Update: professional negligence

Privilege of documents

The Court of Appeal's recent decision in Quinn Direct Insurance Ltd v The Law Society [2010] EWCA Civ 805 upheld Peter Smith J's decision at first instance that the solicitors' professional indemnity insurer cannot obtain documents which are confidential and privileged where no claim has been made against the insured by the client.

Quinn Direct Insurance provided professional indemnity insurance to a two-partner firm, South Bank Solicitors. The Law Society intervened in South Bank in 2007 as a result of suspected dishonesty and Solicitors' Accounts Rules breaches. One partner was found guilty of mortgage fraud and dishonesty and Quinn subsequently refused to indemnify the guilty partner. The second partner was entitled to look to Quinn for cover unless there was evidence to the contrary that he too was involved in the fraud.

So as to investigate whether there was evidence to suggest the second partner was complicit in the fraud, Quinn requested access to multiple client files and ledgers. The Law Society provided Quinn with access to files where clients had made claims against South Bank as those clients had impliedly waived their right to claim privilege over those files. The Law Society did not allow access to other files on the basis that those files were subject to privilege and that it was bound to preserve this (Dooley v The Law Society (unreported, 2002).

Peter Smith J at first instance agreed with the Law Society, holding that Quinn did not have an unfettered right to documents which were protected by confidentiality and privilege. Quinn appealed the decision and Sir Andrew Morritt, Chancellor of the High Court, along with the Lords Justice Rimer and Jackson of the Court of Appeal, upheld Smith J's decision.

In the Court of Appeal, Sir Morritt's leading judgment set out the following key points:

• a solicitor with a claims made professional indemnity policy is not bound to disclose to his insurer on inception, renewal or notification any privileged or confidential documents without a client's consent to do so;
• a solicitor's duty of confidence to his client will override his duty of good faith to an insurer and if a client refuses to waive his privilege the resulting conflict may render a solicitor's ability to provide a complete and proper notification inadequate;
• the purpose behind Quinn's request was at odds with the regulatory role of the Law Society; and
• in some circumstances there exists a 'circle of confidence' but a qualifying insurer is not included within this.

The appeal judgment leaves several practical difficulties unresolved where circumstances are notified in the absence of any claim. Insurers remain in a position where they may not have enough information to fully investigate and assess a notification, including its scope and validity, as the firm cannot provide greater disclosure given it must protect a client's privilege.

At a time when the solicitors' professional indemnity market already faces a number of challenges, the effect on professionals and insurers alike when it comes to renewal and notification is further heightened.

Substitution of parties

The recent case of (1) GE Money Home Lending Ltd (2) GE Money Mortgages (By Substitution) v H C Wolton & Sons Ltd [2010] EWHC 1011 (Ch) is a stark reminder to ensure that the identity of a party is correct at the outset of proceedings.

A professional negligence claim was brought by a lender claiming it had suffered a loss as a result of the surveyor's negligence and issued a claim form a few days before the expiry of the limitation period. The claim form named GE Money Home Lending as the lender although all of the paperwork regarding the advance and the mortgage itself was in the name of GE Money Mortgages. Accordingly, the claimant made an application to substitute GE Money Mortgages for GE Money Home Lending after the claim form was issued and outside of the limitation period and to extend the time for service of the particulars of claim.

For a substitution of a party to be allowed after the expiration of limitation, there must have been a mistake as to the name of the party, not its identity. In addition, the identity of both the person intending to sue and the person intending to be sued should be apparent, despite the mistaken name. The claimant's application was granted.

The defendant surveyors appealed against the court's decision on the basis that the application was after the expiry of the limitation period and that the mistake was one of mistaken identity as opposed to mistaken name. Further, the defendant surveyors produced a letter to the court which indicated that the claimant's solicitors should have realised their mistake sooner. The court allowed the surveyors' appeal, finding that:

• the claimant's solicitors' mistake was genuine although could have been detected sooner;
• the claim form identified the correct borrower, advance figure and date, providing an adequate description to identify the claimant;
• the defendant, however, did not know the identity of the lender and this was not apparent from the pre-action correspondence or from the original valuation report (which was addressed to GE Money Home Lending's parent company and all subsidiaries). It was not apparent to the surveyors that there was the possibility of a claim by GE Money Mortgages until after the expiry of the limitation period and when it received the application for substitution; and,
• therefore, in the absence of any special factors, the judge's discretion under CPR 19.5 should have been exercised against allowing the substitution (Owners of Sardinia Sulcis v Owners of the Al Tawwab [1991] 1 Lloyd's Rep 201).

Accordingly, the claim was struck out.

The court considered and applied the recent Court of Appeal decision in Lockheed Martin Corporation v Willis Group Ltd [2010] EWCA Civ 927. Lockheed Martin Corporation had sued the wrong defendant by mistake and made an application under CPR 19.5 to substitute a new party as defendant. The amendment was made after limitation. Willis successfully had the substitution set aside and Lockheed appealed.

The Court of Appeal held that Lockheed had made a genuine mistake of name, as opposed to identity; but the true identity of the defendant Lockheed intended to sue was not apparent. However, Lord Philips stated in Adelson v Associated Newspapers Ltd [2007] EWCA Civ 701 that 'it was necessary to have regard to the jurisprudence'. The test as set out at CPR 19.5 does not contain a jurisdictional requirement that the mistake was not misleading; however, the court must judge each case objectively and on its facts.

A full investigation must be undertaken as to the correct identity of the parties before proceedings are commenced, particularly when close to the end of the relevant limitation period.

Communicating advice

The recent case of Levicom v Linklaters [2010] EWCA Civ 494 has received widespread attention. Levicom accused Linklaters of giving inadequate advice in the context of a commercial fall out between it and two Swedish companies, which led to arbitral proceedings that were eventually settled.

At first instance, Mr Justice Andrew Smith concluded that Linklaters had, in certain specific respects, been negligent, but that Levicom's complaint failed at the causation stage. The judge made an award of nominal damages of £5 to reflect the breach of contract by Linklaters.

The Court of Appeal, overturning the decision, held that when a solicitor advises his client that he has a strong case to pursue litigation rather than a commercial settlement, and the client follows that advice, the inference will be that the advice was causative of the client's actions and any subsequent loss. There was no point in a client seeking advice if it was not going to influence its conduct. Accordingly, the burden of proof thereby shifts to the solicitors to show that their advice was not so causative.

The decision in Levicom highlights the potential burden placed on solicitors when advising clients whether to settle or proceed with litigation or arbitration. It also underlines the importance for professional advisers to conduct a proper, balanced assessment of the client's prospects of success and the associated risks before advising on strategy.