AXA Insurance Ltd v Akther & Darby Solicitors & Ors (Rev 1)

In presenting their rival submissions as to the correct answer to the preliminary issues of limitation, Miss Sue Carr QC for the panel solicitors and Mr Charles Hollander QC for Axa take diametrically opposed positions as to the effect of the decision of the House of Lords in Law Society v Sephton [2006] 2 AC 543 (‘Sephton’). Miss Carr submits that Sephton does not change the previous law in this area as established by a number of previous decisions mainly of the Court of Appeal and that the decision in Sephton is to be approached with caution and to be given a narrow interpretation limited to its own special facts. On the basis of the law laid down by the earlier decisions and by decisions subsequent to Sephton, as applied to the assumed facts in this case, Miss Carr submits that in the case of vetting breaches, actual damage was first suffered when each ATE policy was entered. This submission depends to an extent not only on an analysis of the case law but on the nature of ATE insurance.

Miss Carr emphasises the distinction between ATE insurance and more traditional ‘Before the Event’ (‘BTE’) legal expenses insurance, most commonly encountered as an adjunct to motor or household insurance. Under BTE insurance, what Miss Carr describes as the insurer’s ‘meter’ does not start running unless and until a claim is made by the insured notifying the insurer that he wishes to call on the policy to fund the particular proceedings in which he is involved and the insurer accepts that the proceedings have a reasonable prospect of success. The insurer may not be required to pay out anything under the policy until the conclusion of the claim, but costs on both sides are being incurred and in that sense the ‘meter is running’. Of course, the insured may never make a claim under the BTE insurance at all, so the insurer will have received the premium but not paid out anything towards the claim.

In contrast, under an ATE policy, there is no gap between the receipt of the premium and the claim arising. The relevant event has already occurred and the ATE insurer’s meter starts running the moment it agrees to fund the particular claim. It takes on the risk of funding proceedings that have already arisen. This distinction between the two types of legal expenses insurance was recognised in the Claims Direct Test Cases [2003] Lloyd’s Rep IR 69 at paragraph 69 per Senior Costs Judge Hurst. As Miss Carr puts it, as soon as an ATE policy incepts, the insurer is exposed to immediate transactional commitments, which is why it essential from the outset for the insurer to exercise control over the handling of proceedings. Putting it another way, as soon as the ATE policy incepts, the insurer has changed its legal position.

Of the gross premium payable under each policy, a substantial proportion was retained by CLE for claims management and coverholding charges. For the CLE Scheme to have been profitable, the amount of the net premium retained by NIG on all Scheme Claims would have had to exceed the sums paid out by NIG in unsuccessful cases. In an unsuccessful case, the amount for which NIG would be liable far exceeded the net premium. Under the policy, NIG would be liable for the claimant’s costs and disbursements, the premium, interest on the loan and in all probability the other side’s costs. The net premium was (or should have been) calculated by reference to assumptions made by NIG about the rate at which Scheme Claims were likely to fail. Miss Carr submits that if NIG was committed, as a consequence of a vetting breach, to an ATE policy with 50% prospects of success or less, then although NIG retained the net premium, it acquired a Scheme Claim which was less valuable (in terms of the ability to generate recovery of the items insured under the policy from the other side in the proceedings) than it should have been. In those circumstances, actual damage for the purposes of the accrual of the cause of action in tort in the case of vetting breaches was incurred when the policy incepted.

Mr Hollander submits that there is no remit for giving the decision in Sephton a narrow interpretation and that it has effected a change to the law so that, following Sephton, the determination of when actual damage is suffered in cases of negligence in tort causing financial loss is to be determined by reference to the principles laid down by the House of Lords. Mr Hollander submits that, applying those principles, loss and damage cannot be said to have occurred (and thus a cause of action to have accrued) until the date when the underlying claim has ‘failed’ (either when NIG withdrew indemnity in respect of the claim or there was a settlement or judgment which meant that the claimant was liable for the other side’s costs or had recovered less than the amount that NIG would have to pay out under the relevant ATE policy). Until then he submits, any liability NIG was under was wholly contingent. However likely it was that a claim which had a 50% chance of success or less would fail, the fact is that it might not. As such, pursuant to Sephton that contingent liability is to be disregarded in assessing whether actual damage had occurred and thus whether a cause of action in tort had accrued.

I certainly accept Mr Hollander’s submissions that there is no remit for giving the decision in Sephton a narrow interpretation and that, in one respect at least, the House of Lords has clarified the law in this area. This concerns the formulation of what constitutes ‘actual damage’ needed to complete a cause of action in negligence as put forward by Mr Murray Stuart-Smith QC (as he then was) on behalf of the defendants in Forster v Outred & Co [1982] 1 WLR 86 and accepted by the Court of Appeal in that case and in subsequent cases as a correct formulation. This was:

“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.”

The House of Lords in Sephton cavilled at the concept of ‘liabilities which may arise on a contingency’ constituting ‘actual damage’. They concluded that a purely contingent liability standing alone however likely to occur did not amount to actual damage for the purposes of accrual of the cause of action in tort: see per Lord Hoffmann at paragraphs 18, 20, 22, 30 and 31; Lord Walker at paragraphs 48 and 51 and Lord Mance at paragraphs 76 and 77. In reaching that conclusion, they doubted the correctness of one decision of the Court of Appeal, Gordon v JB Wheatley [2000] Lloyd’s Rep PN 605, which on proper analysis is almost certainly a case, like Sephton itself, of purely contingent liability. I will consider the detail of what their Lordships say as necessary later in this judgment.

A central thesis of Mr Hollander’s submissions is that what emerges from the speeches in Sephton is that the authorities in this area can be placed in three categories which he contends are as follows:

In my judgment, despite the detailed and careful submissions put forward by Mr Hollander, the approach he advocates is misconceived for a number of reasons. First although the analysis of the earlier cases into categories may be helpful in identifying a strand of authority most relevant to the particular case under consideration, it is important to have in mind that none of the previous authorities, including Sephton in the House of Lords, involves this somewhat mechanistic categorisation. Any number of the cases emphasise that whether or not actual damage has been suffered is, in each case, a fact specific question, an approach which by definition militates against analysis of the cases into the sort of rigid categories for which Mr Hollander contends. Furthermore, a number of cases (including as it seems to me the present case) demonstrate the difficulty of drawing a distinction between what I will called ‘flawed transaction’ cases (Mr Hollander’s category 2) and ‘no transaction’ cases (his category 3) because in a very real sense they fall into both categories. I will return to this difficulty later in the judgment.

Second, despite the change in or at least clarification of the law in Sephton, for reasons which I will elaborate further in this judgment, I do not consider that Sephton when properly analysed leads to the conclusion that the date when “actual damage” occurred as a consequence of vetting breaches in the present case should be suspended until any claim has actually ‘failed’ in the sense defined above. Putting the matter another way, in my judgment, there is nothing in Sephton to preclude the conclusion that the actual damage here occurred when each ATE policy incepted, as the panel solicitors contend. This is primarily because, contrary to Axa’s submissions, this is not a case of a purely contingent liability standing alone.

Third, if one had to put cases into categories in the way for which Axa contends, it seems to me that this is a category 2 case in the sense that the duty which the defendant solicitors are alleged to have been under in tort was on analysis a duty ‘to bring about a transaction with particular characteristics or features’. That is clear from the formulation in the Amended Generic Particulars of Claim of the duty in tort in relation to vetting claims as ‘a duty to take reasonable care to vet claims to ensure that only claims with sufficient prospects of success and sufficient likely value in terms of quantum were accepted onto the Scheme’ (para 4.18.2). In other words, the duty was to take reasonable care to vet claims so as to ensure that CLE only accepted claims and issued ATE policies for Scheme Claimants whose prospects of success were assessed through the vetting process as 51% or more.

True it is, as Mr Hollander says, that the panel solicitors did not warrant that the claims would be successful, but nonetheless the duty as pleaded is one which was to ensure that NIG was only exposed to claims which had greater than 50% prospects of success, which is clearly a duty to use reasonable care to ensure that the contracts of insurance, the ‘transactions’ to which NIG was committed or exposed, had a particular characteristic or feature, namely that the prospects of success were assessed by a competent lawyer at more than 50%, an assessment which was vital to the success or otherwise of the Scheme. As such, it seems to me that this case falls within the line of decisions of the Court of Appeal running from Forster v Outred & Co [1982] 1 WLR 86 to Shore v Sedgwick Financial Services [2008] PNLR 37 the effect of which, as Lewison J most recently summarised it in Pegasus Management Holdings v Ernst & Young [2009] PNLR 11 at paragraph 74 is: “it is firmly established at the level of the Court of Appeal that, in a professional negligence case, the client suffers damage if he does not get what he ought to have got”. The fact that the flaw in the transaction means that inherent in it is a risk which in one sense is contingent, because it may or may not occur, does not mean that the accrual of the cause of action is suspended until that contingency occurs (if it does). When the professional’s duty is to procure that a transaction had a particular characteristic or feature and in consequence of his breach of duty it does not, the cause of action accrues on entering the flawed transaction.

So far as the decisions pre-Sephton are concerned, I do not propose to burden even further what will be a lengthy judgment in any event by analysing them in detail. They are all considered by Lewison J in Pegasus and, to the extent that it is necessary to analyse them for the purposes of this judgment, the various points can be picked up through the other cases, including Sephton itself and the post-Sephton cases, which I do consider in detail later in the judgment.

Although Axa places much emphasis in its submissions on the decision of the House of Lords in Sephton, it is clear that their Lordships approved the line of Court of Appeal authority in professional negligence cases from Forster v Outred onwards to which I have referred. Thus at paragraph 22 of his speech, Lord Hoffmann says:

“Thus cases like Bell v Peter Browne & Co [1990] 2 QB 495 and Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172 are readily explicable as cases in which the damage was the difference between the plaintiff's position as it was and as it would have been if the defendant had performed his duty and in which it was possible to infer that the plaintiff's failure to get what he should have got from a bilateral transaction was quantifiable damage, even though further damage which might result from the flaw in the transaction was still contingent. The plaintiff had paid money, transferred property, incurred liabilities or suffered diminution in the value of an asset and in return obtained less than he should have got. But these authorities have no relevance to a case in which a purely contingent obligation has been incurred.”

Lord Walker cites with approval the judgment of Saville LJ in First National Commercial Bank v Humberts [1995] 2 All ER 673 at 679 and continues at paragraphs 45 and 46 of his speech:

“The three cases cited by Saville LJ in this passage were all cases where the client had through the negligence of his professional adviser ended up with a package of rights less valuable than he was entitled to expect-damaged or defective goods, to pursue the metaphor, rather than the undamaged and serviceable goods which he should have got. In Forster v Outred & Co [1982] 1 WLR 86 it was a mortgage (securing the existing and future liabilities of the claimant's son, who later went bankrupt) burdening the claimant's previously unencumbered freehold property. In Iron Trade Mutual Insurance Co Ltd v J K Buckenham Ltd [1990] 1 All ER 808, it was a reinsurance policy which was voidable for misrepresentation or non-disclosure. In Bell v Peter Browne & Co [1990] 2 QB 495 it was a beneficial interest in one-sixth of the proceeds of sale of a former matrimonial home which was defective as a result of what Nicholls LJ, at p 502, called “failure (a)” and “failure (b)”:

“(a)

the solicitors' failure to see that the parties' agreement was recorded formally in a suitable declaration of trust or other instrument and (b) their failure to protect the plaintiff's interest in the house or the proceeds of sale by lodging a caution. As to failure (a), clearly the damage, such as it may have been, was sustained when the transfer was executed and handed over. At that point the plaintiff parted with title to the house, and became subject to the practical inconveniences which might flow from his not having his wife's signature on a formal document.”

