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What can be challenged in contribution claims? Percy v Merriman White explained

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22 April 2022

On 12 April 2022, the Court of Appeal handed down judgment in the contribution claim between solicitors and counsel in Percy v Merriman White [2022] EWCA Civ 493. The case has clarified what

has to be proved by a contribution claimant against a contribution defendant, and has explained the extent to which arguments of abusive collateral attack can be relied on in this context. Helen Evans KC summarises the case and its ramifications.

The facts

The claims against Merriman White (a firm of solicitors) and Mr Mayall (a barrister) had their origin in company law proceedings. Put briefly, Mr Percy had fallen out with his fellow shareholder (a Mr Trevor) and the company was at deadlock. Various options were potentially available to Mr Percy, two of which were bringing a derivative claim or seeking the just and equitable winding up of the company.

Mr Percy decided to seek permission to bring a derivative claim. This was arguably more attractive to him than a winding up, because he would have more control over the way his allegations of wrongdoing against his fellow shareholder were investigated and he would not lose control of costs. However, Mr Trevor contested his application for permission.

There were authorities showing that permission had been granted for a derivative action in similar circumstances. Despite this, on 30 June 2011, David Donaldson QC (sitting as a Deputy High Court Judge) refused Mr Percy permission to bring a derivative claim. Instead, he made a costs order against Mr Percy.

Mr Percy subsequently settled the company law dispute for £65,000.

Mr Percy took the view that if he had not had an adverse costs against him he would have achieved a better settlement. Indeed, he pointed to the fact that Mr Trevor had made a £500,000 offer at a mediation in 2010 – a mediation at which Mr Mayall had not been present.

Mr Percy sued Merriman White and settled with the firm for £250,000. Merriman White then brought proceedings against Mr Mayall under the Civil Liability (Contribution) Act 1978 (“the Contribution Act”) in respect of his advice.

The contribution claim culminated in a finding at trial that Mr Mayall should make a 40% contribution to Merriman White. However, it got into some difficulty on the law. This was for two key reasons:

  1. The first was that the Deputy Judge- Chief Insolvency and Companies Court Judge Briggs, sitting as a Deputy High Court Judge- did not fully appreciate which constituent parts of a claim under the Contribution Act can be challenged by a contribution defendant and which cannot;
  2. The second is that the Deputy Judge was attracted by the argument that it was an abuse of process for Mr Mayall to suggest that there could have been any other outcome to Mr Percy’s dispute than the refusal by Mr Donaldson QC to allow a derivative action.

This article now reviews each of these areas of controversy in turn.

The Contribution Act debate

Contribution claims are best thought of as having a triangular structure. In the professional negligence context, they depend on showing that two defendant advisers (i.e. the contribution claimant and contribution defendant) either are or are assumed (by virtue of the Contribution Act) to have been liable to the original client.

Where both defendant advisers are sued by the original client to a final hearing the court gets a chance to determine their liability. However where, as here, one defendant adviser settles and later seeks to bring a contribution claim against the other adviser, the court does not have that opportunity.

To prevent the court from becoming mired in arguments about whether the contribution claimant was ever liable to the original client, there is a “deeming provision” in s. 1(4) of the Contribution Act. This provides that:

“A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage….. shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established.”

The purpose of this is that if a professional person enters into a bona fide settlement and then sues another professional, that new contribution defendant cannot contend that the underlying claim against the contribution claimant would have failed at trial on the issue of liability- provided of course that the facts gave rise to a proper cause of action.

This seems simple enough, but the law had got tied up in knots over the issue of whether this precluded defendants to a contribution claim from advancing what is known as a “collateral defence”.[1]

The case law in this area had got rather confusing.  In the course of debating collateral defences, WH Newson Holding Limited v IMI Plc v Delta Limited [2017] Ch 27, stated (at para. 59) that

“the sense of that is that all that D1 needs to show is that such factual basis would have disclosed a reasonable cause of action against D1 such as to make him liable in law to C in respect of the damage. If he can do that, he will be entitled to succeed against D2. There may of course remain issues as to quantum, as to which section 1(4) makes no assumptions.” (emphasis added)

In the contribution claim against Mr Mayall, Merriman White latched on to the words “if he can do that, he will be entitled to succeed against D2”  to suggest that a similar set of assumptions to those applying to its own liability to Mr Percy also affected the question of whether Mr Mayall was liable to Mr Percy.  In other words, Merriman White submitted at trial that:

  1. Once it was accepted that it was liable to Mr Percy, it followed that Mr Mayall was also liable; and
  2. The court was therefore precluded from enquiring into whether Mr Mayall was negligent or whether that negligence had caused loss.

At first instance, the Deputy Judge accepted Merriman White’s approach.

Mr Mayall appealed, arguing that the Deputy Judge had misconstrued s. 1(4) of the Contribution Act and had therefore failed to consider the evidence about whether Mr Mayall was negligent and/or whether that alleged negligence had caused any loss.

