Legal Review of 2012

Transcription

1 Legal Review of 2012

2 Table of contents Page Foreword 4 Beale and Company News 5 Professional Liability 6 Breach of Trust 6 Termination of solicitor s retainer 8 Duty to review earlier advice 8 Scope of the retainer 10 Reasonable skill and care 10 Tortious duty of care 11 Liability for what? 11 Solicitors acting under a CFA 12 Construction 14 Project Managers 14 Designers 14 Building Contracts 15 Adjudication 17 Adjudicator s fees 18 Litigation 19 Costs 19 Costs and mediation 20 Costs and Part 36 offers 21 Late acceptance of Part 36 offers 23 Privilege 24 Contracts 25 Interrupted developments 25 Duties to help each other 26 Limitations of liability 27 Liability for personal injury 30 Liability of parent company 30 Limitation: the question of knowledge 30 Limitation: the court s discretion 32 Insurers 33 Mesothelioma claims 33 Legal expenses insurance 33 Mitigation costs 34 Reforms to civil litigation 35 1

3 Case List Case Name Page 1. AB & Ors v Ministry of Defence [2012] UKSC 9 (14 March) ACE European Group & Ors v Standard Life Assurance Ltd [2012] EWCA Civ (18 December) 3. ADS Aerospace Ltd v EMS Global Tracking Ltd [2012] EWHC 2904 (TCC) (24 20 October) 4. AIB Group (UK) Plc v Mark Redler & Co [2012] EWHC 35 (Ch) (23 January) 7 5. Allen Fabrications Ltd v ASD Ltd [2012] EWHC 2213 (TCC) (1 August) Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2012] EWHC (Ch) (4 July) 7. Arrowhead Capital Finance Ltd (in liquidation) v KPMG LLP [2012] EWHC (Comm) (2 July) 8. Aviva Insurance Ltd v Hackney Empire Ltd [2012] EWCA Civ 1716 (19 December) Baht & Ors v Masshouse Developments Ltd [2012] All ER (D) 168 (Mar) (15 March) BAI (Run Off Ltd) v Durham [2012] UKSC 14 (28 March) Barker v Corus [2006] UKHL 20 (3 May 2006) Beasley v Alexander [2012] EWHC 2715 (QB) (9 October) Beck Interiors Ltd v Classic Decorative Finishing Ltd [2012] EWHC 1956 (TCC) (12 18 July) 14. Beck Interiors Ltd v UK Flooring Contractors Ltd [2012] EWHC 1808 (TCC) (4 July) Berry Piling Systems v Sheer Projects Ltd [2012] EWHC 241 (TCC) (21 February) Brown-Quinn & Ors v Equity Syndicate Management & Anor [2012] EWCA Civ (12 December) 17. Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jonas (A Firm) 12 [2012] EWCA Civ 1417 (8 November) 18. Cawdery Kaye Fireman & Taylor v Minkin [2012] EWCA Civ 546 (1 May) Chandler v Cape Plc [2012] EWCA Civ 525 (25 April) Compass Group UK & Ireland Ltd v Mid-Essex Hospital Services NHS Trust [2012] 27 EWHC 781 (QB) (28 March) 21. Connell v Mutch [2012] EWCA Civ 1589 (6 December) Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB [2012] EWHC (Comm ) (15 March) 23. Faidi v Elliot Corp [2012] EWCA Civ 287 (16 March) Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22 (20 June 2012) F&C Alternative Investments (Holdings) Ltd & Ors v Barthelemy & Anor [2012] EWCA 22 Civ 843 (22 June) 26. FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2012] EWHC (Comm) (5 September) 27. Gabriel v Little & Ors [2012] EWHC 1193 (Ch) (10 May) Herbosh-Kiere Marine Contractors Ltd v Dover Harbour Board [2012] EWHC (TCC) (26 January) 29. Herrmann v Withers LLP [2012] EWHC 1492 (Ch) (30 May) Hutchinson & Anor v Neale & Anor [2012] EWCA Civ 345 (20 March) Integral Memory plc v Haines Watts [2012] EWHC 342 (Ch) (22 February) Jet2.com v Blackpool Airport Ltd [2012] EWCA Civ 417 (2 April) 26 2

4 33. Johnson v Ministry of Defence and anor [2012] EWCA Civ 1505 (21 November) Lidl UK GMBH v RG Carter Colchester Ltd [2012] EWHC 3138 (TCC) (8 November) Lloyds TSB Bank Plc v Markandan & Uddin [2012] EWCA Civ 65 (9 February) MMI Research Ltd v Cellxion & 5 Ors [2012] EWCA Civ 139 (23 February) Nationwide Building Society v Davisons Solicitors [2012] All ER (D) 141 (Apr) (24 6 April). Appeal Decision 12 December [2012] EWCA Civ PC Harrington Contractors Ltd v Systech International Ltd [2012] EWCA Civ 1371 (23 18 October) 39. PGF ll SA v OMFS Co & Anor 2012] EWHC 83 (TCC) (27 January) 21, PHI Group Ltd v Robert West Consulting Ltd [2012] EWHC 1257 (Ch ) (10 May) Procter & Gamble v Svenska Cellulosa Aktiebolaget & Anor [2012] EWHC 2839 (Ch) 22 (23 October) 42. Quayle v Rothman Pantall & Co [2012] EWHC 1474 (Ch) (30 May) RTS Flexible Systems Ltd v Molkerei Alois Muller & Co KG [2010] UKSC 14 (10 14 March) 44. Rubenstein v HSBC Bank [2012] EWCA Civ 1184 (12 September 2011) Sayers v Chelwood & Anor [2012] EWCA Civ 1715 (19 December) SG v Hewitt [2012] EWCA Civ 1053 (2 August) Shepherd Construction Ltd v Pinsent Masons [2012] EWHC 43 (TCC) (19 January) Simmons v Castle [2012] EWCA Civ 1288 (10 October) Squibb Group Ltd v Vertase Fli Ltd [2012] EWHC 1958 (TCC) (10 July) Swain Mason & Ors v Mills & Reeve [2012] EWCA Civ 498 (23 April) 10, Ted Baker plc & anor v AXA Insurance UK plc & ors [2012] EWHC 1779 (Comm) (29 19 June) 52. Thewlis v Groupama Insurance Co Ltd [2012] EWHC 3 (TCC) (5 January) Tinseltime Ltd v Roberts and others [2012] EWHC 2628 (TCC) (28 September) Trebor Bassett Holdings Ltd & Anor v ADT Fire and Security plc [2012] EWCA Civ (23 August) 55. Trustees of Ampleforth Abbey Trust v Turner and Townsend [2012] EWHC (TCC) (27 July) 56. Villa Agencies SPF Ltd v Kestrel Travel Consultancy Ltd [2012] EWCA Civ 219 (17 19 January) 57. Walter Lily & Co Ltd v Mackay & Anor [2012] EWHC 1773 (TCC) (11 July) Walter Lilly & Co v Mackay [2012] EWHC 649 (TCC) (15 March) Webb Resolutions Ltd v Waller Needham & Green [2012] EWHC 3529 (Ch) (11 23 December) 60. Working Environments Ltd v Greencoat Construction Ltd [2012] EWHC 1039 (TCC) 17 (24 April) 61. WW Gear Construction Ltd v McGee Group [2010] EWHC 1460 (TCC) (1 June) 15 3

5 Foreword Our review of court cases in 2012 focuses on a number of constantly recurring issues: in the field of professional liability, the basic obligation to exercise reasonable skill and care and the importance of avoiding strict or absolute obligations, the scope of a professional person s duty and how it affects the type of loss for which one may be liable and how liability to third parties may arise; in the field of construction, disputes over the meaning of contractual terms and the ways in which enforcement of adjudicators decisions may be resisted; in the field of litigation, disputes over costs and the effect of Part 36 offers ironic to think that the latter are intended to facilitate settlement of disputes. Within these areas, there were also some more particular themes. There have been a number of cases raising the question of a duty (if any) on professional advisers to review advice already given and showing how additional duties may (or may not) arise during the course of a retainer. The effect of a term in a contract limiting liability has been considered in several cases, chiefly on the issue of whether it satisfies the requirements of the Unfair Contract Terms Act. The effect of such a term on the alleged existence of a tortious duty of care owed to a third party was considered to be decisive in one case. In another case, a parent company was held to owe a tortious duty of care to an employee of its subsidiary, a case which raised fears about the veil of incorporation being breached. Claims against solicitors for breach of trust where they, as well as their clients, have been the victims of a fraud are nothing new in a time of economic hardship. Cases in 2012 illustrate how potentially such claims can circumvent the need to prove negligence and causation and recover the whole loss from the solicitors, including loss that would not have been recoverable in an action for negligence; nonetheless, the cases also show that there are defences. Contractual disputes in the construction arena yielded some useful decisions on various clauses in the JCT contracts; and disputes concerning obligations on contracting parties to co-operate with each other (with or without good faith) are now coming before the courts. The enforceability of an adjudicator s decision may now concern not only the parties to the adjudication but the adjudicator too: in a decision that surprised some, the Court of Appeal ruled that an adjudicator s decision that was held to be unenforceable was not entitled to his fees. In litigation, there have been particular problems over the costs of split trials must the question await the end of the whole action? The insistence on strict compliance with the rules of Part 36, for an offer made under Part 36 to be effective, is also causing problems in some situations; and an old issue will a refusal to mediate be penalised in costs? resurfaced a few times. 4

6 Beale and Company News Antony Smith Senior Partner Another difficult year for our economy has seen our clients continue to seek business and take opportunities overseas. Beale and Company likewise have developed our portfolio of work overseas including in Africa and the Middle East. Royston Pendley joined the Firm as Partner at the beginning of the year, based at Anjarwalla Collins & Haidermota in Dubai. Royston provides capability in the fields of professional indemnity and construction and has strong links with leading international insurers in the Middle East and with the construction community. With huge development opportunities overseas we have provided support and valuable input for our clients in challenging and risky environments for their businesses. Continued involvement in British Expertise, trade missions to emerging economies, as well as delivering key seminars for clients, sponsors and government bodies in sub-saharan Africa have helped to promote advice on insurance, contracting and dispute resolution strategies. We were pleased to announce the opening of an office in Lime Street, EC3 in the heart of the insurance community in November. This office provides improved accessibility and enables us to continue to develop key relationships and initiatives with insurers. Alongside our offices in Covent Garden, Dublin and Bristol, we continued to focus on high quality delivery recognising and meeting clients performance demands in relation to costs, quality and service. Our outsourced claims handling service headed by Claims Manager Simon Wright continued to grow with a number of new accounts in our UK offices and in Dublin and the appointment of dedicated claims handlers in London, Bristol and Dublin. In Dublin we were delighted to have Sarah Conroy join us from A&L Goodbody as Partner. Her appointment brings further depth of experience in the fields of professional indemnity, insurance and commercial litigation. We were also pleased to have internally promoted five of our solicitors to associates in 2012, reflecting the quality and value of our lawyers and our ability to build for the future. We welcomed eight new solicitors last year including two of our trainees. Across all offices Beale and Company s team of around 50 professional indemnity specialists and our team of construction lawyers continue to grow with client needs. We remain focussed on high quality performance and delivery recognising clients demands in relation to cost, quality and service. With thanks for your support last year, we wish all our clients and friends a happy and successful 2013! Antony Smith Senior Partner Sources praise the friendly ethos espoused by this trusted team.offering expertise in defending claims involving a range of professionals. Chambers UK 2013 The team at Beale and Company Solicitors LLP is top class, and has a deserved reputation for excellence in disputes involving construction and engineering professionals. Legal 500 UK