Nicholls LJ went on to hold that failure (b) also caused immediate loss even though the defect (if recognised, which was unlikely once the solicitor had closed the file) could have been avoided, at some expense, at any time while the house remained unsold. A similar approach was taken (to a voidable fire insurance policy) by the Court of Appeal in Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172.

46 It is unnecessary to multiply examples of “transaction” cases but D W Moore & Co Ltd v Ferrier [1988] 1 WLR 267 calls for mention, since it has been cited in many later cases. A solicitor was instructed to prepare an agreement providing for the introduction of a new working director into an insurance business carried on by a company. His instructions called for the new director to enter into a restrictive covenant which would take effect on his leaving the business. Through careless drafting the covenant was ineffective. The agreement (entered into in 1971 and renewed with the same defect in 1975) continued until 1980 when, on the director's departure from the business, the covenant was found to be defective. The company issued a writ against the solicitors in 1985. The Court of Appeal upheld the judge's decision that the claim was statute-barred. Neill LJ said, at p 278:

“the plaintiffs suffered damage ‘because [they] did not get what [they] should have got.’ The plaintiffs' rights under the two agreements were demonstrably less valuable than they would have been had adequate restrictive covenants been included.”

Similarly, Bingham LJ said, at p 279:

“On the plaintiffs' case, which for purposes of this issue may be assumed to be wholly correct, the covenants against competition were intended, and said by the defendants, to be effective but were in truth wholly ineffective. It seems to me clear beyond argument that from the moment of executing each agreement the plaintiffs suffered damage because instead of receiving a potentially valuable chose in action they received one that was valueless.””

Lord Mance cites the earlier Court of Appeal judgments with approval in paragraphs 67 and 68 of his speech:

“There is considerable case law concerning situations where a person's legal position has, through negligence, been altered to his immediate, measurable economic disadvantage, and it has been held that a cause of action accrued although the beneficiary neither knew nor had any reason to know about its existence. In Forster v Outred & Co [1982] 1 WLR 86 a mother, in reliance on negligently given advice, executed a mortgage over her home to secure her son's borrowings, thereby immediately diminishing her home's value. In D W Moore & Co Ltd v Ferrier [1988] 1 WLR 267 due to solicitors' negligent advice, the claimant company took on Mr Ferrier under contractual agreements which failed to prevent him, if he left, from establishing his own competing business. The claimant's “rights under the two agreements were demonstrably less valuable than they would have been had adequate restrictive covenants been included” (per Neill LJ, at p 278G). “Instead of receiving a potentially valuable chose in action they received one that was valueless” (per Bingham LJ, at p 279H). In Baker v Ollard & Bentley (1982) 126 SJ 593 (cited in D W Moore & Co Ltd v Ferrier [1988] 1 WLR 267 ), the claimant due to solicitors' negligence acquired a less valuable interest in a house held on trust for sale, rather than a separate and saleable interest in its first floor. In Bell v Peter Browne & Co [1990] 2 QB 495 , after a marriage breakdown, a solicitor's negligence led to the husband putting the matrimonial home into his wife's name, without any accompanying document being prepared or any caution lodged to protect the one-sixth interest which the wife had agreed that the husband should have on any sale of the house. His resulting equitable interest was “clearly less valuable” than an interest secured by a charge or protected by a deed of trust (per Beldam LJ, at p 510E); further, even though his equitable interest could have been protected at any time until the wife sold the home, that would have involved at least some costs recoverable in damages from the defendant (per Nicholls LJ, at p 503G).

68 In Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172, the Court of Appeal examined the previous case law in detail. It concluded, consistently with prior first instance decisions, that, where a fire insurance policy was, due to an insurance broker's negligence, voidable for non-disclosure, the insured's cause of action accrued on its placing. The insured were regarded as suffering some measurable loss on placing, although the fire and the insurers' avoidance lay in the future. Hobhouse LJ, at p 186D, cited with approval Saville LJ's explanation of the case law in First National Commercial Bank plc v Humberts [1995] 2 All ER 673 , 679:

“much reliance was placed on the cases where the claimant entered into a transaction which through a breach of duty owed to the claimant provided the claimant with less rights than should have been secured, or imposed liabilities or obligations on the claimant which should not have been imposed… In all those cases, however, the court was able to conclude that the transaction then and there caused the claimant loss on the basis that, if the injured party had been put in the position he would have occupied but for the breach of duty, the transaction in question would have provided greater rights, or imposed lesser liabilities or obligations than was the case; and that the difference between these two states of affairs could be quantified in money terms at the date of the transaction.””

On the basis of those authorities as approved in Sephton, the panel solicitors contend that, in the case of vetting breaches, NIG suffered actual damage when each individual ATE policy was entered, because in each case, that was when NIG did not get what it ought to have got. Mr Hollander seeks to avoid that conclusion by contending that this case is what he categorises as a Category 3 case. By that he means that it is a case where, if the solicitors had performed their duty, NIG would not have entered into the transaction in question at all i.e. it is a ‘no transaction’ case. The panel solicitors challenge this contention on the basis of what Axa says in its pleadings to the effect that, if NIG had not entered these transactions in relation to which the prospects of success were 50% or less, it would have entered other profitable transactions where the prospects were 51% or more (para 6.3.1 of the Amended Generic Particulars of Claim). Axa on the other hand submits that this point is not within the Assumed Facts on which the Court is asked to proceed.

I agree with Miss Carr that there is something artificial and unattractive in the Court being asked by the party seeking to avoid the consequences of the Limitation Act to proceed on a basis which is inconsistent with that party’s own pleaded case. However, in my judgment, I do not have to decide the preliminary issues on a basis which goes beyond the Assumed Facts. Even if this case is what Mr Hollander describes as a ‘category 3’ or ‘no transaction’ case, where the defendant’s duty in tort was to use reasonable care in vetting claims to ensure that the transaction in question had a particular feature, here the prospects of success of 51% or more, the damage was still suffered in each case when the flawed transaction (i.e the policy with less than a 50% prospect of success) was entered into, on the basis that it was then that NIG (and thus by assignment Axa) did not get what it ought to have got.

Mr Hollander submits that the relevant asset, the premium, was not ‘damaged’ when the transaction was entered into and that the asset remained worth the same, unless and until the claim failed for whatever reason and it was only then that NIG suffered actual damage. I agree with Miss Carr that the fallacy in that argument is that it ignores, in a wholly artificial manner, the fact that, because the prospects of success were 50% or less, the insurer is exposed to a greater risk for the relevant premium than was intended and thus the insurer is not getting what it was the panel solicitors’ duty to ensure that it got.

In my judgment, nothing in the speeches in Sephton dictates the conclusion in the present case for which Axa contends. To the extent that Axa suggests that ‘no transaction’ cases are to be treated differently as a consequence of the decision of the House of Lords in Sephton, that is in my view a misinterpretation of the real grounds which their Lordships had in mind for any distinction between so called ‘no transaction’ cases and other cases, which is essentially to do with the scope of the relevant duty owed by the defendant and thus the measure of damages.

The point as to the distinction between the measure of damages in contract and in tort where a professional man is sued for providing inaccurate information emerges in the context of the liability of negligent valuers in South Australia Asset Management Corporation v York Montagu Ltd [1997] AC 191 (usually known as “SAAMCO”) where Lord Hoffmann said:

“The measure of damages in an action for breach of a duty to take care to provide accurate information must also be distinguished from the measure of damages for breach of a warranty that the information is accurate. In the case of breach of a duty of care, the measure of damages is the loss attributable to the inaccuracy of the information which the plaintiff has suffered by reason of having entered into the transaction on the assumption that the information was correct. One therefore compares the loss he has actually suffered with what his position would have been if he had not entered into the transaction and asks what element of this loss is attributable to the inaccuracy of the information. In the case of a warranty, one compares the plaintiff"s position as a result of entering into the transaction with what it would have been if the information had been accurate. Both measures are concerned with the consequences of the inaccuracy of the information but the tort measure is the extent to which the plaintiff is worse off because the information was wrong whereas the warranty measure is the extent to which he would have been better off if the information had been right.”

Of course the point in such cases is that the valuer is not warranting that the underlying loan transaction will be successful. It is for that reason that Lord Hoffmann in the only substantive speech in the House of Lords in SAAMCO (with which the other Law Lords agreed) discusses the question of the scope of the relevant duty and the damages which can be said to flow from a breach of that duty. In contrast with that case, are the cases where even though the duty under consideration arises in tort not in contract (albeit often there are parallel duties in contract and tort), given that the duty is to take reasonable care to ensure that a particular result follows or a transaction has a particular feature, the effect of the application of the normal measure of damages in tort is that the claimant is entitled to be put in the same position as if reasonable care had been taken, in which case the claimant would not have entered the flawed transaction. In the context of this case, on the basis of the Assumed Facts, NIG would never have entered the particular transactions with a less than 51% chance of success.

Accordingly, in such cases where the obligation in tort is to take reasonable care to ensure that a transaction has particular features, although the claim throughout is in tort, the measure of damages is in fact the same as the so-called “warranty” or contract measure, i.e. the equivalent of damages for loss of expectation or of bargain. As I see it, that is a result of the duty owed by the professional man in tort (albeit qualified, as indeed it is also in contract, by it only being a duty to use reasonable skill and care) being a duty to ensure that a transaction has a particular feature, whether that feature is that the contract of employment contains an enforceable restrictive covenant (as in Moore v Ferrier) or that the claimant has a valid contract of insurance (as in Knapp v Ecclesiastical Insurance) or in the present case that any ATE policies are only issued on the basis that a competent lawyer considers that the underlying claim has more than a 50% chance of success.

Axa seeks to distinguish the earlier cases to which I have referred on the grounds that the panel solicitors were not warranting that the claims accepted as a consequence of the vetting procedure would succeed at the end of the day. That is no doubt correct but misses the point, which is precisely the one made by the claimant’s own pleaded case, that what the panel solicitors did undertake (again qualified by the obligation to use reasonable skill and care) was that as a consequence of the vetting procedure, only claims assessed after vetting as having a more than 50% prospect of success would be accepted under the Scheme (and thus as an inevitable consequence of acceptance, an ATE policy issued). This seems to me to bring this within what Mr Hollander describes as a category 2 case.

On the assumption that, had the panel solicitors done their job properly, the particular transactions would not have been entered at all, it is then contended by Axa that this makes all the difference, in the sense that, in reliance on some principle applicable to so-called category 3 cases which is said to be derived from the decisions of the House of Lords in Nykredit v Edward Erdman [1997] 1 WLR 1627 and Sephton, it is contended that actual damage cannot have been suffered when the relevant transaction, in each case the ATE policy was entered. In my judgment that analysis is wrong. Neither of the House of Lords decisions is authority for the proposition that merely because, had the correct advice been given or the negligent professional defendant performed its duty, the claimant would not have entered the transaction, the claimant cannot as a matter of law have suffered actual damage when the flawed transaction was entered.

Nykredit formed part of the same litigation as SAAMCO. It was thus a case of negligent overvaluation by the defendant valuers of property against which the claimant lenders were going to lend money on mortgage. Lord Nicholls of Birkenhead at 1631D-E pointed out that the basic measure of loss in assessing loss caused by the defendant’s negligence is “the comparison between (a) what the plaintiff’s position would have been if the defendant had fulfilled his duty of care and (b) the plaintiff’s actual position”. He continued at 1632B-E:

“The basic comparison gives rise to issues of fact. The moment at which the comparison first reveals a loss will depend on the facts of each case. Such difficulties as there may be are evidential and practical difficulties, not difficulties in principle.

