Update: professional negligence

There has been a steady stream of professional negligence decisions in the past few months. This update therefore looks at two issues in depth and briefly summarises some of the other decisions.

DHL: rectification and contribution

One casualty of the current economic crisis has been the commercial property consultancy DHL, now in liquidation. Valuations were a significant part of its business and it faced a large number of claims arising from allegedly negligent and/or fraudulent valuations. On notification of the claims, the excess insurers denied cover on the basis that the insurance contained a limiting condition so that it covered property management activities only. DHL thereupon sued its brokers, EIS, for negligence in placing the excess cover (Dunlop Haywards Ltd v Erinaceous Insurance Services Ltd [2009] EWCA Civ 354). In its defence EIS asserted that as a matter of construction the policy did cover valuation activities, and hence there had been no breach and/or no loss; alternatively, there had been a common intention that valuation would be covered by the policy, so DHL was entitled to rectification and had suffered no loss.

The Court of Appeal, overturning the decision of the court below to refuse EIS's application, held that it was desirable to join the excess insurers to the proceedings under CPR 19.2(2) so that the issues concerning construction and rectification could be fully ligated between all the parties concerned in them, and so that all parties could be bound (see para.89). The judge had been wrong to reject the argument on rectification on an interlocutory hearing.

Remedy

However, the judgment of Rix LJ makes clear that the defendant brokers are far from home and dry. He had doubts whether it was open to a defendant who was not a party to the contract to advance a claim for rectification, which is a personal equitable remedy (see para.57). The claim was that DHL had a remedy which would avoid the loss but, if DHL was unwilling to claim it, could EIS take advantage of it? The point was apparently not taken by the excess insurers in the application or the appeal, but it remains to be seen what may be made of it in the substantive proceedings. Since 'the difficulties in the way of proving rectification are well-known and have been described as formidable' (para.78), a plea of failure to mitigate might well have cut little ice. But can a defendant avoid liability altogether by seeking the remedy, as it were, on its former client's behalf, and succeeding, with the result that the client in fact suffers no loss?

Meanwhile, in Nationwide Building Society v (1) Dunlop Haywards Ltd and (2) Cobbetts (a firm) [2009] EWHC 254 (Comm), the court provided useful guidance on the method of apportionment under the Civil Liability (Contribution) Act 1978 between a fraudulent and a negligent defendant where there are defences available to one defendant but not the other.

DHL's valuer had fraudulently overstated the value of Nationwide's security; negligence was alleged against the solicitors. The solicitors settled the claim for almost £5.6m.

The judge held that the valuers, who were not represented, were liable in deceit under eight separate heads of damage for a total of approximately £21m. It was necessary to assess the solicitors' liability only for the purpose of the contribution claim.

What's the damage?

The valuers' contribution fell to be assessed according to what was just and equitable having regard to the extent of their responsibility for 'the damage in question' '“ but what damage was that? Different answers could produce wildly different outcomes: if the damage in question was the claimant's total loss, around £20m, and it was apportioned in the ratio of 75/25, the solicitors would be liable for £5m and would recover almost none of the settlement figure; whereas if the settlement figure itself was the damage, they would be entitled to recover 75 per cent of it from the valuers. The former construction would be particularly inequitable since a defendant would be in a worse position if his co-defendant were fraudulent (and thus the claimant's total recoverable losses were higher) than if they were merely negligent.

The judge held that 'the damage in question' in s.2(1) of the Act had to be the 'same damage' referred to in s.1(1); that is, damage for which the valuers and the solicitors were both liable. Certain losses for which the valuers was responsible were, vis à vis the solicitors, unforeseeable or too remote, so the damage for which the valuers and the solicitors were both, prima facie, liable was limited to £13m.

Contributory negligence and contractual limitation

The solicitors' liability in that sum, however, was subject to possible defences of contributory negligence and a contractual limitation clause. The judge held that contributory negligence had to be taken into account before assessing the defendant's relative contributions; otherwise, the amount of the solicitors' liability would be assessed ignoring a factor which could only be ignored because the valuers had been fraudulent, which was not 'just and equitable'. In the instant case, a 50 per cent reduction for contributory negligence was appropriate, reducing the amount to be apportioned to £6.6m.

