On Thursday 13 July 2017, following the trial of a preliminary issue of limitation, HH Judge Paul Matthews handed down judgment in Osborne v (1) Follett Stock (a firm); (2) Follett Stock LLP. The judgment can be accessed here.
The judgment is further High Court authority considering the issue of pure contingent loss in relation to professional liability claims. The decision is of interest in that it comes after the Privy Council decision in Maharaj v Johnson [2015] PNLR 27 which considered the distinction in limitation terms between “no transaction” and “flawed transaction” cases. In refusing to adopt a “categorisation” approach and resisting the claimant’s attempt to depict the transaction as a “no transaction” case so as to postpone the accrual of the cause of action, the judge held that for limitation purposes the transaction was properly to be characterised as one that was flawed at the outset and that actual damage was suffered at that point.
In this article Michael Bowmer considers the judgment and points of interest arising from it.[1]
The facts
Remarkably, the underlying facts ranged over a period of two decades. In July 1996, Mr Filip Roth made a will leaving the whole of his estate to his daughter, Mrs Benakovic, and a legacy of £10,000 to the claimant, Mrs Osborne. Mr Roth had been a German prisoner of war during the second world war, and assigned to work on the land. There, he had met Mrs Osborne’s aunt, an appropriately named Miss Wills. After the war Mr Roth and Miss Wills formed a long standing relationship and eventually bought Nansalsa Farm near Truro in Cornwall. Mr Roth and Miss Wills were unable to marry because Mr Roth had been married before the war and had a daughter, Mrs Benakovic, with whom he had lost contact. When Miss Wills died in 1995, the farm passed to Mr Roth. At that point, with the assistance of the Red Cross, Mr Roth traced Mrs Benakovic to where she was living in Germany and Mr Roth made the will
Relations between Mr Roth and his daughter, Mrs Benakovic, were nevertheless strained and following a visit by her and her husband to England in late 1996, Mr Roth told Mrs Osborne he wanted to make a new will leaving his estate to Mrs Osborne (and appointing her and her husband as executors) and leaving a pecuniary legacy of £50,000 to his daughter. Mrs Osborne and her husband asked their long standing business adviser, an accountant named Mr Condliffe, for help. Mr Condliffe in turn involved a non-practising solicitor, a Mr Mashiter, who worked as a consultant to a firm of solicitors called Coodes-Torpoint, to draw up the will. The will was executed on 11 February 1997. But there was a problem. Mr Condliffe and Mr Osborne witnessed the execution of the will with the result that, as Mr Osborne was the spouse of Mrs Osborne, the gift of residue to her was invalid pursuant to section 15 of the Wills Act 1837, and brought about a partial intestacy whereby, as next of kin, Mrs Benakovic inherited the whole of the estate.
Mr Roth died six days later, on 17 February 1997, before the problem was appreciated. After Mr Roth’s death, Mrs Osborne went to see another firm of solicitors. On showing them the will, the problem was immediately pointed out to her. Mrs Osborne’s case was that at Mr Roth’s funeral, a few days later, she reached an agreement with Mrs Benakovic that in return for increasing Mrs Benakovic’s legacy to £75,000, the residue should pass to Mrs Osborne. At that point, once again, Mr and Mrs Osborne turned to Mr Condliffe. He in turn obtained a form of agreement, in effect varying the will, drafted by Mr Mashiter. This was signed by all concerned on 1 March 1997.
Mrs Osborne proceeded thereafter believing the agreement was valid and effective. She completed the administration of the estate, re-arranged her financial affairs, moved to Nansalsa Farm and incurred expenditure which she would not otherwise have incurred.
Out of the blue, however, by a solicitors’ letter dated 9 February 2005, Mrs Benakovic asserted a claim to set aside the agreement of 1 March 1997. This was on the footing that Mrs Benakovic had received no legal advice in relation to the agreement. She started legal proceedings on 23 June 2005. Mrs Benakovic in due course obtained summary judgment against Mr and Mrs Osborne and an appeal against that decision was dismissed, the court taking the view that Mrs Osborne had no real prospect of showing that the agreement should not be set aside for breach of the fiduciary fair dealing rule, which was engaged by the agreement between Mrs Osborne as executor and Mrs Benakovic as beneficiary, there being no evidence that Mrs Benakovic’s entry into the agreement was fully informed.
