permitted. The analysis in Flatman fully supports that view; on the facts of that case the Court held that material suggesting that solicitors had pressed on without ATE cover contrary to a client’s instructions indicated that the solicitors had tried to control the course of the litigation, so that disclosure was justified.

  • Coda  

 

  • The extent to which the rules of maintenance and champerty will continue to affect the development of legal policy in relation to the issues under consideration is unclear. There is as yet no indication that the English courts are ready to adopt the root and branch attitude to reform displayed by the High Court of Australia in Campbell’s Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41. Following that decision a funder in Australia is now allowed a far greater degree of control and decision-making than would be permissible in England, and the view has been expressed by Hodges, Peysner and Nurse in their January 2012 Litigation Funding: Status and Issues, that the only relevance of the old rules today is in a dispute between a plaintiff and a funder as to enforceability. Since English law on these matters has been developed judicially, a continuing evolution is to be expected, but it must be doubtful whether the courts here would embrace Fostif with any enthusiasm.

 

FUNDER’S LIABILITIES

The decided cases provide some fairly clear guidance as to a funder’s potential liabilities:

  1. A “pure funder” who does not take control of proceedings, or stand to share in any “winnings” is very unlikely to have a liability for another party’s costs; Hamilton v Al-Fayed (no 2) [2003] QB 1175. Exceptions could be cases of malice or ulterior purpose.
  2. A solicitor who provides an indemnity to his client in respect of costs liabilities will not, without more, be guilty of champerty; Sibthorpe and Morris v Southwark LBC [2011] 1 WLR 2111. The Court held that to decide otherwise would extend the law of champerty, which would be inappropriate in the 21st century. The position would be different if the solicitor were to be sharing in proceeds of a claim.
  3. A litigation funder’s liability will be capped by reference to his contribution made to costs; see Arkin above. Note, however, that Sir Rupert Jackson favoured the removal of this cap. In Tinseltime Ltd v Eryl Roberts & others [2013] PNLR 4, HH Judge Stephen Davies declined to depart from Arkin on the basis that at first instance it was not open to him to do so; the risk remains that an appellate court would now revisit the issue.
  4. A lawyer who does not step outside his role as such will not be liable for costs because he “funds” litigation by operating under a conditional fee arrangement, or meets disbursements; Hodgson v Imperial Tobacco [1998] 1 WLR 1056, and Tinseltime.
  5. It remains unclear whether the Hodgson type immunity would be extended by the courts to a lawyer acting under a Damages Based Agreement. The doubt, which is a real one, arises because the lawyer would be sharing in the proceeds of the litigation. The Civil Justice Council’s report in August 2015, The Damages-Based Agreements Reform Project, for this reason, by Recommendation 28.1, urged that the law should be clarified and expressly extend the immunity to such arrangements.

 

JEREMY COUSINS QC

Radcliffe Chambers,

23rd September 2015

 

Jeremy Cousins QC is a practising barrister, and also sits as a deputy High Court judge in the Chancery Division. He is the consultant editor of Third Party Litigation Funding by Nick Rowles-Davies (OUP, 2014).

Nothing in these notes or the related seminar constitutes legal advice, and it is not anticipated that it will be relied upon as such.

 

 

 


When do lawyers come under enhanced/wider duties: Giambrone and all that

 Shantanu Majumdar, Radcliffe Chambers

It is routinely said that the scope of a solicitor’s duties is determined primarily by the terms of its retainer. Thus – to quote what an American would probably call “hornbook’ law – in Midland Bank v Hett Stubbs & Kemp [1979] 1 Ch 384 Oliver J said that

The extent of his duties depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do.”

But what are those terms? To the extent that this dictum is referring to the express terms, then the word “primarily” is unexceptionable if it means that this is the first place one looks. If it means that this is the main place one looks then the proposition is more doubtful.

This is because the express terms of a retainer letter do not typically set out at much length, or in much detail, what the solicitor will do and indeed attempts to be prescriptive of what the solicitor will do will usually be difficult and sometimes even dangerous.

