Clare v Buckle Mellows (a firm)

This is an appeal from the decision and order of His Honour Judge Clark sitting at the Lincoln County Court on 7^th March 2005. The defendants were a firm of solicitors who had advised the claimant in connection with the dissolution of a partnership in a road haulage business. The judge dismissed the claim, holding that, although the defendants had been in breach of contract and in breach of their duty of care to the claimant, the claimant had failed to prove that she had suffered any loss as the result of the breach. The claimant now appeals.

For some years prior to 2000, the appellant, Mrs Marion Clare, had been in partnership with her husband, trading under the name of M. A. C. Transport (the business). Mr Clare ran the business and the appellant worked as the bookkeeper. By 1998, the marriage was in difficulty and the parties separated. In 1999, the appellant consulted the respondents, Buckle Mellows, in connection with the financial consequences of the breakdown of her marriage. She told Mr Ifor-Jones about her financial affairs, including the partnership and explained that she was willing to transfer her interest in the partnership to her husband, who wished to carry the business on, provided that an appropriate settlement could be agreed. She told him that she was concerned about the financial viability of the business, which had been going through difficult times. She said that she had lent the business £20,000 of her own money. She had inherited a share in some agricultural land, and she had shares worth about £15,000 and a cottage in France. The former matrimonial home, worth about £115,000, which was in joint names, was mortgaged to the Abbey National Building Society (with about £34,000 outstanding) and was also charged to HSBC (the bank) to secure the business borrowing. The bank had also taken personal covenants from both Mr and Mrs Clare. Mr and Mrs Clare had an endowment policy in connection with the first mortgage.

Negotiations were opened with Mr Clare’s solicitors and an offer of settlement was made but rejected by Mr Clare. At that stage, the appellant was seeking the return of her £20,000 and wanted to keep her car which had been purchased by the business. In late October 1999, the appellant told Mr Ifor-Jones that the partnership’s accountant had told her that she could not ‘simply resign’ from the partnership. Mr Ifor-Jones, who was a specialist in matrimonial law, brought in Mr Lewis, one of his partners who specialised in commercial law to advise the appellant on the partnership aspects of her problems. The firm was then retained in respect of both matrimonial and partnership matters.

The partnership deed, at clause 1, provided for termination by the giving of 6 months notice by either party. Clause 17 provided that one partner could give notice of termination to the other on account of one or more of qualifying defaults or breaches set out in the clause. Clause 18 was not well drafted but appears to have provided that, where one party gave the other notice of termination or committed a breach or default that would entitle the other to terminate the partnership, the ‘innocent’ partner would have the option to buy out the defaulting partner’s share. A valuation of the shares would be required. Any disputes arising from the deed were to go to arbitration.

The judge held that Mr Lewis advised the appellant that she could terminate the partnership and left her to decide what she wanted to do. Thereafter, it appears that Mr Lewis delegated the partnership aspects of the case to a newly qualified solicitor, Mr Blackburn. On 25^th November 1999, Mrs Clare spoke to Mr Blackburn for the first time. The judge found that Mr Blackburn failed to advise Mrs Clare about the principle of joint and several liability of partners to creditors. He should have done. She was unaware of that principle until May 2000 and did not appreciate the risks to which she was exposed while a partner.

On 13^th December 1999, Mr Clare’s solicitors, Maples, served a notice alleging that the appellant was in breach of the agreement by taking employment elsewhere without Mr Clare’s consent. The appellant told her solicitors that there was no truth in this. She had recently taken a part-time job outside the business because Mr Clare had encouraged her to do so. She also told them that she had discovered a cheque from one of the business customers which had been made out to Mr Clare personally. She was puzzled by this but the solicitors realised that, if this were true, Mr Clare was himself in breach of the partnership deed, as clause 6 provided that all monies belonging to the firm should be paid into the firm’s bank account. On 21^st December, Mr Blackburn wrote to Maples denying the allegation against the appellant and alleging that Mr Clare was himself in breach.

On 6^th January 2000, Maples served a formal notice of expulsion on the appellant under clause 17 of the deed. The notice alleged that the breach previously alleged had not been remedied and alleged further that the appellant had not carried out her book-keeping duties. Maples indicated Mr Clare’s intention to purchase her share pursuant to clause 18. The effective date of termination would be 14^th January. They also claimed that the £20,000 which the appellant had introduced into the business had been a capital injection and not a loan.

The judge found that Mr Ifor-Jones and Mr Blackburn discussed this development but did not determine any clear strategy as to how the appellant was to be advised. When the appellant met her two solicitors on 13^th January, she showed them a list of the business’s creditors and the most recent balance sheet. The figures showed that the business was not in a good financial state. It was technically insolvent, although able to continue trading by reason of the forbearance of creditors and the overdraft facility. However, as the judge observed, the position as shown in the balance sheet was potentially more serious than it appeared as the fixed assets comprised mainly vehicles. It was later to transpire that the book value was much higher than the sum actually realised on a forced sale. Notwithstanding the financial position, the appellant was advised to continue to act as a partner. She was not advised as to the prospects of recovering the £20,000. She was not advised as to the possibility that her liabilities might increase if she remained within the partnership. She was not advised of the possibility of service of a clause 17 notice on Mr Clare in respect of his alleged default in respect of the cheque that had been paid into his personal account. Instead, Mr Ifor-Jones wrote to Maples disputing the validity of the expulsion notice served on the appellant, on the basis that she was not guilty of the alleged breaches. He suggested that Mr Clare purchase the appellant’s share of the business and repay the £20,000 loan. In short, such plan as there was, was to keep the partnership alive and try to negotiate a termination and matrimonial settlement.

