Law Society v Sephton & Company (A Firm)

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLORD HOFFMANN,LORD SCOTT OF FOSCOTE,LORD RODGER OF EARLSFERRY,LORD WALKER OF GESTINGTHORPE,LORD MANCE
Judgment Date10 May 2006
Neutral Citation[2006] UKHL 22

[2006] UKHL 22

HOUSE OF LORDS

Appellate Committee

Lord Hoffmann

Lord Scott of Foscote

Lord Rodger of Earlsferry

Lord Walker of Gestingthorpe

Lord Mance

Law Society
(Original Respondents and Cross-appellants)
and
Sephton & Co (a firm)
(Original Appellants and Crossrespondents)

and another and others

(Original Appellants and Cross-respondents)

Original Appellants:

Michael Pooles QC

Derek Holwill

(Instructed by Barlow Lyde & Gilbert)

Original Respondents:

Timothy Dutton QC

Rosalind Phelps

(Instructed by Wright Son & Pepper)

LORD HOFFMANN

My Lords,

1

Over a period of about six years ending in March 1996, Mr Andrew Payne, a solicitor practising near Solihull, misappropriated about £750,000 held in his client account. In each of the years 1988-1995 he delivered to the Law Society an accountant's report in which Mr Ian Mascord, a partner in the firm of Sephton & Co of Solihull, certified that he had examined Mr Payne's books and accounts and was satisfied that he had complied with the Solicitors' Accounts Rules 1991. Mr Mascord was negligent, if not worse, in signing these reports since he could not have made a proper examination without discovering the misappropriations.

2

The Law Society, which has broad supervisory and disciplinary powers over the profession, relied upon the reports by refraining from making the investigation it would have made if the reports had not been delivered or had indicated that something was amiss. Mr Payne had staved off discovery by taking money from one client to pay off another ("teeming and lading") but in April 1996 a client complained to the Law Society of delay in payment and on 17 May 1996 the Society's investigating accountant discovered the deficiency. On 20 May 1996 the Society exercised its statutory powers of intervention; Mr Payne was afterwards struck off the roll of solicitors and went to prison.

3

By section 36 of the Solicitors Act 1974 the Society is required to maintain and administer a Compensation Fund for the purpose of making grants for, among other things, the relief of loss caused by dishonesty on the part of a solicitor. The Society has power to make rules about the Fund and the Solicitors' Compensation Fund Rules 1995 contain "guidelines" which explain the circumstances in which grants will ordinarily be made. General principle (a) says that the "basic object of the Fund is to replace 'client's money' misappropriated by a solicitor'. General principle (b) emphasises that grants are wholly at the discretion of the Council and that "no person has a right to a grant enforceable at law" but that the intention of the Council is to "seek to administer the Fund in an even-handed and consistent manner". Claims must be made in a form prescribed by the Society (Rule 5) and delivered to the Society within six months after the loss has come to the knowledge of the applicant (Rule 6).

4

The first claim by a former client of Mr Payne was made on 8 July 1996 and over the following months more came in. The claims fell squarely within the object of the Fund and were duly paid. The first payment was made in October 1996 and by 8 January 2003 the Fund had paid a total of £1,245,764.11 (including interest) in respect of claims arising out of Mr Payne's misappropriations.

5

On 8 October 1996 the Society wrote to Sephton & Co saying that they proposed to hold the firm liable for payments which had to be made out of the Fund and which they said were attributable to the negligent reports signed by Mr Mascord. Matters proceeded slowly, not least because the whole question of whether an accountant who gives such a report owes a duty of care to the Law Society was about to be litigated in other proceedings. The Society and Sephton & Co's insurers agreed to await the outcome. In 1999 Sir Richard Scott V-C ruled in favour of the Law Society and on 29 June 2000 an appeal to the Court of Appeal was dismissed: see Law Society v KPMG Peat Marwick [2000] 1 WLR 1921.

6

Negotiations continued but the claim form was not issued until 16 May 2002. On 20 May 2002 Sephton & Co's solicitors wrote to say that they had been advised that that the limitation period had expired "long ago". The defence filed on 24 June 2002 pleaded that the claims were statute-barred. The Law Society denied that the limitation period had expired and pleaded in the alternative that Sephton & Co were estopped from relying upon the Limitation Act by representations made in the course of correspondence. Both questions were ordered to be tried as preliminary issues.

