As P&P Property Ltd v Owen White & Catlin LLP; Dreamvar (UK) Ltd v Mischon de Reya (a firm) and another (Law Society intervening) [2018] EWCA Civ 1082; [2018] EGLR 27 shows us, property transactions do sometimes go wrong (the seller was an imposter and took the funds to China). There are also other examples of smaller practices where sale proceedings have simply been stolen.
Purchasers and sellers often rely on the solicitors’ insurance to cover them for their losses, and the property industry normally presumes that either the Law Society or the Solicitors Regulation Authority (SRA) will assist. “Don’t worry, you can always sue the solicitor” is often stated by barristers or property or commercial lawyers after litigation or a transaction has gone wrong. If only life was that simple.
What problems can arise?
Establishing who is the defendant
- The defendant is the legal entity which provided the negligent advice that caused damage. This is not always simple. Many law firms have incorporated into limited liability partnerships (LLPs) or limited companies, or even gone public in the last six years. You need to check whether the company that you now understand to be the successor practice was in fact the legal entity that provided the negligent advice. It may be that both the unincorporated partnership and the LLP need to be included as defendants. (Godfrey Morgan Solicitors v Armes [2017] EWCA Civ 323).
- The company or the LLP may be insolvent or even dissolved. If the company is dissolved and the insolvency of the company/LLP occurred before August 2016, an application will need to be made to restore the company to the register and proceedings issued against a dissolved company prior to the application being completed. If the company became insolvent after August 2016, a claim may be made direct under the Third Parties (Rights against Insurers) Act 2010, but the name of the insurer would have to be obtained from the SRA practice department. (Redman v Zurich Insurance [2017] EWHC 1919 (QB).)
- If the defendant company is in administration or liquidation, permission must be obtained from the administrator/liquidator or from the insolvency court, if proceedings are to be continued against the company in insolvency, for those cases in which the Third Parties (Rights against Insurers) Act 1930 applies which predate an insolvency from August 2016.
The risks in respect of claiming against a partnership (unincorporated company) or a sole trader
A partnership’s notepaper normally details the names of those held out as partners by the practice. If the partnership has dissolved and the partners are not bankrupt, proceedings can be issued against the dissolved partnership by simply referring to the name of the partnership but with (a firm) after its name. Otherwise, each and every partner needs to be entered as a separate defendant.
Service on a dissolved partnership can create real difficulties, as Planetree Nominees Ltd v Howard Kennedy LLP [2018] EWHC 2302 showed. Simply leaving the documents at the address of the dissolved partnership won’t work if that practice no longer has a working address. Proceedings served on a partner of the dissolved practice can create practical difficulties as service at the new partner’s office address, unless it is personal service, will not be good service. Service will need to be performed at the partner’s residential address, or preferably personal service. Finally, if the partner is in fact a salaried partner and you cannot show that you relied on them being held out as a partner in the practice (which is unlikely unless it is a two-partner practice and you are a lender) then service on a salaried partner may be ineffective as Nationwide Building Society v Lewis [1998] PLSCS 62 illustrates.
Should you include the employee or salaried partner of the partnership in the claim?
Employees of LLPs and limited companies are not liable for the negligent acts of their companies unless those employees assumed a special responsibility. The law is not the same in respect of employees of partnerships. If those employees were held out as partners and you relied on their holding out (which is unlikely), then they can be sued as employees of the partnership. Furthermore, employees themselves can be named as defendants in their own right, if they themselves carried out the negligent advice. The law in Merrett v Babb [2001] EWCA Civ 214; [2001] 1 EGLR 145 is still good law. Here, a surveyor employed by a surveying practice was held personally liable when his employer had become bankrupt. The good news for an employee in a solicitor’s practice is that under minimum terms and conditions he is an insured party himself.
You might go down this route because you are unaware as to who exactly the partners in a practice were. But also, if the solicitor’s practice and its professional indemnity insurers are insolvent, the Financial Services Compensation Scheme (FSCS) will not help in respect of a claim against a partnership if its turnover at the inception of the insurance policy was more than £1m. But it will probably cover an employee. This may seem bizarre, but in the past 10 years seven professional indemnity insurers have become insolvent, including Quinn Insurance, which once insured 33% of the market, and Balva, which insured around 15%.
Can you stop worrying once you have discovered the correct defendant and served your claim properly?
No. In many cases, insurance in respect of a claim against a law firm will be voided by its insurers on the grounds of fraud and dishonesty. There is no obligation for the insurers to avoid cover at an early stage, and avoidance can occur even later in the proceedings, close to or even at trial. Dressing up proceedings as a professional negligence claim does not mean that insurers can’t treat it as fraud and decline cover. (Omega Proteins Ltd v Aspen Insurance UK Ltd [2010] EWHC 2280 (Comm)).
I do not need to worry because there are two partners/directors
Some partnerships or companies are sham partnerships. One man might, for example, be brought in as a sham director/partner for the purposes of gaining entry onto lenders’ panels. Indemnity insurers treat that as a sham, and if the sole/principal is guilty of fraud and dishonesty then cover will be withdrawn.
If there are two or three partners and a blindness is shown to the fraud and dishonesty of the dishonest partner, again cover can be withdrawn. See Zurich Professional Ltd v Karim & ors [2006] EWHC 3355 (QB).
Won’t the Compensation Fund pick up on a claim if fraud and dishonesty has led to the policy being voided?
The Compensation Fund has stated policy that it will not cover any claim unless there has been a misappropriation of funds. And it is likely that if other parties are involved in the fraud other than the dishonest solicitor, they may reduce the award to be granted under Rule 10 to take account of the fraud of others. If they consider that another partner is partially to blame, there may be a reduction of the award under Rule 19.
What happens if the solicitors are bankrupt/insolvent and their insurers are bankrupt/insolvent?
The FSCS will not help you in circumstances where the defendant is a company or a limited liability partnership or a partnership in which the turnover of that firm was more than £1m at its inception. Partners may be able to rely on the employee exception, but that would only apply in circumstances where there was a partnership. Furthermore, Merrett is certainly open to challenge.
Can you rely on the Successor Practice Rules?
Sometimes, larger law firms go into administration and are purchased out of administration by smaller law firms that take on the clients, employees and goodwill of the old insolvent law firm. To show that there is a successor practice, two hurdles have to be overcome: a transition and a holding out, either expressly or by implication.
In those circumstances, the new law firm’s insurance will cover the negligent acts of the insolvent previous law firm, which will need to be named as defendant in the proceedings.
However, matters may not be clear. There may be an attempt to move assets and employees while the insolvent law firm is still trading before it becomes insolvent, and there may be arguments as to whether the new law firm that has taken over the bulk of the insolvent law practice has in fact either expressly or by implication held itself out as successor practice.
So even before you get to the stage of receiving a defence, there are many reasons that you should worry about suing a solicitor.
Jonathan Sachs is a commercial litigation partner and head of professional negligence at Irwin Mitchell