Over a month then passed during which allegations and counter allegations of breaches of the partnership deed were made between the solicitors. In February, the appellant was concerned about her husband diverting cash from the business. The Inland Revenue was pressing and there was no money to pay their demand. Maples wrote to say that the firm was at the limit of its bank borrowing and they ‘feared the worst’. Mr Ifor-Jones and Mr Blackburn discussed these matters between themselves but did not speak to the appellant until she telephoned Mr Ifor-Jones on 29^th February. She then said that the business was ‘in dire straits’. Her concerns about the diversion of cash were increasing. She believed that Mr Clare had set up a limited company and was channelling custom into that but was using the business’s vehicles to do the work. She wanted to get out quickly, with her £20,000.

The following day, 1^st March, there was a meeting with the bank attended by Mr and Mrs Clare and their advisers. It appears that the purpose of this meeting was to discuss the appellant’s proposed retirement from the business. Mr Lewis attended with the appellant. His attendance note recorded that the bank required to be satisfied that the business was generating enough income to support debt repayment. It had to be satisfied that there was sufficient security to cover its lending. It required the business to appoint a financial controller who would provide good management information. Once the partnership was ended, the bank wished to see the debts collected, the liabilities discharged and some retained profits. The bank would then consider agreeing a new loan facility with Mr Clare as sole trader. At that meeting the bank confirmed its understanding that the £20,000 was a loan and not a capital injection. After the meeting at the bank, there were discussions between the parties but these proved fruitless; the appellant’s side was still insisting on repayment of the £20,000. Mr Lewis reported back to Mr Ifor-Jones and the latter recorded that the bank had seemed ‘fairly relaxed’ about the continuation of the business.

On 13^th March, the appellant telephoned Mr Ifor-Jones to say that she was worried that things seemed to be ‘drifting’. She asked about dissolving or winding up the business. Two days later, Mr Ifor-Jones talked to Mr Blackburn about this but they did not reach any conclusion as to what the appellant should be advised to do. Mr Blackburn thought that dissolution would have to wait. If the appellant gave the business to Mr Clare she would be ‘paying capital into the firm’ and she would have difficulty in getting her £20,000 out. Soon afterwards, the appellant told Mr Blackburn that there was no money to pay the VAT return. His response was to say that ‘we must cajole Mr Clare into a settlement if we are to seek to protect your investment’. On 27^th March, the appellant wrote to the respondents asking whether she was still a partner in the business, whether terms had been agreed and whether she was liable for debts incurred after 14^th January. The judge found that the respondents did not reply to that letter.

Thereafter things went from bad to worse. The business’s trading position declined steadily. There were inconclusive exchanges of correspondence between solicitors. Maples were suggesting that the partnership had in fact terminated on 14^th January. On 4^th May, Mr Blackburn replied saying that the appellant would not confirm her agreement to dissolution with effect from 14^th January until she received sensible proposals regarding Mr Clare’s acquisition of her interest and repayment of her £20,000. However, on the same day, he advised the appellant that she would not get her £20,000 back. She had already realised that. Meanwhile the bailiffs had arrived at the business premises to levy execution. On 11^th May, the appellant told Mr Ifor-Jones that she was prepared to write off the £20,000. He recorded that it might be appropriate for her to accept that the dissolution had taken place on 14^th January and for Mr Clare to take responsibility for any debts incurred since then. However, the judge found that no clear advice was given to the appellant at that stage.

By 12^th May, Mr Clare had contacted Mr Adrian Allen, an insolvency practitioner, who was to become the supervisor of the individual voluntary arrangements with creditors (IVAs) which were later entered into by both Mr Clare and the appellant. The latter met Mr Allen on 15^th May and the next day reported these events to Mr Ifor-Jones. Later that day, Mr Blackburn informed Mr Allen that the appellant was ‘prepared to concede’ a dissolution date of 14^th January. At the end of May, the appellant went away on holiday. On 5^th June, HM Customs and Excise issued a demand for about £22,000, which could not be paid. Following the appellant’s return from holiday, it was agreed with Maples that the partnership had been dissolved with effect from 14^th January. On 11^th July, notices of dissolution of the partnership were placed in various newspapers and, on 27^th July, notice was given to the firm’s creditors. Meanwhile, Customs and Excise wrote to say that, if the VAT demand was not satisfied, they would issue bankruptcy proceedings.

On 24^th August, the appellant signed an IVA proposal prepared by Mr Allen. It showed an estimated shortfall to creditors of just over £200,000. This proposal was based upon the assumption that she had remained jointly and severally liable for the partnership debts until July and the arrangement with creditors proceeded on that basis. However, by December 2002, Mr Allen had persuaded the creditors (mainly the tax authorities) to accept a reallocation of the debts as between Mr and Mrs Clare on the basis that the dissolution of the partnership had indeed taken place on 14^th January. This reallocation resulted in a significant reduction in the appellant’s liabilities. It appears that, in the event, the appellant’s creditors have now been paid out in full. She has been obliged to sell her shares and her cottage in France, although not her share in the agricultural land. The endowment policy has been sold. The cost of the IVA has been very substantial and the appellant’s financial position is very much diminished as the result of all these events.

In May 2002, the appellant commenced proceedings against the respondents alleging breach of duty. In her particulars of claim, she alleged that, in January 2000, the appellant had negligently failed to advise her that she should take steps to effect the immediate dissolution of the partnership and to avoid or limit her future liability for the debts of the business. She claimed that, had she been given such advice, her liability would have been no more than £1,387. That sum was based upon the deficit shown in the business’s balance sheet dated 14^th January 2000. She alleged that, due to the delay in effecting dissolution, she faced the possibility of having to satisfy the whole of the shortfall declared at 20^th August 2000, which was said to be £181,008. Although her liability should be only 50% of that sum, it appeared likely that Mr Clare would not be able to make any substantial contribution and she would be liable for the whole sum. By amendment, dated October 2003, she said that she would give credit for any reduction in her liability brought about as the result of the reallocation of liabilities. She alleged that she had suffered additional loss because she had been driven to enter an IVA. Had she been properly advised to terminate the partnership in January 2000, an IVA would not have been necessary. She also claimed general damages for distress, inconvenience, shame and expenditure of time caused by entering into and being subject to an IVA.

