Paragon Finance Plc (formerly National Home Loans Corpn Plc) v Freshfields (A Firm)

JurisdictionEngland & Wales
JudgeTHE LORD CHIEF JUSTICE
Judgment Date11 March 1999
Judgment citation (vLex)[1999] EWCA Civ J0311-5
Docket NumberQBENI 98/1458/1
CourtCourt of Appeal (Civil Division)
Date11 March 1999
Between:
(1) Paragon Finance Plc (formerly known as National Home Loans Corporation Plc)
(2) Collateralised Mortgage Securities (No 4) Plc
(3) Collateralised Mortgage Securities (No 5) Plc
(4) Collateralised Mortgage Securities (No 6) Plc
(5) Collateralised Mortgage Securities (No 7) Plc
(6) Collateralised Mortgage Securities (No 8) Plc
(7) Collateralised Mortgage Securities (No 9) Plc
Plaintiffs/Appellants
and
Freshfields (a firm)
Defendant/Respondent

[1999] EWCA Civ J0311-5

Before:

The Lord Chief Justice of England and Wales

(Lord Bingham of Cornhill)

Lord Justice Brooke

and

Lord Justice Chadwick

QBENI 98/1458/1

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

(MR JUSTICE BUCKLEY)

Royal Courts of Justice

The Strand

London

APPEARANCES:

MR STEWART BOYD QC and MR CHARLES HOLLANDER (instructed by Messrs Slaughter & May, London EC2V 5DB) appeared on behalf of THE APPELLANTS

MR SIMON BROWNE-WILKINSON QC and MR BANKIM THANKI (instructed by Messrs Barlow Lyde & Gilbert, London EC3A 7NJ) appeared on behalf of THE RESPONDENT

1

Thursday 11 March 1999

THE LORD CHIEF JUSTICE
2

The plaintiffs in these proceedings appeal against an interlocutory decision of Buckley J made on 6 November 1998. The appeal raises a question of some importance and novelty: if a client sues his former solicitors claiming damages for alleged negligence in the handling of a commercial transaction between the client and a third party, does the client's waiver of legal professional privilege (implied from the bringing of the proceedings against the former solicitors) apply not only to confidential communications between the client and those former solicitors relating to that transaction but also to confidential communications between the client and different solicitors whom he later instructed to pursue and settle his claim against the third party? The judge answered that question affirmatively. The plaintiffs, to whom the decision was adverse, say that he was wrong to do so.

3

The plaintiffs, of whom there are seven, claim damages against Freshfields, who formerly acted as their solicitors. The relevant facts may be conveniently taken from the defendants' skeleton argument. The first plaintiff carried on business as a substantial centralised mortgage lender. In order to raise capital it entered into transactions whereby pools of its mortgages were securitised. The transactions were complex, each involving several thousand mortgages and raising several million pounds. For the purpose of each transaction, a special purpose vehicle company was set up (named CMS Nos. 1 to 9) each of them independent of the first plaintiff. A pool of mortgages was selected and sold to each CMS company pursuant to a mortgage sale agreement. The CMS company raised the purchase price by issuing loan notes which were purchased by investors. Each transaction was preceded by an offering circular to potential investors. Freshfields acted as solicitors to the first plaintiffs and the relevant CMS companies in respect of the securitisation transactions.

4

In order to enable the loan notes to obtain an AAA security rating, in respect of transactions 4–9 inclusive, a pool insurance policy was issued by either Sun Alliance or Eagle Star. By those policies the insurers agreed to indemnify each CMS company against loss arising from default by the mortgagor if the property in question proved to be inadequate security for the monies advanced. Each pool policy provided, as a condition precedent to the insurer's liability, that the mortgages had been made in accordance with the first plaintiff's lending guidelines referred to in the pool policies.

5

In the early 1990's there were many defaults by mortgagors on the mortgages in question and, as a result of a fall in the property market, the CMS companies sustained heavy losses. They looked to insurers to indemnify them. Insurers declined to indemnify the CMS companies in respect of a significant number of securitised mortgages. One of the grounds on which they refused to pay was that the lending guidelines had not been complied with. In particular, insurers alleged in the case of some rejected claims that the deferred interest loan-to-value ratio lending guideline referred to in the pool policies had not been complied with when the mortgages were made.

