Law Society v Sephton & Company (A Firm)

JurisdictionEngland & Wales
JudgeLord Justice Neuberger,Lord Justice Maurice Kay,Lord Justice Carnwath
Judgment Date13 December 2004
Neutral Citation[2004] EWCA Civ 1627
Docket NumberCase No: A3/2004/0372/CHANF
CourtCourt of Appeal (Civil Division)
Date13 December 2004
Between:
The Law Society
Appellant
and
(1) Sephton & Co
(2) Tania Lindsey Mascord
(3) James Arthur Sephton
(4) Philip Leslie Houston
(5) Alexander William Gordon Cunningham
Respondents

[2004] EWCA Civ 1627

Before:

Lord Justice Carnwath

Lord Justice Neuberger and

Lord Justice Maurice Kay

Case No: A3/2004/0372/CHANF

HC020C01293

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

(Michael Briggs QC sitting as a Deputy Judge)

Royal Courts of Justice

Strand, London, WC2A 2LL

Timothy Dutton Esq, QC & Miss Rosalind Phelps

(instructed by Wright Son & Pepper) for the Law Society Michael Pooles Esq, QC, & Derek Holwill Esq

(instructed by Barlow Lyde & Gilbert) for the Respondents

Lord Justice Neuberger

Introductory

1

This is an appeal against a decision of Mr Michael Briggs QC, sitting as a Deputy Judge of the High Court, who effectively dismissed, on the ground that they were time-barred, claims brought by the Law Society ("the Society"). The claims were based on allegations of negligence and of fraud against a firm of accountants, Sephton & Co ("Sephtons", as I shall refer to the defendants), who had provided unqualified annual reports on a solicitor's practice, Payne & Co, carried on by a Mr Andrew Payne between 1989 and 1995. In fact, Mr Payne had been misappropriating his clients' monies, and, as a result of his being permitted to continue in practice he misappropriated further monies. These monies were eventually repaid to the clients concerned out of the Solicitors' Compensation Fund ("the Fund"), of which the Society is trustee.

2

The three preliminary issues before the judge were effectively as follows:

i) Did all or any of the causes of action in negligence which the Society alleged against Sephtons first accrue more than six years before the action was brought, in light of the provisions of s2 of the Limitation Act 1980 ("the 1980 Act") ?

ii) In light of the provisions of s32 of the 1980 Act, did all or any of the Society's causes of action in fraud against Sephtons first accrue more than six years before the action was brought?

iii) If and to the extent that the Society's claims against Sephtons were time-barred, were Sephtons estopped from relying on the provisions of the 1980 Act?

3

The judge decided all three issues against the Society, with the result that all its claims were time-barred, and consequently he dismissed the claims in their entirety.

4

I shall first set out the basic facts, which are all that is needed to deal with the first issue. I shall then turn to the further facts which are relevant to the second and third issues. I shall then briefly deal with the law relating to the functions of the Society and the Fund, and will then turn to each of the three issues which the judge decided.

The basic facts

5

Mr Payne was admitted as a solicitor in 1977 and started practising on his own under the style of Payne & Co, from 1986 in Knowle, West Midlands. Pursuant to s34 of the Solicitors' Act 1974 ("the 1974 Act") he was obliged to deliver to the Society a report signed by an accountant, containing the information prescribed by the Accountant's Report Rules 1986 and 1991, in respect of each period of 12 months ending on 31 st October. Mr Payne retained Sephtons for that purpose, and, for each of the years ending 31 st October 1988–1995 inclusive, Mr Payne delivered to the Society an annual report (a "Report") signed by a Mr Mascord, a partner in Sephtons. The first Report was dated 5 th January 1989, and the last 8 th November 1995.

6

There is no need to describe the contents of the Reports in any detail. It suffices to say that each of them recorded that Mr Mascord had examined all the relevant documents of Payne & Co, and was satisfied that Mr Payne had substantially complied with Solicitors' Accounts Rules, and that the monies in his client accounts were consistent with what was in the relevant ledger accounts.

7

As Sephtons now admit, none of the matters certified in the Reports was true: Mr Mascord had not examined Mr Payne's documents, Mr Payne was plainly in breach of the Solicitors' Accounts Rules, and there was a very large, and increasing client account shortfall throughout the six year period, owing to Mr Payne's persistent misappropriations of his clients' funds.

