Professional liability case law update: October 2013

17 Oct 2013

Michael v Middleton [2013] EWHC 2881 (Ch)

John de Waal QC, who acted in this case, has written an article about it for Litigation Futures: Refusal of relief from sanctions also highlights negligence risk for solicitors, warns QC

Lorraine Studholm Feltham v Freer Bouskell [2013] EWHC 1952 (Ch) Charles Hollander QC; 15/07/2013

Facts: The claimant (L) brought an action in negligence against the defendant firm of solicitors (F) under the principle in White v Jones [1995] 2 A.C. 207, alleging that she had suffered loss by reason of F’s failure to carry out the instructions of the testatrix (C), who was a relative of L.

By January 2006, C was living in a nursing home and there was some suggestion that she might have dementia.

On 24 January 2006, L, acting on C's behalf, instructed W (a partner in F) to prepare a new will under which L was to inherit the bulk of C's estate. W accepted the instructions, but subject to satisfying himself as to C's testamentary capacity. He therefore instructed a doctor to report on that issue. The doctor attended C on 3 February and concluded that she had capacity, but then failed to provide a report to that effect until 2 March. W did not chase the doctor for his report during the intervening period.

W also had concerns that L might be seeking to take advantage of C. He decided to do nothing further in respect of his instructions unless C herself asked him to do so. On 13 March, C provided personal instructions to L to prepare the new will for her, saying that she no longer wished W or another solicitor to do so. L agreed to prepare a draft. C signed this new will before two witnesses on 24 March and died on 1 April.

After her death, W was informed of the new will and wrote to the ousted beneficiaries querying C’s testamentary capacity and effectively encouraging them to challenge the new one. They did so and L settled with them out of court. L then sought damages from F representing her losses by reason of having had to settle the claims of the earlier beneficiaries.

Decision: L succeeded. Charles Hollander QC, sitting as a Deputy Judge of the Chancery Division, held that:

(1) W had been negligent in his handling of C’s instructions to prepare her revised will. A solicitor instructed to prepare and execute a new will was obliged to do so within a reasonable time, particularly where it was foreseeable that the testator might not live long. If he delayed for even a comparatively short period, he could be negligent: Hooper v Fynmores (A Firm) [2002] Lloyd's Rep. P.N. 18 considered. Although L was not W's client she fell within the White v Jones principle: she was the intended beneficiary under the proposed will and it was reasonably foreseeable that she would sustain loss if W failed to carry out his instructions.

(2) Where a solicitor had concerns about a testator's mental capacity, he had either to refuse the instructions or to take prompt steps to satisfy himself that the testator had the requisite capacity and to resolve that issue with reasonable expedition. On the facts, W should have chased up the medical report within the first 10 days and should have arranged for another doctor to be instructed in the event that the first could not report expeditiously. Upon receipt of the report he should have visited C to discuss her instructions.

(3) W’s separate concern that L might be taking advantage of C was genuine and understandable, and the circumstances would have justified him visiting C to satisfy himself that she knew what she was proposing to do. However, L failed to take this course and elected to do nothing unless prompted by C. That was an entirely inadequate course of action. It was not for W to determine whether it was a good idea for C to change her will and, in any event, his concern was misplaced.

(4) On the facts of this case, the Court was in no doubt about how C would have acted if W had discharged his instructions properly. She would have executed the revised will and W would have been in no doubt as to her intentions; he would not, therefore, have written to the ousted beneficiaries under the former will in the terms that he did, and the suit which L settled would not have occurred. L’s claim was thus made out.

(5) Obiter, because the Court was in no doubt in the instant case about how C would have acted had W properly discharged his obligations, the question of how properly to evaluate, for the purposes of establishing loss, the manner in which C would or might have acted but for his negligence was academic. However, in a case where the evidence was not so clear, the Court would have to consider whether the evaluation fell to be made on a balance of probabilities or as a percentage chance. There was no authority on the point and it was something which would have to be decided upon in due course by an appellate court. However, it seemed to be in accordance with principle to treat a testator as a third party and to evaluate what she was likely to have done in percentage terms, applying the principles governing the actions of third parties as set out in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 W.L.R. 1602.

Comment: It is the obiter conclusion of the judge that is of most interest in this decision. 