The defence denied liability and loss and damage. In particular, it challenged the appellant’s calculation of loss and alleged that, whenever the dissolution of the partnership had taken place, the result would have been such as to force the appellant into an IVA.

In December 2003, Mr Douglas Hall, an accountant, was jointly instructed as an expert. He was made aware of the contentions of the parties as I have set them out above. In his report dated February 2004, Mr Hall opined that the insolvency of the business had been inevitable and that, bearing in mind the way in which the liabilities had been reallocated in the IVA, the appellant’s financial position had turned out to be the same as it would have been had she terminated the partnership in January. Therefore she had suffered no loss as the result of not having withdrawn from the partnership in January 2000.

The appellant was dissatisfied with Mr Hall’s report and obtained leave to call another accountancy expert, Mr Keith Johnson, to comment upon Mr Hall’s report. Mr Johnson supported the appellant’s claim for financial loss. He advised on the basis that, if the partnership had been terminated in January 2000 and if there had been an agreed division of the matrimonial assets, (the appellant giving her share of the matrimonial home to Mr Clare and releasing him from the £20,000 loan and Mr Clare taking responsibility for the business), the bank would have agreed to release the appellant from her personal covenant to them. Had that happened, the appellant would have been liable only for partnership debts incurred before the date of dissolution. He acknowledged that any indemnity that Mr Clare might have offered in respect of the pre-January debts would have been worthless. Mr Johnson considered that the appellant had suffered financial loss as the result of remaining as a partner until July 2000. His hypothesis was that, if Mr Clare had been able to run the business as a sole trader, he would not have diverted any cash or custom away from the business and the business might not have become insolvent. At least £13,000 had been diverted, possibly more. Even if it had become insolvent by July 2000, the pre-January 2000 debts would have been much reduced. Mr Johnson assumed that, in the ordinary course of business, Mr Clare would have paid off the business debts in chronological order. Thus Mr Johnson was not prepared to agree with Mr Hall that the insolvency of the business was inevitable; nor did he agree that, on insolvency in July (if that occurred), the appellant’s position would have been the same (even after reallocation) whether or not she had withdrawn in January or in July.

At a pre-hearing meeting, the experts identified three points on which they disagreed. First, Mr Hall did not agree with Mr Johnson’s proposition that if Mr Clare had had sole charge of the business, he would not have diverted any cash or custom and the business would not or might not have become insolvent. Mr Hall was of the view that, even if there had been no diversion, the amount involved was not enough to make the difference between the business being solvent or insolvent. Second, Mr Hall did not accept that, if Mr Clare had carried on the business, he would have paid off the debts in chronological order. In evidence, Mr Johnson conceded the point and agreed that, as the business was at all times short of money, Mr Clare would have paid them off in such order as best enabled him to keep the business afloat. Third, Mr Hall did not agree that the bank would have been prepared to release the appellant from her personal covenant. Mr Johnson did not concede this point in evidence but it became apparent that the debt to the bank at January 2000 was about £110,000 and the security they held in the matrimonial home was of the order of £80,000. Mr Clare had no other assets, whereas the appellant did.

Both Mr Hall and Mr Johnson were of the view that it would not have been in Mrs Clare’s interest to go for a general dissolution in January 2000, even on the assumption that that could have been achieved. Mr Hall thought that the insolvency of the business was inevitable, either in January or July. Whenever it happened, Mrs Clare would have had to resort to an IVA because her assets were not readily available and it would not have been in her interests to have to sell the French cottage quickly.

The judge found that the respondents had been in breach of their duty of care towards the appellant. In general terms, he accepted the appellant’s evidence. He found that the respondents had failed to advise the appellant about her continuing joint and several liability for the partnership debts. He observed that no advice had been given as to the prospects of recovering the £20,000 loan. He described the attempts to negotiate a settlement as ‘client-led’. There had been no analysis of the prospects of achieving a satisfactory settlement, bearing in mind the deteriorating state of the business. He rejected the respondents’ claim that the appellant had assured them that the business remained viable until May 2000. He held that there had been clear warning signs of impending fiasco. He rejected the respondents’ claim that the bank had been ‘relaxed’ at the time of the meeting on 1^st March. The judge held that the respondents should, at the very least, have advised the appellant as to her available options to disengage from the business. They had not done so; instead, said the judge, “the matter was allowed to drift until it was too late to preserve her position before the business finally went under in July”.

The judge then turned to deal with causation. He directed himself that he should approach this question in accordance with Allied Maples v Simmons and Simmons [1995] 1 WLR 1602 and Harrison v Bloom Camillin [2000] Lloyds Reports PN 89. He considered whether the appellant would have acted upon advice properly given, (being an explanation of the risks inherent in her position if she remained a partner) and would have given instructions that she should be extricated from the partnership as soon as possible. He said that there was a distinction between the three ways in which the partnership might have been ended.