Thus, in many cases the most important function of the express retainer will be to identify the nature of the instruction as well as anything specific which the client has asked the solicitor to do in connection with it.

From the nature of the instruction will flow, by practice and implication, what that would ordinarily involve; what a reasonably competent solicitor would do both on the facts as they seem at the time of the conclusion of the retainer and, of course, as they emerge thereafter.

Some reflection of this can be found in Groom v Crocker [1939] 1 KB 194 (at 222) where Scott LJ said that

The retainer…puts into operation the normal terms of the contractual relationship, including in particular the duty of the solicitor to protect the client’s interest and carry out his instructions in the matters to which the retainer relates, by all proper means. It is an incident of that duty that the solicitor should consult with his client in all questions of doubt which do not fall within the express or implied discretion left him and should keep the client informed to such an extent as may be reasonably necessary according to the same criteria.

If this all sounds rather vague then this is an inevitable consequence of generalizing about something which ultimately depends on the specifics.

But even though the performance requirements of a particular retainer depend on the particular circumstances, the Courts have developed limiting presumptions (themselves rebuttable in particular circumstances such, in particular, as when the express terms of the retainer require a different result).

One is that the “default obligation is one limited to the taking and exercise of reasonable care”[1] and that the imposition of stricter obligations requires “special facts or clear language” (see the judgment of Rix LJ in Platform Funding Ltd v Bank of Scotland plc [2009] QB 426). In departing in this way from the default “strict duty”- position in most other kinds of contract, the Courts recognize that it will generally not be realistic for a professional to be held to have assumed an obligation to secure a particular result particularly where it may depend to a significant extent on the actions of a third party.

Another limiting principle is that a solicitor is not generally required to give advice about the commercial wisdom of a transaction see eg Reeves v Thring & Long [1996] PNLR 265, Clarke Boyce v Mouat [1994] 1 AC 428 and Pickersgill v Riley [2004] UKPC 14, [2004] PNLR 31.

This general position is subject to the qualification that the solicitor may agree otherwise but also that a solicitor has a duty to warn its client of problems or risks with a transaction which the solicitor discovers (or should have discovered) of which it is reasonable to assume that the client may not be aware: Credit Lyonnais v Russell Jones & Walker [2002] EWHC 1313; [2003] PNLR 17.

This does not apply only to obvious risks: “…the professional man does not necessarily discharge his duty by spelling out what is obvious. The client is entitled to expect the exercise of a reasonable professional judgment. That is why the client seeks advice from the professional man in the first place. If in the exercise of a reasonable professional judgment a solicitor is or should be alerted to risks which might elude even an intelligent layman, then plainly it is his duty to advise the client of these risks or explore the matter further.” County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1987] 1 WLR 916 (per Bingham LJ)

A solicitor is under a duty to draw the client’s attention to material matters within the solicitor’s knowledge that might adversely affect the client’s position in a transaction: Mortgage Express Ltd v Bowerman & Partners (a firm) (No.2) [1996] PNLR 62.

A solicitor may be liable in negligence for ignoring a risk that should have been obvious or foreseeable to him: Martin Boston & Co v Roberts [1996] PNLR 45.

One of the themes underlying these qualifications is the more generally relevant one that the nature of the client will also affect the scope of the retainer and the advice which it is necessary to give to a particular kind of client.

Also potentially relevant is the reasonable expectation/understanding of the client in the light of the expertise and experience which the solicitor claims to have. But this brings us back at least to the vicinity of the express retainer and the sovereign need to take care not to agree to do, or to imply that you will do, things which you do not intend to do and may not even be capable of doing.

Sometimes this will be the result of mere carelessness but on other occasions it might be caused by enthusiasm to obtain the instruction in the first place.

With these not entirely random observations about some of the principles which inform the scope of a lawyer’s duty under English law, I come to the case which I have primarily been invited to talk about.

