Law Society v KPMG Peat Marwick and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Ward,Lord Justice Clarke |
| Judgment Date | 29 June 2000 |
| Judgment citation (vLex) | [2000] EWCA Civ J0629-5 |
| Docket Number | Case No: A3/2000/0175 |
| Court | Court of Appeal (Civil Division) |
| Date | 29 June 2000 |
[2000] EWCA Civ J0629-5
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE VICE-CHANCELLOR
Royal Courts of Justice
Strand,
London, WC2A 2LL
The Lord Chief Justice Of England And Wales
(the Lord Woolf Of Barnes)
Lord Justice Ward and
Lord Justice Clarke
Case No: A3/2000/0175
Mr Gordon Pollock QC and Mr Rhodri Davies QC (instructed by Herbert Smith, London EC2A 2HS for the Claimant/Respondent)
Lord Goldsmith QC and Mr Matthew Collings (instructed by Messrs Wright Son & Pepper, London WC1R 5JF for the Defendants/Appellants)
LORD WOOLF CJ :
This is an appeal from a judgment of the Vice-Chancellor, Sir Richard Scott, given on 29 October 1999. The Vice-Chancellor decided a preliminary issue in favour of the Law Society in their action for damages against KPMG Peat Marwick ("KPMG") and two partners of that firm, Stephen Ingleby Cawley and Neil Spencer Chapman. The Vice-Chancellor based his decision on his conclusion that accountants who report on the accounts of solicitors owe to the Law Society a duty of care when preparing their reports.
Under the Solicitors Act 1974, the Law Society and its Council are responsible for the regulation of the solicitors' profession. The Act requires the Law Society to maintain and administer the "Compensation Fund". The purposes for which grants are made from the Compensation Fund include grants to relieve loss or hardship suffered in consequence of dishonesty on the part of a solicitor, in connection with that solicitor's practice. (Section 36 of the Act)
In general, section 34 of the Act requires every solicitor to deliver to the Law Society a report signed by an accountant unless the Council is satisfied that it is unnecessary for him to do so. The report has to contain the information prescribed by rules made by the Council under this section. The relevant rules were the Accountants' Report Rules 1986. The rules also prescribe the information the report is to include, the form of the report and the qualifications to be held by a reporting accountant.
In addition the accountant is required by the Rules to indicate whether he is satisfied that during the period to which the report relates, the solicitor has complied with the Rules. The Law Society contends that if a solicitor complies with the Rules it should then be impossible for him to confuse his clients' money with his own, or inadvertently to make any improper payments, which could lead to claims being made on the Compensation Fund.
If an accountant's report reveals non-compliance with the provisions of the Rules, this provides the Law Society with an opportunity of exercising its powers to protect the public, clients of the solicitor and the Compensation Fund. The powers include a discretion to intervene in a solicitor's practice where the Council of the Law Society has reason to suspect dishonesty on the part of the solicitor in connection with his practice. (See paragraph 1(1)(a) of Part 1 of Schedule 1 to the Act. It is relevant to note that, while it is the Council which "suspects", Part 1 of the Schedule is headed "Circumstances in which Society may Intervene"). Intervention would prevent any further dishonesty by a solicitor.
The preliminary issue arose in proceedings relating to the collapse of a firm of solicitors called Durnford Ford. KPMG were retained by Durnford Ford to prepare their annual reports. The report for the year ending 31 May 1989 was prepared by Mr Cawley and the report for the year ending 31 May 1990 was prepared by Mr Chapman. It is alleged the reports should have been qualified more strongly. They were sent by the defendants to the Law Society. The fees of KPMG were paid by Durnford Ford.
On 6 May 1992, the Law Society commenced an investigation into Durnford Ford. On 31 May 1992, the firm stopped practice. It was then found that Mr Graham Durnford Ford, the senior partner, who was responsible for the firm's probate department, together with another partner Mr Digby Bew, had defrauded a number of the firm's clients. As a result some 300 clients of the firm made claims on the Compensation Fund and substantial payments amounting to some £8.5 million were paid out of the Fund.
