Law Society of England and Wales & Ors v Wemyss & Ors

Mr Shah was a solicitor who (to use an opaque but neutral expression) became involved with a number of small conveyancing practices which he branded as “the BJ Brandon Group”. Mr Shah transferred the accounting functions of each constituent practice in the BJ Brandon Group to a central accounting office: and he also transferred the client and office accounts of the constituent practices to a single branch of Barclays Bank. On 22 September 2000 the Office for the Supervision of Solicitors (acting under delegated powers from the Law Society) intervened in the BJ Brandon Group because they suspected dishonesty. The OSS found that about £12.5 million had been misappropriated from client accounts. Mr Shah left the jurisdiction. The Law Society has paid out of its Compensation Fund the clients who have suffered from Mr Shah’s dishonesty. It has commenced twelve actions against solicitors whom the Law Society alleges were partners or were held out as partners in the constituent practices of the BJ Brandon Group. Where individual clients consented to be named as claimants, they were so named. Where individual clients did not consent the Law Society claimed as subrogee or as assignee of the claim (by virtue of having made payments out of the Compensation Fund). This basic narrative (which should not be treated as making any findings of fact) provides the general context of the application now before me.

All the defendant solicitors had (until 1 September 2000) been provided with professional indemnity cover by the Solicitors Indemnity Fund (“SIF”). From the 1 September 2000 those solicitors should have obtained professional indemnity insurance in the open market: but none of them had done so, and accordingly they were covered by the Assigned Risk Pool operated by the market participants (“the Insurers”). Three of the solicitors who became defendants to the proceedings were discharged bankrupts: but the Law Society brought proceedings against them personally (not against their trustees in bankruptcy). These bankrupted solicitors were defendants to eight of the twelve actions. They pleaded that their bankruptcy and discharge provided them with a complete defence to the Law Society’s claims.

When the bankruptcy point was taken a number of applications were issued. The Law Society sought to amend its claim to seek a declaration that the solicitors were liable to the Law Society prior to their discharge from bankruptcy. The bankrupt solicitors sought to strike out the claims against them. Originating applications were issued by the Law Society in the individual bankruptcies seeking an order joining the trustees in bankruptcy as defendants to the eight actions so as to establish the Law Society’s rights to prove in the relevant insolvency. The substantial point lying behind all of these procedural applications was whether it was possible for the Law Society to claim payment from the bankrupted solicitors’ insurers under the Third Parties (Rights against Insurers) Act 1930 after the individual had been discharged from bankruptcy.

On 30 November 2007 Mr Justice Floyd that:-

“In the event that the court determines that the Law Society is entitled to prove in the bankruptcy of [X] the Law Society is entitled to claim against the insurer under the Third Parties (Rights Against Insurers) Act 1930 payment of such sum (if any) as the insurer is liable for under the policy.”

He ordered that the trustee in bankruptcy should be joined as a defendant to the Law Society’s main proceedings for the purpose of establishing the entitlement of the Law Society to prove in the estate of the bankrupt in such sum (if any) as might be determined by the court.

Pausing there, the practical consequence of this outcome was that the trustee in bankruptcy was charged with the task of resisting the Law Society’s entitlement to the sum claimed (at the expense of the bankruptcy estate), but the Insurer was exposed to liability for payment of that sum. In those circumstances the Insurers were (by consent) made defendants to the eight actions in which the bankruptcy point arose. It is the unchallenged evidence of Mr Weaver (on behalf of the Law Society) that:-

“The Insurers were joined, by consent, on a limited basis so that:

(1)

their interest in respect of the discharged bankrupt might be protected. It was now the relevant trustee in bankruptcy and not the discharged bankrupt themselves who was a party to the proceedings. The insurers do not exercise the same rights of subrogation over the trustee as they did over the assured discharged bankrupt and are not entitled to determine the manner in which the trustee pursues his case: and

(2)

insurers would be bound by any determination in the proceedings.”

As will be apparent from that summary (and as is common ground before me) the main proceedings were not amended by the Law Society so as to make any claim or to seek any relief against Insurers.

When this consent came to be embodied in an Order of the court there was a dispute about the exact wording. The nature of the dispute and its result do not matter. The arguments advanced in the course of the dispute are illuminating.

