Date: Thu, 11 May 2006 10:27:30 +1000

From: Neil Foster

Subject: Law Society v Sephton & Co

Dear Colleagues;

Interesting to note the House of Lords decision in Law Society v Sephton & Co [2006] UKHL 22, where a firm of accountants negligently certified that a rogue lawyer's books were in order, when he was in fact fiddling the books and stealing client's money, and later the Law Society paid compensation to cheated clients, the question was whether the Law Society's action to recover money from the accountants was statute-barred. The issue was raised because they did not file their negligence claim against the firm until May 2002, even though they had first initiated regulatory action against the accountants in May 1996 (shortly after first receiving a defrauded client's complaint which alerted them to the problem). The defective accountant's reports started in 1988. The accountants argued that from the moment of the first defective report the Law Society was "exposed to liability" to make payments, and hence that by 2002 they were too late to make a claim (applying either the standard 6-year limitation period or even the extended 3-year period now provided under s 14A of the UK Limitation Act 1980 commencing at the point where the injured party becomes aware of the action).

All the members of the House found in favour of the Law Society. The damage to the Society in terms of its potential liability to pay compensation did not arise until a claim had actually been made for compensation by a defrauded client (the first actual claim was made in July 1996, within the 6 years). Until then the liability to pay was only "contingent". The House reviewed previous authority on contingent losses, and adopted the approach taken by the High Court of Australia in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514, which held that in this sort of case loss did not accrue until a claim for compensation or indemnity was actually made. In particular the comments of the majority of the High Court (described by Lord Hoffmann at [16] as a "masterly exposition of the law") in analysing previous English authority were adopted by the House (see eg at [17]) -

If … the English decisions properly understood support the proposition that where, as a result of the defendant’s negligent representation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred.

A sensible decision. If members of this list find the facts familiar they may recall that the High Court itself had to deal with an almost identical situation last year in Travel Compensation Fund v Robert Tambree t/as R Tambree and Associates [2005] HCA 69 (save that a lawyer is not a travel agent). I had thought initially that the House might refer to that decision, but on reflection it is clear why they did not. In TCF there was no issue of limitation periods - the defalcations of the travel agent were discovered after only about two years' worth of operating and negligent accountant's reports, and apparently the action against the firm was commenced in good time. The issue there was causation - whether or not the action of the travel agent in continuing to trade after her licence was revoked by the regulator was a novus actus in the chain linking the accountant's default with the payments made by the Fund. In the end the decision on the causation issue by the HC was fairly straightforward - since the purpose of the Fund (and the accountant's reports as part of the scheme set up by the Fund) was to compensate for the dishonesty of travel agents, loss caused by dishonesty of the travel agent was sufficiently linked to the defective reports to be recoverable.

I suppose someone in Sephton might have raised the causation issue at some point. After all, the Law Society did have a discretion of some sort whether or not to pay compensation. But as the members of the House note (eg Lord Mance at [63]-[64]) the Society would have been subject to judicial review of any decision not to pay compensation where the criteria were met. And no-one seems to have quite had the hide to argue (as had not only been argued but accepted in the NSW Court of Appeal in TCF) that the dishonesty of a solicitor would break the chain of causation in relation to payments from a scheme designed to compensate for dishonesty of solicitors!

Regards
Neil Foster

Neil Foster
Lecturer & LLB Program Convenor
School of Law
Faculty of Business & Law
University of Newcastle
Callaghan NSW 2308
AUSTRALIA
ph 02 4921 7430
fax 02 4921 6931

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