Various Claimants v Giambrone [2015] EWHC 1946 (QB) (“Giambrone”) relates – you will note the present tense – to a development of about 600 holiday properties on the Calabrian coast – Jewel of the Sea. It was meant to be complete by June 2009 but most of it is incomplete and indeed the last building work was done prior to 5 March 2013 when the site was seized by the Guardia di Finanza (the Italian financial police) on the grounds that the developer RDV – allegedly a creature of the local mafia the ‘Ndrangheta – had collaborated with the Irish developer VFI to launder the proceeds of IRA drug trafficking through the Jewel of the Sea development.

Jewel of the Sea had been mired in planning and financial problems long before its seizure by the Italian authorities and as early 8 March 2009 the Mail on Sunday published an article which said this (amongst many other things):“Ask Italians about the brief Anglo-Irish mania for Calabria and they shake their heads knowingly. In a part of the world renowned for its lawlessness – and nasty local mafia – the arrival of well-monied, naïve, monoglot holiday homebuyers, eager to snap up an off-plan bargain for the price of a garage in Tuscany, was bound to result in disappointment.”

Buyers at the development came mainly from the UK and Ireland and had succumbed to significant and sophisticated marketing which encouraged them to think that they could “live the Italian dream” at modest prices. They thus bought off plan, typically paying deposits of 50% of the purchase price in sums from about £40,000 upwards.

A few buyers have attempted to sue RDV in Italy but most have proceeded against Giambrone, the solicitors, who in various incarnations acted for the majority of the buyers. Until now, all the (mainly Irish) claims have settled but about 100 UK cases (in 53 of which I act) have been managed together (there is no GLO) and were the subject of a trial of common issues in March of this year.

Over 4 weeks, Foskett J heard 25 witnesses and 4 experts on various aspects of Italian law. His 153-page judgment was handed down in July and ranges widely over the many and various claims of negligence/breach of contract, breach of trust, and breach of fiduciary duty.

One could dilate almost endlessly on the highways and byways of this case. These included the challenge of applying SAAMCo to what Foskett J held to be the numerous failures by Giambrone to advise their clients about various aspects of the transaction: from the fact that guarantees given in respect of the clients’ deposits did not comply with the requirements of the Italian Civil Code to the fact that commission amounting to 31% of the purchase price (62% of the deposit) was due to the promoter VFI and transmitted to it by Giambrone.

It is therefore something of a relief to be confined by both title and time slot to a relatively narrow aspect of the case: what standard applied to what duties.

Giambrone was the lawyer favoured, even designated, by the promoter and the developer. In 2007 when it first became involved, the firm was only 2 years old and the chance to act for some hundreds of buyers at Jewel of the Sea was a significant commercial opportunity. It was the desire to win this business which led to the production of client literature which verged on the promotional and which it must now have come to regret.

The first was a letter written “to whom it may concern” and which was entitled “Due Diligence Report — “Jewel of the Sea” Development (Brancaleone). Its text is reproduced in appendix 1 to this paper and contained this opening paragraph:

“We would like to confirm that Giambrone & Law, an independent firm of Italian lawyers in London, is in the process of carrying out the due diligence over the land and the development called “Jewel of the Sea”.

Mr Giambrone’s oral evidence was that this document was not written for or intended to be seen by buyer clients rather as the Judge put it:

He said that the letter was produced “at the request of UK and Irish agents for their potential clients”, its purpose being “to give some comfort that Giambrone & Law were independent Italian lawyers, and to confirm what initial due diligence checks had been made in relation to JoTS”.

Having said that, it was plain that it had come into the possession of numerous claimants in circumstances where, whatever the intention with which it had been written, Giambrone accepted that it had no control over its subsequent circulation. As Foskett J said:The whole emphasis of the letter, whether seen directly by a potential purchaser or by virtue of its substantive content being mentioned by an agent to such a person, was the independence of Giambrone & Law from the developers and the professionalism they were bringing to the due diligence process. On any view, this message was intended to (and plainly did) operate as an incentive to potential purchasers to instruct Giambrone & Law.And indeed that was the tenor of some of the evidence given by claimant witnesses at the common issues trial. And, as we shall see, it also contributed to the context of reasonable expectation and understanding in which scope of duty was to be assessed.