7

The normal period of limitation prescribed by section 2 of the Limitation Act 1980 for an action founded on tort is six years from the date on which the cause of action accrued. Since a cause of action may accrue without the knowledge of the injured party ( Cartledge v Jopling [1963] AC 758) the six year period may expire before he is able to bring proceedings. In actions for negligence in which the cause of action accrues before the potential claimant knows the relevant facts, section 14A therefore prescribes an additional period of three years from the date on which he acquires such knowledge. But this provision is of no use to the Law Society because, if the cause of action accrued before the commencement of the six year period, ie before 16 May 1996, the Society knew all the relevant facts very shortly thereafter; certainly well before the commencement of the three year period on 16 May 1999. The Society can therefore bring the proceedings only if the cause of action accrued after 16 May 1996.

8

The preliminary issues were tried by Mr Michael Briggs QC, sitting as an additional judge of the Chancery Division [2004] EWHC 544 (Ch). He ruled against the Society on both points, holding that the cause of action had accrued before 16 May 1996 and that Sephton & Co were not estopped from relying upon a limitation defence. The Court of Appeal agreed with the judge on the second point but, by a majority (Carnwath and Maurice Kay LJJ, Neuberger LJ dissenting) reversed his decision on the first point [2004] EWCA Civ 1627; [2005] QB 1013. Sephton & Co appeal to your Lordships' House on the limitation issue and the Law Society cross-appeal on the estoppel issue.

9

Damage is an essential element in a cause of action for negligence. Mr Mascord was negligent when he signed his reports at various dates between 1988 and 1995 but the Law Society had no cause of action until it suffered damage in consequence of his negligence. So the critical question is when the damage happened. Sephton & Co say that the Society suffered damage whenever Mr Payne misappropriated a client's money after a negligent report had been delivered. The misappropriation gave the client a right to make a claim on the Fund and liability to such a claim was damage. The Law Society says that it suffered damage only when a claim was made. The misappropriation might have been repaid, either out of Mr Payne's own money or, more likely, by some teeming and lading. The client might not have made a claim. All that could be said was that, once there had been a misappropriation, it was likely that there would be a claim. But the Law Society could not have commenced proceedings on the basis that claims were likely.

10

There is, I am afraid, a good deal of recent authority on the point, which was considered at some length by Neuberger LJ in his thoughtful dissenting judgment and, slightly more summarily, by the judge and the majority in the Court of Appeal. As far back as Bell v Peter Browne & Co [1990] 2 QB 495, 502B, Nicholls LJ said that "the question of damage and the limitation period in negligence claims has been a troublesome one for some years" and later cases show that the question has not ceased to trouble. An examination of a number of cases, including a recent decision of your Lordships' House, is unavoidable.

11

It is not necessary to go back further than the decision of the Court of Appeal in Forster v Outred & Co [1982] 1 WLR 86. On 8 February 1973 Mrs Forster signed a mortgage by which she charged her farm to secure money which her son was borrowing to buy an hotel. The business was a failure and on 21 January 1975 Mrs Forster was called upon to pay about £70,000, which she paid on 29 August 1975. In March 1980 she issued a writ against the solicitors who had advised her in connection with the mortgage, alleging negligence in not explaining the transaction. The question was whether the action was statute barred and that depended upon whether she suffered damage when she executed the deed (more than six years before the writ) or when she was called upon to pay.

12

Stephenson LJ recorded (at p 93) the submission of Mr Stuart-Smith QC, for the defendants:

"When she signed the mortgage deed she suffered actual damage. By entering into a burdensome bond or contract or mortgage she sustained immediate economic loss; her valuable freehold became encumbered with a charge and its value to her was diminished because she had merely the equity of redemption, varying in value at the whim of her son's creditors."

13

Later (at p 94), he recorded Mr Stuart-Smith's submission on the meaning of the "actual damage" needed to complete a cause of action in negligence:

"Any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases."

14

Stephenson LJ said (at p 98) that he accepted Mr Stuart-Smith's statement of the law. The ambiguity in these passages (in an unreserved judgment in an interlocutory appeal) arises from the inclusion of the words "it...

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