Ascribing a value to the borrower's covenant should not be unduly troublesome. A comparable exercise regarding lessees' covenants is a routine matter when valuing property. Sometimes the comparison will reveal a loss from the inception of the loan transaction. The borrower may be a company with no other assets, its sole business may comprise redeveloping and reselling the property, and for repayment the lender may be looking solely to his security. In such a case, if the property is worth less than the amount of the loan, relevant and measurable loss will be sustained at once. In other cases the borrower's covenant may have value, and until there is default the lender may presently sustain no loss even though the security is worth less than the amount of the loan. Conversely, in some cases there may be no loss even when the borrower defaults. A borrower may default after a while but when he does so, despite the overvaluation, the security may still be adequate

It should be acknowledged at once that, to greater or lesser extent, quantification of the lender's loss is bound to be less certain, and therefore less satisfactory, if the quantification exercise is carried out before, rather than after, the security is ultimately sold. This consideration weighed heavily with the High Court of Australia in Wardley Australia Ltd. v. Western Australia (1992) 109 A.L.R. 247. But the difficulties of assessment at the earlier stage do not seem to me to lead to the conclusion that at the earlier stage the lender has suffered no measurable loss and has no cause of action, and that it is only when the assessment becomes more straightforward or final that loss first arises and with it the cause of action.”

Lord Hoffmann (who delivered the other substantive speech in that case) said much the same thing at 1638H-1639D:

“Proof of loss attributable to a breach of the relevant duty of care is an essential element in a cause of action for the tort of negligence. Given that there has been negligence, the cause of action will therefore arise when the plaintiff has suffered loss in respect of which the duty was owed. It follows that in the present case such loss will be suffered when the lender can show that he is worse off than he would have been if the security had been worth the sum advised by the valuer. The comparison is between the lender's actual position and what it would have been if the valuation had been correct.

There may be cases in which it is possible to demonstrate that such loss is suffered immediately upon the loan being made. The lender may be able to show that the rights which he has acquired as lender are worth less in the open market than they would have been if the security had not been overvalued. But I think that this would be difficult to prove in a case in which the lender's personal covenant still appears good and interest payments are being duly made. On the other hand, loss will easily be demonstrable if the borrower has defaulted, so that the lender's recovery has become dependent upon the realisation of his security and that security is inadequate. On the other hand, I do not accept Mr. Berry's submission that no loss can be shown until the security has actually be realised. Relevant loss is suffered when the lender is financially worse off by reason of a breach of the duty of care than he would otherwise have been. This is, I think, in accordance with the decisions of the Court of Appeal in UBAF v. European American Banking Corporation [1984] Q.B. 713 and First National Commercial Bank Plc. v. Humberts [1995] 2 All E.R. 673.”

Thus, what emerges from that case is that where the claimant would not have entered the transaction but for the negligence, as in every other case, the question when the claimant first suffered actual damage and, specifically, whether that was when the transaction was first entered is essentially a question of fact dependent upon the circumstances of each case. As I see it, one of those circumstances is the nature and extent of the duty owed by the defendant. Where the defendant was under an obligation to use reasonable care to procure a particular result, to ensure that a transaction had particular features, the court will more readily conclude that actual loss was suffered at the time that the flawed transaction was entered. In my judgment, when properly analysed, the speeches in Sephton support that conclusion.

Much was made by Mr Hollander in his submissions of the passage in paragraph 18 of Lord Hoffmann’s speech (with which Lord Scott of Foscote expressly agreed at paragraph 33) where he agrees with the following analysis in the judgment of the majority of the High Court of Australia (delivered by Mason CJ) in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 at 529, 531 and 532, which he says provides the answer to the appeal in Sephton:

“[Forster v Outred is explicable] by reference to the immediate effect of the execution of the mortgage on the value of the plaintiff's equity of redemption… It has been contended that the principle underlying the English decisions extends to the point that a plaintiff sustains loss on entry into an agreement notwithstanding that the loss to which the plaintiff is subjected by the agreement is a loss upon a contingency. For our part, we doubt that the decisions travel so far. Rather, it seems to us, the decisions in cases which involve contingent loss were decisions which turned on the plaintiff sustaining measurable loss at an earlier time, quite apart from the contingent loss which threatened at a later date… If… the English decisions properly understood support the proposition that where, as a result of the defendant's negligent misrepresentation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred.”

On the basis of Lord Hoffmann’s approval of that passage, Mr Hollander contends that where as a consequence of the defendant’s negligence, the claimant enters into a transaction which exposes him to a contingent liability (such as he contends was the position in the present case), actual damage is not suffered on entering the transaction. That is of course what the judgment of the majority in Wardley expressly approved by Lord Hoffmann says, but in my judgment that point cannot be taken too far and, unlike in Sephton, cannot be regarded as an answer to the present case. That is because in this passage in his speech, Lord Hoffmann is not purporting to deal with ‘flawed transaction’ cases. He refers to such cases in paragraph 22 of his speech, which I have cited in paragraph 26 above. There he cites with approval the decisions of the Court of Appeal in cases such as Bell v Peter Browne & Co and Knapp v Ecclesiastical Insurance, from which it is clear that he regards these as cases where the defendant’s duty was to procure that the transaction had particular features and his breach of duty has resulted in the claimant getting less than he should have got. In such a case, actual damage may well have been incurred when the transaction was entered because the claimant has not got what he should have done, even though further damage which may be incurred because of the flaw in the transaction is still contingent. Lord Hoffmann draws a clear distinction at the end of paragraph 22 between such cases and those where a purely contingent liability arises.

That distinction also emerges from his citation with approval in paragraph 21 of his speech, immediately before his reference to the ‘flawed transaction’ cases, of another passage from the majority judgment of the High Court of Australia in Wardley:

“Another element in some of the English decisions … is the conclusion that, because the subject matter of the agreement lacked the qualities which it had been represented as having, that subject matter was therefore less valuable than it would have been if the representations had been true. That conclusion is acceptable in cases in which the contract measure of damages is appropriate but it is not acceptable here where the contract measure of damages does not apply. The application of that measure of damages [sc the difference between the value of what the plaintiff got and what he would have got if the defendant had performed his duty] may, in some situations, enable a court to conclude more readily that the plaintiff first suffers loss or damage on entry into an agreement. ”

The first sentence of that passage is clearly a reference to the ‘flawed transaction’ cases such as Moore v Ferrier. The statement that a conclusion that, in effect, actual damage is suffered where the transaction ‘lacking the qualities which it is represented as having’ (ie where as a consequence of the defendant’s breach of duty, the claimant does not get what he should have got), is acceptable in cases in which the contract measure of damages is appropriate, is not intended in my judgment to be a reference only to cases where the cause of action is for breach of contract. Rather this is a reference to the fact, to which I have already referred earlier, that where the relevant duty in tort is to procure that a transaction has particular features, the measure of damages recoverable in tort is in effect the same as the contract measure of loss of expectation or bargain. In any event, whether my analysis of Mason CJ’s judgment is correct or not, it is clear that that was how Lord Hoffmann was interpreting the judgment from the fact that immediately after citing this passage from the judgment, he cites Bell v Peter Browne and Knapp as examples of the application of the principle to which Mason CJ was referring.

Lord Hoffmann returns to the distinction between cases of purely contingent liability and ‘flawed transaction’ cases at the end of his speech, where he says this:

“30 In my opinion, therefore, the question must be decided on principle. A contingent liability is not as such damage until the contingency occurs. The existence of a contingent liability may depress the value of other property, as in Forster v Outred & Co [1982] 1 WLR 86 , or it may mean that a party to a bilateral transaction has received less than he should have done, or is worse off than if he had not entered into the transaction (according to which is the appropriate measure of damages in the circumstances). But, standing alone as in this case, the contingency is not damage.

31 The majority of the Court of Appeal appear to have decided the case on the basis that the Law Society did not enter into any transaction giving rise to the contingent liability. It did nothing and the contingent liability was created by the misappropriations and the previous existence of the compensation fund and the rules which governed its administration. No doubt in most cases in which a party incurs a contingent liability as a result of entering into a transaction, that liability will result in damage for the reasons already discussed in relation to bilateral transactions. But I would prefer to put my decision on the simple basis that the possibility of an obligation to pay money in the future is not in itself damage.”

So far as concerns what Mr Hollander describes as category 3 cases, that is cases where but for the defendant’s negligence, the claimant would not have entered the transaction, Lord Hoffmann alludes to such cases in paragraph 21 of his speech where after citing Nykredit and Humberts he says that:

“If the damage is... the difference between the defendant's position after entering into the transaction and what it would have been if he had not entered into the transaction, the answer may be more difficult. Despite the breach of duty, the transaction may on balance have originally been advantageous to the plaintiff and some evidence may be necessary to show when he was actually in a worse position.”

It is at this point that he then cites the passage in Wardley which I have already quoted in paragraph 43 above, from which it seems that he has it in mind that, in cases where the “contract measure” (that is a measure of damages in tort equivalent to the measure of damages recoverable in contract) is appropriate because as a consequence of the breach of duty the claimant has not got what he should have got, the conclusion may more readily be reached, even in cases where the claimant would not have entered the transaction but for the defendant’s negligence, that actual damage was suffered when the transaction was entered. That seems to me to be precisely the import of what Lord Hoffmann says in the passages in paragraphs 30 and 31 of his speech which I have already cited:

“The existence of a contingent liability...may mean that a party to a bilateral transaction... is worse off than if he had not entered into the transaction (according to which is the appropriate measure of damages in the circumstances)... No doubt in most cases in which a party incurs a contingent liability as a result of entering into a transaction, that liability will result in damage for the reasons already discussed in relation to bilateral transactions.”

The reference to the appropriate measure of damages in the circumstances is clearly the same point as Mason CJ was making in the passage from Wardley which Lord Hoffmann had cited, namely that in cases where the defendant’s duty in tort is to procure that a transaction has particular features, in effect the same measure of damages as the contract measure of damages will apply. It is clear from these passages that he considered that in such a case, damage would have occurred when the transaction was entered, even where the defendant would not have entered the transaction at all but for the defendant’s negligence.

Mr Hollander placed particular emphasis on paragraph 48 of Lord Walker’s speech where, having cited the earlier ‘flawed transaction’ cases in the Court of Appeal he analyses them as follows:

“In all these cases the claimant has as a result of professional negligence suffered a diminution (sometimes immediately quantifiable, often not yet quantifiable) in the value of an existing asset of his, or has been disappointed (as against what he was entitled to expect) in an asset which he acquires, whether it is a house, a business arrangement, an insurance policy, or a claim for damages. Your Lordships have not, I think, been shown any case in which the imposition on a claimant of a purely personal and wholly contingent liability, unsecured by a charge on any of the claimant's assets, has been treated as actual loss. That would have been the position if the claimant in the Forster case [1982] 1 WLR 86 had given a personal covenant guaranteeing her son's debts (which she seems not to have done-she paid them simply to prevent enforcement of the security on her farm) and if she had not given any security over any of her own assets. ”

Much is made by Mr Hollander of the sentence in the middle of that paragraph: ‘Your Lordships have not, I think, been shown any case in which the imposition on a claimant of a purely personal and wholly contingent liability, unsecured by a charge on any of the claimant's assets, has been treated as actual loss.’ He relies on that sentence in support of the proposition that there is no question here of any charge on NIG’s assets as a consequence of the negligence of the panel solicitors, so that there is only a contingent liability which cannot amount to actual loss. It seems to me that this is an unduly prescriptive analysis of what Lord Walker is saying. If that were what he was saying, as Mr Hollander suggested, that would be inconsistent with the passage in paragraph 30 of Lord Hoffmann’s speech which I have analysed at paragraphs 45 to 48 above.