Mr Giambrone also accepted that there was a promotional aspect to the fact that Giambrone & Law had offices in Calabria and in London.

The single most important document was a letter sent to clients and which was described by Giambrone at trial as the “retainer letter” – see Appendix 2 for its key passages. By calling it that they no doubt hoped to confine the scope of the duties which they were held to have owed not least by stopping the clock in an attempt to exclude subsequent documents which might (otherwise) have been relevant.

Those included a document called “Report on Title” which, in any event, sometimes came with the so-called retainer letter and which contained these passages:“Giambrone & Law has independently carried out the due diligence in relation to [JoTS] promoted by VFI … and has also carried out a multiple object investigation aiming at determining the feasibility of the targeted purchase and at reviewing the clauses of the Preliminary Sale Agreement for Immovable Property) prior to the exchange between the client and the Vendor” And later“Payment Schedule: the proposed payment schedule seems acceptable, as there is no request by the Builders for further interim payments during the phases of construction: this somehow seems to imply that they have their own resources to bring the construction to a positive completion.”

One of the very few issues which was not contested by Giambrone was that the retainer had been governed by English law, but the parties were not able to agree what the standard was. This involved a choice between the following formulations:

what a firm based in the English jurisdiction, but with actual or professed expertise in the Italian off-plan market, would have done (as the claimants contended)

or

a duty to act as would the reasonably competent English conveyancing firm of solicitors, holding itself out as able to conduct conveyancing in Italy (as the defendants contended)

The Judge chose the former on the basis that the latter was just too narrow in the circumstances and it is perhaps little surprise, not least because the purchase transactions took place in another country and under a different system of law, that he did not consider that analogies with English conveyancing practice were of much assistance when it came to scope of duty.

That might suggest that the obvious alternative would be consider what an Italian lawyer instructed to act for a client in such a transaction would do, but it turned out that “conveyancing” is something of a misnomer when applied to the practice of Italian land transfer. Indeed, it would be highly unusual for an Italian buyer to retain a lawyer to advise him or her in such a transaction and the usual practice is rather that the buyer and seller would rely on the independent role and scrutiny of the notary at the time of the execution of the transfer documents. This meant that significant parts of the evidence of the notary experts called by my clients and by Giambrone was interesting, but not particularly helpful.

This necessarily caused an even more intense focus on the express terms of the documents which Giambrone had put into circulation.

So what did the Judge hold that Giambrone had agreed to do or said that it had done? This was in part to be answered by reference to the level of expertise which Giambrone had (repeatedly) claimed to have, as the Judge put it:“if the professional person professes to have skills and expertise in a particular area, the client (or, in a medical context, the patient) is entitled to assume that he or she does indeed possess those skills and that expertise. Putting it in layman’s language, if a professional person sets out his stall in a particular sphere as involving the ability to go an extra mile, his work is to be judged by reference to someone who can in fact go that extra mile.”

Neither the time available nor the patience of the audience permits any detailed description of the judge’s findings or the reasoning therefor and/but summary is apt to mislead. Nonetheless, the key conclusions of Foskett J on scope of duty were as follows:

Even allowing for an element of “puffery” about Giambrone’s claim to be “one of the leading Italian Law firms in the United Kingdom and Ireland” the reference to having “a dedicated department specialising in Italian Real Estate law and off-plan property acquisitions.”

“would have operated as an inducement to everyone to think that everything that needed to be considered in “off-plan property acquisitions” would be considered.”

The phrase “[have] been requested to complete the necessary due diligence over the development, issue the Preliminary Contracts and to advise you in relation to the legal aspects of the aforementioned purchase” amounted to an agreement to do 3 things:

  1. the necessary due diligence over the development
  2. issuing the preliminary contracts, and
  3. advising on the legal aspects of the purchase.

