The Law Society v Sephton & Co & Ors

It is and was rightly common ground between the parties and accepted by the judge that, following the decision in the KPMG case, the Society had, as a matter of principle, a cause of action in negligence against Sephtons as a result of the issue of each Report. However, what had to be resolved was the date on which the Society’s cause of action accrued, in light of s2 of the 1980 Act, which provides:

“An action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued.”

A number of different candidates were put forward to the judge as the possible dates upon which the Society’s causes of action in negligence against Sephtons could have accrued. The judge concluded that the cause of action, in relation to each Report, accrued at the latest on the date of the first misappropriation by Mr Payne following the receipt of the Report by the Society.

The reasoning of the judge was based on the proposition that it has been authoritatively established that a cause of action in negligence is complete once the claimant has suffered loss as a result of the negligence, even if the existence of the loss (and indeed of the negligence) is not, and could not be, known to him, and even where that loss is much less than the loss which he ultimately suffers as a result of the negligence. On the facts in this case, Mr Mascord provided, on eight occasions, an unqualified Report in respect of Mr Payne’s practice, whereas he should have provided a qualified Report, or indeed no Report at all. Had he not been negligent in this way, therefore, the Society would not have permitted Mr Payne to carry on practising, at least without supervision or some sort of condition which prevented him from having any control of client monies, as a result of which he would not have been able to misappropriate any such monies. Therefore, as soon as Mr Payne misappropriated any monies after the Society’s receipt of a Report, the Society, in its capacity as trustee of the Fund, was exposed to a liability, which would not have happened in the absence of the negligence, the liability being exposure to a potential claim, which, the judge concluded, constituted sufficient damage to start time running under s2 of the 1980 Act.

In reaching this conclusion, the judge relied on a number of cases, whose effect was conveniently summarised by Clarke LJ in Polley -v- Warner Goodman & Street [2003] PNLR 40 at paragraphs 15 and 16:

“15.

In Hatton -v- Chafes (13.3.2003) [2003] EWCA Civ 341, in a judgment with which Peter Gibson LJ and Sir Anthony Evans agreed, I summarised the principles in this way in paragraph 12:

‘(i) A cause of action in negligence does not arise until the claimant suffers damage as a result of the defendant's negligent act or omission.

(ii)

The damage must be ‘real’ as distinct from minimal: Cartledge -v- Jopling [1963] AC 758 per Lord Reid at 771 and Lord Evershed MR at 773-4.

(iii)

Actual damage is any detriment, liability or loss capable of assessment in money terms and includes liability which may arise on a contingency: Forster -v- Outred [1982] 1 WLR 86 per Stephenson LJ at 94, approved by the House of Lords in Nykredit Mortgage Bank plc -v- Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627, per Lord Nicholls (with whom the other members of the appellate committee agreed) at 1630F.

(iv)

The loss must be relevant in the sense that it falls within the measure of damages applicable to the wrong in question: Nykredit at 1630F.

(Propositions (i) to (iv) were confirmed by Sir Murray Stuart-Smith in Khan -v- Falvey [2002] EWCA Civ 400, [2002] PNLR 28, at paragraphs 11 and 12.)

(v)

A claimant cannot defeat the statute of limitations by claiming only in respect of damage which occurs within the limitation period if he has suffered damage from the same wrongful act outside that period: Khan -v- Falvey at paragraph 23, following Knapp -v- Ecclesiastical Insurance Group Plc [1998] PNLR 172 per Hobhouse LJ at 184 and 187.’

16.

Having regard to the submissions in the instant case I would add a sixth proposition, namely: damage often occurs before it can be crystallised, and difficulties of quantification do not prevent damage from being said to have occurred (see Nykredit at 1632).”

I do not need to discuss any of the leading cases on this topic in any detail, at any rate at this stage. However, it would be wrong not to cite what Lord Nicholls of Birkenhead said in Nykredit at 1630C-F

“In Forster v. Outred & Co. [1982] 1 W.L.R. 86, 94, Stephenson LJ recorded the submission of Mr Stuart-Smith Q.C.:

‘What is meant by actual damage? Mr Stuart-Smith says that it is any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases. They are all illustrations of a kind of loss which is meant by “actual” damage. It was also suggested in argument … that “actual” is really used in contrast to “presumed” or “assumed”. Whereas damage is presumed in trespass and libel, it is not presumed in negligence and has to be proved. There has to be some actual damage.’

Stephenson L.J., at page 98D, accepted this submission. I agree with him. I add only the cautionary reminder that the loss must be relevant loss. To constitute actual damage for the purpose of constituting a tort, the loss sustained must be loss falling within the measure of damage applicable to the wrong in question.”

Nykredit itself was concerned with the question of when the cause of action accrued in favour a lender who lent money secured on property, on the basis of a negligently high value ascribed to the property by the defendant valuer. (The question arose in connection with determining the date from when interest was to run, rather than for limitation purposes, but the principles are clearly the same). The House of Lords held that the cause of action in tort accrued on the date when it could first be shown that the value of the rights acquired by the lender, namely the value of the security plus the value of the debtor’s covenant, fell below the amount of the loan (always assuming, as was the case there, that the amount of the loan was less than the value of the rights acquired, at least if one ascribed to the property the value it had been given by the valuer).

The Society’s case, as developed by Mr Timothy Dutton QC and Ms Rosalind Phelps, raises three separate arguments why the conclusion of the judge was wrong. Those arguments are as follows:

If the first or second argument is right, then, the Society’s cause of action would have first accrued in relation to a particular Report on the date on which the Society first resolved to pay out from the Fund a client whose funds had been misappropriated by Mr Payne after the Report in question had been provided. If the third argument is correct, then it is possible that the court might be able to take an approach based more on policy than principle, and may be able to fasten on a date for accrual of cause of action which makes practical common sense, such as the date on which the Society actually intervened in Mr Payne’s practice.

I turn, first, to the contention that the judge drew the wrong conclusion from Forster and the authorities considered in Polley, as they were all cases where the defendant’s negligence occurred in connection with a transaction where the claimant was executing a document and acquiring an asset or a right whose value was reduced or lost as a result of the negligence. In the present case, by contrast, it is said, the Society suffered no loss, merely a risk of loss or a contingent liability, as a result of any subsequent misappropriation, until the Society decided to pay out to the client whose monies were misappropriated.

In my view, the judge’s conclusion here receives some support, over and above the principles summarised in Polley, from another observation of the House of Lords in Nykredit. Lord Nicholls said that “the first step in answering [the] question” of when a claimant “first sustains a measurable relevant loss” involves identifying “the relevant measure of loss” (see 1631D-E), which in turn involves identifying the scope of the defendant’s duty (see at 1631G). In this case, as I see it, the scope of Sephtons’ duty, so far as relevant, was not directly related to the risk of receiving or paying out claims by clients whose funds had been misappropriated; it was directly related to the risk of such misappropriations occurring in the first place. As Lord Woolf CJ said, in para 22 in the KPMG case at [2000] 1 WLR 1929B, “the reports were required so that protective steps could be taken” (although it is only right to mention that he immediately went on to say that it was “obvious” that the Fund could suffer loss if such steps were not taken). That suggests that damage first arose when the first such misappropriation occurred. However, it is argued on behalf of the Society that measurable damage did not accrue, at least until the first client made his claim, and probably not until the Society first decided to meet such a claim.