As I see it, Lord Walker is not dealing separately in paragraph 48 of his speech with ‘no transaction’, category 3 cases. I agree with Miss Carr that he is not saying that there could never be loss and damage upon the entering of the transaction in a case such as the present merely because, but for the negligence of the defendant, the claimant would not have entered the transaction at all. On the contrary, it seems to me for the reasons I have already given that this case falls within the analysis in the first sentence of paragraph 48 of Lord Walker’s speech. It is a case in which, on the Assumed Facts, as a consequence of the negligence of the panel solicitors, NIG was ‘disappointed’ in the assets it acquired, in other words it ‘acquired’ a whole raft of policies it would not otherwise have done where the prospects of success were less than 51%.

Mr Hollander also relies on paragraph 70 of Lord Mance’s speech where, having cited the ‘flawed transaction’ cases in the Court of Appeal, he says:

“In all these cases except Forster v Outred & Co [1982] 1 WLR 86 the defendant failed to preserve or procure for the claimant an asset (including a particular chose in action) which could and should have been preserved or protected by proper performance of the defendant's duty in relation to the transaction affecting the claimant's legal position. In Forster v Outred & Co the claimant's case was that, but for the defendant's negligence, she would never have entered into the transaction at all. But in that case, by doing so, she clearly depreciated the value of her house in a measurable way. However, while a defendant's failure to preserve or protect a particular asset by proper performance of his duty in relation to a particular transaction may readily be seen to have caused measurable loss, negligence causing a claimant to enter into a transaction which he would not otherwise have entered may not immediately, or indeed ever, cause measurable loss to any particular asset.”

Contrary to the submissions advanced by Mr Hollander, in the last sentence of that paragraph Lord Mance is not saying that where the claimant would not have entered the transaction but for the defendant’s negligence, he can never have suffered actual loss at the time when the transaction is entered. That is clear from the first sentence of the next paragraph of his judgment, paragraph 71, where he says:

“In a number of authorities the court has made clear that a claimant does not necessarily suffer loss merely by being caused by negligence to enter into a transaction to which he would not otherwise have agreed. (my emphasis)”

Lord Mance goes on to discuss earlier cases such as Nykredit and Wardley. It is clear from what he then says at paragraphs 76 and 77 of his speech that the distinction he is seeking to draw is between cases where all the claimant can show is a contingent liability without more and cases where, although there may be a contingent liability in the future, the claimant can nonetheless show a change of legal position or a diminution in the value of a particular asset, at an earlier point in time. In the latter case, actual damage may have been suffered at that earlier point in time. It was because, at the time of Sephton & Co’s negligence, the Law Society had not changed its legal position, nor had any asset of the Law Society diminished in value at that time, that he considered any loss suffered at that time as purely contingent loss. This is clear from the whole of paragraph 76 of his speech and from the penultimate sentence of paragraph 77 where he said:

“But I do not consider that the law should treat purely contingent loss assessed on so remote a basis as sufficiently measurable, in the absence of any change in the claimant's legal position and of any diminution in value of any particular asset.”

Mr Hollander emphasised the last sentence of paragraph 77 where Lord Mance said:

“Even where negligence brings about a specific transaction and thus a change in the claimant's legal position, Lord Nicholls observed in the Nykredit (No 2) case [1997] 1 WLR 1627 , 1631c–d in the passage cited in para 73 above, that the mere entry into the transaction under which “Financial loss is possible, but not certain” is not sufficient detriment.”

However, the context in which Lord Nicholls said that, as I have explained above, was the case of a valuer whose duty was not to ensure that the transaction had particular features but only to give an accurate valuation. In Mr Hollander’s own categorisation, Nykredit would be a category 3, not a category 2 case. I do not consider that sentence in Lord Mance’s speech can be read as supporting the proposition that where the defendant’s duty is to ensure that a transaction has particular features and the claimant has changed his legal position by entering a transaction which is less advantageous than the one he thought he was getting (ie Mr Hollander’s category 2 case), actual damage cannot be suffered when the transaction is entered merely because there may be future contingent loss or liability.

It seems to me that this is the point which Arden LJ is making about this sentence in paragraph 77 of Lord Mance’s speech in paragraph 34 of her judgment in Watkins v Jones Maidment Wilson [2008] PNLR 23 when she says:

“Likewise, the final sentence is not authority for the proposition that the fact that a contingent liability is incurred means the damage cannot have occurred at that point: see, for example, the passage cited from the speech of Lord Walker at [18] above.”

The reference back to Lord Walker is to paragraph 48 of his speech, which I quoted above, but evidently what Arden LJ had in mind was that the cases cited by Lord Walker were the line of Court of Appeal authorities, where the defendant’s duty was to procure that the transaction had particular features and, as a result of his negligence, the transaction is less advantageous than what the claimant expected to get. The point that she is making seems to me to be that Lord Mance was not saying that in such cases, actual damage can not be suffered when the transaction is entered into, in circumstances where the flawed transaction gives rise to a contingent future liability or loss.

In conclusion on the analysis of the House of Lords speeches in Sephton, for the reasons I have given, in my judgment there is nothing in those speeches which requires the conclusion that, in cases where the defendant’s duty is to ensure that the transaction which the claimant enters has particular features, here that in each case the ATE policy is one under which the likelihood of the claim succeeding has been assessed as 51% or more, and where because of the defendant’s breach of duty, the claimant enters a flawed transaction which does not have those features, if the transaction is one which the claimant would not otherwise have entered, then actual damage cannot have been suffered at the time that the transaction was entered. That in such cases, actual damage may well have been incurred at the time the transaction was entered also emerges from the various decisions of the Courts since Sephton. Before considering those in more detail, I should address two further points about Sephton raised in argument.

The first point is one aspect of Mr Hollander’s overall argument concerning the effect of the decision of the House of Lords. He seeks to avoid the conclusion that the present case is a ‘flawed transaction’ case by contending that in each case, NIG did receive an asset in the form of the ATE policy with the net premium under it and that until the claim failed in the sense referred to above, NIG had the benefit of that asset, as he put it until then the value of the net premium remained the same. He submits that it is not possible after Sephton to bring into account the potential liabilities of NIG which would diminish the value of that asset as at the date the ATE policy incepted, because those liabilities were contingent.

However, for the reasons I have already given as to why this case is properly analysed as a ‘flawed transaction’ case, in my judgment there is nothing whatsoever in the speeches in Sephton which suggests that, where the defendant’s duty was to ensure that the transaction had particular features and, in breach of that duty the transaction effected was one which imposed liabilities on the claimant, albeit of a contingent nature, the court should somehow ignore those liabilities. Sephton does not support Mr Hollander’s rather extreme position that since that case, the liability side of the equation is to be ignored merely because the relevant liability is contingent in the sense that it may arise in the future, rather than at the time the transaction is entered. Equally, for the reasons I have also already given, Sephton is not authority for the proposition that a ‘no transaction’ (category 3) case may not also be a ‘flawed transaction’ (category 2) case in which actual damage is suffered when the transaction is entered. As I have endeavoured to demonstrate, whether or not actual damage has been suffered in such a case depends not upon the division of cases into rigid categories, but upon the facts of the particular case.

The second point about Sephton is the argument of Miss Carr on behalf of the panel solicitors concerning Companhia de Seguros Imperio v CE Heath [1999] Lloyd’s Rep IR 571, a decision of Langley J which was not cited to the House of Lords (or to any lower Court) in Sephton. Miss Carr relies upon that case as one where, in circumstances which she contends are, as a matter of analysis, essentially on all fours with the present case, the court concluded that actual damage was suffered for the purposes of the accrual of the cause of action in tort when the relevant flawed transaction was entered. In that case, the defendant insurance brokers had held binding authority agreements with the claimant insurers between 1977 and 1979. During the currency of those agreements, ostensibly under Article 15 of the agreements, the defendant committed the claimant to various fronting agreements under which the claimant fronted reinsurance risks for other members of the pool of insurance and reinsurance companies with whom the defendant had binding authority agreements, without receiving any premium in return. Large losses were incurred in due course on the risks on which the claimant had fronted.

Preliminary issues on limitation were ordered to be tried on assumed facts as to whether the various causes of action pleaded against the defendant were time barred. The principal argument in the case concerned whether claims against the defendant for breach of fiduciary duty were time barred, the claimant contending that such claims were not covered by the Limitation Act 1980 at all. Langley J found against the claimant on that issue, holding that under section 36 of the Act, the six year limitation period applicable to the causes of action in contract and tort applied by analogy to the cause of action for breach of fiduciary duty. That decision was upheld by the Court of Appeal ([2001] Lloyd’s Rep IR 109).

The part of the judgment of Langley J which Miss Carr relies upon is the section which deals with the accrual of the cause of action in negligence. I agree with Mr Hollander that one has to exercise some caution not to place too much reliance on this section of the judgment, not least because whenever the cause of action in tort accrued, in all probability it had become time barred by the time the writ was issued so that the claim in tort was something of a lost cause. Accordingly, counsel for the claimant did not really challenge the conclusion that the main claim in negligence for having negligently assumed that Article 15 permitted fronting was time barred, although an argument that other causes of action in the tort of negligence were not time barred was maintained.

I certainly accept that if Mr Hollander were correct in his contentions as to the effect of the speeches in the House of Lords in Sephton, then the reasoning of Langley J in that case could not stand. However, for all the reasons I have given, I do not consider that he is correct. In those circumstances I consider that the reasoning of Langley J is of assistance in relation to the issues I have to decide, albeit not to the extent urged upon the court by Miss Carr.

The section of the judgment dealing with the accrual of the cause of action in tort appears at pages 586-7 and is as follows:

“Accrual of the causes of action in tort

It is of course trite law that a cause of action in negligence does not accrue until damage has been suffered. It is also trite law that damage may be suffered without the loser being aware of it. Examples are to be found in the cases of Bell v Peter Browne [1990] 2 QB 495 (solicitor transferring house to wife without protecting the husband's share in the proceeds should it be sold) and Forster v Outred & Co [1982] 1 WLR 86 (plaintiff client suffers damage by solicitor's negligence by executing a mortgage deed over her property which subjected her to a liability which might mature into a financial loss). In each case damage was held to have been suffered at the time the transfer and mortgage respectively were executed, albeit the sale by the wife and liability under the mortgage occurred only much later.

The questions whether and when damage is suffered are questions of fact: D W Moore & Co Ltd v Ferrier [1988] 1 WLR 267 and Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No. 2) [1997] 1 WLR 1627. But the receipt of something less valuable or the transfer of something of value without an agreed protection is itself damage. There must be actual damage within the measure of damage applicable to the wrong in question for the cause of action to accrue but an increase in a plaintiff's obligations plainly may constitute such actual damage. Nor is it relevant that the damage may later become more serious or capable of more precise quantification.

I have already recorded that the claims in respect of fronting are alleged in para. 16 of the points of claim to have caused loss to Imperio by exposing the company to a greater liability or potential liability than the net liability subscribed and for which the premium was calculated and paid. In the course of the hearing Mr Flaux was not inclined to dispute that such exposure for no compensation was damage and thus that the cause of action in tort accrued, as the cause of action in contract, when Imperio was committed by Heaths to front. In this, in my judgment, Mr Flaux was plainly right. Insurance is the business of undertaking risk for reward. An insurer who is committed to a greater risk than agreed for no reward has thereby suffered a real loss. In this case that is all the more real as Imperio also alleges that some of the other members of the pool were not acceptable security to reinsure Imperio. It follows that the claims in para. 15, 17–22 and 24 of the points of claim also accrued when Imperio was committed by Heaths to front.

Mr Flaux did not, however, accept that the same principle applied to all of the various other causes of action pleaded in para. 26–59 of the points of claim. In my judgment, however, it does and with the same result. The claims in para. 26 and 32 are themselves aspects of the claims for fronting. The claims in respect of Bellefonte gave rise to a loss on each occasion an overrider was payable to Bellefonte which exceeded any tax credit. Again that must have occurred by 1 April 1983. The claim that there was no London market leader must, if it is valid, relate to a matter which affects the nature of the risk and so consideration of the appropriate premium to charge for undertaking it. Exceeding underwriting limits, the accumulations claim and writing poor quality business, all fall within the same category.

