Bowling & Co Solicitors v Edehomo

This case raises the question of when an innocent vendor whose signature is forged on the documents for the conveyance of land suffers damage, for the purposes of limitation of an action arising from a solicitor’s breach of duty. Is it on the exchange of contracts, in which case the present claim is said to be time barred; or is it only on completion, in which case the claim was just commenced in time? In a judgment delivered in the Central London County Court on 3 August 2010, HH Judge Hand QC held that it is the latter. The second defendant (“Bowlings”) appeals, contending that it is the former.

The issue arises on Bowlings’ application to strike out the claim against it or alternatively for summary judgment. It is accepted that the facts alleged by the claimant, Mrs Edehomo, should therefore be assumed, for present purposes, to be established.

The relevant facts are relatively simple. The first defendant, Mr Jerome Edehomo, is the estranged husband of the claimant. In about December 1989, the claimant and Mr Edehomo together purchased the property known as 18 Stock Street, Plaistow, London E13 (“the Property”) as an investment. The purchase price was £75,000 of which they paid a deposit of £5,000 and the balance was funded by a mortgage. The Property was registered into their names as joint tenants.

In 2002, Mr Edehomo instructed Bowlings to act for him and the claimant regarding the sale of the Property to a third party. Contracts were exchanged on 21 November 2002 and completion took place on 2 December 2002. However, the claimant was at the time unaware either of those instructions or of the sale and played no part in the transaction. Her signature was forged, it would appear by Mr Edehomo, on both the contract and the TR1 form of transfer. It is also suggested, although the claimant is not sure of this, that Mr Edehomo may have procured someone to impersonate her and attend a meeting at Bowlings when the original instructions were given.

As a result, the Property was sold and there is no suggestion that the purchasers were aware of the fraud. Bowlings sent Mr Edehomo a cheque made out to both him and the claimant for the net proceeds of sale, amounting to £86,143.35. The claimant has never received any of the money.

On 1 December 2008, the claimant issued a claim form claiming against both Mr Edehomo and Bowlings, alleging as regards the solicitors that they were in breach of a duty of care to her. Mr Edehomo did not serve a defence, and it may be presumed that he is unlikely to be able to satisfy a judgment against him. The claimant’s claim against Bowlings, as pleaded in her Particulars of Claim, is framed in both contract and tort, but it has been proceeded with only in tort because her case is that she was never a client of Bowlings and, accordingly, there was no contract between them. The allegations made by her against Bowlings are in paragraph 11 of the Particulars of Claim, which reads as follows:

“It was an implied term of the aforesaid agreement [ie the agreement resulting from Mr Edehomo’s instructions] or alternatively it was the duty of [Bowlings] their servants or agents:

(a)

to take reasonable or appropriate steps to establish the identity of [Mr Edehomo] and the claimant believes [sic] the persons unknown that were impersonating the claimant, at all material times

(b)

to undertake the aforesaid contractual and conveyancing work with all due care, skill, competence and diligence to be expected of solicitors experienced in the conduct of conveyancing;

(c)

to take or advise the claimant to take all necessary steps to protect her interests in respect of the proposed sale.”

The argument for the claimant on this appeal, as in the court below, has been largely based on (a) of the above allegations.

Section 2 of the Limitation Act 1980 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.”

The extensive delay in the commencement of these proceedings appears to be due, at least in part, to the conduct of the claimant’s previous firm of solicitors, which firm has since been dissolved. In any event, on her own case, the claim form was issued just one day within the six year limitation period. But Bowlings contend that if they were in breach of duty (which they deny), then the claimant suffered damage as a result on 21 November 2002 when contracts for the sale of the property were exchanged and therefore more than six years before this action was started.

I raised with counsel at the outset of this appeal whether there was not a continuing duty on Bowlings up to the date of completion to verify the identity of their clients, such that there was a further breach when they released the transfer form (or a continuing breach up to that point). If that were the position, then even if the claimant suffered damage on exchange of contracts, she might be able to claim on the basis of a further breach at the time of completion that gave rise to further damage. It was explained to me that the reason that this was not pursued is that, under normal conveyancing practice, solicitors are expected to verify the identity of their client in a face-to-face meeting at the outset, but are not expected to do so again thereafter unless there are circumstances which should reasonably alert the solicitors to some doubt regarding their client’s true identity. Whether that is a complete answer to the point where it is alleged that the solicitors never properly verified the identity of their client is not for me to determine on this appeal.