Allied Maples distinguishes between different categories of evidential propositions for the purposes of evaluating loss, in circumstances where the loss claimed was in some way contingent upon what a third party would or would not have done if properly advised. First party propositions (“I would have done X”) must be proven to the balance of probabilities; third party propositions must be proven to the lesser standard of a substantial chance (“there was a substantial chance that s/he would have done Y”).

In the present case, during her lifetime C was not a third party for the purposes of the solicitor’s retainer: she was a party to it. However, upon her death, she could not give evidence of any first party propositions. The only way evidence could be led about her theoretical actions was by a claimant, here L, making third party propositions about how she would have acted. The judge felt this was the decisive issue indicating that the substantial chance approach would apply: see para 111.

Against this it was argued by leading counsel acting for W that a disappointed beneficiary such as L may not be put in a better position than the testatrix to whom the direct duty of care was owed by the solicitor under his retainer (paragraph 109). There was authority that in a claim brought against a solicitor by personal representatives standing in the shoes of the deceased, propositions about the deceased’s hypothetical actions would need to be proved on a balance of probabilities: see Otter v Church Adams Tatham & Co [1953] Ch 280. The same should apply to a White v Jones claim by a disappointed beneficiary.

The core tension, therefore, is between primacy or otherwise of the principle that the beneficiary’s rights should not be more extensive those enjoyed by the testator, and the apparent logic of how a deceased’s evidence must necessarily be established at trial. As the judge himself said, this point is likely to require resolution by an appellate Court in due course.

(1)Terrence Dowling (2)Anne Dowling (3)Anthony Dowling v Bennett Griffin (A Firm) [2013] EWHC 1995 (Ch) Kevin Prosser QC; 12/07/2013

Facts: The claimants (D), as members of a partnership, sued the defendant solicitors' firm (BG) for professional negligence.

D had employed a company, Alan Philips Associates Ltd (APAL), to provide architectural and design services. A dispute subsequently arose between D and APAL’s principal officer, P.  A claim was brought against D for unpaid fees in the name of “Alan Philips Associates”.

D retained BG to defend the claim and to counterclaim in respect of losses caused by P's alleged negligence. D told BG at the outset that they had a limited budget for the litigation.

In 2004, a successful application was made for APAL to replace Alan Philips Associates as the named claimant in the fees claim, and therefore also as defendant to the counterclaim.

Following a trial in 2005, the fees claim failed and D succeeded in their counterclaim. However, it was not until 2006 that P notified APAL's professional indemnity insurers of the counterclaim. Due to this late notification, and on the further grounds of non-disclosure and material misrepresentation, APAL’s insurers avoided. APAL then went into insolvent liquidation. As a result, D did not recover all of the money owed to them by APAL on the counterclaim judgment.

In light of this difficulty, D then brought a claim against their former solicitors BG, arguing that they had been serially negligent in representing D’s interests in the (successful) counterclaim. In particular, they argued that BG had been negligent in failing to ascertain whether APAL's insurance cover was in place, and in failing to warn D that there were strong reasons to think that APAL's insurers had not been notified of the counterclaim and the consequences of this. They also alleged, inter alia, that permitting the substitution of APAL as the defendant to the counterclaim had been negligent, and that P should have been joined as a defendant after APAL's substitution.

Decision:The claim failed. Kevin Prosser QC, sitting as a Deputy Judge of the Chancery Division, held:

(1) In determining whether BG had complied with their duty to exercise reasonable care and skill in advising, assisting and informing D, protecting their interests and carrying out their instructions, they were judged by the standard of a reasonably competent practitioner specialising in civil litigation, in particular where the existence and effectiveness of an insurance policy was fundamental to the success of the litigation.

(2) When considering that duty, it was relevant that D had explained to BG at the outset that they were working from a limited budget, and that as the proceedings progressed D's financial position deteriorated such that it became increasingly difficult for them to fund the litigation. Those facts were relevant because BG was necessarily obliged to work within those financial constraints.

(3) The allegations of negligence concerning the substitution of APAL (and regarding the non-joinder of P) lacked merit, for the contract upon which the counterclaim was based was quite clearly with the limited company APAL, and that company was therefore the proper defendant to the counterclaim (and claimant to the fees claim).