It follows that I see no difference in this case in the application of s. 2 of the Act from the application of s. 5. If the claims are not to be statute-barred it must be because of the operation of s. 32 and not because the causes of action pleaded did not accrue to Imperio until after the cut-off date. (my emphasis)”

Miss Carr relies in particular on the passages in the judgment which I have underlined. She submits that the present case is, like that case, one of a commercial insurer in the business of undertaking risk for reward. Indeed, as she points out, the vetting of claims to ensure that NIG was only committed by CLE to issuing ATE policies for claims which had been assessed as having a prospect of success of 51% or more was a critical aspect, so far as NIG was concerned, of the hoped for profitability of the CLE Scheme. This was emphasised in the relevant documentation. Miss Carr submits that the position of a commercial insurer such as NIG is a million miles from the ‘safety net’ of the Law Society’s Compensation Fund which is not a profit-making organisation but designed to protect those caused hardship by misappropriations or other fraud on the part of a solicitor.

Just as Imperio suffered actual loss when committed by CE Heath to fronting arrangements for which they received no premium (even though any claims under the fronted reinsurances would be made in the future and were to that extent, contingent) so, Miss Carr submits, NIG suffered actual loss when committed in each case to a greater risk than it would have been if the panel solicitors had performed their duty, for the same premium as for the lesser risk which it thought it was getting under the Scheme. Furthermore, Miss Carr submits, Imperio is an example of what Mr Hollander would categorise as a ‘no transaction’ category 3 case, since plainly had Imperio been aware of the fronting risks to which CE Heath was committing it, it would not have agreed to enter the relevant reinsurance contracts, and yet Langley J considered that actual loss was suffered when the relevant fronting transactions were entered.

Although, as I have said, too much reliance should not be placed on Imperio in circumstances where the relevant point was not really fully argued, nonetheless I consider the reasoning of Langley J is persuasive. As I have also said, it is not contrary to the decision of the House of Lords in Sephton and it seems to me that it is reasoning which is not only consistent with the earlier Court of Appeal decisions such as Forster v Outred, Moore v Ferrier and Bell v Peter Browne, which Langley J himself cites, but with the decisions both at first instance and the Court of Appeal since the decision of the House of Lords in Sephton. It is to those subsequent cases that I now turn, in chronological order.

The first relevant decision after that of the House of Lords happens to be another decision of Langley J in Poole v HM Treasury [2007] Lloyd’s Rep IR 114. In that case, the claimants were Lloyd’s names who sued the government for failing to implement a European Directive, as a consequence of which it was contended that the Government had failed to ensure that there was an appropriate system in place whereby the reserves of Lloyd’s syndicates were adequate to meet liabilities. One of many issues which arose in a long and complex case was that of limitation. The Government argued that any cause of action in tort was time barred because that cause of action accrued when the particular claimant became a Lloyd’s name or remained a name or increased his or her underwriting limit. In contrast, the claimants argued that the cause of action only accrued at the earliest when they first became liable to pay a contribution to syndicate underwriting liabilities, or received reduced profits by reason of syndicate underwriting liabilities, as a result of the defendant's failure to implement the Directive.

Langley J disagreed with that analysis. In paragraph 236 of his judgment, he said:

“I would be content to approach the question on the basis that actionable damage first occurred when a Claimant became a Name, or did not leave, or increased limits, on a Syndicate which was already or subsequently became exposed to the liabilities which caused the losses of which complaint is made. In my judgment that would be regardless of awareness of the exposure. Damage would have been suffered upon the commitment (or increased commitment) to meet the liabilities on the relevant year of account.”

He then considered whether as the claimants submitted, the decision of the House of Lords in Sephton supported the different analysis for which they were contending. He concluded that it did not. He pointed out that the liabilities in Sephton were contingent because the misappropriations by the solicitor might have been made good and a claim on the Law Society Compensation Fund had to be made in proper form. In the event that the misappropriations were made good or the claim on the Fund was not in proper form, obviously there would be no valid claim on the Fund. He contrasted that position with the one in the case he was considering in paragraph 239 of the judgment:

“But, in this case, I do not think the court is addressing a loss which is only prospective and might never be incurred. By becoming a Name (and joining a Syndicate or Syndicates) a Name was committed to the liabilities of that Syndicate under RITC it had written and on all business (including RITC) it did write in the course of his membership. Quite apart from joining fees and the provision of charges and guarantees...there were therefore actual liabilities undertaken albeit unquantified. This was not a contingency standing alone in the sense with which, as I understand their speeches, their Lordships were concerned in Sephton : see in particular, Lord Hoffmann at paragraph 30. The Names were worse off than if they had not become or continued to be Names. That is precisely their case, albeit, and quite understandably, they were shocked to discover just how much worse off they were when the claims did start to come in, or became manifest, as they did, from at the latest 1991 onwards.”

In terms of Mr Hollander’s categorisation of cases, that case is both a flawed transaction or category 2 case (in the sense that had the Government implemented the Directive which on this hypothesis it failed to do in breach of duty, any syndicate the particular name joined would have had adequate reserves to cover its liabilities) and a no transaction or category 3 case (in the sense that the name would not have joined the syndicate if he or she had known that reserves were inadequate). Mr Hollander sought to analyse Poole as a case where, on joining the syndicate, the name suffered actual loss rather than contingent loss because he or she assumed actual liabilities at that point in time, specifically the liabilities under the reinsurance to close (RITC) which would be closed in due course into the year of account in which the name joined the syndicate.

However, although it is correct that Langley J contrasts, in paragraph 239, the liabilities under the RITC with purely contingent liabilities, in terms of the Sephton analysis put forward by Mr Hollander on behalf of Axa, those liabilities under the RITC are still contingent liabilities in the sense that they will arise in the future, not at the moment the name joins the particular syndicate but at the point when the previous year of account is closed into the current year of account (usually after 36 months of that previous year of account). Furthermore, although it is highly likely that, in the normal course of events, the name will assume that previous year’s liabilities under the RITC, it is not inevitable. The history of Lloyd’s over the last thirty years demonstrates that there are occasions when the RITC of a particular year of account of a syndicate is not closed into the next year of account but left open with the first year’s names or reinsured out of the syndicate in whole or in part with other insurers. In any event, even if the likelihood of the name inheriting the previous year’s liabilities under the RITC is so great as to be almost inevitable, on the analysis which Mr Hollander puts forward, that is still a contingent liability.

Accordingly, in my judgment Mr Hollander’s attempt to explain away Poole as a case of actual rather than contingent liabilities is misconceived. Rather Poole, like Imperio before it, is an example of the court concluding that, although the liabilities to which the transaction exposes the claimant, however likely to occur, arise in the future and are thus ‘contingent’, the claimant nonetheless suffers actual damage when the transaction is entered, notwithstanding that the claimant would not have entered the relevant transaction at all but for the defendant’s breach of duty. The rationale for that conclusion, as I see it, although not spelt out expressly in either of the decisions of Langley J, is that the defendant in each case was in breach of an obligation to ensure that any transaction entered by the claimant had particular characteristics or features (in Imperio that the claimant was not committed to disadvantageous fronting arrangements for no risk, in Poole that the particular name was only joined up to syndicates which had adequate reserves to cover their liabilities). Putting it another way, neither case was one in which the relevant obligation was limited, as in Nykcredit, to the issue of an accurate valuation, something in one sense collateral to the relevant transaction itself in that the defendant is under no obligation in the negligent valuation cases to ensure that the loan transaction which the claimant lender enters in reliance on the valuation has particular features.

The next post-Sephton decision in point of time is the decision of the Court of Appeal in Watkins v Jones Maidment Wilson [2008] PNLR 23, a case in relation to which I have already referred to the judgment of Arden LJ in the context of what Lord Mance meant in paragraph 77 of Sephton. In that case, the claimants instructed the defendant solicitors to advise them in relation to a building contract. The contract contained a provision entitling the claimants to terminate if the work were not completed by a certain date. Some three weeks before that date arose, on the advice of the solicitors, the claimants waived their rights under that provision. The claim put forward related to both alleged inadequacies in the contract itself and negligent advice in relation to the waiver of rights. The Court of Appeal found that the cause of action against the solicitors arose when the contract was entered, alternatively when the rights under the provision were waived.

The Court of Appeal concluded that the case was one in which, on the claimants’ contentions, as a consequence of the defendant solicitors’ breach of duty, the claimants received a less advantageous contract than they thought they were getting and that, accordingly, actual damage was suffered for limitation purposes at the time the contract was entered, notwithstanding the claimants’ argument that this was a ‘no transaction’ case because, if the claimants had been properly advised, they would have tried to renegotiate the contract and would not have succeeded, in which case they would not have entered the contract at all (see paragraphs 20 to 24 and 27 of the judgment of Arden LJ).

The Court of Appeal also rejected an argument by the claimants, based upon the decision of the House of Lords in Sephton, that the loss of their rights under the contract depended on a contingency, so that actual loss was not suffered until the contingency occurred, on the later date upon which the relevant contractual right to terminate arose. The Court of Appeal concluded that this was a case in which, as a consequence of the defendant solicitors’ negligence, the claimants received a bundle of rights in the building contract which was of less value than they had been led to believe, so that measurable actual loss was suffered when the contract was entered and the claim was time barred (see paragraph 32 of the judgment of Arden LJ). I have already referred to the passage in her judgment (paragraphs 33 and 34) where she rejects any contrary argument based upon paragraph 77 of the speech of Lord Mance in Sephton.

The next authority in point of time after Watkins is Spencer v Secretary of State for Work and Pensions [2009] 2 WLR 593, another decision of the Court of Appeal. This was not cited in submissions at the hearing but my attention was drawn to it after the hearing. The panel solicitors did not make any separate submissions about it but Axa produced a short Note setting out submissions about the case. The claimant suffered personal injury and brought a claim against his former employers which failed by reason, it was alleged, of the Government’s failure properly to implement European law which required a remedy to be provided in the circumstances. A claim was then brought for Francovich damages against the Government and it was common ground that that was to be treated as a claim in tort to which section 2 of the Limitation Act 1980 applied. The issue was when the claimant’s cause of action against the Government arose, specifically whether, as the Government contended, it arose when the personal injury was suffered, in which event the claim was time barred or whether, as the claimant contended, it arose only when the claim for damages for personal injury failed by reason of the deficiency in the law.

The Court of Appeal held that the cause of action against the Government arose when the claimant suffered his personal injury, because although he had a claim against his former employers that claim was not as valuable as the claim he contended that he should have had if the Government had implemented European law as it should have done, so that it was at that point that the claimant suffered actual damage for the purposes of the accrual of his cause of action against the Government. Having cited the earlier authorities, specifically Moore v Ferrier, Knapp, Nykredit and Sephton, Waller LJ summarised the law at paragraph 24:

“I would draw the following conclusions from the authorities including the Sephton & Co case and the Nykredit case. The facts may demonstrate that no measurable damage has been suffered at the date when negligent advice has been given or negligent failure has occurred and, as the Sephton & Co case itself demonstrated, that will be so where damage is totally contingent. But if it can be shown that a claimant is worse off in terms that can be measured financially at the date of receipt of the advice or the negligent failure, the cause of action will accrue on that date, even though accurate measurement of damage would be difficult and some of the damage may still be contingent. In particular, if the allegation is of a failure to provide a term in a contract or a failure to provide an effective insurance policy, the cause of action will accrue on receipt of the negligently drafted contract or receipt of the ineffective policy because, as at that date, the claimant has received something of less value and has thus suffered loss.”