For the Insurers it was argued:-

For the Law Society it was argued:-

What is clear from the arguments advanced is that the Law Society had consented to the joinder of the insurers and the insurers had consented to being joined as defendants for the purpose of defending a claim against the insolvent solicitor’s estate and so as to bound by any decision that the court might make that the Law Society was entitled to claim any provable sum in that estate. This was a limited purpose. The Insurers did not want to be “involved more widely in the proceedings” (to quote part of their skeleton argument).

There is now before me an application by the solicitors and by the Insurers to re-amend the Defence, to re-amend an existing Additional Claim, and to insert by re-amendment a further Additional Claim. The re-amendments expand the original 35 pages of pleading to 65 pages. The parties are to be commended for agreeing much that might have been in dispute and for precisely identifying and succinctly arguing the matters in issue.

In the statement of case as it stands there is an “Additional Claim” made by the solicitors against the Law Society. It alleges that the Law Society owed a duty of care to the clients of the BJ Brandon Group, and that in breach of that duty of care it failed to carry out any adequate investigation or to intervene in the BJ Brandon Group, and by reason of its negligent delays failed to prevent Mr Shah from removing funds: the solicitors accordingly claim that if they are found liable to the clients (or to the Law Society on the basis of any subrogated or assigned claim) then the solicitors will claim an indemnity or contribution in respect of such liability from the Law Society under Section 1 of the Civil Liability (Contribution) Act. The proposed re-amendment of this additional claim asserts a further duty of care in relation to the grant of practising certificates (and it greatly expands the particular acts and omissions that will be relied upon as establishing breaches of the originally claimed and newly asserted duties said to be owed by the Law Society to the clients). The Law Society does not resist these amendments insofar as they are made on behalf of the solicitors and in support of the claim for a contribution or indemnity.

The second (and new) Additional Claim relates to the Insurers. It asserts (for the first time) duties owed by the Law Society to the Insurers. It is simplest to set it out:-

“Further or alternatively, the [Law Society] owed the following duty to Insurers (i) in view of the introduction of insurance on an open market basis (including the [assigned risks pool]) on or around 1 September 2000 and/or (ii) generally and/or (iii) in circumstances where all or any of the matters set out in paragraph 28 below had been brought to the [Law Society’s] attention and/or (iv) it had decided to investigate Shah and/or his activities as set out at paragraph 32 below:-

(a)

a duty to ensure that it notified SIF of the steps that Shah was taking to obtain control over client accounts belonging to firms with which he was associated and/or the risk or likelihood that he had or would abscond with client funds: and/or

(b)

a duty to inform Insurers of the matters set out in paragraph 6A (a) above in order that they could ensure that SIF had been notified of the same (whether by themselves or otherwise).”

In support of this plea the proposed paragraph 1A of the re-amended pleading pleads facts relating to SIF and its operation, the advent of open market insurance, and the agreements which relate to whether SIF or the Insurers should be liable for particular claims. It then brings in all of the facts and matters relied on by the solicitors as constituting a breach of the Law Society’s alleged duty to the clients. The re-amendments then go on to allege that the Law Society owed a duty to the Insurers to notify SIF of any concerns about Mr Shah so as to put SIF on risk (rather than the Insurers) and a duty to the Insurers (who would be on risk from the 1 September 2000) to provide information to the Insurers so as to enable the Insurers prior to the 1 September 2000 themselves to notify SIF (so that again SIF could be put on risk and the Insurers relieved of any claim). The Insurers then claim damages from the Law Society “in respect of its delay to and inadequate investigations into Shah and/or his activities”.

The application notice seeking permission to make these amendments is dated 5 September 2008. All of the acts or omissions of which complaint is made must of necessity have occurred before 22 September 2000 (when the Law Society intervened). Some matters now complained of must have occurred before the 1 September 2000 (before which date it would have been necessary to notify SIF in order to put it on risk). There is a limitation problem.

There are two possible answers. The first hinges on the date upon which the Insurers’ cause of action arises. The Insurers will wish to argue that their claim is not barred under section 2 Limitation Act 1980 because the Insurers have not yet suffered actionable damage: see Law Society v Sephton [2006] 2 AC 543. If the Insurers are right upon this the apparent limitation problem disappears. The Law Society and the Insurers have agreed that this issue will be determined at the trial on the basis that the claims were made on 5 September 2008.