Support for this line of argument is to be found in the decision of the High Court of Australia in Wardley Australia Limited -v- State of Western Australia (1992) 175 CLR 514, 109 ALR 247. The facts of that case were not dissimilar to the present, in that the claim was based on a statutory trade indemnity scheme (contained in s82(1) of the Australian Trade Practices Act 1974). The insurers claimed damages from Wardley, on the basis that its alleged deceit induced them to grant an indemnity, which was subsequently called on. The High Court of Australia held that the claim accrued, not when the indemnity was granted, but when the event which gave rise to a claim on the indemnity occurred. (In this connection, I should add that it is clear from the judgment that the basic principles as to when an action in tort accrues in Australia are the same as in this jurisdiction.)

The reasoning of the majority of the Australian High Court (Mason CJ and Dawson, Gaudron and McHugh JJ), at least so far as relevant to this appeal, can be extracted from three passages at 175 CLR 530-533, 109 ALR 257-259 to the following effect:

“[T]he English decisions have proceeded according to the view that, where the plaintiff is induced by a negligent misrepresentation to enter into a contract and the contract, as a result of the negligence, yields property or contractual rights of lesser value, the plaintiff first suffers financial loss on entry into the contract, notwithstanding that the full extent of the plaintiff's financial loss may be incapable of ascertainment until some later date … [175 CLR 530, 109 ALR 257 ll 12-18]

If, contrary to the view which we have just expressed, the English decisions properly understood support the proposition that where, as a result of the defendant's negligent misrepresentation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred. A deferred liability may stand in a different position but there is no occasion here to discuss that matter. … [175 CLR 532, 109 ALR 258 ll 29-38]

The conclusion which we have reached is reinforced by the general considerations …. It is unjust and unreasonable to expect the plaintiff to commence proceedings before the contingency is fulfilled. If an action is commenced before that date, it will fail if the events so transpire that it becomes clear that no loss is, or will be, incurred. Moreover, the plaintiff will run the risk that damages will be estimated on a contingency basis, in which event the compensation awarded may not fully compensate the plaintiff for the loss ultimately suffered. These practical consequences which would follow from an adoption of the view for which the appellants contend outweigh the strength of the argument that the principle applicable to the cases in which the plaintiff acquires property (or a chose in action) should be extended to cases where an agreement subjects the plaintiff to a contingent loss. In such cases, it is fair and sensible to say that the plaintiff does not incur loss until the contingency is fulfilled.” [175 CLR 533, 109 ALR 259 ll 21-34]

It may be that, on a close analysis, the decision in Wardley is of no real assistance here. First, it is clear from the judgment of Brennan J (at 175 CLR 535, 109 ALR 261 ll 22-34) that four different dates were put forward as candidates for the accrual date, and that only the earliest of those dates resulted in the action being time barred. The earliest date was the actual execution of the indemnity. Yet, even on the judge’s reasoning on this case, that would have been too early a date: it would be equivalent to the date on which the Report was provided. Secondly, the determination of the majority in Wardley was governed, at least in part, by the way in which s82(1) and (2) of the Australian statute concerned were worded (see 175 CLR 525-527, 541-542 and 545, 109 ALR 253 l.5 - 254 l.15, 266 ll 14-35 and 268 l.28 - 259 l.8).

Nonetheless, I am inclined to accept the contention that at least some of the reasoning in Wardley supports the Society’s argument, and is inconsistent with the judge’s approach. Whether or not to follow the reasoning of the High Court of Australia in Wardley is, in my view, a difficult question. On the one hand, it could be said to be somewhat arbitrary that, when determining whether a cause of action accrues in negligence, very different answers might be given depending on whether or not the negligence was in a case where the claimant was executing a document and acquiring an asset or a right. On the other hand, the reasoning in Wardley, which is of particular force bearing in mind its source, has considerable attraction.

The Society reinforces its argument on this point by reference to the decision of Neill J in Telfair Shipping Operation SA -v- Inersea Carriers SA, the Caroline P [1985] 1 WLR 553. In that case, a contractual claim based on an indemnity was held not to be time-barred on the basis that the cause of action in contract accrued not on the date of the occurrence of the damage for which the indemnified was liable, but on the date on which the court found the indemnified to be so liable: see at 568H. The decision itself, and some of the observations of Neill J (for instance at 566G where he distinguished Forster) certainly appear to give some assistance to the Society’s case. It is true that The Caroline P concerned a claim in contract, not tort. Nonetheless, it appears to me that, both as a matter of policy and as a matter of principle, one should try to minimise the differences between the date of accrual of a cause of action in contract and that in tort, where there are parallel causes of action (a view supported by Lord Nicholls in Nykredit at 1633D-F).

There is no doubt that there are grounds for contending that damage should not be treated as having been suffered by the Society in this case until its decision to pay out claim, notwithstanding the reasoning in cases such as Forster, Nykredit and Polley. The principal ground is that the Society did not acquire an asset or right, whose value was diminished owing to the negligence of Sephtons, as a result of, or in connection with, any of the Reports. A second ground is that the Society did not act on receipt of the Reports: the Society merely let things continue as they were. I accept that these do represent grounds of distinctions between the present case and (at least in relation to the first ground) Wardley, on the one hand, and, on the other hand, cases such as Forster and Nykredit, as considered in Polley.

While acknowledging the existence of these distinctions, I have, however, reached the conclusion, that, at any rate in this court, they do not justify distinguishing the earlier cases such as Forster. The law relating to the date on which a cause of action accrues in negligence is, I think, generally accepted as being somewhat arbitrary and unpredictable, and, in some cases, capable of leading to unsatisfactory results. Unless clearly satisfied that the reasoning in previous decisions is distinguishable on an intellectually and practically satisfactory basis, I consider that it would be wrong in principle, and would merely add to the uncertainty and arbitrariness which already exists in this field, if we were to depart from them. In that connection, apart from the cases already mentioned, I must deal in a little detail with two decisions of this court of particular relevance.

The first of the two decisions is Knapp -v- Ecclesiastical Insurance Group plc [1998] PNLR 172. In that case, the plaintiffs’ property had been damaged by fire, and their insurer had refused to pay out on the basis that the insurance cover they had taken out was voidable. The plaintiffs claimed, inter alia, that the voidability was attributable to the negligence of their insurance broker at the time they took out the cover. The Court of Appeal unanimously held that the action against the insurance broker was time-barred because the cause of action arose at the time the cover was taken out, not the time at which the fire occurred.

At 177F-178B, after referring to some earlier decisions, Hobhouse LJ (with whom Butler-Sloss LJ agreed) said this:

“The cause of action in negligence accrued as soon as damage was caused independently of whether or not at that time the plaintiff was aware of it. It was in the light of these decisions that the legislature made additional statutory provision to deal with the cases of injustice and hardship which arose from the application of the primary limitation period. English law has therefore preserved the strict primary rules governing the accrual of causes of action but has sought to avoid or mitigate injustice by specific statutory provision. …

[T]he approach in other Commonwealth jurisdictions has not been the same. For instance, in New Zealand the decision in Pirelli -v- Oscar Faber has not been followed (Invercargill CC -v- Hamlin [1996] AC 624.) In Australia a similarly distinct approach has been adopted and the English cases such as Forster -v- Outred have not been followed (Wardley…). Both the Invercargill and the Wardley cases clearly demonstrate that those countries have adopted different solutions to the potential injustices which arise from the strict application of the primary limitation period.”