(4) On the facts, it was also not negligent for BG to have failed to notify D that there were strong reasons to believe that P had not notified his or APAL's insurers of the counterclaim: firstly, there were not "strong reasons to believe" that the insurers had not been notified, and secondly, D were well aware throughout the litigation of the continuing doubts as to whether the insurers had been notified, and of the fundamental importance of insurance cover. D did not need to be advised of what they already knew.

(5) None of the remaining allegations of negligence were made out. Furthermore none of allegations made by D, if they had been made out, had caused D's loss: the true and only cause was P's imprudent and improper conduct in failing to notify APAL's insurers of the counterclaim earlier.

Comment: The Claimants in this case were acting as litigants-in-person, therefore it is perhaps unwise to attempt to draw broad conclusions from this first instance decision that necessarily was factually specific. Nonetheless, it is of note that BG took no steps to identify APAL’s insurer or write to them unilaterally. Whilst in the specific case the reasons for the insurer’s avoidance of cover may not have been overcome if this step was taken, it may nonetheless be a prudent step where indemnity insurance cover is uncertain. In any event, the case is a reminder to solicitors to ensure that their clients are apprised of the dangers in enforcing judgment at the earliest opportunity.

Heather Mary Padden v Bevan Ashford (A Firm) [2013] EWCA Civ 824 Court of Appeal (Lord Dyson MR; Arden and McCombe LLJ); 16/07/2013

Facts: In 2003, the Claimant (C) discovered that her husband (H), a financial advisor, had been accused of misappropriating very substantial amounts of his clients’ funds. H's assets were frozen by an action by his employer.

H's solicitor (L) approached C to ask her to agree to divest herself of her interest in various joint and sole assets, to make funds available to settle intended claims by one of H’s clients, Ms Partridge. L told C that this was the only way for clients to be repaid and for H to avoid a criminal prosecution. C agreed orally, and L prepared draft documents to this effect. C’s agreement stemmed from her concern at H going to prison and the effect this would have on her children.

L also advised C to seek independent advice, albeit she was told that she would need to ignore the advice given. L sought that advice from the defendant (B). At a first meeting C was advised by a recently qualified solicitor at B, (S), not to proceed with the proposed transactions and that there was a big risk that H would still be prosecuted. However, C indicated that she still wished to proceed.

At a later meeting at B's offices, with a different solicitor, (M), C signed the relevant documents. M signed a charge document certifying that he had explained the obligations and implications of the agreement to C and she had freely consented to signing it.

In due course H was convicted and given a custodial sentence. C issued proceedings against B, which were initially dismissed on the basis of no case to answer; upon appeal, the Court of Appeal directed a re-trial: Padden v Bevan Ashford Solicitors [2012] 1 W.L.R. 1759.

At the re-trial the judge accepted C’s evidence that she had not been adequately advised of the risk that, even if she signed the agreement, H might still go to prison. The judge found that B had breached its duty in failing to evaluate properly the risk of H being prosecuted that C had sought to avoid. He accepted that if C had been properly advised she would not have signed the documents.

On appeal, B challenged the judge’s findings on causation, arguing that (i) he had failed to explain how he reached his conclusion that C would not have signed the documents if properly advised; (ii) he had misdirected himself in accepting C's evidence in respect of the meeting with M; (iii) his conclusions on causation were conclusions which "no reasonable judge could have come to" on the basis of the facts found by him, in particular given the finding that C had at an earlier stage been warned by S of the risk that H would be prosecuted in any event.

Decision on Appeal: The appeal was dismissed. McCombe LJ, with whom their Lordships agreed, held:

(1) Any competent lawyer ought to have advised that the completion of the proposed transactions would have been very unlikely to prevent a prosecution. C had given clear evidence in relation to causation that she would not have signed the documents if this advice had been provided to her.

(2) It was for the judge to assess the credibility of that evidence as it had appeared to him and to assess what C would have done, in the face of clear and obvious undue influence from H and L, if she had been given the advice to which she was entitled.

(3) There was nothing wrong with the judge having preferred C's evidence to M's regarding the second meeting. M had no recollection of the events and had been forced to rely on asserting what his “usual practice” would have been. In fact, given his breaches of duty in the advice he gave, his “usual practice” could hardly be said to have been followed in any event.