The second answer is procedural. Because the Insurers are already party to the eight actions in which the bankruptcy point had arisen they can, in amending, “relate back” the new Additional Claim for damages to the date of the original claim form issued by the Law Society. The application now before me for permission to amend is made in the action brought by the Law Society against the DWP Partnership. That was begun in August 2005 (and so very probably within six years after the accrual of the cause of action, assuming the Insurers primary case that the cause of action has not yet accrued fails). The question is whether I should allow that amendment.

Section 35 of the Limitation Act 1980 deals with the circumstances in which claims which would otherwise be statute barred may be brought in existing proceedings. Section 35 sets out a general rule (to which there is a specific exception): and then defines circumstances in which the general rule may be disapplied.

Section 35(1) provides that “a new claim made in or by way of third party proceedings” does not have the benefit of relation back. “Third party proceedings” are proceedings brought by a party against someone not already a party. So that section operates simply by reference to the court record. The doctrine of relation back applies in all cases other than third party proceedings.

Section 35(3) then provides that the court shall not allow a new claim (which might benefit from relation back) to be made in the course of any action after the expiry of any limitation period which would affect a new action to enforce that claim. The specific exception to that general rule is that it does not apply to “an original set off or counter claim”. This expression is defined to mean:-

“A claim made by way of set off or (as the case may be) by way of counter claim by a party who has not previously made any claim in the action.”

For the Insurers it is argued that they are squarely within this exception. Following the Order of Mr Justice Floyd they are now “a party”. They have not previously made any claim in the action: the claim they now make is therefore “original”. The new Additional Claim is made by way of counter claim because it is a claim for a remedy (damages) brought by an existing defendant against an existing claimant in an existing action.

The Law Society submits that the Insurers’ new Additional Claim is not an “original counter claim” within the meaning of Section 35(3). Mr David Edwards QC readily acknowledged that the claim was “original” (in at least two senses): but he submitted that it was incapable of being a counter claim, because there was no claim made by the Law Society against the Insurers to which the additional claim could run “counter”. He submitted that it was implicit in the concept of a counterclaim that some claim should have been brought against the party now counter claiming, and that the whole rationale for permitting “an original set off or counter claim” to be advanced notwithstanding any limitation difficulties was that a party against whom a claim was being made should be free to deploy any weapon in defence: the price a claimant had to pay for bringing proceedings was to forgo any available limitation point that could be taken against the party he chose to sue. Mr Edwards QC submitted that the argument was encapsulated in the Glossary definition of the term “counter claim” used in the CPR which is:-

“A claim brought by a defendant in response to the claimant’s claim…”

(He did not, of course, suggest that the definition was of itself an aid to the construction of Section 35 of the 1980 Act).

Attractive as is the argument of Mr Edwards QC, I consider that upon its true construction Section 35(3), in referring to “an original…counter claim”, is referring to any cause of action that might be asserted by an existing defendant against a claimant, there being no warrant in the words of the Section itself for adopting a more restrictive meaning. The counterclaim is essentially a procedural device. The nature of the cause of action on which the counter claim is founded is not integral to the concept of “counter claim”. All that matters is that all the parties requisite to assert the cause of action are on one side of the record and one of the persons against whom the cause of action may be asserted is on the other side of the record. Although I approach the question as one of broad principle, the conclusion I have reached is at least consistent with the decision in Hodson v Mochi (1878) 8 Ch. D. 569. (I was not referred to this case: but since I am not relying upon it as an authority I have not invited further argument).

I therefore hold that the Insurers’ counter claim is “an original counter claim” for the purposes of Section 35(3) of the Limitation Act 1980, notwithstanding that the Law Society is suing as subrogee or assignee of the claims of the clients, and notwithstanding that the Law Society seeks no explicit relief against the Insurers (simply wanting them to be bound by the outcome of the action against the solicitors). Whether the re-amendment advancing this original counter claim should be allowed is a procedural question.