After considering many of the authorities which were considered by Clark LJ in Polley and by the High Court of Australia in Wardley, Hobhouse LJ concluded at 184E-F:

“From these authorities it can be seen that the cause of action can accrue and the plaintiff have suffered damage once he has acted upon the relevant advice ‘to his detriment’ and failed to get that to which he was entitled. He is less well off than he would have been if the defendant had not been negligent. Applying this to the present case, the plaintiffs paid their renewal premium without getting in return a binding contract of indemnity from the insurance company. They had acted to their detriment: they did not get that to which they were entitled.”

It seems to me that in the first passage Hobhouse LJ made it clear that he considered that the conclusion of the Australian High Court in Wardley did not represent the law in this country. As to the second passage, it is fair to say that, at least if looked at on its own, it could be read as being limited to cases where the negligence is connected to the plaintiff’s acquisition or intended acquisition of property or an asset (especially in light of the words “that to which he was entitled”). But, especially when read together with Hobhouse LJ’s earlier observations relating to Wardley, it seem to me a little unrealistic to read the second observation as being other than of general application.

In his judgment in Knapp, Buxton LJ (with whom Butler-Sloss LJ also agreed) said at 188C-D:

“It was conceded by the [plaintiffs that from its inception they] received a policy that was not valid but voidable. The short answer to the appeal would therefore seem to be that the plaintiffs were then, and thereafter, suffering actual damage in legal terms. The quantification of that damage might be difficult, and might depend on contingencies that had not arisen, either [at the inception of the policy] itself or indeed at the date of trial. That, however, does not affect the existence of damage at the date of the [insurer brokers’] failure of duty.”

Towards the end of his judgment, Buxton LJ turned to the decision in Wardley. He first quoted with approval the passage I have cited from (1992) 175 CLR 530, 189 ALR 257. Importantly, for present purposes, he went to say this at 192B-D:

“The [High Court of Australia] however rejected, or at least doubted, the argument put to it that [certain English] decisions establish that the plaintiff necessarily suffers loss on entry to an agreement notwithstanding that the loss to which the plaintiff is subjected by the agreement is loss upon a contingency: what is required is actual loss on entry, quite apart from the contingent loss threatened at a later date (see … [(1992)] at 109 ALR 247 at p.257). Since P's guarantee only ‘generat[ed] an executory and contingent liability upon the part of [P], [P] suffered no loss until that contingency was fulfilled and time did not begin to run until that event’: see 109 ALR 247 at p.260, l4.

None of these propositions seem to me, any more than they seemed to the High Court of Australia, to be inconsistent with the current English law. True it is that some further passages in the leading judgment in Wardley, 109 ALR 247 at pp.258, 40-259, 35, suggest that in some cases that court might take a different view from the English courts when identifying what it calls actionable actual loss (as opposed to a mere potential for loss).”

In relation to the present case, those observations might appear, at least at first sight, to cut both ways. In favour of Sephtons, the point can be made that Buxton LJ clearly did not consider that all aspects of the reasoning and decision in Wardley would apply in this jurisdiction, in particular the passage at 109 ALR 258-259 which included the third extract I have quoted from that decision. On the other hand, the passage he expressly quoted with apparent approval from 109 ALR 260 may appear to be of assistance to the Society’s argument in this appeal. However, it seems to me that what Buxton LJ called “a mere potential for loss” could fairly describe the Society’s position after receipt of a Report, and “actionable actual loss” its position following the first misappropriation thereafter.

In these circumstances, I consider that the obiter observations of Hobhouse LJ fairly clearly, and those of Buxton LJ probably, indicate that the reasoning in Wardley cannot safely be relied on to support the Society’s case. Further, at least in my judgment, a comparison of the outcomes in Wardley and Knapp indicates that, at least as a matter of common sense (possibly a dangerous concept to invoke in this field), they are mutually inconsistent. Compare a case where, owing to the negligence of his agent, an insured fails to insure against a specific risk, with a case where, due to the negligence of their agents, the insurers insure against a risk they do not intend to cover. On the face of it, the insured in the first case, and the insurers in the second case, have claims which are mirror images. One would expect time to start running against the claimant (insured or insurers) in each case with effect from the same date, or least from a date arrived at by reference to the same principles. Yet Knapp results in time running from the date of the insurance contract in the first case, and the reasoning in Wardley indicates, I think, that time runs from the date that the insured risk occurs in the second case.

I turn now to the second decision of this court namely Gordon -v- J B Wheatley & Co [2000] Lloyds LR PN 605. In that case, the claimant engaged the defendants to advise him in connection with a mortgage scheme he operated for customers. His case was that the defendants had negligently failed to advise him to register under s3 of the Financial Services Act 1986 (“the FSA”). After the defendants had ceased to act for him, the claimant was required to agree to underwrite his customers’ losses under the scheme, at the insistence of the Securities and Investment Board (“the SIB”). This was pursuant to a right given to the SIB under the FSA owing to the claimant’s failure to register. The SIB had commenced its investigation into the claimant’s business less than six years before he brought his action against the defendants, and therefore any obligation to underwrite customers’ losses was imposed on the claimant well within the limitation period. However, his claim against the defendants for failure to advise him of his duties under the FSA was held to be time-barred, because the claimant had first suffered actionable loss, and therefore his cause of action had accrued, when the first customer entered into the mortgage scheme.

The point made on behalf of the unsuccessful claimant was recorded in the judgment of Kennedy LJ (with whom Kay LJ agreed) at 607, first column, as:

“… actual loss is not the same as a serious risk of loss, and … that until at the earliest the claimant signed the Deed of Undertaking and Indemnity (which was within the six year period) there was no more than a serious risk of loss.”

Kennedy LJ referred in the second column on the same page to the claimant’s argument in slightly different terms, namely:

“Forster's case there was immediate damage to a discernible asset, the plaintiff's equity of redemption, not merely a risk of damage to her assets as a whole.”

Kennedy LJ rejected those submissions initially by reference to a decision of first instance of Nourse J, Milton -v- Walker & Stanger (1981) 125 SJ 861, where the claim was based on the contention that the defendant solicitors had failed properly to protect the plaintiff so far as concerned his potential future liabilities for capital gains tax (which, of course, would only arise if he sold the property concerned). Kennedy LJ quoted Nourse J as saying:

“If shortly after executing the agreement the plaintiff had issued a writ against the defendants, however difficult or even speculative the process might have been, the court would have awarded damages.”

Kennedy LJ then went on to say that this court adopted the same approach in D W Moore & Co -v- Ferrier [1988] 1 WLR 267 (cited with approval in Nykredit at 1634A). At 608, first column, Kennedy LJ described Bingham LJ at 279H ff in Moore as having “followed the approach adopted by Nourse J in Milton’s case”, in a passage which he then quoted. I accept that Moore can fairly be characterised as a case where the claimant acquired an asset, namely the benefit of a contract with a director, which contract included a restrictive covenant. However, the way in which Bingham LJ expressed himself is hard to reconcile with the Society’s case here, or with the reasoning in Wardley.