(4) The evidence regarding S’s earlier warnings to C had not undermined the judge’s later conclusion about the second meeting. At that first meeting, only the outlines of the intended transactions were to hand and it was not until later that the full documents emerged. Whilst C might have realised there was some risk H would still be prosecuted, the nature and degree of that risk had never been explained to her; in reality, it was almost inevitable that H would still be prosecuted no matter what C did with her assets. Had M advised C that prosecution, and custody, for H was highly unlikely to be avoided, this information "would have mattered hugely" to C. The judge’s conclusion was that she would not have signed the documents would not be disturbed.

Comment: There are perhaps two key messages from this case.

The first is that appeals based purely on challenges to a first instance judge’s assessment of the evidence before him are commonly very difficult. The Court of Appeal pointed out that it was precisely the judge’s function to weigh and balance the credibility of what C had told him, and he did just that. Ultimately the appeal failed because the Court of Appeal could not be satisfied that B had attained the onerous standard of showing that no reasonable judge would have made the findings that the judge, here HHJ Vosper QC, had made.

The second point is to reiterate the cardinal importance of proper record keeping by professionals. In the absence of a proper attendance note of the second meeting, M was forced to make the familiar refrain that he believed he would have provided advice in accordance with his normal practice. The Courts have long deprecated the risks of “happy hindsight” in such an exercise, and there is no substitute for a full and careful note of a meeting or of advice given; see for example Goody v Baring [1956] 1 W.L.R. 448.

Samuels Solicitors, professional negligence specialists based in Devon, acted for the Claimant Mrs Padden.

Petrocapital Resources Plc v Morrison and Foerster (UK) LLP [2013] EWHC 2682 (Ch) Mark Cawson QC

Facts: The claimant (P) claimed professional negligence against the defendant solicitors firm (M).

P had instructed M to draft an agreement for the acquisition by a company (J) of 95.7 per cent of P's issued share capital. Under the agreement, two of P's shareholders (S), who held convertible loan notes issued by P, irrevocably agreed that, in consideration of P agreeing to redeem the balance of their convertible notes for the sum of £20,000 within seven days of raising new capital, or in any event within 12 months of the date of the agreement, they would not convert their convertible notes. In the event, P did not pay S £20,000 each within 12 months, namely by July 31, 2009.

In May 2010, M advised P that S’s undertakings were no longer irrevocable, and that it was in P's best interests to pay S a total sum of £1.45 million in satisfaction of their convertible notes. P entered into a settlement with S on the basis of that advice.

At trial, P argued that M had acted in breach of retainer and negligently in (i) giving the advice it did in May 2010; (ii) drafting the undertakings in such a way that they failed to accord with P's subjective intention that the undertakings should remain irrevocable in the circumstances that actually occurred; (iii) failing to advise P's board that £20,000 should be paid to each of S before 31 July 2009 in order to prevent them from exercising their conversion rights thereafter upon the undertakings ceasing to apply.

Decision: The claim failed. Mark Cawson QC, sitting as a Deputy Judge of the Chancery Division, held:

(1) The issue was whether M's advice could properly have been given by a competent practitioner in the area of law in which it held itself out as having expertise, without falling below the standard reasonably expected of it. On a literal reading of the undertakings and without contextualising them, their wording clearly referred to "irrevocable undertakings" and to S "irrevocably agreeing". However, having regard to the background circumstances, there were various factors that pointed to a different intention than one based simply upon a literal reading of the undertakings: (i) if the intention was for a truly irrecoverable undertaking, the agreement could simply have provided for J to purchase the convertible notes and S's rights to convert thereunder. So long as the convertible notes remained alive, albeit subject to S's undertakings in respect of them, P remained subject to the obligations under the notes which were designed to preserve the value of the relevant shares on conversion; (b) the fact that P's obligation under the undertakings to redeem the balance of the loan notes was expressed to be "irrevocable" made it highly questionable whether the word "irrevocable" as used within the context of the undertakings added anything to S and P's reciprocal obligations; (c) the undertakings were expressed to be "in consideration of" P agreeing to redeem the balance of the convertible notes "in any event within 12 months"; that pointed to an intention that if payment was not effected within 12 months, the undertaking should no longer be binding. Accordingly, there was at the relevant time a highly tenable argument that the undertakings fell to be construed in the manner supported by M. Time was of the essence.

