The Law Society v Kpmg Peat Marwick (Sued as Kpmg Peat Marwick McLintock) and Others
| Jurisdiction | England & Wales |
| Judge | The Vice-Chancellor |
| Judgment Date | 29 October 1999 |
| Judgment citation (vLex) | [1999] EWHC J1029-18 |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | CH 1995 L. No. 4621 |
| Date | 29 October 1999 |
[1999] EWHC J1029-18
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Vice-Chancellor:
The Rt. Hon. Sir Richard Scott
CH 1995 L. No. 4621
Lord Goldsmith QC and Mr Matthew Collings instructed by Wright Son & Pepper, London WC1R 5EF for the Claimant
Mr Gordon Pollock QC and Mr Rhodri Davies QC instructed by
Herbert Smith, London EC2A 2HS for the Defendants
JUDGMENT: Approved by the court for
handing down (subject to editorial corrections)
Hearing date: 4th, 5th and 6th October 1999
The Law Society, under statutory provisions contained in the Solicitors Act 1974, is the regulator of the solicitors' profession. The statutory scheme includes provisions requiring the Law Society to maintain and administer a fund, the "Compensation Fund", from which grants may be made for various purposes, one of which is to relieve loss or hardship suffered by persons in consequence of dishonesty on the part of a solicitor in connection with the solicitor's practice (see section 36 of the 1974 Act) . The Compensation Fund is held by the Law Society as trustee on trust for the purposes set out in section 36 (see paragraph 1 of Schedule 2 to the 1974 Act) and is fed by annual contributions, the amount of which is fixed by the Law Society, paid by every solicitor with a practising certificate and by further contributions, levied by the Law Society from time to time as circumstances may require, paid by all practising solicitors who hold clients' money. In short, the Compensation Fund is held by the Law Society as trustee, is applied for the purpose of compensating defrauded clients and is funded by practising solicitors.
Section 34(1) of the 1974 Act requires every solicitor to deliver to the Law Society annually a report signed by an accountant and containing information prescribed by rules made by the Law Society. The rules made by the Law Society under this power prescribe not only the information the accountant's report must contain but also the form of the report and the qualifications to be held by a reporting accountant.
Section 35 of the Act, and the provisions contained in Schedule 1 to the Act, enable the Law Society to intervene in a solicitor's practice where, among other things, they have 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) . One of the purposes of an accountant's report, perhaps the main purpose, is to alert the Law Society to circumstances that point to the possibility of improprieties in the conduct of a solicitor's practice that might lead to claims on the Compensation Fund. Early intervention where impropriety is suspected is desirable not only in order to protect clients of the firm but also to protect the Compensation Fund. Paragraph 1 of Chapter 14 of the "Guide to the Professional Conduct of Solicitors" (1974 Edition) issued by the Law Society says that:-
"If the Accounts Rules, are complied with then it should be impossible for a solicitor 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".
In the Accountants Digest No. 40, published in 1976, the annual delivery of an accountant's report "which will show whether or not the solicitor has complied with the Solicitors Accounts Rules in his handling and recording of clients' money during the year …" is described as one of the ways in which clients' money is protected.
And in paragraph 1–11 of a publication by the Institute of Chartered Accountants entitled "Solicitors' Accounts" the importance that reporting accountants should comply with the requirements of the Law Society's Accountant's Report Rules is emphasised. The text includes the warning that, if there is evidence that the reporting accountant is at fault, "The Law Society is likely to take a firm line in future, in order to protect the solicitors' Compensation Fund…"
The present case relates to the collapse of Durnford Ford, a solicitors' firm with 24 partners and some 10 offices concentrated in East Sussex. The senior partner was Mr Graham Durnford Ford. Mr Ford was the partner responsible for, among other things, the firm's probate department. Another partner who worked in the probate department was Mr Digby Bew, a junior partner.
Partners in KPMG Peat Marwick ("KPMG") were engaged by Durnford Ford to make the accountant's reports required to be delivered to the Law Society under section 34 of the Act. The partner who made the report for the year ended 31 May 1989 and the year ended 31 May 1991 was Mr Cawley. Mr Chapman was the partner who made the report for the year ended 31 May 1990. Their fees were paid by Durnford Ford.
The Law Society commenced an investigation of Durnford Ford on 6 May 1992. The firm ceased to practice on 31 May 1992. It was then discovered that Mr Ford, with the complicity of Mr Bew, had defrauded a number of the firm's clients. The nature of the fraud was that unjustified interim bills had been created on probate accounts. The sums billed were then transferred from client account to office account, a proper procedure in the case of justified bills. Once in the office account the fraudulently transferred sums were absorbed by running expenses of the firm and by partners' drawings. Accordingly, 22 innocent partners, as well as the two fraudulent partners, had, unknowingly, derived financial benefit from the fraudulent transfers.
As a result of these frauds some 300 clients made claims on the Compensation Fund. Substantial payments, amounting to some £8.5 million, were made out of the Fund.
On 4 August 1995 the Law Society commenced proceedings against KPMG, Mr Cawley and Mr Chapman. It did so "in its capacity as trustee of the Compensation Fund" (paragraph 4 of the Statement of Claim) . The Law Society contends, in paragraph 11 of the Statement of Claim, that the accountants, in respect of the 1989 and 1990 accountant's reports,
"…owed the Law Society a duty of care to act with that degree of skill and care reasonably to be expected of a firm of accountants and persons in their position"
and, in paragraph 12, that, in respect of the 1989 and 1990 reports, the accountants,
"… were negligent and acted in breach of the said duty of care in that they failed adequately or at all to examine the books, accounts and other records of Durnford Ford in accordance with paragraph 4(1) of the [Accountant's Report Rules 1986] and to qualify the reports in accordance with the [Accountant's Report Rules 1986]".
The Law Society contends (in paragraphs 14 and 15 of its Statement of Claim) that had the 1989 and 1990 reports been qualified as they should have been the Law Society would have exercised its statutory powers of intervention thereby putting an end to Mr Ford's raids upon the probate clients account. The Law Society calculates that about £1.7 million was misappropriated in the period between the 1989 and 1990 reports and that about £5.7 million was misappropriated after the 1990 report. So, the Law Society contends, the accountants' negligence led to payments of about £7.4 million being made out of the Compensation Fund to defrauded clients.
Paragraphs 16, 17 and 18 of the Statement of Claim plead the claim as one of negligent misrepresentation. It is alleged that the reports, in negligently failing to refer to various matters, thereby falsely represented that all was well at Durnford Ford, and that the Law Society relied on the reports and took no action, in consequence of which Mr Ford was able to continue his frauds and the Compensation Fund suffered accordingly.
13. On 29 May 1998 the Law Society commenced similar proceedings in respect of the 1991 report.
The frauds, not surprisingly, led also to criminal proceedings. On 12 October 1995 Mr Ford was convicted on ten counts of theft. On 19 December 1995 Mr Bew was convicted on four counts of theft.
KPMG and the two defendant partners deny that the preparation of the reports was attended by any negligence. They challenge, also, the causative connection between the alleged negligence and the payments made out of the Compensation Fund. But they take a prior point as well. They deny that they owed any duty of care to the Law Society in its capacity as trustee of the Compensation Fund (paragraph 13 of the Defence) .
By an order made on 16 November 1998 in the 1995 action, Mr Justice Carnwath directed the trial of a preliminary issue. The issue was this:-
"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".
In short, the issue is whether the accountants, in preparing the reports, owed the Law Society a duty of care.
17. An order made on 16 November 1998 in the 1998 action recorded the parties' agreement that the determination of the preliminary issue in the 1995 action would be binding also in the 1998 action.
Lord Goldsmith QC, in contending on behalf of the Law Society for the duty of care, placed great emphasis, and rightly so, on the relationship between the Law Society and reporting accountants created by the provisions of the 1974 Act and the rules relating to accountant's reports made by the Law Society under their statutory powers.
To continue reading
Request your trial