Patrick Lawrence KC of 4 New Square appeared for Mr Mayall on appeal.

The Court of Appeal overturned the Deputy Judge’s approach to the operation of the Contribution Act.

Lord Justice Flaux held that s. 1(4) of the Contribution Act created a species of deemed liability of the contribution claimant – i.e. Merriman White in the present proceedings- to the client. It had nothing to do with whether the contribution defendant – i.e. Mr Mayall- was negligent or whether that negligence was causative of any loss (para. 83).  He rejected the idea that the passage from WH Newson in fact supported Merriman White’s approach and pointed out that that case had unusual facts in which both defendants had already been found to be parties to a cartel and that they were bound by that decision. He suggested that the approach espoused by Merriman White would lead to a “startling result” (para. 88).

Lord Justice Flaux made clear that the burden would have been on Mr Percy, had he sued Mr Mayall himself, to prove that Mr Mayall was negligent and that he had caused loss. He therefore explained that the same burden fell on Merriman White in the contribution claim (para. 105).  However, Merriman White had not elected to call Mr Percy to give evidence and had therefore been left with a “fatal lacuna” in its case (para. 106).

Lord Justice Lewison took a similar approach.  He explained that it was clear that a contribution claimant must show that a contribution defendant was liable to the original claimant.  He further held that the Deputy Judge had been wrong to “sidestep” the question of whether Mr Mayall had been negligent and had caused loss (paras. 122ff).

The collateral attack debate

The Deputy Judge’s failure to consider whether Mr Mayall’s advice on the derivative action was negligent was tangled up with another error in his reasoning.

In response to Mr Mayall’s protestation that it was unfair to presume that he had been negligent, the Deputy Judge suggested that Mr Mayall was not entitled to attack the finding of Mr Donaldson QC that no permission should be granted to pursue a derivative claim in any event. He suggested that in order to defend his advice, Mr Mayall would need to prove that Mr Donaldson QC’s decision was wrong and that there was no basis on which the Deputy Judge could make such a finding (para. 95).  Indeed, he said that such an outcome would undermine the rule of law and endanger the reputation of the administration of justice within the meaning of the test for abuse of process established by Bairstow v Secretary of State for Trade and Industry [2003] EWCA Civ 321 and affirmed by Allsop v Banner Jones [2021] 3 WLR 1317.

On appeal, Mr Mayall argued that this was wrong. The judgment of Mr Donaldson QC was not determinative of whether Mr Mayall’s advice had been negligent. There was no issue of res judicata because the parties to the negligence claim were different to the parties before Mr Donaldson QC. There was also no issue of abusive collateral attack. In order to decide whether Mr Mayall’s advice had been negligent, the court did not need to decide whether Mr Donaldson’s judgment was right or wrong. Instead it had to consider the range of likely outcomes in the permission application and whether Mr Mayall’s advice was “off beam” by reference to that range.

Lord Justice Flaux stated that the proposition that Mr Mayall could not argue that Mr Donaldson was wrong was “equally startling” as the approach that Merriman White was taking to the operation of the Contribution Act (para. 90).  He referred to the judgments in both Bairstow and Allsop and held that it was only in an exceptional case that a court would find that a second set of proceedings between different parties was an abuse of process because it called into question a judgment between different parties in another case (para. 93).  He said that:

MW was unable to point to any authority to the effect that, for a professional negligence lawyer who had conducted litigation to be able to challenge the judgment in defence of a negligence claim against him, would bring the administration of justice into disrepute” (para. 93).

Lord Justice Flaux also accepted that it was not necessary for Mr Mayall to go so far as to say that Mr Donaldson QC’s judgment was wrong. Instead, all he had to show was that other judges might well have taken a different view and might have concluded that permission should be granted to pursue a derivative action. In that case, he could show that the advice to proceed with a derivative claim could be given by a reasonably competent barrister and was therefore not negligent (para. 95).

At para. 98, Lord Justice Flaux concluded that:

“because the judge fell into error in…..concluding that the application of section 1(4) of the 1978 Act established Mr Mayall’s liability in the contribution proceedings without more and concluding that any challenge by him to the correctness of Mr Donaldson QC’s judgment would be an abuse of process, the judge did not address sufficiently the critical issues in the case as to whether Mr Mayall was negligent and if so, whether that negligence was causative of Mr Percy’s loss”.

Conclusion

The Percy case is a timely reminder that it is important to understand what elements of a contribution claim have to be proven, and the limits on the component parts which are deemed to have been made out. This issue has a direct bearing on what evidence needs to be called and the shape of the trial.


Disclaimer: this article is not to be relied on as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.

© Helen Evans KC, 4 New Square Chambers | 22 April 2022.


[1] This expression attempted to encapsulate a defence which does not undermine the factual basis of the claim pleaded against the original professional but suggests that there was in fact no liability. An example of such a collateral defence is a limitation defence.

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