6

Freshfields acted as the plaintiffs' advisers until about July 1993, and initially advised on the plaintiffs' claims against the insurers. Then, however, recognising the possibility of conflict, they withdrew and Slaughter and May thereafter acted for the plaintiffs. In July 1995 the plaintiffs began proceedings against Sun Alliance, and about a year later the plaintiffs settled their claims with both Sun Alliance and Eagle Star. Under these settlements the CMS companies, in consideration of a large payment, gave up their rights to make any claim pursuant to the pool policies. As part of their claim against Freshfields, the plaintiffs claim the costs of both the negotiations and the proceedings. The plaintiffs claim that the restructuring and refinancing of the CMS companies was a necessary consequence of the settlements.

7

The plaintiffs complain that Freshfields were negligent, in particular in incorporating into the pool policies lending guidelines which were stricter than the first plaintiff's actual guidelines, thereby affording the insurers a ground of non-payment when these stricter guidelines were not complied with. The plaintiffs claim as damages the shortfall which they claim to have suffered in recovery under the pool policies. They also claim as damages the fees charged by Slaughter and May in effecting recovery against the insurers and in restructuring the CMS companies. Freshfields strongly contest the allegations of negligence, denying that they were supplied with the first plaintiff's guidelines and contending that all the relevant documentation was specifically approved by the plaintiffs. They also contest the causation and quantum of the plaintiffs' alleged loss, allege contributory negligence by the plaintiffs and contend that the plaintiffs failed to take reasonable steps to mitigate their loss. At this stage the court is in no way concerned with the merits of the parties' respective contentions.

8

For purposes of the present proceedings, there have no doubt been confidential communications between the plaintiffs and Slaughter and May and counsel concerning the merits of the plaintiffs' claim against Freshfields, tactics, pleadings, evidence and so on. Such communications are plainly protected by legal professional privilege, and there is no suggestion that that privilege has been waived whether expressly or impliedly. The present issue concerns, and concerns only, confidential communications between the plaintiffs and Slaughter and May and counsel concerning claims made by the plaintiffs against the insurers and the pursuit and settlement of those claims. The documents now in issue are referred to in paragraph 5 (a) to (m) of the first schedule to a summons issued by Freshfields dated 8 June 1998. Nothing turns on the details of those documents. It is common ground that they are relevant to issues in these proceedings, and it is common ground that some of them are protected from disclosure by legal professional privilege unless that privilege has been impliedly waived. There is no question of express waiver.

9

In the course of a careful judgment Buckley J reviewed the authorities cited to him and concluded that there was no real distinction between the situation in which the solicitor sued had acted for the client in a number of different transactions previously and the situation in which the solicitor sued had acted in some transactions and a different solicitor in others. He said (at page 14 of the transcript of his judgment):

"The answer is clearest where the client seeks to sue his solicitor and at the same time hide from the court relevant communications between them (under the guise of privilege). I do not lose sight of what appears to be the more protective nature of legal professional privilege compared with privilege arising from without prejudice communications. However, the various dicta in the cases to which I have referred, all seem to identify the same evil, namely, a defendant being deprived of relevant material with which to defend himself against a party who chooses to bring proceedings against him whilst withholding that material from the court. That would not be justice and no concept of privilege could make it so. The court is not taking away the privilege in the sense of a mandatory order the breach of which would amount to a contempt, as where an injunction is granted. The court is simply directing that if the party claiming the privilege wishes to obtain a court decision he must, at least in circumstances such as these, be prepared to disclose relevant material."

10

Then, after referring to a passage in the judgment of Parker J in Hayes and Another v Dowding and Others [1996] PNLR 578 at 591B, Buckley J continued:

"Neither that passage, in context, nor what I have said above, undermines, nor is intended to undermine, the most common and fundamental operation of legal professional privilege, namely, that one party to a dispute cannot obtain communications between the other party and his lawyer in respect of it. Of course, the privilege goes further than that. But, to my mind, it is not significantly undermined by holding that the implied waiver that arises when a client sues his lawyer for professional negligence extends to any privileged communications touching the transaction which gives rise to the charge of negligence and which are...

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