In a separate development, legal proceedings were also brought against Mr and Mrs Osborne by Mr Condliffe seeking payment of various fees. After instructing at least two other firms of solicitors, Mr and Mr Osborne instructed the first defendant in April 2007 to act in relation to both sets of proceedings. In the proceedings brought by Mrs Benakovic orders had been made against Mr and Mrs Osborne to provide various accounts and in addition a barrister retained by previous solicitors, whose strategy the first defendant was engaged to follow, advised taking steps to try and set aside the summary judgment (which steps ultimately failed). The second defendant was incorporated in June 2009 and in April 2010 took over conduct of the proceedings for a short period before Mr and Mrs Osborne withdrew instructions. Mr and Mrs Osborne later reached some form of resolution with Mrs Benakovic and Mr Condliffe. By October 2011, however, through new solicitors, Mrs Osborne asserted a claim against the defendants.
The claim against the defendants
Mrs Osborne alleged that the defendants had failed to advise her to bring a claim against Coodes-Torpoint before any claim she had against that firm became statute-barred. She sought damages for the loss of the chance of bringing proceedings against Coodes-Torpoint in relation to the agreement. She claimed that Coodes-Torpoint had failed to ensure that Mrs Benakovic had independent advice and to advise her that Mrs Benakovic should receive such advice. She claimed the loss of her intended inheritance under the 11 February 1997 will, a sum exceeding £¾m, and her costs of the litigation with Mrs Benakovic which ran to several hundreds of thousand pounds.
Although she had intimated a claim against the defendants in October 2011, Mrs Osborne did not enter into a standstill agreement until 9 February 2015 (and even then the agreement was only with the second defendant, the limited liability partnership) and did not issue a claim form against the defendants until 17 August 2016. For that reason Mrs Osborne was unable to rely on section 14A of the Limitation Act 1980 as against the defendants as the standstill agreement and the issue of the claim form were more than three years after she had first intimated the claim.
The limitation arguments
Mrs Osborne needed to show that her cause of action against Coodes-Torpoint was lost whilst one or other of the defendants was retained and that the claim against the defendants was brought within six years of that date.
Accepting that any disappointed beneficiary claim against Coodes-Torpoint under White v Jones in relation to the execution of Mr Roth’s will became statute-barred by 17 February 2003, six years after Mr Roth’s death, Mrs Osborne originally advanced four limitation arguments in relation to the cause of action against Coodes-Torpoint concerning the agreement.
- The period of limitation was six years from the end of February 1998 under section 2 and section 5 of the Limitation Act 1980 on the footing that Coodes-Torpoint acted for her up until that date in connection with the administration of the estate and was under a continuing duty to advise.
- The period of limitation was six years from 17 February 2003 under s 2 of the Limitation Act 1980 on the basis that this was the date Mrs Osborne lost her cause of action against Coodes-Torpoint as a disappointed beneficiary and first suffered actual damage.
- The period of limitation was three years from 23 June 2005 (or at the earliest 9 February 2005) under section 14A of the Limitation Act 1980 on the basis that this was when Mrs Benakovic brought the claim against Mrs Osborne (alternatively intimated the claim) and when Mrs Osborne first knew there was a problem with the agreement.
- The period of limitation was six years from 23 June 2005 alternatively 9 February 2005 under s 2 of the Limitation Act 1980 on the basis that it was only when Mrs Benakovic changed her mind and brought a claim that she suffered actual damage.
In the course of the proceedings it was pointed out to Mrs Osborne that arguments (1) to (3) did not assist her. Argument (1) did not work, quite apart from the problems of demonstrating a continuing retainer, because the cause of action against Coodes-Torpoint would have become statute-barred in February 2004 before either defendant was instructed.
Argument (2) did not work because, whilst Mrs Osborne’s cause of action against Coodes-Torpoint would have become statute-barred on 17 February 2009 when the first defendant was acting for her, and she would have had until 17 February 2015 to bring a claim against the defendants, the standstill agreement entered into on 9 February 2015 was with the second defendant only and her claim against the first defendant was not issued until 17 August 2016.
Argument (3) did not work because, whilst the cause of action against Coodes-Torpoint would have become statute-barred on 9 February 2008 or 23 June 2008 when the first defendant was acting for Mrs Osborne, she would have had until 9 February 2014 or 23 June 2014 to bring a claim against the first defendant and this was before the standstill agreement and before the claim form was issued.