Mr Hollander submits that in terms of his categories, Spencer is a category 2 case, which would seem to be correct. He submits that the key characteristics of such a case are identified in the last sentence of that passage and contends that in the present case, there is no question of the panel solicitors having failed to ensure that the contracts of insurance to which they committed the insurer were effective or that they contained particular terms. He then repeats his submissions as to why this is a ‘no transaction’ case. He says the highest it can be put is that it was the panel solicitors’ duty to ensure that the insurer did not write bad claims. Because on the Assumed Facts it cannot be said that, had the insurer not written a particular ‘bad’ claim, it would have written an alternative ‘good’ claim, the comparison which is to be made is between the position the insurer is in from having written the ‘bad’ claim and the position it would have been in if it had not written the claim at all.

That brings Mr Hollander back to the submission he made at the hearing that the present case is not a category 2 but a category 3 case and that the relevant asset, the premium, was not ‘damaged’ when the transaction is entered. He submits that it remains worth the same, unless and until the claim fails for whatever reason and it is only then that NIG suffers actual damage. As I have already said, the fallacy in that argument is that it ignores the fact that because the prospects of success are less than 51%, the insurer is assuming a greater liability than it intended for the relevant premium and thus is not getting what it was the panel solicitors’ duty to ensure that it got.

The decision of the Court of Appeal in Shore v Sedgwick Financial Services [2008] PNLR 37 is one which in my judgment poses considerable obstacles in the way of Mr Hollander’s analysis and argument. In that case, the claimant claimed that the defendant investment advisers had negligently failed to advise him to remain in an occupational pension scheme rather than transferring his accrued benefits into a personal pension income withdrawal scheme. It is quite clear from the facts assumed proved for the purposes of the appeal (see paragraph 18 of the judgment of Dyson LJ) that the claimant’s case was that if he had been given the right advice, he would not have entered the income scheme at all. Thus in terms of Mr Hollander’s categories, this was a ‘no transaction’ or category 3 case.

However, it is equally clear that, as Mr Hollander not only accepted but indeed urged upon the court in seeking to distinguish that case from the present, it is also a ‘flawed transaction’ or category 2 case. That emerges from several passages in the judgment of Dyson LJ (with which Buxton and Keene LJJ agreed). At paragraph 27 he refers to the distinction drawn in the authorities (and specifically Sephton) between ‘contingent liability’ cases and ‘transaction’ cases. Having rejected any suggestion that the case was a contingent liability case he then poses the question at paragraph 33 whether the case was a ‘transaction’ case: did the claimant suffer damage as soon as he gave up his rights under the occupational scheme and entered the income scheme? Having set out the submissions of the claimant as to why no damage was suffered until a later date he says in paragraph 37 that he cannot accept those submissions:

“It is Mr Shore's case (assumed for present purposes to be established) that the PFW scheme was inferior to the Avesta scheme because it was riskier. It was inferior because Mr Shore wanted a secure scheme: he did not want to take risks. In other words, from Mr Shore's point of view, it was less advantageous and caused him detriment. If he had wanted a more insecure income than that provided by the Avesta scheme, then he would have got what he wanted and would have suffered no detriment. In the event, however, he made a risky investment with an uncertain income stream instead of a safe investment with a fixed and certain income stream which is what he wanted.”

Mr Hollander criticised the emphasis placed by Dyson LJ on the subjective value of the income scheme to the claimant, in assessing that the claimant was worse off at the time of entering the income scheme and that was certainly an aspect of his judgment which puzzled Lewison J in the subsequent case of Pegasus Management Holdings v Ernst & Young [2009] PNLR 11: see paragraph 103 of the judgment. However, as Mr Hollander really accepted, that curiosity of Shore is not really relevant for present purposes. I consider that the overall reasoning in Shore remains sound and compelling in the context of the present case.

Dyson LJ rejected the argument advanced on behalf of the claimant that Shore could be distinguished from the transaction cases, because they all concern transactions in which there is the risk that the claimant will be financially worse off than he would have been if he had not entered into the transaction and that none of them concerns a transaction in which it is possible that the claimant will be financially better off than he would have been if he had not entered into it. At paragraph 42 of his judgment Dyson LJ said:

“I do not accept that the transaction cases can be distinguished as he contends. It is true that none of them concerned a transaction in which it was possible that the claimant would be better off financially as a result of the negligence than he would have been but for the negligence. But the essence of the reasoning in those cases is that the fact that the risk to which the claimant was exposed by the defendant's negligence might not eventuate did not mean that the claimant did not suffer loss as a result of being exposed to that risk. In Moore, it was possible that the director would not leave the plaintiffs' employment or that, if he did, he would not act in breach of the covenant. In Bell, it was possible that the former wife would not deny the plaintiff his one-sixth share in the proceeds of the matrimonial home. So too in the present case, the fact that the financial benefits accruing to Mr Shore from the PFW scheme might not be less than those accruing to him from the Avesta scheme did not mean that he did not suffer loss when he invested in the scheme and was then and there exposed to the risk that they might be less. It is the possibility of actual financial harm that constitutes the loss. That possibility is present even if there also the possibility that the claimant will be financially better off as a result of being exposed to the risk. In my view, therefore, it is irrelevant that, as things turned out, Mr Shore might have been financially better off under the PFW scheme than he would have been if he had deferred taking his pension under the Avesta scheme until the age of 60.”

What that passage seems to me to demonstrate is that in a case where, as a consequence of the defendant’s failure to ensure that a transaction has particular characteristics (there that the income scheme did not expose the claimant to greater risk than the occupational scheme) the claimant will have suffered actual loss when the transaction is entered into, as a result of exposure to that greater risk, even though whether or not that greater risk does eventuate in further financial detriment may be dependent upon a contingency occurring in the future.

As in Watkins, which Dyson LJ cited with approval, the Court of Appeal in Shore rejected the argument for deferral of the running of limitation based upon Nykredit. At paragraph 47 Dyson LJ said this:

“I do not consider that Nykredit is authority for some special approach to the question of when loss is suffered in negligent advice cases or even in cases of negligent valuations of property which are relied on by lenders to make loans on the security of property. Where (as in Nykredit ) the complaint is that money was lent on mortgage in reliance on a negligent valuation of property, there may be cases, as Lord Hoffmann said at 1639B, in which it is possible to demonstrate that the claimant suffers loss immediately upon the loan being made. The lender may be able to show that the rights that he has acquired as lender are worth less in the open market than they would have been if the security had not been overvalued. But that would be difficult to prove in a case in which the lender's personal covenant still appears to be good and interest payments are being duly made. It all depends on the facts.

48 The PFW scheme was a different kind of transaction from the advance of a loan on the security of a mortgage on property. It was a transaction under which Mr Shore obtained a bundle of rights which, from the outset, were less advantageous to him than the benefits that he enjoyed under the Avesta scheme. On the facts of this case, it was not necessary to wait to see what happened to determine whether Mr Shore was financially worse off in the PFW scheme than he would have been in the Avesta scheme.”

In my judgment it is clear from that rejection of the Nykredit argument that the Court of Appeal did not consider that some different and special rule applied in cases where, but for the defendant’s negligence, the claimant would not have entered into the transaction. Shore is a clear example of a case where, but for the defendant’s negligence, the claimant would not have entered the relevant transaction and yet the court held that he had suffered loss when the transaction was entered because, as a consequence of the negligence, he got a bundle of rights which was less advantageous to him than he should have got, in the sense that he should have got a pension scheme which was no more risky than the one he had.

The most recent decision relied upon by the panel solicitors, at least from this jurisdiction is the decision of Lewison J in Pegasus Management Holdings v Ernst & Young [2009] PNLR 11. The facts of the case are complicated, but there is a useful summary which I have adapted from the panel solicitors’ Skeleton Argument. The claimant, Mr Bradbury, had sold his business for a large sum, the consideration being paid in loan notes to defer capital gains tax liability. Under the tax legislation, deferral could be extended beyond disposal of the notes if the proceeds of disposal were reinvested in a qualifying business by a certain date. The defendant advised the claimant to set up a holding company to invest in the qualifying trades and the claimant incorporated Pegasus as the holding company and sold some loan notes to subscribe for shares in it. Pegasus acquired the shares of various companies carrying on qualifying business and, to satisfy the requirements for reinvestment relief, the assets and trading activities of each company were hived up to Pegasus. When the assets were hived up, the base cost at which Pegasus was deemed to have acquired them for the purposes of capital gains tax was the original base costs of the assets to the business in question. Because much of the value of each business lay in the goodwill it had built up, without paying anything for it, that goodwill could not amount to a base cost. In consequence, if Pegasus came to sell any of the businesses for more than the base cost, it would have to pay capital gains tax on gains above the base cost. In his judgment Lewison J referred to this as “the adverse consequence”.

The claimant alleged that the adverse consequence could have been avoided if the defendant had advised him to incorporate and fund subsidiaries to acquire the businesses. It is thus a case in which the claimant was contending that, if he had been advised properly, he would not have entered the relevant transaction. It is thus in terms of Mr Hollander’s categories, a ‘no transaction’ or category 3 case in one sense, but it is equally apparent that it is also a category 2 case, in the sense that the defendant’s duty was to procure a transaction having particular features, that is a structure which procured effectively the relevant relief from capital gains tax.

The relevant question in that case was whether the adverse consequence was a contingent liability “standing alone” or whether it was a contingent liability which meant that a party to a bilateral transaction “has received less than he should have done” in the words of Lord Hoffmann in paragraph 30 of his speech in Sephton (see paragraph 92 of the judgment of Lewison J). Having reviewed the various Court of Appeal authorities from Forster v Outred to Knapp Lewison J said at paragraph 74 of his judgment:

“As a result of these authorities it can be seen that it is firmly established at the level of the Court of Appeal that, in a professional negligence case, the client suffers damage if he does not get what he ought to have got. Although one might have thought that, applying orthodox principles of assessing damages in tort (e.g. Watts v Morrow [1991] 1 WLR 1421), a claimant who exchanged money for property or rights of equal value had suffered no loss, that does not appear to be the law in the context of professional negligence.”

That last sentence was a reference to the principle, to which I have already referred in detail above, that in professional negligence cases where the defendant’s duty is to ensure that a transaction has particular features and, as a consequence of breach of that duty, it does not have those features, although the claim is in tort, the measure of damages is in effect the same as the contractual measure of loss of expectation or bargain.

Lewison J then considered whether this position was altered by either of the House of Lords authorities, Nykredit and Sephton. After considering Nykredit, he said at paragraph 84, in a passage which is of considerable relevance for the present case:

“84 Mr Davies Q.C [for the claimant] submits, and I agree that Nykredit makes clear that, even where a claimant enters into a transaction which he would not have entered into but for the negligent advice, there is no general rule or presumption in English law for the purposes of the law of tort that loss is suffered by the claimant at the date of the advice or of the relevant transaction. While the claimant may, in a general sense, feel a detriment in entering into the transaction, this does not necessarily constitute actual damage for the purposes of the law of tort. It is necessary to examine, on the facts of the case, whether the negligent advice has actually caused a loss; and if so when.

85 However, in my judgment the cases in the Court of Appeal show that where the client has engaged professionals in connection with a transaction to secure for him some property or rights, and because of the negligence of those professionals, the client acquires less valuable property or rights than he would have done if he had been given correct advice, he suffers damage at the time of the transaction, even if the property or rights are worth no less than he actually paid for them. Those cases were not criticised in Nykredit.”

Lewison J did not consider that the law in this respect was altered by the House of Lords in Sephton. His analysis of the speeches was essentially similar to my own analysis set out above and, like me, he concluded that the House of Lords was recognising that, where as a consequence of a breach of the defendant’s duty to procure that a transaction has particular features, the claimant does not get what he should have got, actual damage occurs when the transaction is entered (see paragraphs 89, 90, 94 and 97 of his judgment). Lewison J then examined Shore which (apart from the caveat about the subjective aspect to which I have already referred) he recognised as another case applying the same principles.