The claim in Moore was by the employer (the first plaintiff) against solicitors for including an ineffective restrictive covenant in the employment contracts of two of its directors. Bingham LJ, holding that the cause of action against the solicitors accrued when the contract was entered into, said this at 280A-B:

“[S]o long as there was any risk that one of the first plaintiff’s two directors might leave … to establish a competing business, there must necessarily have been a depressive effect on the value of the first plaintiff’s business ….” (emphasis added)

Thus, there was a cause of action by reference to the potential financial risk to the first plaintiff’s business, not by reference to the value of the particular asset or right acquired, namely the benefit of the director’s contract.

Reverting to Gordon, at 609, first and second columns, Kennedy LJ identified the submission for the claimant as being that:

“… in the earlier cases, there was immediate damage to a definite proprietary interest other than the plaintiff's general wealth, and that, he submits, is important. There must be, as he put it, a tangible loss to a bank balance, or something you can point your finger to.”

After considering judicial observations in other cases, Kennedy LJ went on to say this at 610, first and second columns:

“… it is necessary to identify the loss claimed, and to measure it against the duty allegedly breached. Here the breach of duty relied upon is an alleged failure to advise the claimant how to operate in such a way as not to be likely to attract adverse criticism for the SIB, in consequence of which negligence vulnerable transactions were made which were all completed before the beginning of the six year period, and before the SIB began to investigate.”

He then referred to Knapp and Nykredit, and said this at 612, first column:

“[Counsel for the claimant] submitted that in the present case when investments were made the claimant was not actually worse off as a result of the … defendant’s alleged negligent failure to advise. He was only potentially worse off, but in my judgment that is not right. After the investments were made the plaintiff was exposed to the risk of being required by a court, pursuant to … the 1986 Act, to restore … investors and borrowers … to the position in which they were before the transactions were entered into. That was a liability, albeit a contingent liability, a fetter on his assets, from which on his case he would have been protected if the … defendant had exercised proper care.”

Accordingly, in the second column on the same page, he said that he “must conclude that the claimant did sustain actual loss sufficient to complete his cause of action … when each investment was made”, although he did say that he “did not find the question … an easy one”.

The various passages I have quoted from Gordon show that the claimant in that case ran arguments very much along the lines of the Society’s principal ground for not following the approach in cases such as Forster and Nykredit, and that those arguments were rejected. The decision and reasoning of this court in Gordon, when considered with the other cases I have been considering, renders it, therefore, very hard, at least in my view, to accede to the principal argument of the Society.

Even in the absence of the decisions in Knapp and Gordon, I find it hard to see why, as a matter of principle or practical reality, there should be a difference in approach to the question of the accrual of a cause of action in negligence, between cases where the negligence occurs in connection with a transaction where the claimant acquires an asset or right, and cases where it occurs in connection with a transaction under which he merely incurs a liability. Nor do the principles as they emerge in the leading cases, considered and summarised in Polley, seem to me to turn on whether or not the claimant had acquired an asset or a right. The last passage I have quoted from Wardley suggests that the High Court of Australia restricted the effect of the English cases in this way at least partly because of the difficulty in assessing damages and because of fairness. In my judgment, those reasons are hard to justify as a matter of principle.

This view so far as difficulty of quantification is concerned, is reinforced by what Lord Nicholls said in Nykredit at 1632E-F:

“Quantification of the lender’s loss is bound to be less certain, and, therefore, less satisfactory, if the quantification exercise is carried out before, rather than after, the security is ultimately sold. This consideration weighed heavily with the High Court of Australia in Wardley … but the difficulties of assessment at the early stage do not seem to me to lead to the conclusion that at the earlier stage the lender has suffered no measurable loss and has no cause of action, and that it is only when the assessment becomes more straightforward or final that the loss first arises and with it the cause of action.”

Further, apparently unlike in Australia, it seems to me unnecessary to invoke reasons of fairness in this jurisdiction (as Hobhouse LJ briefly implied in Knapp at 177G), in light of the provisions of s14A of the 1980 Act. That section (as explained by Lord Nicholls in Nykredit at 1630H-1631A) has the effect of extending the six-year limitation period, subject to a cut-off date of 15 years, to a date which (at the risk of over-simplification) is three years from the date on which the claimant could reasonably have discovered the material facts giving rise to his claim.

The fact that the actual liability of the Society (in the sense of having to pay out money from the Fund) turns on a contingency does not seem to me to be a valid reason for departing from the principles summarised in Polley. The essential point is that the Society was, as Nicholls LJ put it in Bell -v- Peter Browne & Co [1990] 2 QB 495 at 503C, “at risk from the outset”, i.e. from the first misappropriation after each Report.

In Nykredit, the risk or potential for a loss arose as soon as the loan was made, but no actionable loss was suffered, and hence no cause of action accrued, until the value of the bundle of rights obtained by the lender was less than the amount of the loan he had made. At that point a loss crystallised, although that loss was contingent, in the sense that it may never have been realised, because the value of the security and/or the borrower’s covenant to repay could have increased, to the extent of exceeding the amount of the loan. In Gordon, the risk or potential for loss arose, when the mortgage scheme was marketed, but no loss crystallised until a customer joined the scheme. That loss may never have been realised in the sense that the claimant may never have been subjected to an investigation by the SIB, or to a requirement by the SIB that he indemnified his customers, or to that indemnity being called on.

So here, on the judge’s reasoning. The risk of loss, in the sense of a potential for a claim being made against the Fund, arose when each Report was provided to the Society, and Mr Payne was permitted to carry on his practice freely. But no loss was suffered and no cause of action accrued until he first subsequently misappropriated client monies, thereby exposing the Fund to a possible claim, which the Society could not prevent being made. Although a loss crystallised at that point, it was contingent, in the sense that Mr Payne may have made good the deficiency or, even if he had not, the client may not have made a claim against the Fund. However, to my mind at least, the Fund, at the moment of the misappropriation, suffered loss in the sense that it was exposed to a potential liability, with the result that its net worth was reduced, by virtue of its exposure to that liability.

I do not consider that The Caroline P justifies rejecting the result which I believe follows from a proper application of the reasoning in the cases I have been discussing. The issue in The Caroline P concerned the question of when time began running under the 1980 Act in relation to a claim based on contract, there was no question of a parallel claim in tort. Here, the claim is in tort, and there is no question of a parallel claim in contract. Neill J was influenced in reaching his decision by the fact “that at common law a person who is entitled to an indemnity cannot enforce it until he has made a payment to the third party” - see at 568E. That is not a ground which, to my mind, justifies our refusing to follow the reasoning developed in subsequent cases concerned with claims in tort, particularly in the light of the refinement of the law in that field since 1985, in decisions such as Knapp, Gordon and Nykredit, as well as most of the decisions which were considered and applied in those cases.

It is true that none of the cases (with the possible exception of Gordon) can be said to involve the claimant having done nothing as a result of the negligence of the defendant. I do not, however, consider that the fact that the Society’s case is that it did nothing (rather than intervening in Mr Payne’s practice) as a result of Sephtons’ negligence, is a satisfactory reason for adopting a different approach to identifying the accrual date from that which would be adopted if the Society’s case was that it had done something as a result of the negligence. Whether as a matter of legal principle or of logic, I am not attracted by the notion that the question of when damage is first suffered should be assessed by reference to a different date and indeed on different principles, just because the claimant did nothing, rather than did something, as a result of the defendant’s negligence. Commission may be morally distinguishable from omission, and the distinction is relevant in some areas of law (probably those which can be said to involve a moral element, e.g. duty of care). However, I see no reason why the distinction should be of relevance, potentially of crucial relevance, in the law of limitation.

What if the plaintiffs in Knapp had obtained a voidable policy through their own fault, had then sought the advice of the defendant broker as to whether the policy was valid, had been negligently advised that it was not voidable? If, as a consequence, they did nothing so that the policy remained voidable, rather than informing the insurer so that the policy ceased to be voidable, I find it hard to think that the Court of Appeal would have concluded that time began to run when the risk eventuated, rather than when the plaintiffs failed to act on the negligent advice.

Quite apart from this, I consider that any reliance on the fact that the Society did nothing, rather than something, as a reason for distinguishing the earlier cases, falls foul of the decision of this court in Gordon. The claimant’s case there was that as a result of the defendants’ failure to advise him properly, he failed to do something, namely so to register under s3 of the FSA; it was not that, as a result of the defendants’ negligence he actually did something, namely getting customers to enter into his scheme. It is true that the positive act of getting the first customer to enter into the scheme was relevant, but it was only because that was the act which gave rise to actual damage. It was entirely consistent with the judge’s conclusion here that the positive act of the first misappropriation following each Report was what gave rise to actionable damage in this case.

I should add this. It may be that the proper application to the facts of this case of the reasoning in Knapp could be said to result in the accrual date being the date of issue of each Report, and not the date of the first misappropriation of monies thereafter. It would be inappropriate to decide that question, because it was not argued before us, and it is not necessary to do so as it would not affect the outcome in this case. The fact that the application of the principles which I consider appropriate could lead to the conclusion that the accrual date was a little earlier than that identified by the judge does not cause me to doubt (or at least to doubt more strongly) the correctness of that principle. Having said that, my provisional view is that, in this case, the judge was probably right, even if, in a normal case, a claim by the insurers in tort may start running from the date the insurance policy is entered into. Applying the reasoning in Nykredit to the normal case, it may be that, at the moment the insurer signed the policy, it could be said that he suffered a loss (at least if the value of the premium he received was less than the value of his risk under the policy): from that moment matters were out of his control.

However, in the present case, the Society did not enter into such a policy as the result of any of the Reports; it merely continued to let Mr Payne practise freely, while being able to intervene at any time in his practice. The Society could therefore be said to have been no worse off as the result of receipt of a Report, because it was free to intervene without being exposed to any loss, until Mr Payne made a subsequent misappropriation. In other words, the risk only sufficiently crystallised to have the quality of actionable loss on the first misappropriation. On this basis, the distinction between this case and the normal case is that, in this case, the Society could avoid any loss by intervening before the first misappropriation, whereas a normal insurer is bound for the term of the policy concerned. This is a distinction which may get a little support from the reference to “particularly a contingency over which the plaintiff has no control” in the passage in Forster cited with approval in Nykredit.

Thus, in my judgment, application of the principles to be extracted from the various decisions of this court and the House of Lords leads to this conclusion. At least in the absence of evidence to the contrary, there was no loss to the Fund at the date of receipt of a Report, any more than, in the absence of evidence to the contrary, there is a loss to a lender who lends on the security of a negligently over-valued property. It was only when there was a misappropriation subsequent to a Report that a loss was incurred here, albeit that it was a loss which might never have been realised, just as it is only when the bundle of rights enjoyed by the lender is less than the loan that a loss was incurred in Nykredit, albeit that that loss also may never have been realised.

Finally on this point, I derive a little comfort in reaching my conclusion on this difficult point from what was said by Lord Nicholls in Nykredit at 1633D, in a passage cited by the judge:

“[W]ithin the bounds of sense and reasonableness the policy of the law should be advance, rather than retard, the accrual of a cause of action. This is especially so if the law provides parallel courses of action in contract and in tort in respect of the same conduct.”

I accept, of course, that the second sentence does not apply here, but the first sentence seems to me to be freestanding. It indicates an approach rather different from that advocated on behalf of the Society or that adopted by the High Court of Australia in Wardley.

I turn to the second argument, which turns on the fact that a client whose monies have been misappropriated by a solicitor does not have a claim as of right as against the Fund, as it would have against a normal insurer, surety, or indemnifier. The Society, as the trustee of the Fund, has a discretion whether to meet any such claim, and it is a discretion with real content. There is no doubt that the discretion may be exercised in such a way as to deprive the client whose funds have been misappropriated of any, or a proportion, of the compensation he claims. Thus, the Society may form the view that the client was very substantially to blame for the misappropriation - as in R -v- The Law Society ex parte Ingman Foods Oy AB [1997] 2 All ER 666. Or there might be insufficient monies in the Fund to meet all claims, so that the Society decides not to meet certain classes of claim. Further, it would be wrong to think that one could imagine every type of circumstance in which the Society might exercise its discretion against admitting a claim.

In these circumstances, it is submitted on behalf of the Society that, unless and until a claim is made and the Society decides to exercise its discretion to pay the claim, it cannot fairly be said that the Fund has suffered any loss, from which it follows that the Fund cannot, until that time, have an accrued cause of action in respect of the relevant Report. (There is a refinement on this point, which might arise where the Society wrongly rejects, or unreasonably delays in considering, a claim. In such a case, there would be an argument for saying that, if the claim is one which the Society should admit, time would run from the date on which the admission should have been made, as it is from that time that the Fund is effectively liable to pay the claim. However, it is unnecessary to decide that point, because, on any view, it would not affect the outcome of this appeal.)

I do not consider that the fact that the Fund’s liability to compensate in respect of any particular misappropriation turns on the exercise of a discretion is a reason for concluding that the accrual of its cause of action against Sephtons should be moved, indeed potentially (and, on the facts of this case, actually) moved radically, from the date of the first misappropriation after the Report to the date when the Society exercises its discretion to meet its claim by a client whose monies have been misappropriated.

In the first place, as I have already mentioned, the discretion is one which is to be exercised in accordance with principle. Indeed, in the absence of special circumstances, it is a discretion which one would expect to be exercised in favour of meeting a claim, where, as here, the misappropriation was plainly dishonest (see the provisions of the 1974 Act, the 1995 Rules and the Guidelines which I have set out or summarised above). Accordingly, if I am right on the first point, when Mr Payne misappropriated monies, the Society was potentially exposed to a liability, and the existence of the discretion is not a valid reason for moving the accrual date forward as the Society argues - see the point made in paragraph 16 of Polley, and at 188D in Knapp. While it may have been difficult in many cases to value that liability at the time it arose, neither evidence and nor argument has been advanced which suggests that this is one of those rare cases where the detriment cannot be valued, and where, therefore, the action cannot be treated as having accrued.

There is the small additional point in this connection. Even if the claim for a misappropriation is one which the Society ultimately decides not to meet, it can nonetheless be said that the Society would have to spend a certain amount of money, no doubt from the Fund, investigating the claim. I accept that the sum involved would be small, and it can fairly be said that there may be no claim, so that there is not even a certainty that this small sum of money will be spent. Nonetheless, the point is not dissimilar from that made by Nicholls LJ in Bell at 503F-G where he was explaining why time began to run in respect of a claim against a solicitor for failing to protect his plaintiff client by registering his interest when it was created in 1978:

“In considering whether damage was suffered in 1978 one can test the matter by considering what would have happened if in, say, 1980 the plaintiff had learnt of his solicitors’ default and brought an action for damages. Of course, he would have taken steps to remedy the default. But he would have been entitled at least to recover from the defendants the costs incurred in going to other solicitors for advice on what would be done and for their assistance in lodging the appropriate caution. The costs would have been modest, but not negligible.”

Secondly, it appears to me that the reasoning and decision of the Court of Appeal in Knapp assists the conclusion I have reached. In that case, the plaintiffs argued that, because the insurer had what one might characterise as a discretion whether or not to disclaim liability on the grounds of non-disclosure (where the non-disclosure was said to be the fault of the defendant insurance broker), time began to run in respect of the claim against the insurance broker, not from the date on which cover was obtained, but from the date on which liability was sought to be disclaimed. In that case, there was no certainty that the insurer would disclaim liability, just as in this case there is no certainty that the Society would meet a claim made on the Fund. However, that uncertainty did not alter the date from which time started running.

There could be said to be a distinction between Knapp and this case. In Knapp, either the policy was voidable at the suit of the insurer or it was not; if it was not, then no significant damage would be claimed, but if it was, then the policy was voidable, and that was clearly a disadvantage in the policy from the inception. In the present case, one could say that it would be uncertain whether or not a particular misappropriation would, in the event, lead to a claim which was accepted by the Society. On reflection, I do not find that distinction persuasive. First, it seems to me that it would have been sufficient to found a claim against the insurance broker in Knapp from the moment the policy was granted if, due to his negligence, the policy was no more than arguably voidable, because the plaintiff would have obtained something less valuable than that to which he was entitled, due to the insurance broker’s negligence. Secondly even if it ultimately transpired that the policy was not voidable, its arguable voidability could have involved the plaintiff in expenditure in arguing with, and, if necessary, litigating against, the insurer in order to establish that the policy was not voidable (and in this connection see the observations of Nicholls LJ in Peter Browne cited above). So in this case. As soon as Mr Payne misappropriated money from a client, the Fund was potentially at risk (and the fact that it was unaware of this is of no more assistance to the Society than the fact that the plaintiffs were unaware of the voidability of the policy was of assistance to him in Knapp). However, I would go this far with the Society’s argument: if it could be shown that the first misappropriation effected by Mr Payne after a Report was one in respect of which there was no real prospect of the Society having to pay compensation, then time may well not start running from that misappropriation, but from the next misappropriation, unless, of course, the same could be said about that next misappropriation.

It is true that the Fund will not have to pay out on a claim unless and until the Society has exercised its discretion, and that, although the exercise of this discretion can be called a “contingency”, it is arguably not the sort of contingency which was specifically referred to in the passage in the judgment in Foster approved in Nykredit, namely “a contingency, … over which the plaintiff has no control”. However, as the judge pointed out in this case, the contingency involves the exercise of a discretion which has to be exercised in accordance with provisions set out in a statute, in rules and in guidelines, and that, indeed, “the alleviation of losses suffered by Mr Payne’s clients by reason of his dishonesty falls squarely within the primary purpose of the compensation fund: see paragraph 1 of the Guidelines”.

If the Society had an unfettered discretion to refuse to meet a claim that could lead to the argument that it had no claim against Sephtons because the cause of any payment was the Society’s choice to pay, not the provision of the negligent Report. That would be a fanciful argument, but may it serve to illustrate the unreality of treating the discretion in the sort of way in which the Society’s argument treats it in connection with this issue.

I turn, then, finally, on this part of the case, to the contention that the Fund’s liability to compensate clients whose monies have been misappropriated by a dishonest solicitor is sufficiently sui generis and subject to its own statutory rules and guidelines, as to permit of a rather different approach to the question of when time starts running than might seem justified by reference to the authorities dealing with more usual types of case.

The first, and most obvious, way of approaching that submission is by seeking to identify the specific relevant features of the Fund’s regime which might justify treatment as a special case. It can fairly be said that the only two such features which have been specifically identified as those which give rise to the first two grounds for challenging the judge’s conclusion as to when time started running. I have rejected each of those two features as helping the Society, and I do not consider that the Society’s case would be assisted by considering the impact of the two features together. Indeed, I do not understand Mr Dutton to suggest otherwise.

The other feature of the Fund is that, as pointed out by Carnwath LJ, it can be seen as part and parcel of the Society’s functions and activities in relation to controlling and managing the solicitors’ profession for the benefit of the public. At any rate in general terms, I do not see how the fact that the Fund exists as part of the statutory and quasi-statutory features of the Society’s control and management of solicitors can alter the principles which govern the determination of when time starts running in relation to a negligence claim brought by the Society against an accountant who provides a negligent Report in respect of a solicitor’s practice.

It was suggested that it would be a sensible practical solution to the present case if time was to start running in respect of a claim such as that under consideration, from the date on which the Society decided to intervene in the practice of the solicitor concerned. The argument was supported by reference to the fact that it is at the point of intervention that the Society acquires a “damaged asset” in the form of a depleted client account (see Schedule 1 paragraph 6 of the Solicitors Act 1974). If the decision as to the date upon which time begins to run were to turn on a sensible, practical date in relation to a particular type of action, such as an action by the Society against an accountant who provided a negligent Report, then I could see considerable force in the submission. However, so long as the 1980 Act represents the law, the choice of the limitation period does not depend on the court’s perception of a fair date in relation to a particular claim, or even a particular type of claim (see again per Lord Nicholls in Nykredit at 1630H). Once one identifies the cause of action as tort, the date upon which the cause of action accrues is to be determined in accordance with principle, and that principle is to be identified by reference to the decided cases.

Finally on this point, I cannot accept that the Society first suffered relevant damage in this case, when it intervened in Mr Payne’s practice. The reason for the intervention was Mr Payne’s misappropriations, which were not the result of any negligence or fraud on the part of Sephtons. In any event, the misappropriations started before any of the Reports was prepared. Accordingly, the intervention would have happened, and its attendant costs would have been incurred, irrespective of the issue of any of the Reports. While I readily accept that the Reports led to a delay in the intervention, which could have resulted in increased costs of intervening, there was no evidence to support such a case, as Mr Dutton very fairly accepts.

In all these circumstances, I am of the view that the judge was right in his conclusion as to when the Society’s cause of action in negligence in relation to each of the Reports in the present case accrued. It is therefore necessary to consider the other two points namely (a) whether the Society’s claim in fraud is similarly time-barred, or whether it can rely upon s32 of the 1980 Act, and (b) whether Sephtons are estopped from relying on any limitation defence.

I should briefly mention four other matters. First, each party relied on passages in the judgment of the Court of Appeal in the KPMG case. The issue in that case was whether an accountant making a report under the Accountant’s Reporting Rules owed a duty of care to the Society, and given that the date on which any cause of action would accrue to the Society was not in issue and did not form part of the reasoning process of the Court. Accordingly, I do not consider that that decision can be of a great deal of assistance, although, as mentioned briefly above, it may provide a small degree of support to Sephtons’ case on the first argument.

Secondly, each party relied on the difficulties to which the other party’s preferred accrual date could give rise where a dishonest solicitor indulged in “teeming and lading” (ie, robbing Peter, in the form of the funds held for one client, to pay Paul, in the form of making up misappropriated funds of another client). It seems to me that problems could arise in that connection whatever the correct accrual date. In any event, the cases indicate that the selection of a correct accrual date should be based more on principle, than on practicality or fairness. (Whether that is desirable is another matter.)

Thirdly, so far as practicality and fairness are concerned, the conclusion I have reached does not strike me as being particularly impractical or unfair in this case, or in its implication for other cases. Section 14A of the 1980 Act, to which I have referred more than once, would, in this case and in the great majority of cases of this type, enable the Society to extend the period for bringing an action such as the present, up to the third anniversary of the date of intervention. This would be on the basis that the Society could not reasonably be expected to discover the facts giving rise to a possible claim against the reporting accountants, until the date of its intervention in the practice of the solicitor concerned. In this case, the Society intervened in May 1996 and had sufficient information to instruct solicitors by August 1996. There was no reason why it could not have brought proceedings in negligence against Sephtons well before May 1999, at least in the absence of a written agreement with Sephtons or their solicitors that time would be extended.

Finally, in this connection, it has been observed in a number of cases that an action may accrue before, even long before, the claimant knew he had a claim, or had suffered any loss, or even had any reason to suspect that that was the case, and, indeed, in some cases, the limitation period can expire before the claimant could reasonably be aware of the existence of any claim. This was pointed out by Lord Nicholls in Nykredit at 1630H. As he went on to explain, the remedy for that problem is for the legislature, not for the courts, and it has been dealt with by the legislature, through the medium of provisions such as s14A - and indeed 32 - of the 1980 Act. The point was also made by Hobhouse LJ in the first passage quoted above from Knapp.

As in relation to the claim in negligence, it was rightly common ground between the parties that, if the Society had a claim against Sephtons in fraud, a fresh cause of action arose out of each Report. The claim in fraud, being in tort, is governed by s2 of the 1980 Act, but the conclusion I have reached in relation to the claim in negligence does not necessarily apply to the claim in fraud. This is because the date when a cause of action in fraud becomes time-barred depends on s32 of the 1980 Act which provides, so far as relevant:

“(1)

… [W]here in the case of any action for which a period of limitation is prescribed by this Act, … the action is based upon the fraud of the defendant … the period of limitation shall not begin to run until the plaintiff has discovered the fraud … or could with reasonable diligence have discovered it ….”

As the judge said, a claimant does not “discover” a fraud until he has “material sufficient to enable him properly to plead it”. Authoritative guidance on that topic was given by Millett LJ in Paragon Finance -v- D B Thackerar & Co [1999] 1 All ER 400 at 418B-D, in a passage cited by the judge:

“The question is not whether the plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. In this context the length of the applicable period of limitation is irrelevant. In the course of argument May LJ observed that reasonable diligence must be measured against some standard, but that the six-year limitation period did not provide the relevant standard. He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency. I respectfully agree.”

The judge in this case concluded that the Society had failed to establish that time had not started to run under the provisions of s32 of the 1980 Act after December 1996, ie within the period of six years before the second action was begun in November 2002. In other words, he held that the Society had not established that the frauds could not have been discovered before 1^st December 1996. His reasoning proceeded along the following lines.

First, while accepting that it was “not unreasonable” for a claimant with a clear case in negligence to take no steps to discover a possible underlying fraud, he nonetheless was of the view that

“Millett LJ’s formulation of the burden imposed by section 32 seems to me to require an assumption of a desire to discover whether there is a fraud. Otherwise there is a question whether [the claimant] could have discovered it with reasonable diligence makes no sense. Reasonable diligence pre-supposes a desire to investigate.”

This, the first step in the judge’s reasoning, involves a short point of construction of s32 of the 1980 Act, which is obviously open to this court to reconsider.

The second step in the judge’s reasoning, however, involved pure findings of fact, most of which were agreed, and none of which was controversial. The Society began investigating the question of fraud immediately after 18^th June 2002, when it was first alerted to that possibility by being told that Mrs Mascord, as the personal representative of Mr Mascord, had been asked to obtain separate advice. Having been alerted to the possibility of fraud, it took the Society some 5½ months to make the necessary investigations and to issue the proceedings based on fraud on 2^nd December 2002.

The third step in the judge’s reasoning appears to me to have been one which might be primarily be characterised as inference. It was that, bearing in mind the evidence and arguments (including the fact that 5½ months in 2002 represented sufficient time for the Society, from the time it first considered the question of fraud, to start an action based on fraud) and applying the test required by s32(1) as explained by Millett LJ, and further developed by the judge in his first step, the judge was not satisfied that with reasonable diligence the Society could not have reasonably discovered the fraud by 2^nd December 1996, ie more than six years before 2^nd December 2002, when the second action was brought.

On this appeal, Mr Dutton, on behalf of the Society, attacks the first and third steps in the judge’s reasoning, but, realistically, he raises no challenge to the second step.

So far as the first step is concerned, I consider that the judge was right in his conclusion that it is inherent in s32(1) of the 1980 Act, particularly after considering the way in which Millett LJ expressed himself in Paragon, that there must be an assumption that the claimant desires to discover whether or not there has been a fraud. Not making any such assumption would rob the effect of the word “could”, as emphasised by Millett LJ, of much of its significance. Further, the concept of “reasonable diligence” carries with it, as the judge said, the notion of a desire to know, and, indeed, to investigate.

I accept that one must be very careful about implying words into a statutory provision, and it can be said that the judge’s first step involves doing just that. However, it appears to me that the judge was not seeking to imply words, or a new concept, into the statutory provision. He was explaining what was involved in the process of deciding whether a claimant, could, with reasonable diligence, have discovered the fraud which it now seeks to plead.

I turn, then, to the judge’s third step. The essence of his reasoning was that, bearing in mind the time that the Society actually took, between the date on which the possibility of alleging fraud surfaced in the mind of the Society and its advisors, and the date on which the proceedings in fraud were actually begun, namely 2^nd December 2002, the Society had failed to persuade him that it could not, with reasonable diligence, have discovered the fraud within the same period, measured from the date of intervention in the practice of Payne & Co. In that connection, it is important to bear in mind that, with effect from the date of intervention, 20^th May 1996, the Society had access to all the papers and records of Mr Payne’s practice, because, as it was entitled to do under Schedule 1 to the 1974 Act, the Society took possession of all those papers and records.

Two points were raised before the judge and are raised before us by Mr Dutton as to why any reliance upon what happened in 2002, as a guide to what could have happened in 1996, was not justified. They were that:

The judge did not specifically rule on the first point, but said that he was prepared to assume that it had some force. As to the second point, the judge accepted, in light of the evidence summarised in the draft pleading enclosed with Wrights’ letter of 23^rd September 2002, a submission on behalf of Sephtons “that disclosure of Mr Mascord’s working papers was not a necessary ingredient in discovery of the fraud with reasonable diligence”. On the other hand, the judge did not accept a further submission on behalf of Sephtons “that it was unnecessary even to ask for disclosure of Mr Mascord’s working papers before pleading fraud”. It is suggested by Mr Dutton that there is some inconsistency between these two observations. I do not agree. What the judge was saying was that, even bearing in mind that, in 1996, the CPR did not apply, and that there was therefore no right to pre-action disclosure, there would have been enough to establish a prima facie, and therefore a pleadable, claim in fraud, in light of the other facts available, by drawing an adverse inference from a refusal by the solicitors acting for Sephtons to produce the documents sought.

An honest accountant (or his personal representative or former partners), who is told by a respectable firm of solicitors, acting for the Law Society and advised by counsel, that there appears to be a real possibility of a claim in fraud against him, and who is asked in this connection to produce his working papers, can reasonably be expected to produce such papers. Of course, there could be some good reason why he would not produce his working papers, but, if there were a reason other than a need or desire to hide his dishonesty, one would expect him to say so. The fact that there was no legal obligation, and no right to apply to the court, to require him to produce those papers does not alter the fact that, particularly where, as here, there would have been other factors to support a claim in fraud, adverse inferences could, even should, be drawn from his refusal to produce his working papers without good reason. There is no suggestion in the present case that there could have been a good reason for Sephtons to refuse disclosure, and, indeed, the judge was entitled to rely on the fact that, when Barlows were asked for the working papers (albeit six years later), they came up with no good reason for refusing to provide them, and, ultimately, did indeed provide them.

In fact, as the judge pointed out, there were grounds for thinking that, if anything, the 5½ months which it took the Society in 2002 between first considering the possibility of fraud and actually pleading it, could well have been longer than the period which would have been reasonably required for that purpose in 1996. He put it this way:

“[T]he litigation culture in 1996 would probably have provoked a persistent refusal by or on behalf of the defendants to produce Mr Mascord’s working papers, sufficient to satisfy the proper professional concerns of the Society’s advisors in 1996 with regard to a plea of fraud. By contrast, in 2002, considerable delay in the due diligence investigation was occasioned to the Society by the fact that the defendants initially refused but then consented to production of those working papers and in the subsequent expert examination of the papers once received.”

At first sight, the word “considerable” may seem a little extreme, but, in the context of a period of 5½ months, it appears to me to be an appropriate adjective. To my mind, that factor more than cancels out any force in Mr Dutton’s point about the perceived need for speed in 2002 because of concerns over the limitation issue.

Mr Dutton also contends that there was no information available to the Society prior to June 2002, which should have alerted it to the possibility that Mr Mascord may have been fraudulent. In my view, that way of putting the argument could be dangerous, because it slightly mischaracterises the question which has to be considered, and therefore may result in a wrong answer. The correct question to be considered, bearing in mind the information available to the Society once it intervened in Mr Payne’s practice, is whether, with due diligence, it could have discovered the fraud within 5½ months (although, to be more accurate, it was for the Society to satisfy the judge that, on the balance of probabilities, it could not reasonably have done so).

In that connection, as Mr Michael Pooles QC, who appears with Mr Derek Holwill for the defendants, says, and as the judge accepted, significant evidence was available to the Society before or immediately upon the intervention. In summary, Mr Pooles relies on the following in this connection:

These factors reinforce the conclusion reached by the judge on this issue. Accordingly, I am of the view that, to put it at its lowest, the judge was entitled to find, as he did, that “the Society have failed to prove that they could not with reasonable diligence have discovered the fraud by 1^st December 1996”. Indeed, on the agreed facts and the findings he made, I suspect that no other conclusion was open to him.

The Society’s case on this issue is that Sephtons’ solicitors, Barlows, represented to the Society’s solicitors, Wrights, that they would not take a limitation point, and the Society relied upon this by not issuing proceedings until May 2002.

In this connection, it appears to me that, in the absence of what was said in Barlows’ letter of 18^th May 2001, the estoppel argument would have no foundation at all. It is true that, from June 1999, Barlows requested the Society to await the outcome of the KPMG case, but that was a simple proposal for delay which the Society and its advisors were entitled to accept or refuse. I do not see how it can be said to carry with it an implied statement that no limitation point would be taken, or, to put it another way, to include an implied offer that no limitation point would be taken. This is particularly so in light of the judge’s finding that there was no question of any arguable sharp practice on the part of Barlows, in the sense of proposing delay with a view to trapping Wrights, and therefore the Society, into rendering a claim which might be partly time-barred into a claim which was wholly time-barred. In general, it seems to me that a solicitor acting for a proposed defendant, when suggesting to an intending claimant’s solicitor that the issue of proceedings be delayed for a genuine reason, is entitled to assume that the intending claimant and its solicitors are able to look after themselves so far as Limitation Act implications are concerned. As already indicated, I do not rule out the possibility of a different conclusion if it could be shown that the proposed defendant’s solicitors have been guilty of sharp practice, but there is no question of that here.

The letter of 18^th May 2001 does, to my mind, give one pause for thought, but in the end I agree with the judge: it is not expressed in clear enough terms to give rise to an estoppel. The terms of the letter cannot fairly be said to amount to a clear indication that liability is accepted, although the letter does amount to an indication from Barlows that liability for negligence is likely to be accepted on behalf of Sephtons. What is important are the conditional way in which the concession is expressed (“… they would be prepared to concede liability …”), the fact that it is made clear that liability is not actually being conceded (“… before our clients would be prepared to make such a concession …”), and, to a lesser extent, the requirement for a quantification of damages, the proposal of a meeting and the fact that the letter was expressly “without prejudice”.

The judge was plainly right to express the view that the letter of 18^th May 2001 “did amount to a reasonably clear representation that the defendants and their advisers did not then have in mind the advancing of a limitation defence to all or any part of the claim”. However, it seems to me that there are two problems, which may in practice be connected, with the contention that the letter amounted to a positive representation to that effect. First, as already mentioned, the letter was expressed in tentative terms, making it clear that there is no concession on liability, merely an expression of expectation of such a concession. Hence, it would not be right to characterise the letter as containing a positive representation whether put in terms of irrevocable intention or assurance, that no limitation point would be taken. Secondly, until the House of Lords gave judgment in Cave on 25^th April 2002, the law would have been understood to have been such that there was no limitation defence, because of the provisions of s32(1)(b) as interpreted by the Court of Appeal in Brocklesbury -v- Armitage & Guest (note) [2002] 1 WLR 598, a case decided in 2000, and overruled by Cave. Accordingly, it is scarcely surprising that, as at May 2001, Barlows were not raising any limitation point in correspondence.

Even if the letter of 18^th May 2001 could otherwise give rise to an estoppel, it seems to me that the Society might well be in some difficulty in raising an estoppel. I do not see how the estoppel could have the effect of reviving a cause of action which was already time-barred. Consequently, the only claims which could possibly be pursued by the Society against Sephtons, if there were an estoppel arising out the letter of 18^th May 2001, would be in relation to the last of the Reports, namely that produced in late 1995. Even that might have its problems. Wrights failed to reply substantively to the letter of 18^th May 2001 for nearly six months, and so the Society could be said to be the author of its own misfortunes, particularly as Wrights’ reply resulted, within some two months, in Barlows denying that they had conceded liability. Secondly, as the judge said, the Society might have had difficulties in establishing reliance as Mr Miller was firmly of the view that there would be no Limitation Act problems in relation to any claim against Sephtons until the sixth anniversary of the intervention in the practice of Payne & Co, so that proceedings could be safely issued at any time before May 2002.

Accordingly, I consider that the judge was right in his conclusion that the Society’s estoppel argument should be rejected.

In these circumstances, I am of the view that the judge reached the right conclusion on all three issues, and I would therefore dismiss the Society’s appeal.