7 Professional liability Breach of trust Solicitors instructed to act on the purchase of a property typically act both for the purchaser and for the purchaser s lender (normally a bank or building society) who is providing funds to enable the purchaser to buy. The solicitors normally receive the funds from the lender, with instructions to use them to complete the purchase of the property and obtain at the same time a discharge of existing mortgages on the property and a new mortgage from the purchaser in order to secure the loan. In such circumstances, the solicitors hold the funds on trust to apply them in accordance with those instructions. If therefore they pay the funds out otherwise than in accordance with those instructions, they will be in breach of trust, not merely negligent, and, in some circumstances, they may not have been negligent at all. For example, they and the lenders may have been the victim of a fraud, as in the case of Lloyds TSB Bank Plc v Markandan & Uddin (9 February). The solicitors here were the innocent victims of a fraud, perpetrated by people purporting to act for the vendors of the property in question. In fact, the property was not for sale at all and the actual owners of the property were unaware of what was going on. An application for a mortgage was made and the mortgage moneys sent to the solicitors with standard instructions to use the money to complete the purchase of the property and a first charge over the property in favour of the mortgagees. The money was paid over to the purported solicitors said to be acting for the vendors but no documents were received in return and the money disappeared. The solicitors maintained that they were not in breach of trust because they had paid out the money in order to achieve completion, as instructed. The question was had completion taken place? The bank s solicitors argued that there could be no completion until registration of the title but the Court of Appeal rejected that argument. However, the court held that no completion took place because the contract that was supposed to be the subject of completion was a nullity. No transfer documents had been received in exchange for the money and the undertakings that had been received were not what the solicitors thought they were. Further, even if documents had been received in return for the moneys, any such documents would have been forgeries, and the court held that in those circumstances there would still have been no completion. In such circumstances, therefore, solicitors can be in breach of trust and liable to account for the trust moneys without any fault on their part. However, where solicitors have acted honestly and reasonably, they may be entitled to relief under section 61 of the Trustees Act. In this case, the judge in the court below had held that the solicitors, while acting honestly, had not acted reasonably in various respects and were not therefore entitled to relief under this section. This was a finding that was not open to appeal. The respects in which the solicitors had been held not to have acted reasonably included failing to check that the address given for the solicitors purporting to act for the vendors was genuine and failing to be alerted by other circumstances that arose. Whether such failings amounted to negligence is another matter, which did not have to be considered. The burden was on the solicitors to show that they acted reasonably under section 61 of the Trustees Act. All in all, solicitors acting for lenders and holding money on trust may well have to perform to a higher standard than the standard of the ordinary competent solicitor that applies to claims of negligence. Whether solicitors can obtain relief under section 61 of the Trustees Act was the main issue a few weeks later in the judgments in Nationwide Building Society v Davisons Solicitors (24 April) and again, in the Court of Appeal (12 December). This was another case of a phantom sale, in which the solicitors acting for the building society handed the money over to what they believed was the firm of solicitors acting for the vendor, believing that they were completing the purchase and new mortgage and would receive a discharge of the existing mortgage in return. 6

8 Completion was supposed to take place by post in accordance with the Law Society s Code for Completion by Post. The court rejected a number of criticisms of the solicitors, directed to the question of whether the circumstances should have raised their suspicions. However, the court upheld the criticism that they had failed to obtain, prior to paying over the money, an express undertaking to redeem the existing mortgage from the firm holding themselves out as the solicitors acting for the vendor. In particular, the court held that the mere agreement to follow the Law Society s Code for Completion by Post, which provides for an undertaking to be given, is not in itself a sufficient substitute for an actual undertaking. The Court of Appeal, however, overruled the judge on this point, and held that the solicitors had, for the purposes of section 61, acted reasonably. However, it might well be thought that obtaining any sort of undertaking in this case would have made no difference anyway; it would presumably have been worthless and the money would still have been lost. Such an argument, which would be highly relevant in a case of negligence, seems to be irrelevant to the question of whether the solicitors acted reasonably under section 61. It is worth noting (and reassuring for solicitors and their professional indemnity insurers) that the Court of Appeal also allowed the solicitors appeal against the judge s finding that they were in breach of contract simply in failing to obtain a first legal charge over the property. This implied that the contractual duty was an absolute obligation but the Court of Appeal held that the contractual duty is to exercise reasonable skill and care. A charge of breach of trust could also increase the damages that solicitors would have to pay, since the lenders are likely to argue that the solicitors are obliged to reconstitute the trust. This is a route by which lenders might be able to recover the whole of their loss on a transaction from the solicitors. AIB Group (UK) Plc v Mark Redler & Co (23 January) involved the remortgage of a property to secure a new loan to the owners of the property. Funds were paid to the solicitors with which they were to discharge an existing mortgage (in favour of an earlier lender) and pay the balance to the owners, having created a new charge over the property to secure this amount. The solicitors did this, but unfortunately the amount that they paid to discharge the existing mortgage was insufficient, so the existing mortgage was not fully discharged and they paid too much to the owners. The owners later defaulted, and in the event the lenders lost a large part of their loan because the property was sold for a substantially lower price than it was thought to be worth when the loan was made. The solicitors accepted that they had been negligent in failing to discharge fully the prior mortgage and were liable for the amount of this underpayment. However, the lenders argued that they were also in breach of trust in paying out the money to the owners and were therefore liable for the whole amount of the loan to the owners, less only the amount that had been recovered for the lenders on the sale of the property. The judge accepted the lenders argument that the solicitors were in breach of trust, because the lenders instructions to them, properly construed, required the solicitors to obtain a first charge on the property in favour of the lenders, or to have done sufficient for obtaining that end, before parting with the money to the owners. However, the judge also held that the solicitors were only in breach of trust to the extent of the underpayment to the existing mortgagees, i.e. the further amount that they should have retained to complete the discharge of the earlier mortgage and not pay to the owners. They were therefore liable only for that amount, plus further interest and charges that had since accrued under the earlier mortgage in short, the amount that was eventually paid to the earlier mortgagees following sale of the property. In this case, therefore, the amount for which the solicitors were liable for breach of trust was probably of a similar order to the amount for which they were liable anyway for negligence. The charge of breach of trust did not, in these circumstances, substantially improve the lenders remedies. 7

9 Termination of solicitor s retainer Last year, we reported on the case of Cawdery Kaye Fireman & Taylor v Minkin (1 May), in which a firm of solicitors was held to have wrongfully terminated their retainer to act for a client in matrimonial litigation. On 1 May, the Court of Appeal allowed the solicitors appeal. The solicitors had notified the client that they would cease acting until their interim bill was paid. The situation was summarised succinctly in the opening words of the Court of Appeal s judgment: Every solicitor will encounter, in one way or another, the kind of problem which gives rise to this appeal. The solicitor is instructed to conduct certain litigation on the client s behalf. He gives his best estimate of the cost of doing so. He asks for a payment on account. The litigation becomes more complicated than had been envisaged. The estimate is exceeded. More money is required on account. The client is by now dissatisfied with the service that he has been receiving and believes that the costs are excessive and that the solicitor is achieving nothing. The fractious relationship is terminated and the solicitor s bill is assessed. The judgement continued: It seemed to me that clarifying what solicitors can and what they cannot do was a compelling enough reason to grant permission for this second appeal. The case, though, inevitably turned on its own facts, although those facts will have sounded familiar to many solicitors. The Court of Appeal held that the solicitors had not terminated the retainer but suspended it, pending payment of the outstanding fees, and that it was the client who later terminated the retainer. The courts below had held that the client had been justified in not paying the solicitors bill because it exceeded the estimate that he had been given. However, the Court of Appeal held that refusal to pay could not be justified on this ground, as it had been made clear that estimates were not intended to be fixed and binding. Consequently, the solicitors were entitled to suspend work, in accordance with their terms of business. Had it been decided that the increase over the estimate justified the client in deferring payment, the solicitors might have been obliged to continue conducting the litigation (and paying counsel s fees) without knowing whether they would ever get paid: it is well established that a retainer to act in litigation is an entire contract, which solicitors cannot terminate before the litigation is over without good reason. Duty to review earlier advice In the construction industry, pay when paid clauses in a subcontract are intended to allow the main contractor to withhold payment to the subcontractor if the main contractor has not itself been paid by the employer. Such clauses were outlawed by legislation in 1996, save in situations where the employer has become insolvent. The solicitors who were sued in the case of Shepherd Construction Ltd v Pinsent Masons (19 January) had drafted in 1998 subcontract terms for their client for use with standard forms of building contract. These terms included a pay when paid clause, which, in compliance with the recent legislation, would apply where the employer becomes insolvent by one of the ways in which insolvency, under the law as it then stood, could occur. A few years later, legislation was passed to create a new method by which a company could become insolvent, through a resolution of its directors. This method of insolvency was not covered by the clauses drafted by the solicitors in Accordingly, these clauses did not protect the solicitors client when their employer on a contract became insolvent by this new method, which meant that they had to pay large sums to their subcontractors, without receiving any payment themselves from their employer. 8

10 Could they sue their solicitors for this loss? The solicitors could not be blamed for their drafting of the clauses in question back in The case against them would have to be that they should have reviewed the clauses following the later legislation and advised their clients that the clauses should be amended in the light of this legislation. But on what basis could there be any such duty, given that the commission to the solicitors in 1998 had been performed and completed long before? The solicitors had continued to act for the claimant on a large number of other commissions over a number of years, with many of the same personnel involved. The claimant attempted to argue that, in these circumstances, there was a single contract or retainer between the solicitors and the claimant, encompassing all the work that the solicitors did for the claimant, under which a duty to review earlier advice would arise. The claimant s argument was complicated by the fact that the constitution of the solicitors practice had changed twice since the original commission. The judge rejected the claimant s argument, holding that there was no basis for inferring the existence of a single contract. There had merely been a series of commissions, the terms of each of which were to be determined by the particular retainer for that commission. It was even less likely that a single contract entered into by a successor practice would have obliged them to review advice given by an earlier practice. As the judge said: There is something commercially and professionally worrying if professional people are to be held responsible for reviewing all previous advice or indeed services provided. Without a single contract or retainer of the sort contended for in this case, in what circumstances could a duty to review advice given on a completed commission ever arise? The judge suggested that such a duty might arise if another similar commission ought to cause a solicitor to realise that advice given on the earlier commission was wrong, or had become wrong as a result of later events such as a change in the law, or maybe if the solicitor does in fact become aware of these matters. However, it would no doubt depend on all the circumstances, including the lapse of time since the earlier commission. Beale and Company successfully represented Pinsent Masons in this case. The question of a continuing duty arose in the case of Integral Memory plc v Haines Watts (22 February), which involved a claim against accountants. It was said that the accountants had failed to advise their clients, the claimants, that a tax avoidance scheme on which they had advised a few years earlier had failed. Assuming that the accountants were under a duty to give this advice at all (a point which did not have to be decided), the question was whether this duty continued after the date when it arose. Previous decisions of the courts concerning allegations of solicitors negligence make it clear that a failure by a solicitor to rectify a negligent act or omission, where it is possible to rectify it, does not constitute a fresh breach of duty. The relevant breach of duty remains the original act or omission which the solicitor later fails to rectify. Subject as always to the terms of the particular retainer or to further instructions from the client, there is in fact no legal duty to rectify negligent errors or omissions. The practical relevance of this concerns the running of the period of limitation. The solicitor is still liable for the negligent error or omission but the period of limitation for bringing an action runs from then, not from some later date when the solicitor could have rectified it. This principle applied to the claim against the accountants, and this meant that the period of limitation for breach of contract had expired before the action was commenced. A similar point, however, received slightly more encouragement (from the claimant s point of view) in Quayle v Rothman Pantall & Co (30 May) in interim proceedings. The case concerned a claim against accountants who were engaged to act as personal tax planning and financial advisors to the claimant and to the company of which the claimant was a shareholder and managing director. The claim 9