First, notice under clause 1, given in January 2000, would not have been effective until July and would have made no difference to the financial outcome. Second, the judge found that, even if properly advised, the appellant would not have been prepared to accept the clause 17 issued by Mr Clare in January. He said that she had a complete answer to the allegation and would have maintained her denial. Third, the judge observed that the appellant had always said that she wanted to withdraw from the partnership on satisfactory terms leaving Mr Clare to run the business alone. He accepted her evidence that, had she known that everything she owned was at stake, she would have given firm instructions to the respondents to negotiate her release at the first opportunity. (I pause there to note that that acceptance of her evidence appears to conflict with the judge’s previous holding that, even if properly advised, the appellant would not have been prepared to accept the clause 17 notice. I shall return to that point in due course.) The judge then observed that the critical question was whether there had been a real or substantial chance that the appellant could have negotiated her release before July 2000. He considered that that would have depended upon a number of contingencies; first whether or not Mr Clare would have been prepared to agree terms of settlement and second whether or not the bank, as principal creditor, would have been prepared to release her from her covenant. As to the first question, the judge observed that Mr Clare had adopted an aggressive stance in serving a clause 17 notice. If the appellant had served a clause 17 notice on him, alleging diversion of funds, attitudes would have hardened and a compromise solution would have been less likely. He observed that the parties had been some way apart in the negotiations that had taken place during the whole six month period and he was not satisfied that, even if the appellant had been given appropriate advice, she would have given such instructions as to terms which would have allowed the partnership to be terminated by mutual agreement.

In any event, said the judge, he was not satisfied that the bank would have agreed to release the appellant from her liability to it. At the meeting on 1^st March 2000, the bank had laid down its conditions for releasing the appellant from her covenant. There was no real prospect of those conditions being met. The business was technically insolvent by January 2000 and the bank’s security in the matrimonial home was not in itself sufficient to cover the debt. The financial position was deteriorating as time went on. The bank would have been unlikely to release the appellant from her personal covenant because her personal assets were greater than those of her husband. The judge said that, without that release, there was no real prospect of a consensual dissolution of the partnership.

The judge therefore concluded that the appellant’s claim failed because she had failed to show that it was the respondent’s breach of duty that had prevented her from extricating herself from the business earlier than July.

Notwithstanding his conclusion that the claim had failed on causation, the judge went on to deal with loss. He observed that the appellant’s case had been something of a moving target. At the start of the case, Mr Janusz for the appellant had sought to abandon his pleaded case and had formulated a re-amended pleading in which he relied upon valuations of the appellant’s assets which had not been considered by either of the accountants. In the event, that attempt had been abandoned and Mr Janusz had relied on the opinion of Mr Johnson. However, after the close of evidence, Mr Janusz had sought to introduce some fresh evidence relating to the costs of the IVA. The judge refused to receive it because it could and should have been introduced at the hearing.

Dealing with the case on loss as pleaded, the judge found that the appellant had not proved any loss. He noted first that both experts agreed that, as at 14^th January 2000, the business was technically insolvent. He then said that Mr Johnson had accepted that, on a general dissolution at 14^th January (by which he meant a dissolution which involved the winding up of the business), the claimant would have been in no better position than that in which she found herself in August 2000 when she entered into the IVA. Indeed, he said, Mr Johnson had said that she would have been better placed remaining a partner than forcing a general dissolution in January. The judge said that, even if he had accepted that the appellant would have been prepared to accept Mr Clare’s expulsion notice in January 2000, both experts agreed that her position would have been no better than it eventually was. She would have failed to prove any loss.

Notwithstanding that conclusion, which he said was common ground between the experts, the judge went on to deal with the three differences of view between the experts on the hypothetical basis that the appellant had accepted the clause 17 notice and withdrawn from the business in January 2000. The judge rejected Mr Johnson’s contention about the diverted funds and held that such diversion of funds as had been shown had not made a material difference to the fact that the appellant had had to enter an IVA or to its outcome. Second, the judge noted that Mr Johnson had accepted that Mr Clare would not have paid off his creditors in strict chronological order. It could not therefore be assumed that the pre-January debts would have been reduced as Mr Johnson had advised. Third, Mr Johnson’s opinion had been based on the premise that the bank would have been prepared to release the appellant from her personal liability to them. The judge had already found that there had been no real prospect of that happening.

In conclusion, the judge held that the appellant had been unable to show that she had suffered any loss, either on the premise of a general or technical dissolution taking place in January 2000 as opposed to July 2000.

The judge also rejected the appellant’s claim for general damages for distress. In so far as the distress related to her having to enter into an IVA, the claim failed because the judge said that entry into an IVA was inevitable. But in any event, the judge considered that the contract between the appellant and respondent was not one of those contracts for breach of which such damages were available. They were limited to contracts designed to provide pleasure, peace of mind or freedom from molestation.

Prior to handing down his judgment, the judge received further submissions. The appellant contended that, even though her claim for substantial loss had failed, she was entitled to nominal damages for breach of contract, which would then have a material effect on the question of costs. The judge declined to make an order of nominal damages, saying that such an order would not have any effect on costs and was therefore pointless. He also rejected the appellant’s submission on costs which was that she should recover one third of her costs, to reflect her victory in establishing breach of contract. The judge held that the issues in the case were so inextricably linked that it was not appropriate to make an issue based costs order. He awarded the respondent its costs on the standard basis up to the end of the trial, each party to bear its own costs in respect of the post trial submissions.

Permission to appeal was refused on paper by Neuberger LJ but granted on a renewed oral application. It was common ground that, in order to succeed in the appeal, the appellant would have to demonstrate that the judge had been wrong on the issues of both causation and loss.

Mr Janusz, for the appellant, submitted that two of the judge’s findings were not in accordance with the evidence. First, the judge’s finding that, even if properly advised, the appellant would not have accepted Mr Clare’s clause 17 notice did not accord with his acceptance that, if Mrs Clare had been warned that everything she had was at stake, she would have given firm instructions that she should be extricated. Mr Janusz submitted that, if the appellant had been advised about the principle of joint and several liability and warned about the deteriorating financial position, (as she should have been) she would have given instructions that she should be extricated. It was true that she had said that she was not guilty of the alleged breaches and was aggrieved that the allegations had been made. She had said, however, that if she had been advised that there was no disadvantage in her accepting the clause 17 notice and significant advantages in withdrawing from the partnership at that time, she would have accepted the notice, notwithstanding that she was not guilty as alleged. Mr Janusz submitted that acceptance of the clause 17 notice would have been the simplest way to achieve withdrawal. There would have been no financial disadvantage to the appellant. The allegations against her were not grave; they carried no imputation of dishonesty. Although the appellant had an answer to them, there would have been no disadvantage (and every advantage) to her in conceding the point. If given proper advice, the appellant would have agreed to do that.