In arriving at his conclusion, Lewison J considered that the claimant had entered into a bilateral transaction when he parted with cash and Pegasus issued shares. He also considered that the claimant had changed his legal position. He was influenced by the fact that once the share issue had taken place, it was too late for the situation to be retrieved, which he regarded as a strong indication that damage was suffered at the date of the share issue. Accordingly, actual damage had been suffered by the claimant when the relevant transaction was entered into and the claim was time-barred.

In my judgment, that passage demonstrates, like Shore before it, that where the defendant professional adviser was under a duty to procure that a transaction had particular features and in breach of duty he has failed to do so, the claimant suffers actual loss when the transaction is entered into, which is when he does not get what he ought to get and that position is not altered by the fact that the transaction was one which, but for the negligence, he would not have entered at all.

The panel solicitors also rely upon a decision of the Supreme Court of New Zealand in Thom v Davys Burton [2008] NZSC 65 in which some of the English authorities including Sephton and Spencer are considered. Whilst decisions of that Court are entitled to be treated with respect, I do not consider it necessary to consider that case further, since it does not seem to me to add to what has already been said in the English cases.

I consider that the reasoning of the cases decided since Sephton supports strongly the conclusion that in the case of vetting breaches in tort, actual damage was suffered by NIG when each ATE policy incepted. On the Assumed Facts, the panel solicitors’ breaches of the duty to vet claims properly so that only those with a 51% or greater prospect of success were accepted for insurance by ATE policies issued on behalf of NIG, meant that NIG was committed to a series of flawed transactions, in the form of policies where the prospects of success were less than 51%. Just like the claimant in Shore, NIG was exposed to a greater degree of risk than what it was entitled to expect if the panel solicitors had complied with their duty. Accordingly, NIG suffered actual loss when committed to the flawed policy and thus exposed to the greater risk. It is no answer to say that NIG would not pay out an amount in excess of the premium in each case unless and until the claim failed for whatever reason, just as the Court of Appeal rejected the argument that no actual damage was suffered in Shore until the claimant was actually financially worse off, merely because there was a possibility he might be better off under the income scheme. As Dyson LJ said in that case at paragraph 42: “It is the possibility of actual financial harm that constitutes the loss”, in other words it is the exposure to the greater risk in the present case which constitutes the actual loss.

The conduct breaches fall into two categories as set out in paragraph 7 above. The first category is essentially failure to notify NIG when, at some stage after inception of the ATE policy, the prospects of success of the particular claim had fallen below 50% or its value below £1,000, so that any indemnity under the policy could be withdrawn. That category of conduct breach falls to be analysed in the same way as vetting breaches, in the sense that actual damage is suffered at the point where there is a failure to notify, which is when NIG was exposed to a greater risk than intended, even though it was not until a later stage when the relevant claim actually ‘failed’ that NIG would pay out more on the claim than it had received in net premium.

The second category of conduct breach is where the panel solicitors allegedly failed to pursue the particular claim with due care and attention, so that NIG lost the opportunity to secure a successful outcome at trial or a favourable settlement. Miss Carr submits that there is a close analogy between this situation and cases where, as a consequence of a solicitor’s negligence, a claim becomes doomed to fail in the sense of being struck out. I agree with that submission, although in a sense the present conduct breach claims are wider in their scope than such cases, because there is said to be a breach not just when the claim becomes doomed to fail because it is liable to be struck out, but where as a consequence of the breach, the prospects of success fall below the critical 50% criterion.

The authorities do not necessarily focus on precisely when a claim becomes doomed to fail. The panel solicitors relied upon the decision of the Court of Appeal in Hatton v Chafes [2003] PNLR 24. There the defendant solicitors commenced proceedings in 1987 but did little in the proceedings thereafter. In 1995 they warned the claimant that there was a risk of the proceedings being struck out for want of prosecution. The proceedings were struck out in June 1999. The proceedings against the solicitors for negligence were commenced in October 2000. The solicitors applied to strike out the proceedings on the ground that they were time barred. The Court of Appeal held that where delay by a solicitor caused an action to be struck out for want of prosecution, the cause of action in respect of the loss of the claimant’s rights arose not at the time that the claim was struck out but at the earlier point when the claim became worthless. At the latest that was when the strike out was bound to succeed, which on any view was before October 1994, more than six years before the proceedings were commenced.

At paragraph 17 of his judgment Clarke LJ said:

“It seems to me that there are three possibilities as to when damage is caused by negligence in such a case so that the claimant's cause of action has accrued and time begins to run against him. The first is when the claimant has no arguable basis for avoiding the claim being struck out, the second is when it is more probable than not that the claim will be struck out and the third is when there is a real (as opposed to a minimal or fanciful) risk of the claim being struck out. The reason why it is not necessary to determine which of those possibilities is correct here is that, in my opinion, this is an example of the first class of case on the facts.”

Both Lord Walker and Lord Mance refer to this category of case in Sephton. Lord Walker describes this at paragraph 47 as a variation on the ‘transaction’ cases. He says:

“The solicitor is liable for making his client's chose in action valueless if he carelessly allows it to become statute-barred (or “doomed to failure” because a striking-out application would be bound to succeed: see Clarke LJ in Hatton v Chafes [2003] PNLR 489, para 23; also Sir Anthony Evans, at para 82).”

Lord Mance also treats such cases as a variation of what Lord Walker had described as ‘transaction’ cases. At paragraph 69 he says:

“A similar line of authority establishes that the cause of action against a solicitor whose negligence deprives his client of a claim which the solicitor was engaged to pursue accrues when the claim becomes time barred or liable to be struck out for want of prosecution (thereby obviously eliminating or reducing the value of any claim): Hatton v Chafes [2003] PNLR 489; Polley v Warner Goodman & Street [2003] PNLR 784 .”

The authorities on this area were considered more recently by Silber J in Jessup v Wetherell [2007] PNLR 10. At paragraph 42 of his judgment, he says:

“I therefore conclude that a claimant's cause of action against defendant solicitor for failing to pursue expeditiously an earlier claim accrues when that earlier action is “ doomed to failure ” ( per Lord Walker) or “ liable to be struck out for want of prosecution (thereby obviously eliminating or reducing the value of any claim) ” ( per Lord Mance) or “ there was an inevitability or at least a very serious risk that they would be struck out at any time ” ( per Sir Murray Stuart Smith) or has suffered “ relevant damage ”( per Clarke L.J.) or “ it would have been struck out had an application been made ” ( per Pill L.J.). As I will explain, it is unnecessary to decide which of these formulations would apply.”

He goes on to explain why on the facts of that case, whichever formulation was adopted, the cause of action had accrued more than six years before the date of issue of the proceedings. The difficulty I face in this case is that I am being invited to determine which formulation is correct in the abstract, rather than by reference to the actual facts of a specific case.

Whilst recognising that the earlier cases essentially sidestep this question because it was not necessary to decide, Miss Carr submits that the correct formulation as a matter of principle must be that the cause of action accrues when the conduct breach by the solicitor results in a material diminution in the prospects of success. She submits that the present examples of solicitor’s negligence are analogous with ‘loss of a chance’ cases. If, as a consequence of the negligence of the panel solicitor, the prospects of the claim succeeding or of a successful settlement being reached have reduced to a material extent, by say 10% or at least by more than a minimal amount below the 50% criterion, then actual damage has been suffered and the cause of action has accrued.

Mr Hollander was dismissive of this approach. He pointed out that the concept of ‘loss of a chance’ does not apply here because ‘loss of a chance’ cases are ones where the contingency of a future event is dependent upon the acts of a third party, not of one of the parties to the transaction. Furthermore, he submits that Miss Carr’s example of a material reduction in the prospects of success remains a case of contingent liability, which he submits on Sephton is not actual damage. He seeks to distinguish the cases where a claim has become amenable to being struck out for want of prosecution as ‘transaction’ cases, which, of course, he submits the present case is not. Thus, in a very real sense, his argument comes back to his analysis of the present case as a category 3 but not a category 2 case, an analysis which I have already rejected in the context of vetting breaches.

I accept that the analogy with ‘loss of a chance’ is not very apt for the reason Mr Hollander gives, but the panel solicitors’ argument on this point was not dependent on the analogy. It was not being argued that the present claims are ‘loss of a chance’ claims rather that, just as in such cases, a more than minimal chance of success will found a claim, so a more than minimal reduction in the prospects of a claim succeeding can constitute actual damage for the purposes of the accrual of a cause of action in tort. It seems to me that in principle and consistently with the conclusion I have reached in the vetting breach cases, the panel solicitors’ argument is right. Accordingly, the cause of action in this category of conduct breach case will have accrued when, as a consequence of the breach, there has been a material diminution in the prospects of success.

The panel solicitors also put forward an alternative argument as to why claims where the breach of duty in tort occurred before 17 June 2002 are time barred. This was based on the so called “non case-specific issues” which the panel solicitors included at paragraph 34 of the Statement of Assumed Facts. In summary, the court is asked to assume that when the relevant breach of duty occurred, (i) the value of NIG’s business was less than it would have been if the relevant claim had not been accepted or continued; and/or (ii) a purchaser of NIG’s business who was aware a claim had been accepted or was being continued as a consequence of breach of duty by the panel solicitor would have paid a lower net amount for the business; and/or (iii) NIG’s underwriting capacity and/or free capital was under a greater restriction than it would otherwise have been; and/or (iv) the benefit of the net premium retained was less than the burden of the obligation undertaken.

Submissions on these issues were advanced at Section G of the panel solicitor’s Skeleton Argument and orally at the hearing by Mr Philip Jones QC on behalf of the panel solicitors. Because I have decided the preliminary issues in favour of the panel solicitors on their main arguments, it is strictly unnecessary to consider this alternative argument, so I can deal with it shortly. So far as the point about the net premium is concerned, to the extent that this is part of the panel solicitors’ primary argument, I have already dealt with it.

However, I have difficulty accepting the other points, principally because in my judgment Mr Hollander is right that, even if they are indeed detriment which NIG may have suffered as a consequence of a breach of duty by a panel solicitor, none of them would be recoverable as damages for breach of that duty, since they fall outside the scope of the duty owed by the panel solicitors. Accordingly it does not seem possible to say that merely because detriment such as described in (i) (ii) or (iii) in paragraph 107 above has occurred, that is ‘actual damage’ for the purposes of the accrual of a cause of action in tort.

Furthermore, if those points stood alone as the adverse consequences of a breach of duty, it seems to me highly arguable that they would be a purely contingent loss for precisely the reasons given by Lord Hoffmann and Lord Mance in paragraphs 29 and 77 of their respective speeches in Sephton, essentially referring to the sort of exercise of calculating a broad diminution in value of the business upon which this alternative argument depends.

Although I am not prepared to accept that alternative argument, I do accept the panel solicitors’ primary argument in relation to both vetting and conduct breaches. Accordingly, in my judgment, in the case of vetting breaches, the claims where the ATE policy incepted prior to 17 June 2002 are time barred. In the case of conduct breaches, where the relevant failure to notify occurred prior to 17 June 2002 or where, as a consequence of a breach of duty in failing to pursue a claim with due care and attention, there had been a material diminution in the prospects of success prior to 17 June 2002, in each case such claims are time barred.

The limitation issues set out in the Order of 11 December 2008 fall to be tried on the basis of the assumed facts set out below.

For the purposes of this preliminary issue only, certain of the allegations taken from the statements of case (and set out below) have been assumed to be correct. The matters set out below are without prejudice to the parties’ respective cases on the facts as set out in the pleadings and the lists of issues. The contents hereof are not to be taken as binding or as proved and the facts remain for subsequent determination.