11 concerned in part advice given more than 6 years before the proceedings were commenced, and so in respect of that advice the claim seems likely to be statute-barred. However, the claimant was seeking to overcome this by arguing that the defendants owed a continuing duty; in particular, they were seeking to argue that on every occasion when the company was advised in relation to matters that affected the claimant s shareholding, the defendants were under a duty to have regard to the implications of its then current advice on the original advice and/or subsequent advice provided to the claimant. In other words, the claimant was seeking to argue that the defendant was under a duty, from time to time, to review its earlier advice, up until the termination of its retainer. The judge held that, given the continued retainer of the defendant, the argument plainly had a real prospect of success, and permitted the claimant to amend its case so as to be able pursue this argument. Scope of the retainer The scope of a professional person s duty should be determined by the retainer. However, it is always possible that a particular duty may be triggered by circumstances that arise during the commission. A particular example is where a professional person, in the course of doing that for which he is retained, becomes aware of a risk or potential risk to the client. The professional may thereby become under a duty to inform the client of the risk, even though dealing with the risk would not fall within the retainer. An example often cited is that of a dentist who is instructed to treat a particular tooth notices that an adjoining tooth also needs treatment. The dentist would be under a duty to bring this to the attention of the patient. The solicitors in Swain Mason & Ors v Mills & Reeve (23 April) were engaged to act for a father and his four daughters, who were shareholders of a company, in relation to the sale of their shares in a management buyout. The father, who was the main shareholder, died during a routine surgical procedure after the management buyout had been completed. His death gave rise to adverse inheritance tax and capital gains tax consequences which would have been avoided had he still owned the shares at the time of his death. The father had not sought from the solicitors advice on inheritance or capital gains tax. However, it was argued against the solicitors that their awareness that the father was to undergo the surgical procedure triggered a duty to advise of these adverse consequences should he die during the procedure and advise postponing the management buyout until after the procedure. The Court of Appeal, agreeing with the judge below, rejected this argument. They had particular regard to the incidental manner in which the solicitors had found out about the surgical procedure. The information was contained in an from the father which he had not originally addressed or sent to the solicitors. It was only seen eventually by the solicitors because it gave rise to a chain of s on other matters and the father copied the chain to the solicitors in connection with one of these other matters. The about the surgical procedure also contained no information to suggest that the procedure was other than routine. The rotten tooth analogy was also referred to in another claim against solicitors, Gabriel v Little & Ors (10 May). The judge was clear that the solicitors were not under a duty to advise the client on the commercial wisdom of a transaction, particularly where the client was an experienced businessman. However, where the solicitors became aware of information that was likely to affect the client s decision on whether to enter into the transaction, they were held to have been negligent in not passing that information on to the client. Reasonable skill and care Professional advisers are normally under a duty to exercise reasonable skill and care, and so will not be liable merely for giving the wrong advice; only if it was advice that no person of their profession acting with reasonable competence could have given. However, the exercise of reasonable skill and care may sometime require them to qualify their advice with a warning that their opinion may be open to 10

12 argument. For example, in Herrmann v Withers LLP (30 May), solicitors acting on the purchase of a high value property in central London advised their clients (the purchasers) that they would have a statutory right of access to a nearby communal garden. After the clients had purchased the property, they found that this right of access was not accepted and in subsequent proceedings before a tribunal it was held that the statute in question did not cover their property. They therefore sued their solicitors. The advice given by the solicitors was not held to have been negligent. However, it was held that the solicitors should have advised them that there was scope for argument over the matter, and that if they had done so, the clients would not have proceeded with the purchase. The obligation to carry out a service with reasonable skill and care, which, if not expressed in the contract, would be implied under the Supply of Goods and Services Act 1982 s.13, will not necessarily apply to all activities carried out under the contract; for example, where the service provider has a discretion whether to do something, perhaps in order to protect his own position. Thus in Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB (15 March), clearing brokers acting for an investment fund trading in options were entitled to close-out their client s portfolio after the client had failed to provide cash margin. Their right to do so was not challenged but the client claimed that, having opted to close-out the portfolio, they had delayed negligently in doing so, at a time when the markets were in full retreat, causing severe losses to the client. The judge rejected the argument that there had been a delay but held, in any event, that in performing this particular activity which was not something they had agreed to do but had a right to do they were not under an obligation to exercise reasonable skill and care but only to act in good faith and rationally. The court also held that there was no basis for creating a tortious duty of care owed by the broker to the investment fund Tortious duty of care It is increasingly common for professional people to include in their terms of engagement a term limiting their liability. A contractual term limiting liability may also help to defeat a claim in tort by a third party (who would not be bound by the limitation). In Arrowhead Capital Finance Ltd (in liquidation) v KPMG LLP (2 July), it was held that the existence of a limitation in KPMG s terms of engagement made it most unlikely that they could be held to have assumed a duty of care to investors in a company which they were advising on methods of ensuring the efficacy of recovering VAT input tax. The successful recovery of VAT input tax was essential to the financial viability of the company. Whether there has been an assumption of a duty to a third party is only one of the main tests now used by the courts for determining whether a tortious duty exists (although each test will usually lead to the same result). The other one considered in this case was the threefold test of foreseeability, proximity and whether it is fair just and reasonable to impose a duty. The application of this test also failed to establish the existence of a duty, for the same reason - the limitation in the contract which in the view of the court meant that it was not fair, just and reasonable to impose a duty in accordance with the third part of the threefold test. A point emphasised by the judge was that the third party investors should have expected a limitation to be in the contract of engagement as such terms are now commonplace in contracts of this sort. Interestingly, this may suggest that this expectation could be enough on its own to negate the existence of a duty of care owed to the third party, even in a situation where there is in fact no such term. Liability for what? It has been emphasized in recent years that a person who has been negligent is not necessarily or even usually liable for all the consequences of his negligence. In 2011, the Bank in the case of Rubenstein v HSBC Bank (12 September) was held to have been negligent and in breach of statutory duty in advising the claimant in 2005 to invest in the AIG Premier Access Bond. When Lehman Brothers collapsed in September 2008, withdrawals from the bond were 11

13 temporally suspended. When the claimant eventually cashed in his investment, he suffered a loss of capital. The judge held that the Bank was not responsible for the loss that the claimant eventually incurred, because the events of September 2008 would not have been contemplated in September 2005; the loss was not reasonably foreseeable by the Bank and too remote in law to be recoverable as damages However, in this case, the Court of Appeal (12 September) disagreed with the judge. The claimant had asked for an investment that involved no risk to his capital but the bank had wrongly advised that the recommended fund was the same as a cash deposit. The unforeseeability of the Lehman collapse and of the specific events of September 2008 were irrelevant. Market turmoil, however caused, was clearly foreseeable and was the very thing against which the claimant had been seeking protection. The bank was therefore liable for the claimant s loss on his investment. There may also be problems for claimants in recovering loss where that loss has undoubtedly been incurred but is not readily ascertainable or which, in any event, has not been ascertained by the evidence before the court. We referred in our report of 2011 to the judgment in that year in the case of Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jonas (A Firm) (8 November 2012), a case of professional negligence against a firm of valuers, arising out of the valuation of a factory outlet shopping centre. The judge held that the valuers had been negligent in a number of respects and that consequently an important component of their valuation had been, in the words of the judge, far too high. The main issue on appeal was whether the judge had sufficient evidence on which to base his finding as to what a reasonably competent valuation would have been. The problem for the claimants was that much of their expert evidence on this issue was discredited. The defendants argued that, as a result, there was insufficient evidence before the judge to support his finding of what a reasonably competent valuation would have been, and that the claim must therefore fail (or only result in nominal damages), notwithstanding the negligence of the defendants, because there was no basis for establishing any loss. The Court of Appeal (on 8 November), by a majority only, dismissed the defendants appeal. The court said that, when it comes to assessing a claimant s loss, it will sometimes be open to the judge to do the best he can : A judge is never bound by expert evidence. While a judge must have a reasoned or rational basis for a decision on issues of quantum as on other issues the judge is in no way confined to the figures contended for by the experts. This is manifestly so in a typical valuation case where the figure arrived at by the judge may well lie somewhere in between those advanced by the rival experts. Moreover, having regard to the true nature of quantum disputes, a judge will sometimes find himself needing to do the best he can. However, the court cannot conjure facts out of the air. There must be some evidence to support its finding. The disagreement between the judges in the Court of Appeal was essentially over whether there was sufficient evidence in this particular case. The judge who dissented concluded that there was not. Solicitors acting under a CFA Many solicitors now regularly conduct litigation under a conditional fee agreement (CFA) (a topic that arises again below in connection with reforms to civil litigation). Broadly, the solicitor acts for the claimant on terms that the claimant will only have to pay the solicitor s fees if it wins the case. There have been a number of cases in recent years over whether solicitors who act for a claimant under a CFA can be liable for the costs of the other party, on the ground that they have funded their client in the litigation. The issue typically arises in a situation where a claimant is enabled to pursue a claim by means of a CFA with his solicitors but loses the claim and is unable to pay the successful defendant s 12

14 costs. A claimant can protect itself against liability for the defendant s costs by taking out after-the-event (ATE) insurance, which of course protects the defendant too if the claimant would otherwise be unable to pay its costs. However, the claimant may not able to afford the premium. It is well-established that a person who funds a party in litigation, without being a party in the litigation itself, can be ordered to pay any costs ordered against that party. However, generally such an order will only be made if the funder stood to gain a benefit from the success in the litigation of the party being funded. The Court of Appeal has held that a solicitor would not be regarded as a funder in this sense merely by virtue of the fact of acting under a CFA, even though payment of its costs would depend on the client being successful. Something more out of the ordinary would be required. A case in 2011 indicated that the situation may be different if the solicitor has also agreed to pay the client s disbursements, for example, court fees and expert witness fees (on the basis that the client will only have to reimburse the solicitor for these if it wins the case). However, in Tinseltime Ltd v Roberts and others (28 September), the court held that the situation where the solicitor had also paid the disbursements was no different and the general rule applied i.e. it must be shown that the solicitor stood to gain a particular benefit from winning the case over and above getting paid its costs, including any disbursements that it may have funded. Each case will turn on its own facts. In this case, it was argued that the solicitor knew that the claimant was impecunious, there was no ATE insurance and the solicitor appeared to have taken a long time to appreciate some important weaknesses in the case but all this was not enough to make the solicitor liable as a funder. If it is thought that a solicitor has incurred extra costs by conducting the case unreasonably, the appropriate remedy is to seek an order for wasted costs against the solicitor. 13

15 Construction Project managers There have been many court cases illustrating the perils of proceeding with construction work under a letter of intent or, in the words of a judgment in the Supreme Court a few years ago, of beginning work without agreeing the precise basis upon which it is to be done. The moral of the story, said the Supreme Court, is to agree first and to start work later. (RTS Flexible Systems Ltd v Molkerei Alois Muller & Co KG on 10 March 2010). In Trustees of Ampleforth Abbey Trust v Turner and Townsend (27 July), the whole of a building project was completed under a series of letters of intent, without a formal contract ever being agreed. This was said to have put the client at a serious disadvantage when disputes arose with the contractor, notably in being unable to deduct liquidated damages for delay. The client blamed its project managers, and the judge upheld the client s claim against the project managers. The project managers were not, however, blamed for having allowed the work to commence at all on a letter of intent. It seems to have been accepted that that will sometimes have to happen. However, the project managers were held to have been negligent in failing to take sufficient steps thereafter to ensure that a formal contract was agreed. In order to determine whether the project managers negligence had actually caused any loss to the client, a number of counterfactuals had to be considered. Would a contract in fact have been agreed if the matter had been pursued by the project managers with greater diligence? What difference would it have made to the client s negotiating position with the contractor? What would the client have recovered in a settlement with the contractor? Through consideration of such hypothetical scenarios, the judge arrived at a sum that it thought the client would probably have recovered in a settlement with the contractor. Treating the claim as one for loss of a chance, it awarded as damages payable by the project managers a percentage of this sum, the percentage being the court s assessment of the degree of probability of that outcome. Designers a professional man is not usually regarded as warranting that he will achieve the desired result. It seems that that would not fit well with the universal warranty of reasonable care and skill, which tends to affirm the inexactness of the science which is professed. (Thake v Maurice) Another adverse effect of undertaking strict or absolute contractual obligations could be the loss, in the event of a claim, of the right to rely on the contributory negligence of the claimant. This right arises only where the claim itself is based and can only be based on negligence (i.e. failure to exercise reasonable skill and care). The point was illustrated by the arguments in Trebor Bassett Holdings Ltd & Anor v ADT Fire and Security plc (23 August), a case concerning the failure of a fire suppressant system to extinguish a fire. The judge held that the suppliers of the system had failed to exercise reasonable skill and care in that they selected an inappropriate sensor and located it in the wrong place. As they were only found liable for failure to exercise reasonable skill and care, it was open to them to rely on the contributory negligence of the operators of the system, which the judge assessed at 75%. The suppliers liability was therefore reduced by 75%. 14