The Insurers may amend their statement of case only with the permission of the court: CPR 17.1(2)(b). In that regard the guidance given by Peter Gibson LJ in Cobbold v Greenwich LBC (CA August 9, 1999) remains valuable. CPR Part 17 must be applied so that the case is dealt with fairly. Amendment in general ought to be allowed provided that any prejudice caused by the amendment can be compensated for in costs, and provided that the public interest in the administration of justice is not significantly harmed. I would exercise my discretion to refuse the amendment quoted in paragraph 12 above (and those other parts of the statement of case whose sole function is to support that plea). In short, it exploits a procedural quirk. The heart of the claim is a claim brought by clients against their solicitors for a shortfall on client account (and a contribution claim by the solicitors against the Law Society in respect of its alleged responsibility for the shortfall). Putting on one side the fact that the Law Society is a claimant only because some of the clients would not lend their names to the action, the real oddity in the case is how the Insurers came to be joined in their own right. It is only because some of the solicitors have been bankrupted (which reduced both their incentive to defend the claim against them and the rights of the Insurers to conduct the defence of the claim) that the Insurers have been added at all. They became parties not so that any substantive relief could be claimed against them, but to afford them a real opportunity to defend the claims being brought against the solicitors. Even if it is technically a counter claim, the Insurers are not deploying the new Additional Claim as a weapon to defeat a claim being brought against them, but rather as an outright offensive weapon. This was not the basis upon which consent was obtained to their joinder. There is no substantial merit in treating the eight actions in which the bankruptcy point arises so differently from the four in which it does not arise.

Further, I do not consider it fair to introduce a new claim which is radically different from anything already in the action. It is true, as Ms Sue Carr QC submitted, that the Insurers will rely on very many of the (greatly expanded) listed acts and omissions on the part of the Law Society of which the solicitors complain in their contribution claim. But it is also true that the Insurers must rely on completely different facts as giving rise to the Law Society’s alleged duty to the Insurers. Ms Carr QC submitted that the transfer of professional insurance arrangements was common knowledge. But it will be recalled that the circumstances in which the duty is said to arise included a plea of “generally”. In support of that it appears that the Insurers intend to rely on the general regulatory environment and the general position of professional indemnity insurers in that environment, and the position of themselves in the “build up” to the transfer of insurance from SIF to market operators (including reference to significant meetings between the Law Society and Insurers). None of this is of any relevance in relation to the duty which the solicitors owe to their clients or to the duty which it is said the Law Society owed to individual clients. When it comes to the breaches of duty, there is indeed overlap: but the alleged acts and omissions of the Law Society said to constitute breaches of their duty to the clients are significantly different from the acts and omissions of the Law Society which are said to constitute breaches of the Law Society’s duty to the Insurers. What the Society did in relation to notifying SIF is but the simplest example. The Insurers must then run an entirely different case on causation from that being run by the solicitors in relation to the alleged breaches of duty by the Law Society to the clients. Finally of course if they establish a breach of any duty owed by the Law Society to the clients, the solicitors seek a contribution or indemnity: but the Insurers will be leading an entirely different case in damages. The differences are sufficiently substantial for me to take the view that an already complex should not be further complicated: and that the Insurers should be left (as regards the eight actions to which they are defendants) in the same position as they are in the four claims which did not raise the bankruptcy point and in respect of which any claim by the Insurers against the Law Society for breach of duty must be pursued in separate, fresh proceedings.

This is sufficient to dispose of the application to amend. But I should consider the position in case I am wrong about the Additional Claim falling within the specific exception (“original counter claim”) to the general rule in Section 35. If the Additional Claim is not an “original counter claim” then it is a “new action” which under the general rule may not be brought after the expiry of any time limit. But Section 35(4) and (5) provide that rules of court may disapply this general rule:-

“Rules of court may provide for allowing a new claim…to be made…”

Such rules of court have been made. They are now to be found in CPR 17.4(2) which is in these terms:-

“The court may allow an amendment whose effect will be to add or substitute a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings.”

On the plain words of that rule there is no prospect of the Insurers obtaining permission to amend the claim in the manner sought. That is because the Insurers (as the party applying for permission) have not already made a claim in the proceedings: and it is a threshold requirement that they should have done so (because a comparison can then be made between the facts, by whomsoever pleaded, in issue in existing claim and the facts now to be pleaded by the Insurers in support of the new Additional Claim to see whether they are “the same or substantially the same”).