(2) P's second argument was not made out because the relevant construction of the undertakings accorded with the parties' true subjective intention, and particularly with P's intention on entering the agreement and the undertakings. Further support for P's true intention was provided by the way in which it dealt with the convertible notes in its financial statements. Accordingly, from and after 31 July 2009, it was open to S to elect to terminate the undertakings on the basis of the repudiatory breach occasioned by P's non-payment of the £20,000 sums by July 31, 2009, and thereby to procure their release from any further obligation to perform their own undertakings not to exercise their conversion rights. It was never actually intended by any party that the undertakings should be truly irrevocable in that they would continue to be irrevocable even if P failed to pay S on time.

(3) M was not under a duty or obligation to advise P on the desirability of paying £20,000 to S prior to 31 July 2009. J and those behind it who were to take control of P had their own legal representation, and so M was entitled to assume that the appropriate advice would be given to those who were to control P. Further, there was an adverse interest and conflict as between the interests of those who previously controlled P, and those who were to control it following J's acquisition; in those circumstances, M was entitled to leave it to those acting for J to give P the appropriate advice.

Willis v MRJ Rundell & Associates Ltd [2013] EWHC 2923 (TCC) Coulson J, 25 September 2013

Facts: The court considered the costs budgets of the claimant (W) and the first defendant (R) in a claim for professional negligence.

The claim related to building works carried out at W's property by R who were construction professionals. The total claim was for £1.1 million. Each side produced a costs budget at a case management conference in December 2012. At that time, W's costs budget was £821,000 and R's costs budget was £616,000. Following mediation, the parties applied for an adjournment of the trial which had been due to start in October 2013. The judge ordered a costs management hearing due to his concerns as to the high figures stated. Both costs budgets had since risen. W's was now £897,369 and R's was £703,130. R submitted that W's costs were disproportionate. 

Decision: Coulson J declined to approve the costs budget of either party, holding:

(1) CPR PD 51G applied to the instant case. The total amount of the costs in the costs budgets was £1.6 million for a claim worth £1.1 million. It would cost more to fight the claim than W would ever recover. On that basis alone, the costs budgets were disproportionate and unreasonable. Even taking into account that professional negligence claims could involve costs that other commercial disputes did not, the costs budget figures were not proportionate or reasonable.

(2) The costs already incurred, such as expert's costs, were disproportionate and unreasonable. It was unsatisfactory that some items in W's budget were said to be both incurred and estimated, without a breakdown of either. It was not appropriate to include a large lump sum for contingent costs and settlement costs without a breakdown by reference to each component part. The purpose of each amount needed to be specified and a calculation provided.

(3) The parties’ criticisms were limited to the overall figures claimed so that there were no figures which the court could use for a reduced, but approved, costs budget. It was not appropriate for the court to impose its own figures without notice and without any supporting material. In those circumstances, neither party's costs budget was approved. The court declined to make a costs management order.

(4) (Obiter) Although some were of the view that the absence of an approved costs budget meant that that party would recover no costs at all, such a draconian approach was not in accordance with the letter and spirit of the new costs rules or PD 51G.

Comment: Whilst this case concerned the TCC’s cost budgeting pilot, it underlines the importance and seriousness with which the courts are attaching to their cost budgeting exercise. The impact for the parties in this case is less severe than for the clamant in Mitchell v News Group Newspapers Ltd [2013] EWHC 2179 (QB), where the Claimant’s cost recovery is to be limited to the court fees due to a failure to file Precedent H on time, but Coulson J nonetheless was provided with an occasion to review the parties’ costs and provide an indication that he considered a final recovery costs recovery of circa £450,000 may well be appropriate. This indication may well impact on the parties’ apparently ongoing negotiations.

It is also notable that the lack of sufficient detail in the Precedent H stopped the judge from imposing an alternative budget. The failure to approve a lower costs budget in fact robs the teeth from the judge’s harsh words towards the parties. Under rule 3.18 CPR, where a costs management order has been made, when assessing costs on the standard basis the court will not depart from the last approved budget unless satisfied that there is good reason to do so. In this case, budgets had been approved in December 2012. In a case where there has been no approved budget, it appears that a costs assessment (on the standard basis) would proceed on the same footing as for cases commenced prior to 1 April 2013, ie the costs judge need have no regard to the parties’ budgets.

Accordingly, parties may take a tactical (if cynical) decision to provide few details as to the calculations contained within their costs budgets if they wish to avoid a risk of having a lower sum approved by the court.


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