All references herein to duties owed by Panel Solicitors, to such duties being owed to the Insurer, to breaches of such duties, and the like, are assumptions made for the purposes of the preliminary issue trial and do not amount to or assume a determination that the Panel Solicitors owed any such duties, owed them to the Insurer, or breached them in any individual case. Further, references to ‘the Scheme’ are without prejudice to the Panel Solicitors’ contention that there was not one Scheme in this case, but a number of different Schemes involving different claims management companies, which were administered by CLE and underwritten by the Insurer. Except in respect of the limitation issues identified in the said Order, all of the Parties’ legal contentions are reserved for subsequent determination.

In this Statement of Assumed Facts, the following terms have the following meanings:

ATE legal expenses insurance schemes were developed following the coming into force of the Access to Justice Act in April 2000. By or around that date, the Insurer had developed a relationship with CLE and other Legal Expenses Insurance providers. On 24 October 2000 the Insurer entered into an agreement with CLE pursuant to which CLE administered the CLE Scheme and underwrote Scheme Claims on behalf of the Insurer. In Spring 2003 the Insurer became aware of the possibility of significant losses under the CLE Scheme and in Summer 2003 it started to receive significant claims arising out of the Scheme. It gave notice to terminate its involvement in the CLE Scheme in August 2003.

During the period of its participation in the CLE Scheme, the Insurer underwrote a total of some 40,000 ATE policies in relation to Scheme Claims conducted by around 170 solicitors’ practices. These proceedings are pursued against 89 solicitors’ practices and concern approximately 25,000 individual Scheme Claims conducted pursuant to ATE policies. Of these ATE policies, 7,383 (Footnote: ¹) were incepted more than 6 years prior to issue of the present proceedings.

The average sum claimed in relation to each Scheme Claim in the present proceedings is £2,487.50 (including interest to 30 April 2008). The total sum claimed in Scheme Claims where the policy was incepted more than 6 years prior to the Claim Form, currently stands at £19,544,472 (including interest to 30 April 2008). (Footnote: ²)

The CLE Scheme enabled members of the public to pursue claims for personal injury, industrial injury and/or housing disrepair (HDR) by protecting them against the risk of having to fund either their own costs and disbursements or the costs and disbursements of the opposing party in the event that the claim failed. Scheme Claimants did not have to pay their own solicitor’s profit costs in unsuccessful cases because solicitors acted on Scheme claims pursuant to conditional fee agreements. The risk of having to fund own disbursements or the opponent’s costs or disbursements if the claim failed was insured under the Scheme by an after-the-event legal expenses insurance policy underwritten by the Insurer.

The premium for the ATE Policy was funded by a loan provided by a Funder pursuant to a loan agreement with the Scheme Claimant. This loan was insured under the ATE Policy in the event that the claim failed. Pursuant to the loan arrangements, the Funder could also lend the Scheme Claimant further sums in respect of disbursements, in which case such further sums were also covered by the insurance. Interest accrued on the loan from time to time and was also covered by the ATE Policy if the claim failed. The Insurer also entered into an agreement to indemnify the Funder so that the Funder would not suffer loss in the event that the Insurer avoided the ATE Policy.

In successful claims, the intention was that the successful Scheme Claimant’s costs and disbursements (including the cost of the premium for the ATE policy and all accrued interest) would be recovered from the unsuccessful opposing party, or alternatively recovered out of the damages which the Scheme Claimant obtained.

In unsuccessful claims, the Insurer would be liable to pay the amount of the loan to the Scheme Claimant (which as stated above included the amount of the premium plus any further disbursements and accrued interest), as well as any Opponent’s costs and disbursements for which the Scheme Claimant was liable.

Before being accepted onto the Scheme, an individual proposed Scheme claim would be vetted by a firm of Panel Solicitors. In order to be accepted onto the Scheme, claims had to meet certain criteria, such as sufficient prospects of success (a minimum threshold of greater than 50% prospects applied) and likely minimum value (a minimum threshold of £1,000 applied, which was subsequently increased to £1,500). It was vital to the success of the Scheme (and to the financial interests of the Insurer thereunder) that only claims with sufficient merit and likely sufficient eventual value in terms of damages were accepted onto the Scheme. As noted above, only cases where the prospects of successfully recovering the minimum value exceeded 50% were acceptable under the Scheme.

The Insurer did not itself assess the suitability of claims to be accepted onto the Scheme and CLE had no legal expertise. The Insurer therefore relied on the Panel Solicitors to assess and (if accepted) run claims.

If the Panel Solicitor positively vetted the claim and all appropriate documentation was in place (such as a signed policy proposal and a conditional fee agreement), a policy or certificate of insurance for that individual claim would then be issued. The Insurer would be on risk for that claim from the date of issue.

As to what occurred on inception of a policy:

After inception, the Panel Solicitor had conduct of the claim and was subject to various obligations in relation to the conduct of the claim, such as an obligation to pursue the claim diligently and an obligation to notify CLE if the prospects of success of the claim fell below 50%.

Where a Scheme claim failed, there would be a claim on the Policy and the Insurer would be obliged to provide an indemnity in respect of the sums referred to at paragraph 9 and 11 above. In practice such indemnification generally took the form of the Insurer paying off the amount of the outstanding loan by making a direct payment to the Funder, although for items such as opponent’s costs, a payment to a third party might be involved. ‘Failed’ claims refers here not only to claims which failed at trial, but also claims whose prospects of success had fallen below 50% so as to lead to the withdrawal of indemnity.

The process for failing a claim generally involved notification by the Panel Solicitor to CLE of the failure of the claim and a request for withdrawal of indemnity. CLE would then notify the Insurer, which would pay the claim after, in appropriate cases, having carried out a review in order to satisfy itself of the amounts payable. The Scheme documentation made provision for Panel Solicitors to submit bordereaux listing the claims which had been discontinued. In practice, however, CLE tended to be notified of failures by the Panel Solicitors writing to CLE and requesting that indemnity be withdrawn on particular identified cases, or alternatively by requesting withdrawal of indemnity via the CLE website. When providing notification of a failure, the Panel Solicitor would send in the file of papers on the individual case to CLE. Where this was not done, CLE would contact the Panel Solicitor requesting that the file of papers be provided. In some cases, however, the process of failure occurred in a different way, e.g. by indemnity being withdrawn by CLE after carrying out an audit of particular claims or classes of claim.

The cover provided by the Insurer for Scheme Claims was defined in the insuring clause of the ATE Policy. Examples of the key insuring and other clauses are set out below.

The insuring and other key clause under the FNB policy applicable to all claims other than HDR claims stated (Footnote: ³):

“DEFINITIONS

....

Loan means the aggregate outstanding principal amount of the advances under the credit agreement made between the Funder and the Insured, the initial advance under which is stated in the Schedule comprising:

(a)

The payment by the Funder to the Company on behalf of the Insured of the Premium;

(b)

All payments by the Funder to the Appointed Solicitor or such person or persons as the Appointed Solicitor may instruct on behalf of the Insured on account of the Insured’s disbursements.

.......

CONSIDERATION AND INSURANCE

The Insured having made a proposal and declaration and having entered into a Conditional Fee Agreement with the Appointed Solicitor and having paid or agreed to pay the Premium, the Company will, subject to the terms, conditions and exclusions of the Policy (compliance with such conditions being a condition precedent to the liability of the Company), indemnify the Insured up to the Limits of Indemnity in respect of Opponent’s Legal Costs under Section 1 below and/or Deficiency of Damages under Section 2 below incurred by the Insured exclusively in connection with the Proceedings, provided that the Proceedings are conducted exclusively within the Territorial Limits

EITHER

SECTION 1- INSURED IS NOT SUCCESSFUL AND DOES NOT BENEFIT FROM A SETTLEMENT

If the Insured is not Successful and does not benefit from a Settlement, the Company will pay to the Insured:

The Opponent’s Legal Costs

The total of the Insured’s Disbursements, the Premium and Interest payable under the Loan

The Limit of Indemnity under Section 1.

OR

SECTION 2- INSURED IS SUCCESSFUL OR BENEFITS FROM A SETTLEMENT

If the Insured is Successful or benefits from a Settlement approved in writing by the Coverholder, the Company will pay to the Insured the amount by which:

The total of the Opponent’s Legal Costs, the Insured’s Legal Costs, the Premium and interest payable under the Loan exceeds:

The total of any damages and Insured’s Legal Costs payable to the Insured pursuant to an Order or a Settlement approved in writing by the Coverholder.

The Limit of Indemnity under Section 2

.............

4.

CONDITIONS

4.1

Prospects of Success

The Company has provided cover under this Policy on the basis that it offers reasonable prospects for the recovery of damages in the Proceedings. The Company or Coverholder on its behalf may discontinue cover if during the course of the Proceedings it considers that such prospects no longer exist.....”.

There were differing versions of the ATE Policy wording for FNB and BOS. For FNB there were two versions: an HDR policy for HDR claims; and a policy entitled ‘Conditional Fee Care Policy’ for all other claims. For BOS there was a policy for claims other than HDR, also entitled ‘Conditional Fee Care Policy’; BOS did not accept HDR claims. So far as concerns payment under the Policy, the FNB Conditional Fee Care Policy provided at Clause 6 that “No payment under this Policy will be made by the Company until the conclusion of the Proceedings provided that, if an Order is made against the Insured to pay any of the Opponent’s Legal Costs prior to the conclusion of the Proceedings, the Company will indemnify the Insured immediately the Insured is required to make such payment”. Materially identical provisions appear in the HDR policy at Clause 3.6 and the BOS Conditional Fee Care Policy at Clause 6.

Further example Policies will be contained in the bundle for the hearing.

As noted above, as part of the package of arrangements under the CLE Scheme, the Insurer agreed with each of the Funders to indemnify them against the amount required to repay a Scheme Claimant’s loan in circumstances where e.g. the Insurer avoided, repudiated or otherwise denied the validity of the relevant ATE Policy.

There were two principal funders under the Scheme, FNB and BOS. Each had its own suite of contractual documentation, including a contract setting out the obligations of the Panel Solicitor. (A third funder, Singer & Friedlander, was also involved at the outset of the Scheme, but it operated on the basis of the FNB documentation.) In the case of the FNB documents, this contract was called the ‘Funded Solicitors Agreement’ or FSA. There were two versions of this agreement, which are termed herein FSA1 and FSA2 (FSA1 was superseded by FSA2). In the case of the BOS documents, this contract was called the ‘Agreement with an Appointed Representative for the Management of Insurance’ or AARMI. This preliminary issue is proceeding on the basis that no AARMI agreements were entered into prior to 17 June 2002. As such, the facts about the AARMI are provided by way of background only.

So far as concerns vetting duties, FSA1 provided that:

FSA2 provided:

AARMI provided:

So far as concerns the conduct of claims, FSA1 provided:

FSA2 provided in addition:

AARMI provided:

The parties rely for their pleaded cases on other provisions in the Scheme documentation, but the above provisions are those to which the present Statement of Assumed Facts principally refers. Nothing in this document shall be construed as a waiver by either party of its right to rely on the Scheme documentation generally for its case in these proceedings. Copies of relevant Scheme contractual documentation as referred to above will be made available for the purposes of the preliminary issues trial (Footnote: ⁴).

The first policy in relation to which a claim is made in this litigation was incepted on 11 April 2001. The Claim Form in these proceedings was issued on 17 June 2008. The Defendants contend that a number of the claims pursued herein are time-barred, in particular:

So far as concerns particular claims, there were a number of variables which might apply, and the preliminary issues concerning limitation therefore fall to be determined against the background of a number of factual hypotheses, as follows.

The Panel Solicitors also wish the Court to determine the preliminary issues against the further hypotheses set out below. The Claimant denies that any of these matters are relevant to the issues to be decided in the preliminary issues trial on the basis that they do not reflect the correct legal test. The further hypotheses are: