Law Society v. Sephton & Co

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Law Society v Sephton & Co (a firm)
England: House of Lords: Lords Hoffmann, Scott, Rodger, Walker and Mance: [2006] UKHL 22: 10 May 2006
Michael Pooles QC and Derek Holwill (instructed by Barlow Lyde & Gilbert) for the Appellants, Sephton & Co
Timothy Dutton QC and Rosalind Phelps (instructed by Wright Son & Pepper) for the Respondents, the Law Society

This case considered issues of limitation in connection with professional negligence claims. The issue was when time started to run in relation to a purely contingent right of action. In dismissing the appeal, the House of Lords held that where an immediate and measurable loss did not occur - in circumstances where a claim was not inevitable at the time of the negligent act or omission - the limitation period would not begin to run until the contingency was fulfilled, in this case being the making of a claim for compensation by a solicitor’s client against the Solicitors’ Compensation Fund

DMC Category Rating: Developed

This case note is based on an Article in the June 2006 Edition of the ‘Re(insurance) Bulletin’, published by the Insurance and Reinsurance team at the international firm of lawyers, DLA Piper. DLA Piper is an International Contributor to this website.

Mr Payne, a solicitor, misappropriated sums from his firm's client account for six years, up until March 1996. From 1988 to 1995, the firm submitted accounts to the Law Society. These included an accountant's report from Sephton & Co., stating that the firm had complied with the Solicitors' Accounts Rules 1991, when any proper examination would have revealed what was going on.

The misappropriation took the familiar form of taking money from one client to pay off another ("teeming and lading"). In April 1996, a client complained to the Law Society about a delay and shortly afterwards, the Law Society's investigating accountant discovered the deficiencies. The Law Society intervened in the practice on 20 May 1996.

Under section 36 of the Solicitors' Act 1974, the Law Society is required to maintain a compensation fund ("the Fund") to replace clients' money misappropriated by a solicitor. Under the Solicitors' Compensation Fund Rules 1995, grants are made at the discretion of the Council. No person has a right to a grant enforceable at law, but the Council seeks to administer the Fund in "an even-handed and consistent manner".

The first claim on the Fund by a former client of Mr Payne was made on 8 July 1996. Over the following months there were many more. Between October 1996 and 8 January 2003, the Fund paid out over £1.2m in claims plus interest.

On 8 October 1996, the Law Society wrote to the accountants stating it proposed to hold them liable in negligence. Matters, however, proceeded slowly, not least because the parties were awaiting the outcome of a case on an accountant's duty of care to the Law Society in giving such a report: Law Society v KPMG Peat Marwick [2000] 1 WLR 1921. As a result, the claim form was not issued until 16 May 2002. The accountants argued that the claim was statute-barred.

When did the cause of action accrue?
The normal period of limitation for an action in tort is six years from the date on which the cause of action accrued: section 2 of the Limitation Act 1980.

In negligence claims, if the cause of action accrues before the potential claimant knows the relevant facts, section 14A allows an additional period of 3 years from the date on which the claimant acquires the requisite knowledge. This was the subject of the recent House of Lords decision in Haward v Fawcetts (a firm) [2006] UKHL 9 (see Haward v. Fawcetts HofL).

In this case, however, the Law Society knew the relevant facts much earlier than three years before they started the proceedings. The issue was, therefore, whether its cause of action against the accountants had accrued within the six-year period, that is, after 16 May 1996.

The accountants said the cause of action accrued when the Law Society suffered damage, which was whenever Mr Payne misappropriated a client's money after a negligent accountant's report had been submitted. The misappropriation gave the client a right to make a claim on the Fund and liability to such a claim was damage.

he Law Society, however, argued that it suffered damage only when a claim was made. Until then, it was uncertain whether or not there would be a claim, since the client might have been repaid out of Mr Payne's own money or (more likely) out of another client's funds.

The judge at first instance found the claim against the accountants was statute-barred, but this was reversed by the Court of Appeal. The accountants appealed to the House of Lords.

The House of Lords held that, in the case of a purely contingent liability such as this, time did not run until the contingency was fulfilled. Consequently, the claim was not time-barred. In many professional negligence cases, a claimant suffers a diminution of the value of an existing asset as a result of the defendant's breach of duty or is disappointed because an asset he acquires does not live up to what he was entitled to expect. In such cases, although there may be a contingent element to the claim, the claimant suffers an immediate and measurable loss, whether they are aware of it or not.

In Forster v Outred & Co [1982] 1 WLR 86, for instance, the claim was made against solicitors who had advised Mrs Forster in connection with a mortgage on her farm to secure her son's borrowing. It was held that she suffered an immediate economic loss on signing the mortgage deed, even though it was not known at that stage that she would be called upon to pay, because her freehold property had become encumbered with a charge.

In the insurance context, in Knapp v Ecclesiastical Insurance plc [1998] PNLR 172, the Court of Appeal concluded that, where a fire insurance policy was voidable for non-disclosure due to an insurance broker's negligence, the insured's cause of action against the broker accrued when the cover was placed because he "did not get what he should have got", even though the fire and the insurer’s avoidance of the policy lay in the future.

In this case, however, the House of Lords was considering a purely contingent liability. In the absence of any English authority on the point, the House of Lords approved the judgment of the High Court of Australia in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 to find that, in such circumstances, a claimant cannot sustain damage until the contingency is fulfilled and the loss becomes actual. Unless and until the remote contingency happens, the claimant cannot be expected to issue proceedings which he would not normally issue, or wish to issue, unless and until that point arises.

Consequently, it was not appropriate to talk of the Fund as having suffered any loss until (at the earliest) a hardship claim was made on the Society. The Law Society's claim against the accountants was not statute-barred and the appeal was dismissed.

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