16 However, the claimant operators attempted to argue that their contract with the suppliers contained strict or absolute obligations and that the suppliers, as well as being negligent, were also in breach of these obligations. Significantly, in relation to the breach of the strict of absolute obligations there could be no reliance on contributory negligence; so the 75% reduction would not apply to these breaches. Some of the wording of the contract seems to have left the suppliers vulnerable to this argument. For example, there was a term in the contract which was to the effect (so it was argued) that the system should be designed to suit the risk. Since the system did not meet the risk of a developed fire, the claimants said it followed that the suppliers were in breach of this term, regardless of whether or not they had been negligent. The claimants also argued the suppliers were in breach of implied conditions in the Supply of Goods and Services Act 1982 regarding the quality and fitness for purpose of the goods and that part of the specification amounted to a warranty or guarantee that the CO2 suppression system would meet the risk of fire. Fortunately for the suppliers, the court (and, later, the Court of Appeal) rejected these arguments. The Court of Appeal said that it was not natural or accurate to regard the claimants as having bought from the suppliers a system which can be equated with goods which are either of good quality or not as the case may be. What was of importance was not so much the inherent quality of the constituent parts (which was of course required to be good) but rather their selection as being suitable for the task and the manner in which they were to be combined, located and installed. In short, what the suppliers were agreeing to supply were primarily design skills and care in exercising them. Given that background, the contract should not be interpreted as imposing a greater obligation than to exercise reasonable skill and care. Building contracts Clause 4.21 of the JCT Trade Contract (TC/C) allows the contractor to make a claim for additional loss and expense caused by disruption to the regular progress of the works. However, the application for any such payment must be made in a timely fashion, as stipulated in clause , and in a recent case this proviso was held to be a condition precedent for making a claim under clause A variation is a matter affecting the regular progress of the works that could give rise to a claim under clause 4.21, which would therefore be subject to the proviso in Variations, however, are valued under clauses 4.4 to 4.6 of the contract, and under clause 4.6 the valuation may include for matters that could be said to disrupt the regular progress of the works. It was argued in WW Gear Construction Ltd v McGee Group (1 June) that if a contractor has failed to comply with the condition precedent for making a claim under clause 4.21, it could not, as it were, get round this by claiming the same thing under clause 4.6. The judge rejected this argument. Clauses 4.6 and 4.21 both contain wording directed at preventing double recovery, to the effect the contractor can only claim under the one if it cannot claim under the other. So the contractor can claim for direct loss and expense (caused by a variation) under clause 4.6 if it cannot claim the same under any other provision in the contract (such as clause 4.21), and the judge held that it does not matter if the reason why it can not make a claim under another provision is failure to comply with some such provision as the condition precedent in clause It is also a condition precedent to a claim for loss and expense under this clause that the contractor supports its claim with information and submits such details as are reasonably necessary to ascertain the loss and expense. This provision (in the JCT Standard Form 1998) was considered in Walter Lilly & Co Ltd v Mackay & Anor (11 July), where the judge said that the wording should not be construed against the contractor. There is no need to construe the clause in a peculiarly strict way or as requiring every conceivable detail and back up documentation to be provided. It is legitimate to bear in mind that the architect and quantity surveyor are not strangers to the project and can be assumed to be aware of heads of costs that are likely to have been incurred. 15

17 The judge also reviewed the authorities on global or total cost claims, since it was alleged that the contractor s claim for prolongation costs comprised a global claim and should be barred. The judge did not in fact consider that the claim could be so categorised, but he also concluded from the authorities that there was nothing in principle wrong with total or global cost claims, save that there may often be added evidentiary difficulties that the contractor would have to overcome. Ultimately, claims by contractors for delay or disruption-related loss and expense must be proved as a matter of fact. If a contractor is claiming the difference between what the contact has cost the contractor and what it has been paid, it will generally have to establish (on the balance of probabilities) that this loss would not have been incurred in any event. It will need to prove that no other matters occurred (other than those which it has proved) that are likely to have caused the loss. However, the fact that one or a series of other factors or events may have caused or contributed to the total loss does not necessarily mean that the contractor can recover nothing. It depends on the impact of any such event: it may be possible to quantify this and deduct the amount from the total claim. There is of course no need to go down the global or total cost route if the actual cost attributable to individual loss causing events can be readily or practicably determined. In such cases, a tribunal will be more sceptical about a global cost claim but even then it would not be rejected out of hand. In the same case, the judge also considered the issue of concurrent causes of delay in a building contract. It now seems to be settled that, in English law, if at least one cause is due to a relevant event i.e. an event entitling the contractor to an extension of time the contractor is entitled to an extension of the full amount of delay caused by that event, even if a concurrent cause of the delay was an event that was at the contractor s risk. The English courts have not followed the approach in Scotland of apportioning the delay between the events. (In this particular case, the judge held that there were no concurrent causes that were not the fault or at the risk of the employer anyway). Clause 27 of JCT 1998 was considered by the Court of Appeal in Aviva Insurance Ltd v Hackney Empire Ltd (19 December). This clause makes provision for the employer to be able to determine the contractor s employment in the event of the latter going into liquidation (or similar) and contains a procedure for settling accounts between the two. The question arose whether, if the employer follows this procedure, it can also claim damages for breach of contract. The argument centred on the effect of clause 27.8, under which the foregoing provisions of the clause are stated to be without prejudice to any other rights and remedies that the employer may possess. Lord Justice Jackson, giving the only judgment, expressed surprise that this question had not been considered and decided before now. Nevertheless, approaching the issue as being free from authority, he ruled that clause 27 does not require the employer to choose between alternative remedies and that clause 27.8 preserves his right, having operated the clause 27 machinery, to pursue any further remedies, including damages. Of course, this does not enable the employer to recover any losses that he has already been able to recover under the clause 27 procedure. The case concerned an employer s claim under a bond (which is why the right to claim damages was more than academic). Following the insolvency and default of the contractor, the insurance company that had issued the bond denied liability on the ground that the employer had made substantial additional payments to the contractor under a side agreement. These payments had been made after the contractor had run into financial difficulties in the hope of keeping the project going. The payments were on account of any claims for loss and expense that the contractor might prove, with any balance being eventually repaid to the employer. Unfortunately, this arrangement did not save the contractor from insolvency. Lord Justice Jackson reviewed the authorities, dating from the nineteenth century, on the validity of performance bonds where the contract in question has been varied or advance payments made. He confirmed the principle that, where the contract has been varied without the consent of the surety, save where the variation is immaterial or is covered by an indulgence clause in the bond, the surety is discharged from liability. 16

18 This principle did not, however, apply to the payments made in this case under a side agreement. The bond therefore was still valid, but those payments would not themselves be covered by it. Adjudication The courts, usually the Technology and Construction Court, continued to be kept busy by applications to enforce adjudicators decisions. Enforcement can be resisted on jurisdictional grounds - for example, the adjudicator may have exceeded his jurisdiction by ruling on matters that had not been referred, or may have infringed the rules of natural justice. However, in the latter case, the courts have insisted that any such objection must be material. For example, a ground for resisting enforcement is where the adjudicator has reached a decision on the basis of an argument that was not put to him by either party and on which the parties did not have an opportunity to comment. However, the argument in question must have been an important factor in reaching the decision, such that the decision would have been substantially different without it. In Herbosh-Kiere Marine Contractors Ltd v Dover Harbour Board (26 January), the adjudicator applied a methodology in assessing delay claims involving the use of a composite rate for all resources that were delayed, whereas both parties in their submissions had used an individual rate for each resource. The adjudicator s approach proved highly favourable to one of the parties (the contractor). His decision could not therefore be enforced. By contrast, in Berry Piling Systems v Sheer Projects Ltd (21 February), a point made by the adjudicator in his decision on which the parties had not had an opportunity to comment was not considered by the judge to have had a material influence on his decision and so the decision was enforced. Another issue that sometimes arises connection with adjudicators decisions is whether a dispute had crystallised at the time of the referral over the matters referred. In Working Environments Ltd v Greencoat Construction Ltd (24 April), the claimant had made an application for payment, to which the respondent had replied by certifying a much smaller amount. The judge held that, save in respect of two items in the application, a dispute had crystallised at that point and rejected the argument that there could be no dispute until the due date for payment. The dispute encompassed all matters that had been raised at that time. In the case of the two excepted items, the respondent had not yet intimated an intention to withhold any payment and so there was no dispute yet over those two items and the adjudicator had no jurisdiction to deal with them. The adjudicator s decision, however, could be severed, so that it was still valid and enforceable in respect of the remaining items. In Beck Interiors Ltd v UK Flooring Contractors Ltd (4 July), the claimants had sent an to the respondents at 5 pm on Easter Thursday making a claim for liquidated damages, and followed that up with a notice of adjudication the following Tuesday. In those circumstances, the judge held that there was no crystallised dispute as far as the liquidated damages were concerned: there had not been time for there to be an inference that the claim was disputed; further, the claim in the adjudication notice was different to that in the . Again, though, it was possible to sever the adjudicator s decision so that the rest of it (not concerning liquidated damages) could be enforced. Severability of the adjudicator s decision was also an issue in Lidl UK GMBH v RG Carter Colchester Ltd (8 November). If part of an adjudicator s decision is unenforceable, can the rest of it be enforced, by being severed from the bad bit? Not where there is a decision on only one dispute or difference. The reason for this, explained the judge in this case, is that the reasoning that lay behind the bad part of the decision may have tainted the rest of the decision. This reasoning needs to be born in mind where more than one dispute has been referred to the adjudicator. It is possible that a bad decision on one dispute could taint the decision on another one but generally it is likely that, in these situations, provided the different disputes have clearly been separately addressed by the adjudicator, it will be possible to sever the good decision and enforce it. In this case, the adjudicator, in deciding a dispute that was within his jurisdiction, also wrongly made a decision on a matter that had not been referred to him. The judge held that the decision made within the adjudicator s 17