However, Ms Daniels for the claimant told me that she wishes to contend that, on the facts here, there were matters that should have alerted Bowlings to the problem after exchange of contracts; and accordingly she intends to seek permission to serve a Reply raising those matters. No draft Reply was before the court at the hearing but, pursuant to my direction, a draft Reply was produced subsequently which the claimant will seek permission to serve out of time. Although determination of that application may affect the form of order to be made on disposal of this appeal, it does not obviate the need to decide the issue raised. The impact on the limitation point of any circumstances on which the claimant now seeks to rely is presently unclear and, in any event, Bowlings would be entitled to dispute the accuracy or implications of those circumstances.

In his judgment below, Judge Hand held that the claimant did not suffer damage for the purpose of accrual of her cause of action until completion on 2 December 2002. However, since that judgment was given, the Court of Appeal decided the case of Nouri v Marvi [2010] EWCA Civ 1107. Mr Carpenter for Bowlings placed the reasoning of that judgment at the forefront of his submissions and, as a result, the argument on this appeal has assumed a rather different shape from that in the court below.

Before turning to that case, it is appropriate to consider what is meant by “damage” for this purpose. In Forster v Outred & Co [1982] 1 WLR 86, the Court of Appeal held that the plaintiff suffered damage caused by her solicitors’ alleged negligence at the time when she executed a mortgage on her freehold property as security for a loan, and not only at the later time when she was required to pay on that security. In the course of his judgment, with which the other members of the court agreed, Stephenson LJ accepted the submission of counsel for the defendant solicitors, expressed as follows (at 94C-D):

“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.”

And Dunn LJ said (at 100A-C):

“In this case, as soon as she executed the mortgage the plaintiff not only became liable under its express terms but also - and more importantly - the value of the equity of redemption of her property was reduced. Before she executed the mortgage deed she owned the property free from encumbrances; thereafter she became the owner of a property subject to a mortgage. That, in my view, was a quantifiable loss and as from that date her cause of action against her solicitor was complete, because at that date she had suffered damage. The actual quantum of damages would, of course, depend on events between that date and the date when the damages had finally to be assessed, but the cause of action was complete when she executed the mortgage, without proof of special damage.”

In Nouri v Marvi, the claimant was the registered owner of a leasehold flat. He allowed the defendant to live in the flat while he was out of the country. While in occupation of the flat, the defendant first re-mortgaged the property in the claimant’s name, forging the claimant’s signature on the mortgage deed. Then, on 2 April 2001, he sold the flat to himself, posing as the claimant in instructing solicitors as vendor and instructing other solicitors to act in his own name as the purchaser. In that case, exchange of contracts and completion were simultaneous, and the defendant forged the claimant’s signature on the transfer. On 4 July 2001, using the transfer, the defendant obtained registration of the flat in his own name and he subsequently sold it to an unconnected third party.

On 2 July 2007, the claimant commenced proceedings against the defendant and also the solicitors who had acted for the defendant when he had impersonated the claimant. Therefore, that action was commenced more than six years after exchange and completion, but less than six years after registration. The allegation against the solicitors was similar to those in the present case and the issue raised on limitation was whether the claimant suffered damage only on registration or already on 2 April 2001. The Court of Appeal upheld the decision of the trial judge that the claim against the solicitors was statute-barred because the claimant suffered actual damage on completion of the sale and was not simply exposed to the contingent loss of his title which would depend on whether Mr Marvi applied for registration as proprietor based on the forged transfer.

Since in that case exchange and completion were simultaneous, it was unnecessary for the court to make any distinction between them. I accept Mr Carpenter’s submission that where Patten LJ in the leading judgment refers to damage arising on completion, that was by distinction with registration and should not be taken to be a determination that it would not have arisen already on exchange of contracts, had that occurred still earlier.

Critical to the reasoning of the Court of Appeal was the finding that as from 2 April 2001, there was a blot on Mr Nouri’s title that significantly decreased the marketable value of the property. The essential reasoning of Patten LJ (with whom Sir Mark Waller and Rix LJ agreed) is contained in the following paragraphs:

“29.

There was no valuation evidence before the judge directed to this issue but Mr Jones [Counsel for Mr Nouri] accepts that had a potential purchaser been told of the forged transfer in the period prior to registration of Mr Marvi's title, this would undoubtedly have led to a diminution in the price he would have been willing to pay. Although the contract and the transfer to Mr Marvi were of no legal effect, they did expose any purchaser to the risk of possible litigation even if that risk was more apparent than real. This is the point taken in the respondent's notice.