At trial, Mrs Osborne accepted that she could not succeed on any of these three arguments and so advanced only the fourth argument based on Law Society v Sephton [2006] 2 AC 543. It was argued on behalf of Mrs Osborne that in Sephton and in the more recent Privy Council decision in Maharaj v Johnson [2015] PNLR 27, as well as in the intermediate Court of Appeal decisions in Axa Insurance Ltd v Akther & Darby [2010] 1 WLR 1662 and Pegasus Management Holdings SCA v Ernst & Young [2010] PNLR 438, the courts had drawn a distinction between “flawed transactions” or “wrong transactions” and “no transactions”. Lord Wilson in Maharaj (in a judgment with which the majority of the Privy Council agreed) said the following:
“It was Rimer LJ, in his judgment in Pegasus Management Holdings SCA v Ernst and Young [2010] EWCA Civ 181, [2010] PNLR 438, who, at para 28, drew a distinction in cases of professional negligence between “no transaction” cases and “wrong transaction” cases. Perhaps the latter are even better described by Longmore LJ in Axa Insurance Ltd v Akther and Darby [2009] EWCA Civ 1166, [2010] 1 WLR 1662, at para 71, as “flawed transaction” cases. In his dissenting judgment in the same case Lloyd LJ suggested, at para 134, that a focus on the distinction might be an unhelpful distraction. Although the Board considers that the distinction can represent a helpful sign-post to the relevant principles, it is essential to bear in mind that the central concept behind the “no transaction” and the “flawed transaction” cases is different. For in the latter the claimant does enter into a “flawed transaction” in circumstances in which, in the absence of the defendant’s breach of duty, he would have entered into an analogous, but flawless, transaction. In the former, however, the claimant also enters into a transaction but in circumstances in which, in the absence of the defendant’s breach of duty, he would have entered into “no transaction” at all. The difference in concept dictates a difference in the inquiry as to whether, and if so when, the claimant suffered actual or measurable damage. In the “flawed transaction” case the inquiry is whether the value to the claimant of the flawed transaction was measurably less than what would have been the value to him of the flawless transaction. In the “no transaction” case the inquiry is whether, and if so at what point, the transaction into which the claimant entered caused his financial position to be measurably worse than if he had not entered into it.” (emphasis added).
The Privy Council gave as an example of a “no transaction” the decision in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [19997] 1 WLR 1627 in which the House of Lords compared the position of the lender having regard to the burden it took on as a result of the transaction (the loan) and the benefits it acquired (the personal covenant of the borrower and the security) and held that on a “balance sheet” it was only when the former was greater than the latter that it could be said that the lender had suffered actual damage to constitute its tortious cause of action.
So, on behalf of Mrs Osborne, it was argued that the court should consider the claim as one in which Mrs Osborne would never have entered into an agreement with Mrs Benakovic because the court could be confident it would not have happened. As a result it was contended that the court had to engage in an exercise of comparing benefits and burdens. In doing so it was contended that this was not a bilateral transaction but the mere conferring of bounty on Mrs Osborne as a result of which she was significantly better off at least until Mrs Benakovic asserted her claim. Until then, even if she had incurred expenditure, this was significantly less than the value of the benefits she obtained under the agreement.
The judgment
In giving judgment HH Judge Paul Matthews agreed with the defendants that the correct analysis for limitation purposes was this was a case of a flawed transaction and that Mrs Osborne suffered actual damage on entering into the 1 March 1997 agreement. This was essentially for three reasons.
First, the correct characterisation of the claim was one whereby Mrs Osborne did enter into a bilateral agreement with Mrs Benakovic, in effect buying out Mrs Benakovic’s interests in residue for an increase in the legacy by £25,000. By reason of the presumed negligence of Coodes-Torpoint she lost the chance of a valid agreement. Drawing on the judgment of Bingham LJ in DW Moore & Co Ltd v Ferrier [1988] 1 WLR 267 at 279-280, the judge held that even if that chance was very small, that was the correct characterisation of the claim and as such enough to constitute actual damage for the purposes of a cause of action in tort. The measurement of the lost chance was a matter of the quantification of damages. As the judge said: “In my judgment it is nothing to the point that it was not within the solicitors’ control whether such an unchallengeable agreement was reached or not. The claimant lost the chance that it could have been.”