8

Although not admitted by Sephtons, the Society's case is that, between January 1990 and March 1996, Mr Payne misappropriated a total of well over £750,000 from his client account. Having been struck off the roll in February 1997, Mr Payne was convicted in July 1998 of theft, forgery and procuring a valuable security by deception, and he was sentenced to five years in prison.

9

Although it is not admitted on the pleadings, it is right, as the judge said, for the purpose of the preliminary issues, to assume that the Society relied upon the Reports, and the representations in them, when deciding not to exercise any of its powers to investigate, or to intervene in, the practice of Mr Payne, until 1996.

10

The first complaint that the Society received about Mr Payne was from a Mr Bradley in a letter dated 31 st August 1995 to the Solicitors' Complaints Bureau ("the Bureau"). Mr Bradley explained that Mr Payne had acted for him in connection with a claim which had resulted in an award of £43,000, none of which Mr Bradley had received. On contacting Mr Payne, the Bureau was told that the payment was being held up while he drew up a discretionary deed of trust for which he had instructions from Mr Bradley. At that time, the Society considered that Mr Payne was guilty of no more than unreasonable delay in complying with instructions, and, by March 1996, it appears that he had told the Bureau that Mr Bradley had been paid. However, towards the end of April 1996, Mr Bradley again contacted the Bureau to say that he had not been paid, whereupon the Bureau asked Mr Payne for an explanation, which was not forthcoming. In the judge's words, "events then took a commendably rapid course". Mr James, the Chief Investigation Accountant to the Society, caused an inspection of Mr Payne's books to take place, which was carried out on 14 th May 1996. Four days later, he produced a report which showed a deplorable state of affairs, including a minimum deficiency of £763, 956 of which Mr Payne was able to pay only £3,653 from office account. Mr James drew attention to the unqualified nature of Mr Mascord's Reports. He also reported that there had been a misappropriation of £50,000 as long ago as June 1991, and misuse of another £112,000 as late as December 1995.

11

As a result of Mr James's report, the Society immediately wrote to Mr Mascord seeking an explanation and intervened in Mr Payne's practice on 20 th May 1996. This intervention effectively involved taking over Mr Payne's practice including all the accounts and papers. Unhappily Mr Mascord committed suicide.

12

On receipt of Mr James's report, it was clear to the Society that claims would be made against the Fund by former clients of Mr Payne, whose monies he had misappropriated. The first such claim was made on 8 th July 1996. Accordingly, in August 1996, the Society instructed solicitors, Wright Son & Pepper ("Wrights") in connection with possible proceedings on its behalf, as trustee of the Fund against Sephtons in respect of losses to the Fund, arising from the affairs of Payne & Co. Eventually, on 16 th May 2002, proceedings based on the negligence of Mr Mascord were issued. By those proceedings, the Society sought damages from Sephtons (or, to be more precise, from Mrs Mascord, the widow and personal representative of Mr Mascord, and the former partners of Mr Mascord). The essence of the Society's pleaded case was that it was entitled to recover from Sephtons all sums which had been paid out of the Fund to former clients of Payne & Co to compensate them for the sums they had lost through Mr Payne's misappropriations, starting with the first misappropriation following the receipt of the first of the negligent Reports to the Society.

13

Subsequently, on 2 nd December 2002, a second set of proceedings was issued by the Society seeking substantially the same relief, but based on the alleged fraud of Mr Mascord, as opposed to the negligence alleged in the first proceedings.

14

Because the defendants alleged that both claims were time-barred, the Master ordered a determination of the preliminary issues which came before Mr Briggs QC. He was understandably concerned about the determination of limitation points by way of a preliminary issue, especially in relation to a disputed allegation of fraud. However, given that the parties both agreed that it was appropriate, indeed desirable, to proceed with the preliminary issues, and, and as he felt able to do so, he determined them.

15

The facts set out above are sufficient to deal with the first issue, namely when the Society's causes of action in negligence accrued, but it is now necessary to set out additional facts in order to deal with the other two issues, namely, when time began to run in relation to the causes of action in fraud, and whether the defendants are estopped from relying on the 1980 Act.

Events between July 1996 and December 2002

16

As mentioned, Mr James's report of May 1996 to the Bureau drew attention both to the deficiency of over £750,000 in Payne & Co's client accounts and to the unqualified nature of the Reports prepared by Mr Mascord between 1989 and 1995. Mr Iain Miller was the partner at Wrights acting for the Society. He formed the view, when he was instructed in August 1996, that, to quote the judge, "a comparison between Mr Mascord's unqualified...

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