30.

On this basis there will have been a diminution in the open market value of the Flat following completion on 2^nd April 2001. Mr Jones contests this conclusion because it proceeds, he says, on a false assumption: i.e. that a potential purchaser would have been made aware of the difficulties caused by the forged transfer. He submits that there was no realistic possibility of Mr Nouri having discovered the fraud before registration on 4^th July and therefore no question of his being under any obligation to disclose those matters to a potential purchaser. The facts were that he remained in ignorance of the fraud until much later.

31.

I do not accept this analysis. It is well established that a cause of action in tort can accrue for the purposes of the Limitation Act without the claimant being aware of it. The decisions of the House of Lords in Cartledge v E. Jopling & Sons Ltd [1963] AC 758 and Pirelli General Cable Works Ltd v Oscar Faber & Partners [1983] 2 AC 1 led to limited changes to the Act to provide alternative time limits of three years running from the date of knowledge. These are now contained in ss.11 and 14A of the 1980 Act.

32.

In this case Mr Nouri was not assisted by s.14A because he had the requisite knowledge of the fraudulent sale to Mr Marvi by 2002. But the provision of these alternative time periods to address the problem of lack of knowledge has left intact the principle that time will run under s.2 even if the claimant is unaware of the circumstances which have led to it. The existence of actual damage for these purposes does not therefore depend on the claimant's state of knowledge in relation to the breach of duty or its consequences but on whether the breach has in fact caused actual loss.

33.

For this purpose the correct hypothesis must be to ask whether Mr Nouri could have maintained an action for damages against [the solicitors] following completion of the sale to Mr Marvi. That requires one to assume that he was aware of the breach and to assess the impact of that on his property or other assets as at that date. Consistently with this hypothesis, any diminution in the value of the Flat attributable to the breach has to be determined on the basis that Mr Nouri was aware of the forged transfer and was under a corresponding duty to alert a purchaser to that problem. The Flat was unsaleable without such disclosure. It must therefore follow that its open market value was what a purchaser would pay for it with knowledge of the forged transfer. There was therefore actual damage suffered by Mr Nouri as of 2^nd April 2001.”

Mr Carpenter submitted that same analysis would apply here. If the claimant had sought to sell her share in the property after 21 November 2002, and for this purpose is presumed to be aware of the fraud, she would have had to disclose to a potential purchaser the existence of the forged sale by her husband. Although she would of course have been able at any time previously to sever the joint tenancy and thus seek to dispose of her beneficial interest in her tenancy in common, after 21 November 2002 no purchaser would have been prepared to enter into an agreement with her until the situation regarding the contract made by Mr Edehomo was sorted out. Thus, it was submitted, her interest in the property had become unsaleable, or at the very least could be sold only at a significant discount or, perhaps more likely, on a conditional contract whereby a purchaser was only obliged to proceed on condition that the earlier fraudulent contract had been set aside within a specified period. Whichever of these alternatives is the more likely, the value of the claimant’s interest in the property was significantly diminished.

In response, Ms Daniels said that the claimant had no wish to sell her share in the property at the relevant time. But that is no answer to the point since if the value of the property is diminished that clearly constitutes a loss even if the loss would only be realised if and when the property were to be sold. Secondly, Ms Daniels submitted that whether the existence of the earlier contract would in fact make it impossible for the claimant to sell her interest in the property, or significantly reduce its value, was a question for expert evidence and none had been produced. There is a difference, she argued, between a conveyance, as in Nouri v Marvi, which is good against all the world and a contract, which is binding only on the contracting parties. However, it seems to me clear beyond argument that no potential purchaser would choose to enter a binding obligation to buy an interest in property at its open market value when he or she was told that it had already been sold to someone else, simply on the basis of being informed that the vendor’s signature on the earlier contract had been forged so that it could be disregarded. The potential purchaser could not know whether that was correct, and no one wishes to buy themselves into a lawsuit. Despite Ms Daniels’ valiant efforts to persuade me otherwise, I do not think that this is a matter that calls for expert evidence.

Accordingly, I hold that the claimant did indeed suffer loss on exchange, such that she could then have started proceeding against Bowlings. It follows that she had a cause of action against them in tort which accrued more than six years before the commencement of these proceedings.