Second, the value of the agreement could be tested by asking what a third party would have paid for an assignment of Mrs Osborne’s rights under the agreement. As the judge said: “In my judgment it is clear that anyone with full knowledge of the circumstances would have paid much less for it than the value of the assets in the estate, to cover the risk (which matured) of a claim by Lisa.” This was a clear indication that Mrs Osborne had suffered actual damage on entering into the agreement; using the terminology coined by Lord Walker in Sephton and adopted by Arden LJ in Axa, the “package of rights” she acquired was less valuable than it should have been.
Third, the judge accepted that even if there was any doubt about the foregoing Mrs Osborne plainly suffered damage when she spent money in reliance on the supposed validity of the agreement, as she had pleaded in the underlying litigation in support of her estoppel arguments as against Mrs Benakovic. The judge regarded the benefits and burden “balance sheet” approach to be artificial as had been held by Arden LJ in the Axa decision in reaching her decision that the insurers in that case had suffered actual damage on the inception of the insurance policies and not at a later date.
The claim was therefore dismissed.
Points of interest from the judgment
The case demonstrates, firstly, the importance of resisting an artificial characterisation of a claim in order to gain a limitation advantage. Although in the Maharaj case the Privy Council had adverted to the difference in approach to limitation depending on the distinction between “flawed transactions” and “no transactions”, its actual decision amounted to a rejection of the claimants’ characterisation of the claim as a no transaction case. The claimants had acquired land in 1986 under a transfer signed by the donee of a power of attorney. They contracted to sell the land in 2008 to a property developer for $20m. As a result of concerns about the validity of the transfer and the power of attorney, the property developer pulled out. The claimants brought a claim against the lawyers who had acted for them in 1986, arguing that the case was a “no transaction” case and they only suffered actual damage in 2008 when the buyer pulled out; that was the contingency to which they were exposed.
Addressing that argument, Lord Wilson said:
“[20] How, then, do the claimants contend that theirs is a “no transaction” case…? The duty of care, so they contend, obliged the defendants to warn them that, although the payment of the price would secure for them full equitable ownership in the land, the proposed execution of the deed of conveyance by Mr Inniss on behalf of Mrs Lambert would fail to convey to them the legal interest in it. Had they been so warned and been invited to address the consequential delay in securing an effective execution of the deed…they now say their response would be likely to have been to exercise their right not to proceed to purchase the land.
“[21] In the Board’s view the suggested analysis of the nature of the defendant’s duty is unrealistic. The defendant’s duty was to take all reasonable care to ensure that legal, as well as full equitable, ownership of the land became vested in the claimants. They therefore had to take all reasonable care to ensure that Mrs Lambert executed the deed of conveyance in a legally effective manner…”
The Privy Council then considered that there was clearly some chance that the transaction could have completed either by Mrs Lambert being traced and signing the transfer or by enlarging the powers of attorney. As such Lord Wilson continued:
“…On Mr Casey’s analysis a case of a “flawed transaction” can too easily be reconstituted as a case of “no transaction” by contending, however artificially, that a defendant has a duty to warn the claimant that, if matters were to proceed in a particular way, the transaction would be flawed and that, if so warned, the claimant would be likely to elect not to proceed with the transaction.”
Such considerations have echoes in the judgments of Arden LJ and Longmore LJ in the Axa case. Both of their judgments decry the suggestion that a “no transaction” approach to damages determines a different date of actual damage for the purposes of the accrual of a cause of action. Two paragraphs from their respective judgments illustrate the point:
“[62] Furthermore, in my judgment, it is correct to treat NIG as incurring loss and therefore suffering damage for the purposes of the accrual of its causes of action in tort as soon as it issued ATE insurance even if Mr Hollander is correct to say that the measure of damage in this case is on a “no transaction” basis. The measure of loss is then the difference between its financial position having issued the policies and its financial position if it had not issued them. The fact that it had incurred loss is relevant to the first part of that equation. The additional loss was the fact that the liabilities under those policies to policyholders were more burdensome, and the package of rights which they acquired under the policies was less valuable, than they should have been if the vetting breaches had not occurred.”