As trustee of the Compensation Fund, on 4 August 1995, the Law Society commenced proceedings against the defendants. The Law Society alleges that:
(i) KPMG, when preparing the accountant's reports for the years 1989 and 1990, were negligent and acted in breach of the duty of care which they owed to the Law Society when examining the books and accounts and other records of Durnford Ford for the years 1989 and 1990; and
(ii) if KPMG had qualified the report as they should have done, the Law Society would have exercised its statutory power of intervention and thus put to an end the dishonesty of Mr Ford and Bew which would have reduced the amount which was paid out by the Compensation Fund. The Law Society calculates that about £1.7 million was misappropriated in the period between 1989 and 1990 and that about £5.7 million was misappropriated after the 1990 report. It is therefore alleged that, in total, the defendants' negligence led to payments of about £7.4 million being made out of the Compensation Fund to defrauded clients. Similar proceedings were subsequently commenced on 29 May 1998 in respect of the 1991 report. Mr Ford and Mr Bew were prosecuted and convicted of a number of counts of theft arising out of the misappropriations.
In their defence the defendants deny that they were negligent. They dispute that there is any causative connection between the alleged negligence and payments made out of the Compensation Fund. They also deny that they owe any duty of care to the Law Society in its capacity as trustee of the Compensation Fund. This last allegation resulted in Mr Justice Carnwath on 16 November 1998 making an order in the 1995 action that there should be trial of the preliminary issue, namely :
"Whether the Defendants or some or any of them owed to the Plaintiff the duty of care alleged at paragraph 11 of the amended Statement of Claim in the capacity in which the Plaintiff sues as stated in paragraph 4 thereof and in respect of the damages claimed therein or whether on the primary facts pleaded at paragraph 16 to 18 thereof the Defendants or some or any of them owed a duty of care to the Plaintiff in such capacity and capable of giving rise to a liability in respect of such damages."
The parties subsequently agreed that the determination of the preliminary issue in the 1995 action would be binding in the 1998 action as well.
In his judgment, which is now reported [2000] 1 All ER p.515 the Vice-Chancellor found in favour of the Law Society and granted the Law Society a declaration that :
"The second defendant owed to the claimant in respect of the Accountant's Report dated 24 November 1989 the duty of care alleged at paragraph 11 of the Amended Statement of Claim in the capacity which the Claimant sues as stated in paragraph 4 thereof and in respect of the damages claimed therein and the third defendant owed to the claimant in respect of the Accountant's Report dated 29 November 1990 the duty of care alleged in paragraph 11 of the Amended Statement of Claim in the capacity which the claimant sues as stated in paragraph 4 thereof and in respect of the damages claimed therein."
As his judgment is reported, I will summarise the detailed and careful reasoning of the Vice-Chancellor. He applied the three criteria which must be met for there to be a duty of care identified by Lord Bridge in Caparo Plc v Dickman [1990] 2 AC 605 at p.617–619, namely :
a) reasonable foreseeability of damage;
b) a relationship of sufficient "proximity" between the party owing the duty and the party to whom it is owed; and
c) the imposition of the duty of care contended for would be just and reasonable in all the circumstances.
The Vice-Chancellor also referred to the passage in the speech of Lord Oliver in Caparo. Based upon the decision of the House of Lords in Hedley Byrne v Heller & Partners [1964] AC 465, Lord Oliver listed the circumstances which should exist in order to establish the necessary relationship of proximity between the person claiming to be owed the duty and the adviser:
"(1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time the advice is given; (2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose; (3) it is known, either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry, and (4) it is so acted upon by the advisee to his detriment."
The Vice-Chancellor came to the conclusion that each of Lord Bridge's and Lord Oliver's requirements were fulfilled "in the present case —at least for the purposes of deciding this preliminary issue". The Vice-Chancellor, however, recognised that "the chain of causation linking the want of due care to the claims on the Compensation Fund may have been broken". Whether it had been broken would remain to be determined. As to the requirement that the imposition of a duty of care must be fair, just and reasonable, the Vice-Chancellor accepted that there had to be an appropriate control mechanism limiting the recoverable economic damage. On this point he...
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