19 jurisdiction could be severed and enforced. It is generally not possible to resist enforcement of an adjudicator s decision by reference to a crossclaim which the respondent may have against the claimant. The policy of the legislation that set up adjudication for construction disputes is that adjudicators decisions are to be enforced (on a provisional basis) without more ado. This has been said many times by the courts and was said again in Beck Interiors Ltd v Classic Decorative Finishing Ltd (12 July). (For good measure, the judge held that a claim of set-off would not have been available to the respondent anyway, since the crossclaim arose under a separate contract and there was no sufficient connection between it and the claimant s claim). It was also said again in Squibb Group Ltd v Vertase Fli Ltd (10 July), where the adjudicator allowed time for payment of the claimant s claim by the respondent and within that time the respondent served a withholding notice (claiming liquidated damages). The judge held that the withholding notice, served after the adjudicator s decision, did not affect enforcement of the adjudicator s decision. One possible exception to this rule is where the right to the subject of the cross-claim (for example, liquidated damages) follows logically from the adjudicator s decision but this did not apply in the last case, because the adjudicator had rejected the main contractor s entitlement to deduct liquidated damages. The adjudicator did, however, award liquidated damages to the main contractor in a subsequent adjudication, following the service of the withholding notice. However, this decision could not be enforced, because the adjudicator was held to have rejected the main contractor s entitlement to liquidated damages in the first adjudication on a further ground (in addition to the lack of a withholding notice), which was that the main contractor had not itself suffered deduction of liquidated damages under the main contract. In the second adjudication, the adjudicator changed his mind about the legal effect of this point. But this was tantamount to re-adjudicating the same dispute, which on clear authority, is not permitted. The main contractor and the adjudicator himself were thus stuck with his decision on liquidated damages in the first adjudication. Adjudicator s fees In our report on 2011, we referred to a case - PC Harrington Contractors Ltd v Systech International Ltd - where an adjudicator whose decision was unenforceable due to a breach of the rules of natural justice (the adjudicator had failed to consider the respondent s defence), the adjudicator was nonetheless entitled to be paid his fees. On 23 October, the Court of Appeal allowed the appeal in this case, holding that the adjudicator was not entitled to his fees. The decision of the Court of Appeal was based on the provisions of the statutory scheme, which applied to this particular appointment. The reasoning behind the court s decision was that the contract with the adjudicator was an entire contract for the production of an enforceable decision. In some cases, jurisdictional challenges to the adjudicator may be made before the decision and the adjudicator may then make a ruling on his jurisdiction, which the parties elect to accept or not. It seems on the basis of earlier authority that, if the party making the challenge elects that the adjudicator should proceed to a decision, the adjudicator s fees will then be payable, even if a court subsequently upholds the original challenge. In other situations, it may be particularly awkward for adjudicators who are aware in advance that their jurisdiction is likely to be challenged and that they may not get paid for their work. Perhaps more likely, adjudicators will now seek to incorporate into their terms of engagement a right to be paid even if their decision is unenforceable. 18

20 Litigation Costs Appeals from [costs] awards are not encouraged and the appellate court will ordinarily only interfere if there has been some error of principle The Court of Appeal held that there had been an error of principle in the case of Villa Agencies SPF Ltd v Kestrel Travel Consultancy Ltd (17 January). The case involved a claim for rent of a luxury villa in the south of France and a counterclaim for damages (due to failure of an air conditioning system at the villa), both of which succeeded. The rent claim was greater than the damages. Liability for the rent was admitted, so most of the trial was concerned only with the counterclaim. On this basis, the court at first instance awarded the defendant two thirds of its costs, with the claimant bearing its own costs. The Court of Appeal said that this was the wrong approach. Although courts are more flexible over awards of costs these days, the starting point still has to be to ask which party has won. A few years ago, it was held that where each party has claims, the party which ends up receiving payment should generally be characterised as the overall winner. The starting point here, therefore, is that overall the claimant was the successful party. The error of the judge was to categorise this case as all about the counterclaim. It was not. It was in reality all about whether or not the defendant owed anything to the claimant; and it was established that the defendant did owe something Therefore, there should be some award of costs in favour of the claimant given that it was in net terms the successful party. However, the fact that most of the trial had related to the counterclaim and in respect of that counterclaim the defendant had achieved substantial (though not total) success must operate to reduce, and significantly so, the starting point entitlement of the claimant as it otherwise would be. In the event, the claimant was awarded 25% of its costs, with the defendant bearing its own costs. In Hutchinson & Anor v Neale & Anor (20 March), the defendant had won the case (a boundary dispute) but, because of the defendant s dishonest conduct, the judge had made no order for costs, save for the defendant to pay certain costs on an indemnity basis. This was the wrong approach, said the Court of Appeal. The starting point was that costs should follow the event i.e. should be awarded to the defendant but then adjusted to reflect the defendant s misconduct, taking into account how much this had affected the overall action. On this basis, the costs awarded to the defendant were reduced to 70%, while the court agreed that defendant should pay, on the indemnity basis, costs specifically incurred by the claimants in responding to the misconduct. In some cases, where there have been a number of discrete issues, it may be appropriate to approach costs on an issue by issue basis. The overall winner may then have to bear its own costs of each issue on which it lost, although it would probably only have to pay its opponent s costs of that issue if it was unreasonable to have pursued the issue. This approach may still culminate in one overall order. In MMI Research Ltd v Cellxion & 5 Ors (23 February), an action concerning the validity of a patent, the defendants raised a large number of unsuccessful defences but succeeded on one issue, which was enough for them to win the case. The Court of Appeal said that there should be no order as to costs. As a result, the defendants were deprived not only of their costs of the unsuccessful defences but also of the costs of the issue on which they won, which the court described as the appropriate price to be paid for its profligacy. 19

21 The costs of the trial of preliminary issues present difficulties. In Ted Baker plc & anor v AXA Insurance UK plc & ors (29 June), the claimants were successful on various preliminary issues. The defendants argued that the court should make no order on costs at this stage, because the success of the claimants may fall to be reconsidered following the outcome of the whole case, including further issues of liability as well as that of quantum. The judge rejected this argument, because there is no reason why the claimants should not be entitled to their costs of the issues on which they have succeeded even if they are unsuccessful overall. More difficult was the possibility that a Part 36 offer might have been made that could, when disclosed to the court, affect the award of costs of these issues. The judge said that this was a real problem and urged a review of rule 36.13, which prohibits disclosure of the fact of a Part 36 offer having been made until the case has been decided. In the event, the judge made an order that the costs be reserved along with a declaration ( save that it is hereby declared ) that (in broad terms) the claimants should be paid the costs of the preliminary issues subject to any offer of settlement that might have been made. The same point arose later in the year in Beasley v Alexander (9 October) in the context of a split trial, where the claimant had succeeded completely in the trial of liability. The judge in that case was clear that, regrettably, the meaning and effect of rule meant that it was not possible to make an order for costs at that stage. Connell v Mutch (6 December) was another building case involving a successful claim for the cost of remedial work and a counterclaim by the builder for a smaller amount representing the unpaid balance in respect of the work performed. The judge, rather than treating the claimant as the overall winner and awarding him the costs, or a proportion of the costs, made separate orders for the costs of the claim and that of the counterclaim. The Court of Appeal agreed with the claimant that the former approach would have been preferable but did not consider worthwhile or in the interests of the parties to interfere with the order. The court did not wish to encourage appeals of this sort and also commented: This is yet another in the depressing series of construction disputes where the costs on both sides can confidently be expected to be out of all proportion to the amount ultimately recovered. Costs and mediation In Swain Mason & Ors v Mills & Reeve (23 April), the judge reduced the costs awarded to the successful defendants because (among other reasons) of the latter s refusal to mediate. Courts have for some time routinely encouraged parties to mediate. The claimants here had proposed mediation or any other appropriate form of alternative dispute resolution at various stages and at two interlocutory hearings the judge had encouraged the parties to consider mediation. At all stages, however, the defendants had declined to participate, on the basis that the claim was without merit. The judge described the attitude of the defendants as intransigent and their position as an unreasonable one to take. This troubled the Court of Appeal, which allowed the defendants appeal on this point and increased the proportion of costs awarded to them (23 April). The fact is that the defendants assessment of the strength of the claimants case on the main issue had been vindicated. The court did not think it right to style critically the defendant s refusal to agree to a mediation as intransigent. A reasonable refusal to mediate does not become unreasonable simply by being steadfastly, and for cause, maintained. The judge had said that the defendants should have considered avoidance of collateral reputational damage as a factor favouring a negotiated settlement. However, as the Court of Appeal said, a settled professional negligence claim is capable, in some instances, of leaving behind reputational damage, and some professional defendants may, entirely reasonably, wish publicly to vindicate themselves at trial. 20

22 In ADS Aerospace Ltd v EMS Global Tracking Ltd (24 October), the judge declined to reduce the costs awarded to the successful party on the ground that that party had rejected a proposal to mediate. The mediation proposal had come late in the day, shortly before the trial was due to commence, and the unsuccessful party had not responded to earlier offers to engage in without prejudice discussions. Nor did it seem likely that mediation would have been successful, and it would have added significantly to costs and disrupted trial preparation. By contrast, in PGF ll SA v OMFS Co & Anor (27 January), the judge held that it was unreasonable for the defendant to refuse an offer to mediate, and for that reason the defendant was deprived of the costs to which it would normally have been entitled following a late acceptance of its Part 36 offer. The Court of Appeal has certainly advocated in strong terms mediation in low value cases where leave has been given to appeal, and since April a scheme has been piloted referring all appeals involving personal injury and contract claims worth less than 100,000 automatically to mediation. Comments by one of the judges in Faidi v Elliot Corp (16 March), a case involving a neighbourhood disputes are worth quoting: Not all neighbours are from hell. They may simply occupy the land of bigotry. There may be no escape from hell but the boundaries of bigotry can with tact be changed by the cutting edge of reasonableness skilfully applied by a trained mediator. Give and take is often better than all or nothing. Costs and Part 36 offers The court s discretion in respect of costs may be more limited if a party makes a Part 36 offer to settle the dispute and then, if the offer is not accepted, achieves a more advantageous result at trial than that proposed in its offer. If the party is a defendant, the claimant would normally have to pay its costs from the end of the relevant period (normally 21 days after the date of the offer). If the party is a claimant, the defendant would normally have to pay its costs from the same date on the indemnity basis and also enhanced interest on the damages or whatever sum it has been awarded and on its costs. These are the orders that the court should make unless it considers it unjust to do so. The point has now been made in several recent cases that, in order to be a Part 36 offer, the offer must comply with the rules set out in Part 36. Otherwise, even though the offer may be described as a Part 36 offer, it will not be treated as one. One of the rules applying to a Part 36 offer is that it must remain open for acceptance unless and until it is formally withdrawn in accordance with the rules; in other words, it cannot be time-limited. In Thewlis v Groupama Insurance Co Ltd (5 January), the claimant made an offer to settle the dispute, described as a Part 36 offer, which was expressed to remain open for 21 days and thereafter could only be accepted if liability for costs was agreed or the court gave permission. The offer was made before the commencement of proceedings and was rejected at the time by the defendant. Some three years later, when the matter was nearly due to come on for trial, the defendant wished to accept the offer. The defendant argued that it should be treated as a Part 36 offer, as it was obviously intended to be so, and so the words qualifying the right to accept the offer after 21 days should be disregarded. However, the judge rejected this argument, because the offer did not comply with Part 36 and so could not be treated as such. The judge held that it was not open to him in this case to interpret the offer in a way that did comply with Part 36, as the Court of Appeal had done in C v D, a case in Thus the defendant could not accept the offer when it finally decided that it wanted to. On the other hand, the claimant would probably not have the benefits in costs and interest that a valid Part 36 offer would have conferred, even though the offer could still be taken into account on the question of costs (see below). Likewise, in PHI Group Ltd v Robert West Consulting Ltd (10 May), an offer clearly intended to be a Part 36 offer did not comply with the rules of Part 36, in that it did not specify a relevant period. It could not therefore be treated as a Part 36 offer. However, a court may still, in the exercise of its general 21