“[73] It is not, however, possible to say that the entering into of a flawed transaction constitutes damage when it is one category of case but not when it is in another. The fact that the flawed transaction has been entered into will usually be damage from the claimant’s point of view. The fact that the recipient of the advice might have hoped for a better transaction or might have hoped to avoid any transaction makes no difference to the fact that he has entered into a flawed transaction which he would not have done if he had been competently advised. If such a flawed transaction has come into existence that will, in my view, usually be damage which the recipient of the advice has suffered and that is more than the existence of a mere contingent liability.”
By parallel reasoning, the duty assumed to have been owed by Coodes-Torpoint to Mrs Osborne in relation to the agreement was a duty to bring about an effective and binding agreement between her and Mrs Benakovic; it was not a duty to prevent her from ever entering into the agreement. As such an attempt to categorise the case as a “no transaction”, so that actual damage occurred only when the contingency arose in the form of Mrs Benakovic challenging the agreement, was wrong. Mrs Osborne did actually enter into the agreement and, whilst there might have been a very small chance of a valid agreement, the loss of that chance was sufficient for there to have been actual damage.
The second point to note about the judgment is the application of the factors in Maharaj as a cross-check to ensure that the inference that actual damage has been suffered is properly drawn. In Maharaj the Privy Council cautioned against any automatic presumption that the entry into a flawed transaction in and of itself is actual damage, commenting that in so far as observations of Templeman LJ in Baker v Ollard & Bentley (1982) 126 SJ 593 and Rimer LJ in the Pegasus case suggested otherwise they “go too far“. It is always necessary to check that the inference is properly drawn. The three factors identified in Maharaj satisfying the Board that it was properly drawn in that case were that (1) the claimants were subjected to significant risks which were present from then onwards; (2) they would have been likely to have met the same difficulties as they did in 2008 at any time after entering into the transaction had they attempted to borrow on the security of or sell the land; as such their interests were less valuable than they should have been; (3) it was not within the power of the claimants to remedy the flaw by themselves; it would have involved the co-operation of a third party (in that case Mrs Lambert).
Having cited these passages from Maharaj the judgment effectively recognised that all three of these factors were present. The agreement was precarious from the outset. Had Mrs Osborne sought to dispose of her interests a buyer with knowledge of the circumstances would not have paid full value. It was also obvious that remedying the flaw would have to involve Mrs Benakovic. In reality the factors identified in Maharaj are likely to be of wide application in contingent loss cases. Nonetheless the importance of drawing out and addressing the factors explicitly is an important step in the reasoning in demonstrating that actual loss has been suffered at the time of the transaction.
Summary
The judgment in Osborne v (1) Follett Stock; (2) Follett Stock LLP is an interesting addition to the canon of authority in the field of contingent loss, coming, as it does, after the decision in Maharaj. From the point of view of defendants, it exemplifies the need to challenge assumptions as to the categorisation of claims and to draw out factors which justify the inference that damage was suffered on the entry into the transaction.
From the point of view of claimants, it exemplifies the need to observe the secondary period of limitation under section 14A of the Limitation Act 1980 rather than rely on difficult and uphill arguments about contingent loss and the postponement of the accrual of the cause of action in tort.
As long ago as 1997 Lord Nicholls said the following in Nykredit:
“Further, within the bounds of sense and reasonableness the policy of the law should be to advance, rather than retard, the accrual of a cause of action. This is especially so if the law provides parallel causes of action in contract and tort in respect of the same conduct. The disparity between the time when these parallel causes of action arise should be smaller, rather than greater.”
As HH Judge Paul Matthews expressly recognised in his judgment, the Latent Damage Act 1986 reflects a policy decision of Parliament balancing the interests of claimants and defendants, giving claimants three years to bring a claim from their date of knowledge, and also providing for a longstop bar of 15 years, and giving defendants the benefit of those limitation periods. English law has therefore been relieved of the pressure to find a later date for damage. Therefore, whilst a proper analysis is still required, the onus is plainly on claimants to plead and prove that the accrual of a cause of action is later than the date of a transaction; the easiest way to surmount that hurdle is to avoid the argument altogether.
Michael Bowmer
4 New Square, Lincoln’s Inn, London WC2A 3RJ
[1] Michael Bowmer was instructed by Tim Barr and Beth Caygill at DWF LLP on behalf of the defendants.