Faced with this difficulty Miss Carr QC said that the words of CPR 17.4(2) should not be accepted on their face, but should be modified. By this she meant that I should ignore the words:-

“…in respect of which the party applying for permission has already claimed a remedy…”

She suggested two bases on which I could do so.

The first was that the words of CPR 17.4(2) do not follow (and are more restrictive than) the words to be found Section 35 of the 1980 Act itself. The keys words of Section 35(4) are:-

“Rules of court may provide for allowing a new claim…to be made…but only if the conditions specified in sub-section (5) below are satisfied, and subject to any further restrictions the rules may impose.”

The key words in Section 35(5) are:-

“The conditions referred to…are the following: (a) in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as are already in issue on any claim previously made in the original action…..”

In short, the statute invites a comparison with facts which “are already in issue on any claim previously made” in the existing proceedings: whereas the rules invite a comparison with the facts “in respect of which the party applying for permission has already claimed a remedy”. This difference does not seem to me to matter. The power I am exercising is one conferred by the rules, and it is to the rules I must look. The fact that different rules might have been made under the statute does not assist. The statute says only that new claims shall not be allowed unless rules of court are made, that the rules of court must at the least confine the permitted new claim to one where the facts are substantially the same as those already in issue, but that a more restrictive rule may be made. A more restrictive rule has in fact been made.

Reading the rule in that way enabled a claimant to bring a new claim based on fact which had been asserted by the defendant. In Charles Church Developments Limited v Stent Foundations Limited [2007] 1 WLR 1203 Jackson J read the rule as enabling a claimant to advance a new claim against D1 on the basis of facts that had been pleaded by D2. He explained:-

“Section 35(5)(a) of the 1980 Act provides an exception to the limitation principle. The rationale of this exception is that once particular facts have been put in issue in litigation, and therefore fall to be investigated, the claimant should be entitled to claim any appropriate remedy upon the basis of those facts. This policy justification is equally valid irrespective of whether those facts have been put in issue by D1 or by D2 or by both defendants.”

These cases do not assist me. In each of them the party seeking amendment had already made a claim in the action (and therefore crossed the threshold): once over the threshold the claimant was able to deploy (for the purposes of comparison with the intended new claim) not only the facts originally pleaded by the claimant, but also facts pleaded by other people. But the Insurers do not cross the threshold.

I found more helpful the basis upon which the Court of Appeal had proceeded in two other cases. In Lloyds Bank v Wojcik (Court of Appeal, 19 December 1997) the court was considering RSC Order 20 Rule 5(5) – the predecessor to CPR 17.4, and in very similar form. The court held that the party seeking permission to amend could not bring himself within the provision because “he had not previously claimed any relief”. In JFS (UK) Ltd v Dwr Cymru Cyf [1999] 1 WLR 231 Nourse LJ expressed the same view (at p236 E-F).

Accordingly, if I am wrong in my construction of the term “original counter claim”, and the claim sought to be advanced by the Insurers is “a new action” I would nonetheless refuse permission to amend under CPR 17.4 because the Insurers do not cross the threshold (clearly stated in the rule) that they should already have made a claim..

I will dismiss the Insurers’ application to amend to introduce the new Additional Claim with retrospective effect (though it is allowed for the agreed purpose referred to in paragraph 14 above): but I will order that the amendments relating to the Defence and to the existing Additional Claim by the solicitors will be allowed.

Having received preliminary submissions on costs I will provisionally order that the Defendants (without distinction between them) will pay the Claimants’ costs of the amendment application, those costs to be the subject of a detailed assessment in default of agreement. The costs of an occasioned by the amendments themselves will be paid by the Defendants in the usual way. If any party is unwilling to accept this provisional order then the matter must be restored before me on application made within 7 days of the handing down.

Only one amended statement of case was put before me. The grouped cases have hitherto proceeded on the footing that each claim will be fully pleaded. That practice will continue. I do not give prior sanction to the amendments in other cases (which amendments I have not seen). I would expect the parties to agree on the requisite amendments in the light of this judgement, and only to issue a fresh application in a case of substantial dispute.

I will formally hand down this judgement at 10.15 am on 23rd October 2008. I do not expect attendance of legal representatives. Junior Counsel will please lodge an agreed Minute of Order by 4.00pm 4^th November.