The Legal Profession – Are we Awaiting an Avalanche of Claims?

Issue 2: December 2020

Although COVID-19 is a medical rather than a financial crisis, the pandemic's economic impact will clearly be considerable, whatever form any recession takes. Experience tells us that recessions result in an uptick in claims against professionals—whether by financial institutions trying to cap their exposures to a falling or collapsing housing market, or clients looking more closely at the outcome of transactions where the money supply is squeezed. Professionals (and their insurers) become a predictable target.

With record-low base rates and a suspension of certain stamp duties, the housing market is extremely active. Are mistakes more likely due to fee earners working predominantly from home? It is hard to say, but concerns remain, particularly when conveyancers are under pressure from clients that are anxious to complete before the stamp duty holiday ends. It is also unclear whether other disciplines are likely to be more susceptible to error while home-working: for example, supervision of junior fee earners will never be as easy when conducted remotely.

Below, we look at cases over the last year that may shape the direction of claims against the legal profession, and the available defences.

SAAMCo – what is the extent of solicitors' liability?

Practitioners will be aware of the SAAMCo principle from the mid-1990s, but how is it applied 13 years on?

The case of LIV Bridging Finance Ltd v EAD Solicitors LLP [2020] EWHC 1590 (Ch), concerned four loans paid over a 10-month period as part of short-term bridging facilities for use in the development of land. LIV, the lender, contended that it suffered loss as a result of the solicitors paying away the loan monies in breach of trust, without ensuring that they were first secured by a first legal charge over specific properties, contrary to their instructions.

Therefore, when the borrowers defaulted, LIV sustained significant losses and sued the solicitors for breach of trust, seeking recovery of the full amounts lost. The High Court confirmed that the SAAMCo principle (as elucidated in the 2018 case of Hughes-Holland v BPE Solicitors), limiting recovery of damages in certain circumstances, applies to cases of breach of trust by solicitors.

This decision is helpful to the profession—reinforcing the application of the principle that solicitors are only responsible for losses within the scope of their duty. The critical distinction remains whether a solicitor is advising on a course of action (which exposes them to greater losses), or merely providing information for the client to decide its own course (which makes those losses more capable of challenge). Importantly, this case confirms the principle extends to breach of trust—an argument often raised by claimants when client funds are involved.

Loss of chance and new evidence

In November 2019, the Supreme Court, in Jean Edwards v Hugh James Ford Simey (A Firm) [2019] UKSC 54, considered the thorny issue of the admissibility of evidence that would not have been available at the original "notional" trial had that occurred, when determining the value of a lost claim in professional negligence proceedings.

The Supreme Court unanimously ruled that a claimant had suffered a loss as a result of his solicitors' negligence, despite after-the-fact evidence suggesting that his underlying claim should not have succeeded. Although this might appear concerning, in this instance the evidence would never have been available at the time the firm was acting, and therefore the claimant had still lost the chance to recover more. This decision still leaves open the possibility of adducing evidence that would have been available, even if not commissioned by the solicitor at the material time, in order to demonstrate that a lost claim lacked value.

Duties of care to a third party

Surprising as it may seem, former clients are not the only parties who bring claims against the profession. Solicitors can also be at risk of assuming duties to others.

In a recent case on assumption of responsibility, Valley Brook Investments Ltd and another v Huam Ltd [2020] EWHC (Ch) 1715, the High Court held that a professional can owe a duty of care towards a third party (a special purpose vehicle—"SVP") that reasonably relies on the professional's work. This is so even where the third party did not exist when the professional supplied its work.

In this case, an architect had supplied drawings to the client and later engaged in informal discussions with a potential buyer of the development (the soon to be owner of the SPV), in which it was alleged that the architect stated the development could accommodate 16 units. The architect later supplied drawings to this effect to the buyer. The SPV was incorporated thereafter, for the purpose of buying the development, and it transpired that the development could not accommodate 16 units.

On the evidence, the judge decided that the number of flats that could be created had been discussed with the buyer. This, taken together with the architect having directly supplied a copy of the drawings to the buyer, led to the conclusion that the architect had assumed responsibility towards the buyer and there being a reasonable expectation of reliance. The professional's contemporaneous documentation was sparse and of little assistance to the judge, emphasising the importance of professionals keeping clear and contemporaneous notes of their dealings, even those that appear informal.

This underlines the need for caution. Is it likely that a yet-to-be-incorporated entity will claim reliance on the advice of a solicitor, and should the retainer letter be crafted to deal with that possibility?

Reflective loss

In July 2020, the Supreme Court handed down its landmark judgment in Sevilleja v Marex Financial Ltd [2020] UKSC 31. The court confirmed that the rule in Prudential stands (that is, where a shareholder has suffered loss in the form of a reduction in the value of its shares or a reduction in distributions, the shareholder is precluded from bringing a claim against a defendant where the company has also suffered loss and has a parallel claim against that defendant). However, this rule does not preclude a creditor or a shareholder—claiming to have suffered losses separate and distinct from those of the company—from pursuing the wrongdoer independently from the company. As such, the Supreme Court narrowed the application of the so-called rule against the recovery of "reflective" losses, overruling a number of cases that had applied Prudential more widely.

In the first judgment to consider Marex, the High Court in Broadcasting Investment Group Ltd v Adam Smith [2020] EWHC 2501 (Ch), applied the principles laid down in Marex, finding that the shareholder’s claims were reflective of the company's losses and, thus, were to be struck out. However, the claim by the individual, who was a second—or further—degree shareholder, was not struck out, as Marex had made it clear that the rule only bars claims by shareholders in the loss-suffering company itself.

It remains to be seen whether this troubles the profession; but it does expose professionals to a potentially wider group of potential claimants.

Conflict of interest

Claims can often involve an allegation of conflict of interest. However, disputes can also arise in relation to the holding of confidential information.

In Glencairn IP Holdings Ltd v Product Specialities Inc (t/a Final Touch) [2020] EWCA Civ 609, the Court of Appeal has provided helpful guidance on the circumstances in which a law firm can be restrained from acting for a defendant where, in earlier similar litigation, the firm acted for another defendant against the same claimant, and that earlier litigation was settled.

The somewhat unusual application was made on the basis that the law firm, Virtuoso Legal, had obtained information confidential to Glencairn IP Holdings Ltd, following its settlement of the earlier litigation, and that there was a risk this information would be passed to Virtuoso's client, Product Specialities Inc (t/a Final Touch). (This differs from the circumstances in which such an application is usually made—namely where a law firm has obtained confidential information while acting for the applicant (rather than simply against it) and then acts for a new client with an adverse interest.)

This judgment provides helpful clarification on the scope of application of the Bolkiah test. A "true fiduciary relationship", such as that between solicitor and client, justifies the imposition of the strict approach in Bolkiah, but a more limited relationship does not. In the latter case, the burden of demonstrating a risk of misuse of confidential information will remain with the applicant, and the onus will not be on the law firm to show that there is no risk of prejudice.

Illegality—does the defence remain?

The global financial crisis of 2008 uncovered a litany of mortgage fraud. We may see the same again, but fraud becomes ever more sophisticated and solicitors may face claims by clients they later realise may not be what they seem.

It is a well-established principle that claimants are barred from recovering where their claim is marked by illegality. The illegality defence has come back into focus over recent years after the Supreme Court's decision in Patel v Mirza [2016] UKSC 42, in which the court identified a number of factors that may be relevant to the assessment of whether the defence should operate to prevent a claim:

• The underlying purpose of the prohibition that has been transgressed, and whether the purpose would be enhanced by denying the claim.
• Any other relevant public policy on which the denial of the claim may have an impact.
• Whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.

In doing this, the Supreme Court allowed the courts to take a discretionary approach, based on individual factors and policy considerations.

Two recent decisions allow us to see how the courts are interpreting the Supreme Court's guidance for the illegality defence. In particular, they highlight how fact-specific, and sometimes narrow, the illegality defence is.

On 3 November 2020, the Supreme Court, in Stoffel & Co v Grondona [2020] UKSC 42, applied the test in Patel and declined to bar a claim against a law firm for negligence in the context of a mortgage fraud. In doing so, the court upheld the decisions made in the lower courts (though only the Court of Appeal decision had applied Patel), and considered the degree of connection between the illegal conduct and the retainer needed for the doctrine to apply. However, the decision does not establish any principle that claims against professionals tainted by illegality can proceed; rather that the policy considerations at play on the facts did not produce the necessary incoherence in the law required.

In Day v Womble Bond Dickinson [2020] EWCA Civ 447, the Court of Appeal applied Patel v Mirza, where a claimant alleged that the defendant law firm had acted negligently in defending him in criminal proceedings, and, in particular, had not raised an abuse of process defence. The court barred the claim on the basis that it would be an abuse of process under the civil procedure rules to allow a collateral attack on the subsisting conviction; the proper approach for an aggrieved defendant is to pursue an appeal through the Criminal Appeal Courts.

Applying Patel v Mirza, the court concluded that this was a fair and proportionate result as it “avoids an abusive collateral attack on the appellant's conviction; and it avoids both inconsistency and incoherence”. No public policy considerations existed that "strongly" suggested a different outcome. In this case (in contrast to Stoffel), the claim was inextricably linked to the criminal conduct and the claim could not succeed without the court undermining a criminal conviction.

However, the Court of Appeal did accept that Mr Day could, at least theoretically, claim for the additional legal costs incurred, which were higher than they would have been if the case had proceeded in the Magistrates Court. Those costs were not part of the punishment imposed by the criminal court, and would not necessarily have been caused by the illegal conduct.

Swift v Carpenter: the future of accommodation claims

Finally, what might be seen as a decision that need concern only personal injury lawyers bears some examination given the possible ramifications. The Court of Appeal recently handed down judgment in Swift v Carpenter [2020] EWCA Civ 1295, addressing what has long been viewed as an unsatisfactory approach to the calculation of awards for accommodation needs in personal injury and clinical negligence litigation.

Ms Swift was aged 39 at the time of the accident, and suffered serious injuries to her lower limbs. Unfortunately, her injuries meant that she had to undergo a below-knee amputation to her left leg, and needed a metal plate inserted in her right foot. She was left with significant ongoing symptoms, including incurable phantom limb pain where her left lower leg was amputated, and pain and stiffness in her right foot. The judge at first instance made an award for general and special damages in the sum of £4,098,051.

Due to the extent of her injuries and ongoing limitations, Ms Swift required a more expensive property, which would be suited to her specific needs. The judge found that Ms Swift's accommodation needs would be met by a property valued at £2,350,000, the purchase of which would require additional capital investment of £900,000 in excess of the value of the claimant's current home of £1,450,000. However, the judge held that she was bound by the longstanding approach to accommodation claims as laid down in Roberts v Johnston, and awarded nothing for the additional capital cost of Ms Swift's property.

The Court of Appeal's approach to solving the problem of overcompensation was to award a sum that was equivalent to income, which would have been achieved had the capital used to purchase the property instead been invested in risk-free investments. Since 2001, this has seen the courts calculate accommodation awards using the prevailing discount rate, at that time 2.5%. Of course, in 2017 a negative discount rate of -0.75% was announced. Although this meant that the value of claimants' future loss claims increased overnight, one (perhaps unintended) consequence was that accommodation claims went the other way; potential awards were suddenly wiped out due to the impact of a hypothetical negative return on risk-free investments. This remained the case when the discount rate was changed to -0.25% in 2019.

It was held that Ms Swift should be awarded the additional capital cost of the new property, less the value of the reversionary interest. The court concluded that the value of the reversionary interest is to be calculated by reference to a "market valuation", adopting an investment return of 5% per annum across the claimant’s expected lifetime (applying the appropriate life multiplier).

As a result, the decision at first instance with regard to Ms Swift's claim for accommodation costs was overturned and she was awarded £801,913.

The means that claimants with specific accommodation needs can now expect the overall value of their injury claim to increase. In many cases this will be by a very considerable margin. It should be noted that the Court of Appeal stated that in some instances, such as cases with short life expectancy, a different approach may be justified.

In this context, we would expect to see claims against legal professionals alleging the loss of a chance to obtain a higher settlement, whether that be:

• Against practitioners who fail to take into account (or challenge where appropriate) the new guidance when settling schedules of loss and negotiating settlements following the handing down of the Swift judgment.
• Against practitioners who ought to have known that the Swift claim was to go before the Court of Appeal as a test case addressing the methodology of calculating accommodation claim, and who failed to advise their claimant clients to delay settling their claims until the outcome of the appeal was known.

Author: James Preece, Partner at Clyde & Co