Second, Mr Janusz submitted that the judge had been wrong in his assessment of the prospects of a consensual withdrawal. First of all, both parties wished that the appellant should retire and leave Mr Clare to run the business alone. It would have been possible to agree to a consensual withdrawal even without full agreement as to terms. That would have had the advantage that notice could have been given to creditors and to the bank and the appellant’s liability to creditors could have been pegged at that date. There was no significant disadvantage to the appellant in retiring without complete clarity as to the terms. Second, the respondents should have realised that the business was not in a good financial state. They knew that Mr Clare had no other assets besides his share in the matrimonial home and the joint endowment policy. The respondents did not advise the appellant as to how realistic or otherwise her expectations were as to the recovery of her £20,000 loan. They should have done. She had at all times accepted that she would have to release her interest in the matrimonial home. Had she been advised as to a realistic attitude towards the £20,000, it should have been quite possible for the parties to have reached agreement between themselves. Of course, that would not have meant that the bank would have agreed to release the appellant from her covenant to them. That was desirable for the appellant but it was not an essential. The judge had erred in concluding that a consensual withdrawal was not possible unless the bank agreed to release the appellant.

On these issues, the respondents submitted that the judge’s conclusions were findings of fact with which this court should not interfere. In any event, the position so far as the financial state of the business was by no means clear in January 2000 and the judge had held back from holding that the respondents should have given positive advice that the appellant should extricate herself from the business as soon as practicable. He had only said that she should have been advised as to her position and had the options explained to her. The court should not assume that the right advice was to withdraw from the partnership; that would only be the right advice if suitable terms could be negotiated. The judge had found that that was not feasible. So, the appellant had failed to prove that she had a real chance of removing herself from the partnership early in the year.

In Allied Maples v Simmonds and Simmonds, (supra), to which the judge referred, the Court of Appeal (Stuart Smith, Hobhouse and Millett LJJ) considered the extent to which a claimant has to prove causation and loss in a case in which solicitors had negligently failed to give proper advice. The headnote, which appears to me properly to summarise the effect of the judgments of court, states:

“…that where the defendant’s negligence consisted of an omission, causation depended on the answer to the hypothetical question of what the plaintiff would have done if the defendant had not been guilty of the omission, which was a matter of inference to be determined from all the circumstances and that where the plaintiff’s loss depended on the hypothetical action of a third party, he was entitled to succeed if he could show that there was a real or substantial rather than a speculative chance that the third party would have acted so as to confer the benefit or avoid the risk to the plaintiff.”

The proper approach to causation in this case was for the judge to ask what the appellant would have done if the respondents had advised her fully as to the options that were open to her, in the light of the risks to which she was exposed. The judge did not expressly hold that the respondents should have advised her to withdraw from the partnership as early as possible. He accepted that she had not been advised about the principle of joint and several liability to creditors. He accepted that there were clear warning signs that the business was deteriorating. He also observed that the respondents had not advised her as to the prospects of recovering her £20,000 from the business. In fact, the prospects of that were always slim, as the business was very short of cash and was at or near the limit of its borrowing. Mr Clare had no assets besides his share in the matrimonial home and the supporting endowment policy. In the light of those observations and in the light of the judge’s finding that, if advised that everything she had was at stake, the appellant would have given instructions to have herself extricated from the partnership as soon as possible, the judge’s conclusion seems very surprising that the appellant would not have been extricated from the partnership any earlier. The feasibility of extrication must be approached on the basis that, if properly advised, the appellant would have given instructions that she wished to be extricated as soon as practicable.

When and how she would have been extricated may be a matter of some speculation. One real possibility is that the appellant would have accepted the clause 17 notice in January 2000. It does seem to me that the judge has failed to take account of the appellant’s evidence that, if advised that there was no financial disadvantage in so doing, she would have accepted the notice, even though she was not guilty of the allegations. Another possibility is that the respondents could have written to Maples saying that, although the appellant did not accept the truth of the allegations, she was prepared to agree to dissolution with immediate effect, with the terms to be settled later. This was, in effect what happened in July. A third possibility was that, if the respondents had given more realistic advice as to the prospects of the appellant recovering her £20,000, it might well have been possible to negotiate terms, in which case the bank could have been asked to consider releasing the appellant from her covenant.

It seems to me that the judge was wrong to draw the inference that, although she wanted to withdraw, the appellant would not have given the instructions necessary to achieve that. It seems to me that the overwhelming likelihood is that, if properly advised about the risks of her position, she would have done so. I would hold that, if properly advised, as to the option of accepting the clause 17 notice, the appellant would have accepted it. Also, if properly advised as to the prospects of recovering the £20,000, she would have conceded or compromised her claim to it and would have reached agreement. In so disagreeing with the judge, I do of course recognise that the judge had the opportunity of seeing and assessing the claimant. However, paying due regard to his primary findings of fact, I have come to the conclusion that the inferences he drew from those findings were in error. I would hold that the appellant would have given instructions that she should be extricated from the partnership and that it would have been possible to achieve that in one of the three ways I have outlined. I do accept that the judge may well have been right to conclude that the bank would not have released the appellant from her personal covenant. But, in my view, the judge erred in so far as he appears to have thought that there could not have been any consensual arrangement for withdrawal from the partnership without a release from the bank. That was not so. The bank could not prevent an agreement for dissolution of the partnership; indeed it was apparent from the notes of the meeting at the bank on the 1^st March that the bank would only consider releasing the appellant from her covenant after the partnership had been dissolved. Further, it appears to me that, pending any agreement by the bank to the appellant’s release, it would have been entirely feasible for the appellant to seek to limit her liability to the bank.