23 discretion on costs (under Part 44), take into account an offer to settle the action. The offer in question was to settle contribution proceedings between the parties on a 70%:30% basis (in favour of the offeree). The offer was not accepted, and at trial the apportionment made by the court was 60%:40%. So the offeror had done better at trial than the terms on which it had offered to settle. In those circumstances, even though the offer did not qualify as a Part 36 offer, the Court of Appeal ruled that the offeror s costs of the contribution proceedings should be paid by the offeree and that the latter should bear its own costs. (The Court of Appeal held that the judge was wrong to treat another offer made later as causing the earlier offer to be withdrawn, even though it was inconsistent with the earlier offer. There is no reason in principle why there should not be more than one offer on the table, although only one can be accepted.) In the last case, the offeror may have achieved, under the court s general discretion, the same as it would have achieved had the offer been a Part 36 offer. Having said that, the offeror was the claimant in the contribution proceedings, and so might, under the rules of Part 36, have been entitled to indemnity costs and enhanced interest on those costs, as from the end of the relevant period. However, it is unlikely that a court would, under the general discretion, award indemnity costs and enhanced interest (in the absence of other factors apart from the offer to settle), as the next two cases also illustrate. One aspect of Part 36 that has caused problems is that it seems to stipulate that a valid Part 36 offer (whether made by claimant or defendant) must include an offer to pay the claimant s costs. This may make sense in the context of a pure money claim. However, as is in fact recognised in Part 36, not all claims are of this nature. F&C Alternative Investments (Holdings) Ltd & Ors v Barthelemy & Anor (22 June) concerned a complex commercial dispute in which the defendants put forward, as an offer in settlement, a commercial deal which involved the claimants making a payment to them. In the circumstances, the defendants considered that it would be absurd for them to offer to pay the claimant s costs, and therefore took the view that technically they could not make an offer under Part 36, although they endeavoured to make the offer which they did make as much like a Part 36 offer as possible. The offer was not accepted, and at trial the defendants achieved more than they had offered. The trial judge acceded to the defendants argument that, given the circumstances, he should treat the offer as being akin to a Part 36 offer and mimic the effects of a Part 36 offer by awarding indemnity costs (from the end of the deemed relevant period ) and enhanced interest, both on the principal sum to be paid by the claimants and on the indemnity costs. The Court of Appeal, however, said in effect that this approach was not permissible: the offer, not being a Part 36 offer, could not be treated as if it were. The Court of Appeal changed the order to costs on the standard basis and interest at the normal rate for small businesses (3% above base rate). A mirror image (in a way) of the same problem arose a bit later in Procter & Gamble v Svenska Cellulosa Aktiebolaget & Anor (23 October). There the claimant commenced proceedings claiming declaratory and negative relief, seeking to restrict its liability to the defendant. It purported to make a claimant s offer under Part 36, but could not in the circumstances justify requiring the defendant to pay its costs up to the date of acceptance of the offer. It therefore included, as part of the offer, an offer to pay the defendants costs up to this date (within the relevant period). The offer was not accepted and at trial the claimant achieved more than it had offered. It therefore sought indemnity costs from the end of the relevant period and enhanced interest on those costs. The defendants argued this could not be done because the offer did not comply with Part 36 (because it did not require payment of the claimant s costs). The judge considered the strict approach to compliance with Part 36 which the Court of Appeal had just recently enjoined in the F & C case. However, he took the view that a purposive interpretation of Part 36 did not mandate payment of the claimant s costs, so the offer that had been made in this case was a proper Part 36 offer. Having so decided, the judge then ruled that this was a case where it would be proper to depart from the normal rule as to cost consequences in any event, the main reason being that the claimant in this case was in substance the defendant (and vice versa). The claimant therefore was awarded only costs on the standard basis from the end of the relevant period, as it presumably would have been had it actually 22

24 been the defendant. (For good measure, the judge added that, if he was wrong on the Part 36 point, this is the order that he would have made under the general discretion). Some of the rules under Part 36 refer specifically to the claimant and the defendant, whereas others refer simply to the offeror and the offeree. This varying use of terminology is obviously deliberate, and in any given case who nominally is the claimant and who the defendant will be clear. However, these descriptions may sometimes disguise a more complex reality, which is perhaps not addressed by the rules and maybe should be taken into account in connection with the current doctrine of strict compliance with the formalities of Part 36. Late acceptance of Part 36 offers If a Part 36 offer is accepted after the end of the relevant period, liability for costs must either be agreed between the parties or decided by the court. The default position is that the party accepting the offer pays the offeror s costs from the end of the relevant period. However, the court may depart from this rule if it considers it just to do so. In PGF ll SA v OMFS Co & Anor (27 January), the defendant whose Part 36 offer was accepted by the claimant a year after it had been made, was deprived of its costs due to its failure to mediate, as mentioned above. In Webb Resolutions Ltd v Waller Needham & Green (11 December), the judge went even further, not only depriving the offeror of its costs from the end of the relevant period but ordering it to pay the offeree s costs from that date. This was a solicitor s negligence case. The claimant, a mortgage company, made a Part 36 offer which was accepted by the solicitors about a year later. The claimants had refused requests by the solicitors during the Professional Negligence Pre-Action Protocol to supply various documents which the solicitors said they needed in order to consider their position and provide a letter of response in accordance with the Protocol. Instead, the claimants had commenced proceedings. The solicitors eventually accepted the Part 36 offer following standard disclosure of documents in the action. The judge found that the claimants had acted unreasonably in refusing the solicitors request for documents at the Pre-Action Protocol stage, especially in refusing the documents unless the solicitors admitted liability. The judge awarded the solicitors their costs from 21 days after the Part 36 offer (presumably on the basis that, if the solicitors had received the documents when requested, they would have accepted the Part 36 offer within 21 days). In the PGF ll SA case (above), the claimant accepted the Part 36 offer, about a year after it had been made, after the defendant had indicated, on the eve of trial, that it intended to raise a new point and seek leave to amend its case. The judge did not, however, consider that this in itself was sufficient to depart from making the usual costs order. Apart from the question of whether the new line of defence would have made a significant difference, it did not count as new information that had come to light: the claimant could have been aware of the possibility of the point in question being made. In SG v Hewitt (2 August), the Court of Appeal departed from the normal rule. The claimant was a child who suffered brain injury in a car accident caused by the negligence of the defendant. The defendant made a Part 36 offer prior to commencement of proceedings but the claimant s advisers felt unable to recommend acceptance of the Part 36 offer at the time, because the prognosis for the claimant would be uncertain until he had entered adolescence. The offer was eventually accepted some two years later. The defendant argued that the matters relied on by the claimant to justify accepting the offer out of time were part of the normal contingencies of litigation but the Court of Appeal (allowing the appeal) disagreed and ruled that the defendant should pay the claimant s costs up until the offer was eventually accepted. Relevant factors included the fact that the claimant was a child (and that court approval of the settlement would be needed) and that the uncertainty of the prognosis was a factor inherent in the nature of the injury. 23

25 Privilege Other professions as well as the legal profession may involve the giving of legal advice. Architects are expected to have a reasonable knowledge of planning law, accountants are often relied on as experts on tax law and a claims consultant in the construction industry may well be expected to advise on the legal merits of a claim. However, such advice, on the current law, is not subject to legal professional privilege and may therefore have to be disclosed in legal proceedings where the advice relates to the issues in dispute. The point was raised in Walter Lilly & Co v Mackay (15 March) in relation to legal advice said to have been given by a claims consultant (Knowles Ltd) in connection with delays that arose on a building contract. These delays eventually gave rise to legal proceedings. The judge rejected the submission that communications with Knowles Ltd seeking or giving legal advice should be treated as privileged. The judge was to a considerable extent bound by a decision of the Court of Appeal in 2010 rejecting the submission that legal advice given by accountants on tax matters should attract legal professional privilege. The Court of Appeal held that legal professional privilege was confined to advice given by qualified lawyers. The judge in the Walter Lilly case ruled that it was irrelevant that the individuals employed by Knowles Ltd who gave the advice may in fact have been qualified solicitors or barristers (a point that was unresolved) because Knowles Ltd itself had been engaged to provide contractual and adjudication advice, and not retained as solicitors or barristers. In the accountants case (R (on the application of Prudential Plc and anor) v Special Commissioners of Income Tax and ors), permission was given to appeal to the Supreme Court. The hearing date was in November and the decision is awaited. If the Supreme Court accedes to the argument that the question of privilege should be decided by the nature of the advice given, rather than who gives it, this could extend privilege to advice given in a wide range of situations. Any change in the law would also be retrospective, so it could affect advice that has been given at any time. 24

26 Contracts Interrupted developments Due diligence obligations in development contracts fell to be considered where developments had been disrupted by the financial crisis in September What rights did purchasers of a lease in a development have against the developer when the development was delayed? Could they could walk away from the contract and recover their deposits? In order to do so, they would have to prove that the developer was not just in breach of contract but in repudiatory breach and that they had accepted the repudiation without affirming the contract. Otherwise, if on eventual completion of the development they failed to complete the purchase, they themselves could be in breach of contract. In Baht & Ors v Masshouse Developments Ltd (15 March), contracts for the purchase of a long lease in the prospective development were made in November 2007, at which time it was anticipated that construction of the relevant block and fitting out of the apartments would be completed by April In October 2008, the main contractor went into administration and progress with the development stopped. A replacement contract was concluded in April 2010 and the works were eventually completed in or around May 2011; but before then, in February and March 2010, solicitors acting for various purchasers had written to the developers purporting to accept the developer s repudiatory breach of contract. But had there been a repudiatory breach of contract by the developer? The key words in the contracts were that the developer shall arrange that the Apartment is completed with all due diligence but the developer would not be liable (among other things) for the default of any contractor. The judge accepted that there may be an implied term that the work would be done within a reasonable time but held that this would add nothing to the due diligence obligation (with its qualifications). The judge held that it was for the purchasers to show what would have been a reasonable time for completion of the works following the failure of the main contractor in October 2008 (for which, of course, the developer could not be held liable). The judge went on to say that there was no evidence on this point and, in particular, there was no basis on which he could say that a reasonable time would have expired by March 2010 (when the second lot of letters were sent by the purchasers solicitors). However, the judge concluded on the evidence of the actions taken by the developers to progress the works that they failed to perform their obligation of due diligence between June 2009 and December So they were then in breach of contract, but was this a repudiatory breach? The judge concluded that the delay by itself over this period did not constitute a repudiatory breach; but he also said that more was involved than mere delay. Nothing at all appeared to be happening during that time on site, and the evidence in court showed that behind the scenes the developers were in fact reconsidering their options on whether to go ahead with the development as planned. This lack of activity signalled an intention on the part of the developers not to be bound by the contracts, which amounted to a repudiatory breach. Thus the purchasers in question were entitled, in February and March 2010, to treat the contracts as repudiated, even though by then work would shortly be resumed. The facts of Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd (4 July) were broadly similar. The contract was for the development of the property by the defendant and the grant of long leases in the property to the claimant, who then planned to sublet the property. As a result of the credit crunch, the defendant had funding problems and stopped work for a time on part of the development. The defendant intended to resume the work when it could, and eventually it did. The delay lasted for over a year and the claimants, while alleging that the defendants were in repudiatory breach of contract, took part in negotiations with a view to the works being resumed. Eventually, though, the claimants purported to terminate the contract by accepting the defendants repudiation. Were the claimants entitled to do this? 25