There was also the later indication that Giambrone would undertake “due diligence over the Limited Company which is building the Complex”.

As Foskett J put it:

“In my view, those features of the letter do convey in their own right the suggestion that what the firm was offering was something more than just ensuring that the legal formalities of the purchase would be complied with so that the purchaser would be secure in the binding nature of the acquisition. They conveyed a clear message that some degree of “due diligence” would be conducted in relation to “the development” as a whole and in relation to the building company undertaking the development. Indeed this message is reinforced by what Avvocato Giambrone said of his motivation in relation to the preliminary research namely, that he “wanted to investigate some more and see whether the project was feasible before becoming involved with it” (see paragraph 83 above). This, in my judgment, is what, according to English law, those aspects of the letter would reasonably have conveyed to the kind of person to whom the letter was addressed. (I should say that, in my view, that interpretation is reinforced by the terms of the Report on Title to which I will turn later, but I reach that conclusion at this stage of the analysis on the basis of the retainer letter as it stands.)

He agreed with Giambrone that the letter suggested that “the usual features of a conveyancing solicitor’s duty within the domestic jurisdiction would be carried out in Italy” but that this was clearly – applying normal principles of construction – not the limit of what Giambrone was saying that it would do/had done.

In his recent decision in Kandola v Mirza Solicitors LLP [2015] EWHC 460 (Ch), HH Judge Cooke said this (at 51):

“It is not, in general, a solicitor’s duty to check on the credit status of his client’s counterparty in a transaction unless instructed to do so. There may be circumstances in which a solicitor should check specifically for the commencement of bankruptcy proceedings, since that may affect a party’s ability to complete a transaction or give a good title. But that is not the same as a general duty to make checks about risk of future insolvency. Nor can such a duty arise merely because the client is incurring a risk of loss if the counterparty becomes insolvent, for that will be true in most if not all transactions. Nor in my view does such a duty arise merely because the transaction takes an unusual form which does involve a solvency risk (eg on release of a deposit) where the more normal form would not (deposit held as stakeholder). In such cases the duty of the solicitor is to advise of the unusual risk, but not to seek to evaluate it unless specifically instructed to do so.”

Or, it might be added (and Foskett J indeed found) the solicitor has specifically said that it will do so.

When it came to planning permission the retainer letter said that Giambrone would undertake “enquiries to ensure … that valid planning permission is in place for the project to go ahead.”

I was constrained to accept that this was not to be construed as an absolute commitment to ensure that valid planning permission for the development was in place ie. it could not be suggested that such a strict or absolute obligation existed but the Judge did accept the proposition that the letter did

“not obviously and clearly confine the obligation merely to checking that the proposed development was in accordance with a planning permission that had been granted.”

and that it had thus had the effect that a “degree of enquiry … higher than normal” was required and that this was of a piece with the enhanced level of due diligence which the retainer letter was otherwise offering.

All in all, it was the Judge’s view that Giambrone had constructed a package aimed at proposed purchasers which, in effect, said “we are experts in this field – we will check everything for you.” This package had appealed to potential clients, just as it was intended to do.

SHANTANU MAJUMDAR

smajumdar@radcliffechambers.com

11 New Square, Lincoln’s Inn

9th October 2015

Appendix 1

“Due Diligence Report — “Jewel of the Sea” Development (Brancaleone)

We would like to confirm that Giambrone & Law, an independent firm of Italian lawyers in London, is in the process of carrying out the due diligence over the land and the development called “Jewel of the Sea”.

Upon inspection of the land registry searches, we have found that the Municipality of Brancaleone has granted two building licences on the 7th July 1994 … for the building of a residential complex located in Brancaleone, and hereby referred to as “Jewel of the Sea”….

We have carried out a number of land registry searches (visure catastali, visure ipotecarie, certificate di destinazione urbanistica) to verify that the Developers have a valid title to dispose of each property in the Development, and checked the legal title of the land to ensure that the property actually belongs to the Vendor and that no-one else has any claims on the land; we have also checked that the land is not being contested in an inheritance dispute in relation to an existing will (in accordance to the strict rules of Italian inheritance law, as regulated in the Civil Code).

We can confirm the absence of pre-emption rights in favour of third parties (such as the “prelazioni agrarie per coltivatori diretti” and/or the “prelazioni urbane”). We have carried out enquiries to ensure that there are no liens, encumbrances, and rights of way in favour of third parties and that the land is legally registered with the urban registry.

Finally, we also confirm that the Developer has provided us with a sample of a “Fidejussione Assicurativa” which is a bank loan guarantee valid under the current Italian legislation in accordance to decree 122 of 2005 and is a safeguard to any potential buyers for the event of default or bankruptcy of the building company.”

“Re: Purchase of your property in Calabria

We have been passed your details from VFI following your reservation of a new property in Jewel of the Sea (Calabria).

Giambrone & Law LLP is one of the leading Italian Law firms in the United Kingdom and Ireland and we have a dedicated department specialising in Italian Real Estate law and off-plan property acquisitions.

We have been requested to complete the necessary due diligence over the development, issue the Preliminary Contracts and to advise you in relation to the legal aspects of the aforementioned purchase. We have experience in advising a growing number of foreign investors in the Calabrian market, which is now fast becoming one of the “hot spots” in the Italian real estate market, with prices increasing rapidly.

Our lawyers from the London office have visited the area of Calabria and met with the representatives of VFI and of the Builders in order to discuss the legal aspects of these new developments in more detail.

Moreover, we will soon be opening a new office in Reggio Calabria: we hope to build a long relationship with you and be able to advise you on all different aspects of Italian law after you complete your purchase in Italy.

A brief overview of the purchasing process

Although we may been recommended to you by the Promoters, we wish to emphasise that our Italian Lawyers are completely impartial from any other party associated with this purchase and therefore we will act solely in your best interests and advise you on all aspects of Italian law which will be relevant to your purchase.

The initial part of our remit is to carry out the customary due diligence over the Development and draft the Preliminary Contract in compliance with the provisions of the Italian Civil Code and local legislation. Our Italian Lawyers have already requested a number of documents to enable us to carry out the due diligence over the Limited Company which is building the Complex.

We have already carried out a number of land registry searches, called visure catastali, visure ipotecarie, and check the certificate di destinazione urbanistica, to verify that everything stated in the initial draft of the Preliminary Contact is correct.

We will also check the legal title of the land to ensure that it actually belongs to the Developers, that no-one else has any legal claims over it, and that this land is not being contested in an inheritance dispute. We will check for the absence of pre-emption rights in favour of third parties (such as the “prelazioni agrarie per coltivatori diretti” and/or the “prelazioni urbane”). If the Developers have obtained a mortgage to fund part of the project, we will need to inspect copies of any relevant bank documents to ensure that any legal charges in favour of the lenders will be removed prior to completion.

We would routinely carry out enquiries to ensure that there are no liens, encumbrances, and rights of way in favour of third parties and that the land is legally registered with the urban registry, and, furthermore, that valid planning permission is in place for the project to go ahead.

We will ensure that the Builders/developers or the Promoters will provide us with a copy of a “fidejussione banacaria”, which is now mandatory in certain circumstances: this is a bank loan guarantee that has to be provided by them so that, in the event of bankruptcy, we can claw back any funds anticipated at this stage directly from the guaranteeing Bank.

We will draft a Report on Title which will give you a clear idea of the legal status of the apartment that you wish to purchase and of the land upon which it is being built. At the same time, the final version of the Preliminary Contract will have been prepared by our lawyers and it will be sent to you for your consideration. Our documents are always drafted in Italian and English so that you will know the exact content of what you are required to sign: however, it is important to note that only the Italian version of the Contract will be legally binding.

Our professional fees

All our lawyers in the London office are regulated by strict rules of conduct imposed by the Law Society (England and Wales) and we have professional indemnity insurance of £5,000,000 for your extra peace of mind. You can rest assured that we will constantly strive to provide you with the highest level of service possible.