I conclude that the appellant did prove, on the balance of probabilities that, if properly advised, she would have retired from the partnership either on 14^th January or soon afterwards.

In his skeleton argument, in support of the appeal, Mr Janusz persisted in the attempts that had failed before the judge to demonstrate that the appellant’s liabilities to creditors had in fact been greater than they would have been if the partnership had been dissolved in January 2000. However, at the outset of the hearing of the appeal, Mr Janusz reluctantly (but realistically) abandoned that contention.

He then focussed upon the contention that, had the appellant withdrawn from the partnership in January 2000, it would not have been necessary for her to enter into an IVA at any time and she would have avoided having to pay the very considerable costs that had been incurred in setting up and administering the IVA. Mr Janusz’ complaint was that the judge had not dealt with this issue, which had been pleaded by amendment in October 2003. The judge rejected the claim in general terms saying only (at paragraph 88 of the judgment) that the appellant had been unable to show that she had suffered any loss, either on the premise of a general or technical dissolution taking place in January, as opposed to July 2000. Mr Janusz contended that the appellant had been deprived of an adequately reasoned explanation of why that aspect of her case had been rejected.

As to this issue, the respondents submitted that the judge had made it plain that he had held that it was inevitable that the appellant would have entered into an IVA. There was evidence, from Mr Hall, upon which he was entitled to reach that conclusion and it could not be disturbed by this court. The respondents said that, throughout the proceedings, they had been making the point that the appellant had been unable to prove any loss, much less quantify it.

It appears to me that both parties and the judge may have lost sight of the fact that, once a breach of duty had been proved and a causal link established, the appellant had only to show that she had lost a real as opposed to a speculative chance that her financial position would have been better if the breach of duty had not occurred: see Allied Maples v Simmonds and Simmonds supra. In that case, the court recognised that it will often be difficult for a claimant to prove on the balance of probabilities what would have happened if there had been no breach of duty. There may be too many imponderables. On reading the submissions of the parties and the evidence, it appears to me that the appellant attempted to prove on the balance of probabilities what her loss would have been. On the question of whether or not she would have had to enter an IVA, she should only have been trying to show the loss of a real chance of avoiding it.

It seems to me that Mr Janusz is right in that the judge did not deal specifically with this head of damage. He referred to the inevitability of the IVA only in connection with the claim for general damages. It appears that he had accepted Mr Hall’s evidence on this point. However, he did not explain his thinking.

It must be noted that the expert evidence was not presented in such a way as to encourage the judge to separate the position in respect of creditors from the costs due to having to enter an IVA. Mr Hall considered mainly the question of whether, if the appellant had withdrawn from the partnership in January, her liabilities to creditors would have been any less than they eventually were, under the reallocation effected in December 2002. He concluded that they were not and the judge accepted that. That conclusion is no longer challenged. Mr Hall also expressed the view that, even if the appellant had withdrawn in January, the event which triggered the collapse of the business in July 2002 would inevitably have happened at about the same time. The inference he drew and the judge apparently accepted was that, as the appellant’s liabilities were the same, as the collapse of the business was inevitable and as the appellant had been driven into an IVA to meet her liabilities, it was inevitable that she would have had to enter an IVA. There is, in my view, a logical flaw in the drawing of that inference, to which I will later return.

Mr Johnson’s evidence had been based upon his hypotheses that, if Mr Clare had been able to run the business alone, he would not, or might not, have diverted funds and he would have paid off creditors in chronological order. Thus, the business might have avoided insolvency altogether. In the alternative, even if it had become insolvent by July/August 2000, the appellant’s liability would have been limited to those pre-January liabilities that had not been paid off in the intervening period. Mr Johnson considered that in these latter circumstances, the appellant would have been able to avoid an IVA because she had sufficient assets to pay the creditors without difficulty. This was the way in which Mr Janusz put the case in his closing submissions. He was still hopeful that the judge would accept Mr Johnson’s hypotheses. However, the judge rejected those hypotheses. Mr Janusz had not presented an alternative case, based upon the possible findings that the diversion of funds had not had a significant effect on the viability of the business and that the pre-January liability to creditors would not have been significantly reduced between January and August. It can sometimes be difficult for counsel to foresee all the possible findings of fact and to make submissions on the basis of various outcomes. However, in my judgment, even without those alternative submissions, it was incumbent upon the judge to work through the implications of his findings of fact, once he had made them. He should have directed himself in accordance with Allied Maples and have asked himself whether, on the hypothesis that the appellant had withdrawn from the partnership in January (with proper notice being given to creditors) and that the business had gone under in August 2000, there would have been a real (as opposed to speculative) chance of the appellant avoiding an IVA. That question was never addressed as, in my view, it should have been, given that the judge had decided to deal with loss, notwithstanding his findings on causation.

Even in the course of argument before this court, Mr Janusz failed to focus on what seems to me to have been the appellant’s best point. He tended to focus upon the appellant’s chances of avoiding an IVA in the event that there had been a general dissolution of the business in January 2000. That, in my view, was never on the cards. Neither the appellant nor Mr Clare wanted it and it is unrealistic to think that it might have happened.

I mentioned earlier that I considered that there was a logical flaw in the conclusions that Mr Hall drew when he opined that it was inevitable that the appellant would have had to submit to an IVA. He did not consider whether or not the appellant might have been able to avoid an IVA if the business had gone under in August but the appellant had clearly and unequivocally withdrawn in the January and had given notice to creditors. This was a point that the appellant herself attempted to make when giving evidence. She drew attention to the fact that, when the business failed, she was obliged to make arrangements to meet the whole of the liabilities of the partnership up to the date of collapse; she was not permitted to accept only the pre-January liabilities. That was because she had not withdrawn properly from the partnership in the January.