27 Under the contract, the defendant had an obligation to proceed with due diligence and to use reasonable endeavours to complete the works by a certain date. Was the defendant in breach of these obligations in stopping the work? The defendant argued that the due diligence obligation should be interpreted as meaning due care, not due expedition as these words are normally thought to mean, because there was already a separate time obligation. As for the time obligation, the defendant had used all reasonable endeavours to obtain funding, and so had discharged this obligation. The judge rejected both these arguments. On the first point, the judge observed that it is not infrequent for contracts to contain overlapping obligations and the presumption against surplusage is of little weight in the interpretation of commercial contracts. On the second point, the judge held that the obligation to use reasonable endeavours covers matters that relate directly to the physical conduct of the works (such as inclement weather or a shortage of materials for which the defendant is not responsible) and not to anterior or extraneous matters such as having sufficient financial resources to do the work at all. Therefore, in stopping work for as long as it did, the defendant was clearly in breach of both these obligations. The main question was whether these breaches were repudiatory, entitling the claimant to terminate the contract by accepting the defendant s repudiation. It was accepted that time was not of the essence of the contract and had not been made so. The terms in question were held to be intermediate or innominate terms, which meant that the question of repudiation would be determined by the seriousness of the breach and of its consequences. In this case, the judge held that the delay was sufficiently serious for the breach to be repudiatory. A further question that then arose was whether the claimants had left it too late to accept the repudiation and thereby terminate the contract; in other words, whether the claimants had in the meantime affirmed the contract, in particular by taking part in negotiations with a view to enabling the contract to continue. The judge held that they had not affirmed the contract: they were entitled to take time to decide whether to accept the repudiation and it was clear that they took part in negotiations without prejudice to their rights arising from the breach. Finally, what damages were the claimants entitled to recover? Obviously they were entitled to the recovery of the deposits they had paid, plus interest thereon. They also claimed for other expenses that they had incurred in anticipation of the contract being performed and their project for the letting of the property going ahead. The issue here was whether they would have made a sufficient profit to recover these expenses had the lettings gone ahead. The court held that the burden was on the defendant to prove that they would not have done so. On the evidence of the rental values, the court held that this burden was discharged: the claimants would not have recovered these expenses had the lettings gone ahead and so could not recover them now from the defendant. Duties to help each other Some commercial contracts may contain an obligation on one party or both parties to promote or protect the interests or business of the other party; the obligation may only be peripheral to the main purpose of the contract. What does such an obligation entail in practice? Jet2.com v Blackpool Airport Ltd (2 April) concerned a contract between the operators of an airport and a low-cost airline for the airline to operate from the airport. It was agreed that the parties would cooperate together and use their best endeavours to promote Jet2.com s low cost service from BA (i.e. Blackpool Airport). There was clear evidence that, for the business of a low cost airline to be successful, it would have to be able to run flights outside normal operating hours i.e. early in the morning and late at night. This was permitted by the operators of the airport for a number of years but then, due to the additional cost that such flights generated for the operators of the airport, the latter informed the airline that flights outside normal operating hours would no longer be permitted. The judge at first instance (as reported in our review of 2011) held that this was a breach of the airport s obligation to use best endeavours to promote the airline s business. The airport operators argued that the obligation was unenforceable due to lack of certainty; alternatively, that it did not impose on them an obligation to act against their commercial interests. The Court of Appeal, by a 26

28 majority, rejected these arguments and upheld the judgment below. The obligation in question was, by its very nature, not one where it was possible to say at the outset precisely what the parties had agreed to do and not to do in any particular situation and the court accepted that it may sometimes be difficult to determine whether there had been a breach of the obligation. However, in principle the obligation was not so uncertain as to be unenforceable and in acting as they did in this instance the airport operators were, in the view of the court, in breach of the obligation. Further, the performance of a contractual obligation, viewed in isolation, usually has a cost attached, and so the cost to the airport operators of permitting flights out of normal hours could not by itself relieve them of any obligation to do this. However, the agreement would probably not require the airport operators to take steps at their own cost to promote the airline s business if that business was failing. Compass Group UK & Ireland Ltd v Mid-Essex Hospital Services NHS Trust (28 March) concerned a long-term facilities contract, containing an obligation to co-operate in good faith: The Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract. The trust was an NHS hospital and the contract was for the provision of catering services, mainly for patients. Other beneficiaries of the contract included the Department of Health, GPs and various health bodies. The service provider had obligations to comply with performance due-by dates, minimum performance levels and methods of performance measurement in the service level specification. They also had to undertake sufficient performance monitoring to demonstrate that each performance parameter in the specifications was achieved. Where performance criteria or standards were not met, the trust was entitled to levy payment deductions against monthly amounts and award service failure points. The mechanism for service failure points and deductions from monthly payments was taken from standard form for a PFI contract (although this was not a PFI project). Calculations and deductions made by the trust in accordance with this mechanism led to a poisoning of the relationship. The judge held that the trust was in repudiatory breach of contract. The trust contended for a narrow interpretation of the clause containing the duty to co-operate in good faith, arguing that it was directed to performance of the services and could only be breached by the trust if it hinders performance of the services (for which there is contractual provision anyway). The judge preferred a wider interpretation. This was a long-term contract, and continuous and detailed co-operation at a number of levels was necessary. The duty to co-operate necessarily encompassed a duty to work together to resolve problems and required the parties not to take unreasonable actions which might damage their working relationship. The second part of the clause imposed a broad obligation on trust to act reasonably in conducting the contract, in particular not taking unreasonable actions which might damage the relationship with the service providers and thus undermine the purpose of the contract. Limitations of liability In all walks of commercial life, it is common to seek to limit liability for breach of contract. However, contractual terms seeking to limit liability may have to be shown to be reasonable under the Unfair Contract Terms Act Any term that seeks to limit liability for negligence will be subject to the Act, so the Act will normally apply to any such term in a professional contract of engagement. The Act also applies to any such term in a party s standard terms of engagement, where the contract has been made on those terms; this is not the same thing as standard terms published by a trade or 27

29 professional body, unless perhaps those terms have through regular use become the standard terms of the party in question. The Act provides some guidance as to what is reasonable but, on the face of it, there is no limit to what can be taken into account, and court cases on this topic may also be helpful. There were several such cases in Allen Fabrications Ltd v ASD Ltd (1 August) involved a serious accident to an individual who fell through a platform erected at first floor level. It is not possible to limit liability for death or personal injury, but the relevant liability in this case was not for the injury as such but for an indemnity in respect of another s party s liability. The party seeking to limit its liability was at the end of a chain of subcontracts, its function being to supply the gratings and clips for the platform. Its liability under its contract was limited to the cost of the gratings and clips, which came to about 705. The total claim was for about 7 million. The judge held that the limitation was reasonable, taking into particular account the fact that the other party, who was seeking the indemnity, had insurance against the claim and that such terms were prevalent in the industry and appear in this case to have been accepted as a risk to be taken in return for a low price. It may still seem remarkable that a party could limit liability arising out of such a serious accident to such a relatively small amount, especially as it would not be able to limit its liability at all to the injured party himself. However, the reasonableness of a term limiting liability is judged at the time the contract is made, not in the light of the actual circumstances that arise. Thus, in contrast to this case, a term that fails the reasonableness test at the time of contracting will not be saved in a situation where its implementation may seem perfectly fair. FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd (5 September) concerned a no set off clause in a contract for the sale of goods. The buyer of the goods sought to avoid payment because of a claim that it had against the seller for alleged breaches of contract, but the seller s standard terms of contract contained a term prohibiting claims for set-off against claims for the price of the goods. The court upheld the term as reasonable, taking into particular account the prevalence of such terms in the industry, the fact that it was not particularly onerous in its scope and the fact that the buyer was substantial and sophisticated. It may be arguable that a no set-off clause is not a term that seeks to limit liability for negligence, and therefore would not be subject to the reasonableness test, save where the contract is on the party s own standard terms. However, in the case of a professional engagement, claims for negligence are the sort of claims that are likely to be in contemplation. Therefore, a term seeking to deny the right to set-off claims (of whatever nature) against claims for payment of fees may well be subject to the Act. The third case concerned the claim of the Trustees of the Ampleforth Abbey Trust against their project managers, to which reference has already been made (under Construction and Project Managers above). The liability of the project managers was quantified at 226,667 but their conditions of engagement, which were held to have been accepted by the client, limited their liability to the amount of their fees, which came to 111,321. However, in this case, the limit on liability did not pass the reasonableness test. The prevalence of terms limiting liability in a particular industry is generally a factor in support of their reasonableness. Consultants in the construction industry can validly argue that such terms are commonplace in published forms and should be expected in consultants standard terms (though not in bespoke agreements prepared by clients). In the Ampleforth case, the client had not read the terms, which the judge said was unfortunate but understandable: the contract followed two earlier engagements on the same project and the client may well have assumed that the terms were the same as on the earlier occasions. In fact, the term limiting liability had not been part of the earlier contracts. 28

30 The main point that concerned the judge was that the limitation was inconsistent with another term, by which the project managers undertook to take out and maintain professional indemnity insurance for a much higher amount ( 10 million). It seems, therefore, that the client may have known about the insurance clause but not the limitation clause. Actual awareness of the limitation on the part of the client at the time of contracting may well make it immune to challenge and may also dispose of another issue that frequently arises at the same time whether the term was in fact incorporated into the contract. Any obligation to maintain professional indemnity insurance in an appointment should be for the same amount as the offered limit of liability. The limit of liability may however still be reasonable if the amount of professional indemnity insurance agreed to be maintained is higher, especially if the limit has been discussed and agreed with the client, although some explanation as to why there is a disparity would be helpful. A limit of liability slightly less than the amount of insurance cover may be justified because professional indemnity insurance has to cover all claims that may arise out of a simple incident, not just the client s claims. An obligation to take out professional indemnity insurance in addition to maintaining it should be avoided a professional will often already have professional indemnity insurance in place. The case does not indicate that a limit is only going to be reasonable if it is for the amount of the professionals current professional indemnity insurance. The amount has to be a fair and reasonable one having regard to all the circumstances. 29

31 Liability for personal injury Liability of parent company Quite a stir was caused by the Court of Appeal s ruling in Chandler v Cape Plc (25 April) that a parent company owed a duty of care to an employee of its subsidiary. However, the court emphasised that it was not piercing the corporate veil or undermining the principle of limited liability in making an owner of a company liable for that company s defaults. The fact of being the parent company was not in itself sufficient to impose a duty. That question was decided by applying the normal rules for deciding whether someone owes a duty of care to a third party. These rules include the three-fold test in Caparo v Dickman: foreseeabilty of harm, proximity of the relationship, whether it is fair and just to impose a duty. Another test is whether there had been an assumption of responsibility by the person alleged to owe a duty, which is sometimes said to be another way of stating the second and third ingredients of the three-fold Caparo test. The expression assumption of responsibility may be misleading, however, since it suggests that the test is subjective (did the person actually assume responsibility?) whereas the courts have emphasised on many occasions that the test is objective (is the person to be held at law as having assumed responsibility?) The court suggested in this case that attachment of responsibility might be a better description. The case concerned a claimant who had developed asbestosis, as a result of exposure to asbestos dust while working for the subsidiary company in the 1950s. The subsidiary company had long since been dissolved and the insurance that it held would not have covered liability for causing this disease. The Court of Appeal, upholding the decision of the judge below, held that the parent company was liable, having regard to the following circumstances: (1) The businesses of the parent and subsidiary were, in a relevant respect, the same; (2) The parent had, or ought to have had, superior knowledge on a relevant aspect of health and safety in the particular industry; (3) The subsidiary s system of work was unsafe as the parent company knew, or ought to have known; (4) The parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees protection. These are circumstances, said the court, where the law may impose on a parent company responsibility for the health and safety of its subsidiary s employees. For the purposes of (4), it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. Element (4) may be established where the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues. If the subsidiary company had been around, it would have been liable as well. Its liability, though, would have been for breach of duty as employer, in failing to provide a safe place of work. Limitation: the question of knowledge The Supreme Court gave judgment in AB & Ors v Ministry of Defence (14 March) on the preliminary issue of limitation in the case brought by former servicemen or their representatives alleging injury suffered as a result exposure to radiation during nuclear tests carried out in the South Pacific in the 1950 s. The Court s decision, against the claimants, was split 4 to 3 and revealed radically different views of the concept of knowledge for the purpose of limitation. 30