This ground, which was not considered in the judgment below, is therefore sufficient to dispose of the only issue to be determined on the appeal. However, since they were fully argued, I address briefly the other points raised on behalf of Bowlings.

First, it is said that the judge was wrong to find that the contract here did not have the effect to sever the joint tenancy, and that such severance of the claimant’s interest in the whole constituted a loss.

As to severance, the position is as follows. On behalf of the claimant, it is now conceded that the above analysis is correct and that severance took place. I think that concession is rightly made. It is well established that a contract in which one co-owner’s signature has been forged by the other is not a nullity but remains valid in relation to the fraudulent co-owner: Edwards v Lloyd’s TSB Bank plc [2004] EWHC 1745 (Ch) at [17]-[18]. Thus, although ownership in law did not pass to the purchasers, because a joint tenancy in law cannot be severed, the transaction had the effect of passing Mr Edehomo’s beneficial interest in the property to the purchasers, although the purchasers could undoubtless have set aside the entire transaction for fraud if they so wished. That the effect of the passing of the beneficial interest of the fraudster to a third party is to sever the beneficial joint tenancy is made clear by Ahmed v Kendrick (1987) 56 P&CR 120. Although the judge below distinguished Ahmed v Kendrick on the basis that it concerned the effect of transfer on completion and not exchange, I do not, with respect, consider that this distinction is relevant. In that case, nothing turned on whether severance occurred at exchange or transfer, but as a matter of first principle, an exchange of contracts constitutes a sufficient alienation to have the effect of severing a joint tenancy; severance is not postponed until completion: see Megarry and Wade, TheLaw of Real Property (7^th ed, 2008), paras 13-037, 13-039.

Accordingly, on 21 November 2002, the claimant’s joint tenancy in the Property was severed. But did that in itself cause the claimant loss? Since the judge below did not find that any severance took place, he did not address this question. Mr Carpenter submitted that severance did cause damage, because the claimant lost the benefit of survivorship. However, as he recognised, in the circumstances of this case, survivorship was rather double-edged. Had the joint tenancy continued, it meant that if the claimant had died, the entire property would have passed to her estranged husband, which one may presume would have been the last thing she would have wished. The question of whether loss is suffered is fact-specific, and although in some circumstances loss of the joint tenancy might constitute damage, I do not think that it did so in this case. Accordingly, although by a different process of reasoning from that of the judge, I would uphold his conclusion that no loss is established on this basis.

Secondly, it was submitted for Bowlings that if the claimant had become aware of the facts, then she would sensibly have taken steps to alert Bowlings to the reality of what was going on, and incurred expense in doing so, possibly in consulting solicitors. Reliance was placed on the much quoted observations of Nicholls LJ in Bell v Peter Browne & Co [1990] QB 495. There, on the breakdown of a marriage, the plaintiff husband executed a transfer of the matrimonial home into his wife’s sole name but the defendant solicitors whom he consulted took no steps, by way of arranging a declaration of trust or mortgage, to protect the one-sixth share in the proceeds of sale which he agreed with his wife he would receive whenever such sale occurred. The issue was whether he suffered damage when the transfer to his wife was executed without any formal agreement to protect his interest, or only on the subsequent sale of the house when his (by then) former wife failed to account to him for his agreed share. Nicholls LJ stated (at 503 F-G):

“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 learned 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 cost incurred in going to other solicitors for advice on what should be done and for their assistance in lodging the appropriate caution. The cost would have been modest, but not negligible.”

However, I agree with the judge below that this cannot be taken out of context or to extremes. In the first place, the claimant could have simply gone into Bowlings offices to identify herself and told them that she had never signed any contract which they were purporting to transact on her behalf. Unsurprisingly, Bowlings did not suggest to this court that that would have been insufficient for them to investigate what was going on. That may have cost the claimant a telephone call and a bus fare, but I do not regard that as the kind of expense which Nicholls LJ had in mind. Further, as Judge Hand pointed out, the cost to which Nicholls LJ referred was that of remedying an alteration to the plaintiff’s legal position. The analysis may be different where no such alteration had yet occurred and the hypothetical cost was that which might be incurred in declaring the existing legal position so that no such alteration could take place in the future. However, it is not necessary to reach a concluded view on this point since this aspect has become academic in the light of my determination that exchange of contracts caused actionable damage to the claimant on other grounds.