However, the judge held that the scheme of the Act contemplated that a defendant might have to contribute in respect of the amount the claimant was entitled to recover, without reference to any contractual limitation clause. Accordingly, the figure to be apportioned was not reduced further. The figure of £6.6m was apportioned 80/20, so the solicitors were entitled to a £4.3m contribution from the valuers. Under s.2(3) of the Act, however, the solicitors' total contribution after performing that calculation could not have been greater than the amount of the limitation clause. The judge also suggested, obiter, that different considerations might apply if the fraudulent defendant also had a contractual limitation clause, but could not benefit from it because of his fraud.

Share purchase agreement

The claim in Tamlura v CMS Cameron McKenna [2009] EWHC 538 (Ch), in which it was alleged that solicitors had been negligent in advising on and drafting a share purchase agreement, was dismissed by Mann J.

Tamlura had alleged that the solicitors' drafting had failed to give effect to an agreement that would have meant that the price paid to Tamlura for certain shares would have been higher than it in fact was.

On the evidence, the judge held that there had been no such agreement. It was true that one version of a draft document produced by the purchaser's solicitors would have had that effect, but that was clearly a mistake and the solicitors were under no duty to point it out to the client and try to take advantage of it. The firm had carried out its client's express instructions. It had been under no duty to explain the commercial effect of those instructions: the clients were experienced men of commerce and had engaged an experienced finance expert to advise and act for them in areas of commercial expertise.

Late limitation date

Axa Insurance Ltd v Akther & Darby Solicitors [2009] EWHC 635 provides yet another example of the court declining to apply Sephton in favour of a claimant seeking to establish a late limitation date.

Axa provided ATE legal expenses insurance, and alleged that its panel solicitors had breached its duty to vet claims to ensure that they met its standard criteria. It argued that no damage had occurred until each underlying claim failed. In an attempt to distinguish the instant case from the line of authorities reviewed in Pegasus v Ernst & Young (see Solicitors Journal, professional negligence update, 10 March 2009), Axa argued that where, but for the negligence, the claimant would not have entered into the transaction, damage was not suffered until the balance between the value of the liabilities acquired under the particular transaction and the value of any assets obtained thereunder became negative. Flaux J rejected that argument: as in Pegasus, the claimant had suffered loss in being committed to a greater risk than it would have been had the solicitors performed their duty. Accordingly, damage was suffered when each ATE policy was incepted.

Negligence in the conduct of a claim

The claimant fared better in Haithwaite v Thomson Snell & Passmore [2009] EWHC 635, winning damages on a loss of a chance basis in a case where negligence in the conduct of his clinical negligence claim had been admitted. Nicol J reiterated the principles governing the assessment of such damages: the court's task was to assess the value of the lost claim, not to determine definitively how that litigation would have been decided. The claimant's prospects of establishing breach of duty were assessed at 40 per cent, and of establishing causation 75 per cent. Overall, therefore, he was entitled to 30 per cent of the notional damages figure.

Careful communication

In Levicom v Linklaters [2009] EWHC 812, Andrew Smith J awarded only nominal damages of £5 despite finding that the solicitors had in some respects been negligent in their advice to Levicom in relation to an international telecoms dispute. He found that the solicitors had formed an assessment of their clients' case that was well within the range of reasonable opinion, though it was more optimistic than a more cautious solicitor might have reached. However, in two letters, their advice had not conveyed the view they intended it to and had given the clients the impression that the situation was considerably more promising that the solicitors in fact thought. Advisers must, then, take as much care in communicating their advice as in formulating their opinions.

However, there was no evidence that Levicom would have rejected the settlement offers even if the firm had given advice that was as pessimistic as Levicom contended it should have been, still less if it had given what the judge concluded would have been reasonable advice in the circumstances.

The negligence had therefore caused Levicom no loss.

Abuse of process

In Watson v Irwin Mitchell [2009] EWHC 441 (QB), the second of two professional negligence actions brought by the claimants, who were litigants in person, was struck out as an abuse of process.

The first action, brought in 2003, had been stayed after the claimants had failed to comply with a court order to amend their pleadings and the claimants' efforts to appeal had failed. The court concluded that the allegations in the second proceedings were not new; they were capable of being pursued in the first, stayed action subject to the claimants complying with the requirements that had been properly imposed upon them by the court in that action.

A claim for damages for breach of warranty of authority was also struck out as an abuse of process in Dean & Dean v Angel Airlines [2009] EWHC 447 (Ch): the central issue had already been decided in previous proceedings and expressly upheld by the Court of Appeal.