[1] See also section 13 of the Supply of Goods and Services Act 1982.


Welcome to our third digital newsletter.  I would like to thank the editor, Simon Hale, for producing it, as well as all the contributors.

This month, we are very pleased to be able to publish a paper given Lord Justice Jackson, our President, which was first delivered to TECBAR in October 2014. It is entitled “Concurrent Liability: Where have things gone wrong?” and is a fascinating comparative study of the interface between contract and tort as seen in four different legal systems: Roman, French, German and the common law. It concludes that the House of Lords took a wrong turning in Henderson v Merrett [1995] 2 AC 45, and calls for the implementation of Law Commission proposals on limitation together with a reconsideration of Henderson by the Supreme Court. I urge you to read it.

We also feature case notes of recent decisions that have considered, among other matters: a radical change of approach to claims where a clinician fails to inform a patient about a treatment option or risk (Montgomery v Lanarkshire, in the Supreme Court); a consultant engineer’s duty to warn of risks to temporary works (Goldswain v Beltec); causation on the loss of a chance basis, in a claim against tax consultants who had advised with respect to corporation tax liabilities (Altus Group v Baker Tilly Tax); a solicitor’s duty to warn about solvency risks on an unusually structured transaction (Kandola v Mirza); and a Part 24 application where deliberate concealment was alleged against a firm of solicitors (BPC Hotels v Brook North).

On 21 April we will celebrate the 25th year of the PNBA with the Peter Taylor Memorial lecture, followed by a champagne reception.  Yet again we are indebted to Lord Justice Jackson, who will speak on “The Professions: Power, Privilege and Legal Liability.”  Who is better placed to reflect on the role of the professions, and their liabilities? To reserve a place for this event, please email the Hon. Secretary Victoria Woodbridge, by clicking here: woodbridge@crownofficechambers.com.

Anyone who came to the January event, and some who did not, may like to know that Prof Paul Davies’s paper is to be published in the Modern Law Review.  The Secretary has received a copy; we are currently trying to have it put on the website on a password-protected basis so that members may read it there.

We will shortly be circulating printed calendars to members, setting out the events which are planned for the rest of the year (better late than never).

May I invite all members to contribute ideas and suggestions for this newsletter or for talks and events.

William Flenley QC
william.flenley@hailshamchambers.com


Upcoming events

To reserve a place for any PNBA event please email: woodbridge@crownofficechambers.com

 

21 April 2015

The 17th Annual Peter Taylor Memorial Address

“The Professions: Power, Privilege and Legal Liability”, delivered by Rt. Hon. Lord Justice Jackson, Hon. President of the PNBA.

5:30 pm – 7:00 pm, Inner Temple Hall

The lecture will be accredited for 1 1/2 hours CPD

Followed by a champagne reception.

 

1 June 2015

“Falling into a Black Hole” 

Identifying claimants and loss in assignment, securitisation and syndication cases.

Moderator: The Hon. Mr Justice Newey

Speakers: Tom Grant QC, Mark Cannon QC, Tom Leech QC

Parliament Chamber, Inner Temple

The lecture will be accredited for 1 1/2 hours CPD

 

1-5 September 2015

AIJA Annual Congress

The Association Internationale des Jeunes Avocats (AIJA) will hold its Annual Congress in London from 1-5 September 2015. The Congress may be of interest to PNBA members. We have been asked to pass on the following information:

The Annual Congress offers an excellent opportunity for private practice lawyers and in-house counsel from around the world to gather for seminars on hot topics across the whole range of legal practice areas, to network and exchange business, to socialize and to discuss issues of importance to the profession.  It is a very popular event, usually attended by some 700 lawyers.  It has a strong history in continental Europe and in the last few years has developed a significant following amongst junior partners in City law firms. The AIJA is for lawyers under 45 years old.

For more information, visit http://london.aija.org/ or contact Ned Beale at Trowers & Hamlins: NBeale@trowers.com.