32 The issue before the court was whether the claims had been commenced out of time. As is well known, for claims for personal injury (and indeed for all claims in tort for negligence), there is an alternative period of limitation of three years running from when the claimant has the requisite knowledge concerning the claim. This alternative period was enacted by parliament to remove the perceived injustice of claimants being out of time before they even realised that they had a claim. However, what comprises the requisite knowledge has itself given rise endless dispute. The requisite knowledge includes knowledge that the injury complained of is attributable to an act or omission of the defendant. At the heart of this case is the knowledge of each claimant that his illness (which typically manifested itself many years later) was attributable to the exposure to radiation and when this knowledge was acquired. The claimants case now is that this knowledge has only been acquired recently following the publication of a report in However, by that time, many of the actions had already started. The unusual feature of the case, therefore, is that on the claimants case, the actions were commenced without the claimants having the requisite knowledge to trigger the three year period of limitation. The claimants had long believed or at least consciously suspected that their various illnesses were due to exposure to radiation but lacked medical evidence which would confirm it. The majority view of the Supreme Court was that it is a legal impossibility for a claimant to lack knowledge of attributability at a time after the date of issue of his claim. By that date he must in law have had knowledge of it. As for the meaning of knowledge on this view, the majority approved a wellestablished formula that knowledge for this purpose entails a reasonable belief (or reasoned belief), which should be held with sufficient confidence to initiate the preliminaries to issuing a claim. So the three year period for each claimant commenced when he first held a reasonable belief in this sense that his illness was attributable to the exposure in question. Applying this test, all the lead cases before the Court were held to be out of time. This approach treats knowledge as being at least partly subjective, and a distinction was drawn between knowledge in this sense and evidence in support of it. The minority, however, drew a sharp distinction between knowledge and belief: for them knowledge in the relevant legislation means actual knowledge. The knowledge that a claimant possessed for the purpose of limitation includes constructive knowledge, i.e. knowledge that he might reasonably have been expected to acquire, including knowledge from facts ascertainable with the help of medical or other expert advice. When might a claimant be reasonably expected to seek such advice? In answer to this, the courts now often apply the curiosity test, derived from a case a few years ago that anyone who has suffered a significant injury should be assumed to be sufficiently curious that he will seek expert advice. This test was applied by the Court of Appeal in Johnson v Ministry of Defence and anor (21 November), but the court said that the assumption about seeking advice would not apply if there were reasons why a reasonable person in the claimant s position would not have done (the test is objective, so reasons particular to the claimant himself would not be relevant). The degree of curiosity to be expected would depend on the seriousness of the condition and the way in which it manifested itself. A sudden and unexpected injury might be expected to arouse more immediate curiosity than a condition that slowly develops. The Johnson case concerned deafness. The claimant noticed that he was suffering significant hearing loss in his early 60s in The Court of Appeal held, with some hesitation, that a reasonable man in the 21 st century in his position would at that time have been sufficiently curious about his condition to seek medical advice about its cause, and that had he done so, it is probable that noise deafness caused by his employment by the defendant some 20 years before would have been considered as a possibility. Allowing a short period for him to have received and considered this advice, the court concluded that he must be deemed to have had the requisite knowledge by the end of 2002, which unfortunately for the claimant meant that his claim was out of time. 31

33 Limitation: the court s discretion There is little doubt that for claimants, the knowledge test has been tightened up in recent years. The courts do though have a discretion in personal injury actions to disapply the limitation period and allow the action to proceed. This discretion has attracted what was described in the Court of Appeal in Sayers v Chelwood & Anor (19 December) as a vast tangle of case law and a bewildering array of inconsistent dicta. The particular dicta that gave rise to the appeal in this case, made in a case a few years ago, were that the burden on the claimant to satisfy a court that it should exercise the discretion in the claimant s favour is heavy and to do so an exceptional indulgence to the claimant. These comments appear to have led (or misled) the judge in this case to describe the burden as particularly heavy. The Court of Appeal said that all one can say about the burden is that it is on the claimant. Subject to that, the discretion is wide and unfettered. The indulgence is exceptional simply in the sense that it is an exception to the normal rule that a case is time barred if not brought within the applicable limitation period. 32

34 Insurers Mesothelioma compensation claims In BAI (Run Off Ltd) v Durham and other conjoined cases (28 March), the Supreme Court resolved the issue of whether various employers liability policies responded to mesothelioma compensation claims. The Court of Appeal had held that policies with the wording disease contracted referred to the time when the disease was originally caused through inhalation of asbestos dust, so that employers with these policies would be covered against claims by employees exposed to asbestos dust while the policy was in force, even though the disease may not have manifested itself until many years later. However, policies with the wording injury sustained referred to the time of the onset of the disease, by which time the policy may no longer be in force, for example, because the employer was no longer in business. The Supreme Court held that the sustained wording was sufficiently broad to cover the time of original causation. Thus all the policies were held to respond to the liability incurred by employers through employees being negligently exposed to asbestos dust while in their employment. Another point, though, was raised during the hearing, concerning the nature of the employers liability. In Fairchild v Glenhaven Funeral Services Ltd (20 June) and Barker v Corus (3 May 2006), a special rule was evolved making an employer liable to an employee who contracted mesothelioma even though it could not be proved that it was exposure to asbestos dust during his employment with him that was the cause of the disease, something which would be impossible to prove if there was at least one other possible source of exposure; liability was based on the employer merely having negligently increased the risk of lethal exposure. This ruling was a departure from the normal rules of causation in civil law, whereby the wrongful act or omission that gives rise to liability must be shown to have caused the damage that gives rise to a claim. In the unique instance of injury caused by exposure to asbestos dust, an employer held legally liable for the injury has not been proved to have caused the injury: can the employer s liability policy respond to cover that liability? The Supreme Court held by a majority that the liability acknowledged by the Glenhaven and Barker cases involved a sufficient weak or broad causal link to engage the policies. Legal expenses insurance A European directive in 1987 required that any legal expenses insurance must expressly recognise the right of the insured to choose their own lawyer. In Brown-Quinn & Ors v Equity Syndicate Management & Anor (12 December), where the insureds had chosen their own solicitors, the Court of Appeal ruled that the terms of the policy in question limited the insurers to paying the rates in their (i.e. the insurers ) standard terms of appointment. That raised the question whether such a provision was permitted by the directive. The court referred to European case law and held that it was permitted, provided that the effect was not to render the freedom of choice meaningless. This would depend on the sufficiency of the remuneration recoverable under the policy as a result of this provision. The court did not have any evidence to reach a conclusion on that point. The insured s freedom to have the lawyer of their choice was not stated in the policy and there were other terms suggesting almost the opposite, which prompted critical remarks from the court: the insurers exhibit an insouciance to their obligations under the Directive and the Regulations which leaves one quite breathless. The court said that the terms in question must either be deleted or comprehensively redrafted. 33

35 Mitigation costs ACE European Group & Ors v Standard Life Assurance Ltd (18 December) concerned a claim under a liability policy for over 100m in mitigation costs. In early 2009, the claimant incurred a lot of criticism when it revalued a fund reducing its value by more than 4.8%, because investors had been given to understand that the fund in question was a cash fund or equivalent. In fact, a sizeable proportion of the fund consisted of asset-based securities. The claimant decided that the best way to avoid claims from investors and to limit damage to its reputation was to replenish the fund with a cash injection equal to the loss in value and to compensate investors directly who had sold units in the fund since the revaluation. The claimant claimed under its liability policy for the full amount (subject to deductible and the policy limit) of the cash injection into the fund and the sums that it had paid to individual investors. The judge at first instance upheld the claim. In the Court of Appeal, the outstanding issue concerned the insurers argument that, as these amounts had been paid partly to avoid or reduce claims and partly to avoid or reduce reputational or brand damage, there should be an apportionment between these two objectives, with the insurers only paying the amount apportioned to the former. The Court of Appeal held that the argument failed as a matter of construction of the policy. The whole of the amounts paid had been directed to avoiding or reducing claims (and had been held to be mitigation costs as defined by the policy). The fact that they also served another purpose was irrelevant. The court also held that the principle of apportionment of suing and labouring costs in marine insurance was irrelevant to the situation and that the principle could not be applied to liability insurance. 34

36 Reforms to civil litigation Reforms to civil litigation often referred to as the Jackson reforms, because they were recommended in Sir Rupert Jackson s report published in December 2009 came into law under the Legal Aid, Sentencing and Punishment of Offenders Act (2012). It is intended that the reforms (with some exceptions) will come into effect in April In practice, the reforms are expected mainly to affect personal injury claims conducted under a conditional fee agreement (CFA) (i.e. on a no win, no fee basis) but their actual scope is much wider. The success fee that can be charged by solicitors acting for claimants under a CFA and, save in a very restricted number of cases, the premium paid by claimants who take out after-the-event insurance to cover themselves against liability for the defendant s costs will no longer be recoverable from the defendant following a successful outcome in the action. The success fee itself (at the moment sometimes as much as 100% of the normal fee) will also be limited. These non-recoverable costs will eat into claimants winnings, but there is to be a 10% uplift in the level of general damages paid by losing defendants, which will extend to claims other than personal injury claims (and will apply whether or not the claim has been funded under a CFA). The uplift in damages has to be implemented by the courts. Accordingly, in the case of Simmons v Castle (10 October), the Court of Appeal took the opportunity to lay down guidelines, which it is assumed all courts will follow. The increase of 10% will apply to all cases where judgment is given after 1 April 2013 and will affect the proper level of general damages in all civil claims for (i) pain and suffering, (ii) loss of amenity, (iii) physical inconvenience and discomfort, (iv) social discredit, (v) mental distress, or (vi) loss of society of relatives. The proper level of all such damages which will be 10% higher than previously, unless the claimant falls within section 44(6) of LASPO. The object of the qualification at the end is to exclude claimants who enter into a CFA before the provision preventing the recovery of success fees comes into effect, since they would still then be entitled to recovery of the success fee and, as the Court accepted, should not also be entitled to the uplift on damages. There is also intended to be, for personal injury claims, qualified one-way costs shifting (QOCS), whereby no costs at all will be paid by losing claimants to defendants, save in certain situations. One such situation is where a claimant fails to beat a defendant s Part 36 offer, though the recoverable costs will be limited to the amount of damages awarded. The rules on QOCS are still being drafted. QOCS will obviously reduce further the risk for personal injury claimants in bringing proceedings where they are represented under a CFA. The payment and receipt of referral fees in personal injury cases is to be banned. The right to charge contingency fees (under what are referred to as damages-based agreements ) will now be allowed in all areas of civil litigation. Under these agreements, the claimant s lawyer s fees will be a percentage of any damages recovered. The present intention is that there will be a cap of 50% on the amount of damages that can be taken as a fee in non-personal injury claims and a 25% cap in personal injury claims (excluding damages for future care and loss). This is potentially a radical change in the funding and conduct of litigation but its overall effect will, of course, depend on how much damages-based agreements are taken up. The Act also makes provision for enhanced damages to be paid to a claimant who makes a Part 36 offer and obtains a judgment more advantageous to the claimant than the offer. New rules of court are expected to bring this into effect. It is envisaged that the additional sanction will be 10% of damages 35

37 awarded, subject to a tapering system for claims over 500,000. The Jackson report also contained proposed changes to the rules of the court to provide more effective management of costs, including limiting costs to court-approved budgets. Schemes along these lines have already been piloted in some courts. It is now expected that parties to litigation will be required to set and agree budgets for costs at the outset of proceedings in all cases except those in the Commercial and Admiralty courts. Where parties fail to do this, the court will set the budget. The current regime for fixed costs in fast-track litigation is expected to be extended to claims of a value of up to 25,000, and the small claims limit in non-injury matters increased. Some observers think that the impact of all these reforms will be greater than that of the Woolf reforms. January

38 London Covent Grden Beale and Company Solicitors LLP Garrick House King Street Covent Garden London WC2E 8JB T: +44 (0) F: +44 (0) DX: Covent Garden London Lime Street Beale and Company Solicitors LLP 34 Lime Street London EC3M 7AT T: +44 (0) F: +44 (0) DX: 517 London/City Bristol Beale and Company Solicitors LLP Royal Talbot House 2 Victoria Street Bristol BS1 6BN T: +44 (0) F: +44 (0) DX: 7809 Bristol Dublin Beale and Company Hamilton House 28 Fitzwilliam Place Dublin 2 T: +353 (0) F: +353 (0) DX: Fitzwilliam Dubai Anjarwalla Collins & Haidermota Emaar Square, Building 4, Level 2 Unit 206, Downtown Burj P.O. Box 58553, Dubai. United Arab Emirates T: F: info@ach-legal.com