It seems to me that this point has force. The difference between the appellant’s situation, as it was in fact in August 2000, and the situation that would have pertained in August if she had withdrawn properly in the January was very marked. By the time the appellant came to sign her IVA proposal, it had been agreed between her and Mr Clare that her withdrawal from the partnership should be backdated to January. That was something of a fiction, although it was a binding agreement as between the two of them. However, it could not affect the position of creditors, who had not been given notice until July and it was inevitable that when the business failed, Mr Allen would advise the appellant that she was jointly and severally liable for all the partnership debts. Faced with debts of the order of £200,000, an IVA was inevitable. However, if the appellant had withdrawn properly in January, with notice to creditors, Mr Allen would have treated her as a former partner with liabilities limited to the pre-January debts. Those were significantly less than the liability she actually faced in August 2000. The best estimate seems to be that they were about £70,000 to £80,000, after taking into account the appellant’s £20,000 loan to the business which would have had to be written off, by then if not before. So, the appellant’s liability to creditors would have been much more manageable.

If the judge had considered these matters, he would then have had to consider whether the appellant would or might have been able to avoid entering an IVA. He had evidence before him of her assets. She had had some shares or savings but it appears that, by August 2000, some of that (about £10,000) had been invested in the purchase of a house and may not have been readily available. She had a cottage in France which was free of mortgage and worth about £55,000. She had a half share in the endowment policy, which eventually fetched £21,000. She had a share in some agricultural land which was never valued. Realistically, the bank was going to take all the proceeds of the matrimonial home. But given those assets and the evidence that, during the IVA, the appellant was able to borrow some money from a third party until such time as she could sell the French property at a reasonably favourable price, it does not seem to me that it could properly be said that it was inevitable that the appellant would have had to go into an IVA. Far from it, she would have had a real chance of avoiding the IVA.

It appears to me that, if the judge had thought through the implications of the findings of fact which he made and had not limited his deliberations to the premises upon which the experts had given their opinions, he would have reached the conclusion that, by not withdrawing properly from the business in January, the appellant had lost a real, not speculative, chance of avoiding an IVA.

Accordingly, I would hold that the judge erred in his approach to both causation and loss and that the appellant should have been entitled to some damages. I would allow the appeal. However, I am aware that Pill LJ and Sir Christopher Staughton do not agree with my analysis of the case and the appeal will therefore fail. I would have attempted to assess the damages which I would have awarded, had the appeal been allowed. However, that would now be an academic exercise. Moreover, there is a practical difficulty in that there is no clear evidence as to the cost of the IVA. The most recent estimate is that the costs were about £35,000 but no argument was heard as to the accuracy of that figure. There is no point in my embarking on an assessment.

For the sake of completeness, I must mention that the appellant also sought to challenge the judge’s refusal to award her general damages for distress and the shame of having to enter an IVA. In my view the judge was right to refuse to award damages under that head. This was not the kind of case in which damages for injury to feelings are recoverable. The purpose of the retainer was for the respondents to give advice on economic matters so as to avoid or minimise financial loss; it was not to avoid or relieve mental distress.

Having failed to gain any award of damages, the appellant was ordered to pay the costs of the action. She appealed against that order. In the light of the overall result of this appeal, that aspect of the appeal remains to be considered. I agree with Pill LJ and Sir Christopher Staughton, that, as the appellant had failed to recover substantial damages, the judge was entitled to make the order on costs as made.

His Honour Judge Peter Clark found on the evidence that Mrs Clare was not given the advice which she should have received from her solicitors, at a time when the business which she shared in partnership with her husband was in difficulty. That is not now challenged. The question in the Court below was whether she had suffered loss as the result of the solicitors’ negligence. That in turn required her to show that, if the correct advice had been given, there was a real or substantial chance that she would have escaped from the loss which she eventually sustained. The judge found that her loss would have been inevitable.

In this court the argument for Mrs Clare was that she had lost a real and not speculative chance, in that she would have been able to avoid an Individual Voluntary Arrangement, which apparently involves a large expenditure in itself. Furthermore it is said that she would have done so. Lady Justice Smith has prepared a judgment in which she concludes that, if Mrs Clare had tried to avoid an Individual Voluntary Arrangement (or IVA), by withdrawing from the partnership in January 2001, there would have been a 40 percent chance that she would have succeeded. On the basis of the law elucidated in Allied Maples Group v. Simmons & Simmons (1995) 1 WLR 1602, Lady Justice Smith would award Mrs Clare the sum of £10,000.

Lord Justice Pill takes a different view. He observes that the chance that an IVA could have been avoided was not put to the judge in the court below, even in the closing submissions, and was not supported either by the expert witness jointly appointed by both parties, or by the additional expert called by Mrs Clare. He agreed with the judge’s conclusion at first instance, that Mrs Clare had suffered no loss as a result of the solicitors’ negligence. For my part, I agree with the judgment of Lord Justice Pill.

I agree that general damages for distress, inconvenience and such like are not recoverable for a breach of contract of this nature. I also agree that costs must not necessarily be awarded for a breach of contract, if no damages are awarded. The judge was right to award costs to be paid by Mrs Clare.

I gratefully adopt Smith LJ’s setting out of the history of events but I regret I am unable to agree with her conclusion on the main issue. It is not now disputed that the respondents were in breach of duty to the appellant. The issue was whether the appellant had suffered loss as a result of that breach.

The judge fairly commented, at paragraph 76, that the appellant’s case on loss had been “something of a moving target”. The appeal is now based on the costs of the individual voluntary arrangement (“IVA”) into which the appellant entered. Based on further evidence before this court, which the judge had declined to admit, because it was submitted late, the cost is said at the date of the trial to have been of the order of £32,000. The appellant’s submission is that, but for the negligent advice, there may have been no IVA.

Smith LJ would allow the appeal and award damages of £10,000 on the basis that the appellant would have had about a forty per cent chance of avoiding an IVA. That figure took account of the probability that some professional expenses would have been incurred in any event. I understand the conclusion to be on the basis that, had the appellant withdrawn from the partnership in January 2000, as opposed to July 2000 (albeit backdated to January), it might not have been necessary for her to enter into an IVA.

The jointly instructed expert, Mr D J Hall is a chartered accountant and head of department in an independent professional and financial services group. Questions were posed by the parties for his consideration. He concluded (7.1.5 of his report):

“I have not seen any evidence to suggest that had Mrs Clare accepted the Notice in January 2000 the financial outcome would have been any different”.

The appellant was later permitted to instruct an expert of her own, Mr Johnson, also a chartered accountant. The judge preferred the evidence of Mr Hall. The judge identified and analysed the differences between his evidence and that of Mr Johnson before reaching his conclusion. The judge had the benefit of the expert analysis of the financial information available as to the state of business in January 2000 and August 2000 and what in fact happened during the intervening period. The judge also found that, on the facts, he was satisfied that the appellant would “inevitably have been obliged” to enter into an IVA.

Smith LJ finds (paragraph 46) a logical flaw in the judge’s inference that, because the collapse of the business was inevitable and the appellant had been driven into an IVA to meet her liabilities, it was inevitable that she would have had to enter an IVA. The perceived flaw was that the appellant’s liability to creditors would have been much more manageable in the January 2000 than in August.

Smith LJ stated, at paragraph 44, that both parties and the judge may have lost sight of the fact that the appellant had only to show that she had lost a real as opposed to a speculative chance that her financial position would have been better if the breach of duty had not occurred. That test is repeated at paragraph 47: would there have been a real (as opposed to a speculative) chance of the appellant avoiding an IVA? Smith LJ has found that the judge should have concluded that the appellant had lost a real, not speculative, chance of avoiding an IVA (paragraph 52). Reliance is placed on Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602.

Smith LJ accepts (paragraph 47) that the thesis upon which a finding in the appellant’s favour is possible was not put to the judge, even in closing submissions. Counsel for the appellant had focused upon the appellant’s chances of avoiding an IVA in the event that there had been a general dissolution of the business in January 2000. Smith LJ has speculated as to what might have happened if the appellant had withdrawn from the partnership in January 2000 (as distinct from there being a general dissolution), though that was not the basis on which the experts had given their opinions and counsel had made submissions. With appropriate borrowing and dispositions of her assets, the appellant would, it is found, have had a real chance of avoiding the IVA.

In my judgment, the judge was not obliged to speculate in that way and this court should not speculate upon a factual scenario not explored in the evidence and submissions.

In refusing permission to appeal on paper (permission was later granted following an oral hearing), Neuberger LJ found the judge’s finding of fact decisive on this issue. It was based on the evidence and on the way the case had been put by the experts. I agree.

Moreover, reliance on Allied Maples, which was also a case of solicitor’s negligence, is in my respectful opinion misplaced. In my judgment, the judge correctly set out in his judgment the principles deriving from that case. The ground explored in Allied Maples was that in which the claimant’s loss depends on the hypothetical action of a third party, either in addition to action by the claimant or independently of it (Stuart-Smith LJ at page 1611B). It was held that, in such a situation, the claimant must prove as a matter of causation that he has a real or substantial chance as opposed to a speculative one (1614D).

The decision does not reject a different approach in other circumstances. Before going on to consider the situation where a “hypothetical action of a third party” has to be considered, Stuart-Smith LJ stated, at page 1610A:

“The court has to determine on the balance of probability whether the defendant's act, for example the careless driving, caused the plaintiff's loss consisting of his broken leg. Once established on balance of probability, that fact is taken as true and the plaintiff recovers his damage in full. There is no discount because the judge considers that the balance is only just tipped in favour of the plaintiff; and the plaintiff gets nothing if he fails to establish that it is more likely than not that the accident resulted in the injury.”

Where a negligent omission is involved, the claimant “must prove on balance of probability that he would have taken action to obtain the benefit or avoid the risk” (1610G).

In Allied Maples, this court was divided on the facts as to whether the third party would have yielded; Hobhouse LJ, in agreement with Stuart-Smith LJ, held that the judge was entitled to make findings of fact which amounted to a rejection of the defendants’ case that the claim for substantial damages was purely speculative (page 1620A). Millett LJ did not accept that it was open to the judge on the evidence before him to find that the claimants had a substantial chance (page 1622B).

Nothing in Allied Maples debars a judge, on appropriate evidence, from making a finding that there was no real or substantial chance. The judge made findings of fact which he was entitled to make. In so far as the decision as to an IVA depended on the acts of third parties, the judge was entitled to make the findings he did. Smith LJ has accepted that the bank was going to take all the proceeds of the matrimonial home. The judge was not obliged to consider further the hypothetical actions of third parties and the need to assess chances did not arise. He was entitled to conclude, and did conclude on the evidence, that the appellant would inevitably have been obliged to enter into an IVA.

For those reasons I would dismiss the appeal on the main issue. As to the somewhat academic issue of making a finding in contract and awarding the appellant nominal damages, I agree with Neuberger LJ that, in the absence of costs implications, it was a perfectly reasonable view for the judge not to give such a judgment in the appellant’s favour. Further, the issue of costs was carefully considered by the judge and I would not disturb his finding on that issue.

I agree with Smith LJ that the judge was right to refuse to award general damages for distress, and for the reason Smith LJ gives.

I would dismiss this appeal.