Sweetman v Nathan & Ors

A claim against a negligent solicitor is not barred merely because the loss would not have occurred but for the claimant’s fraud on a third party. The decisive question is whether the claim can be pleaded and proved without reliance on the illegality and seeks redress for a genuine, conceptually separate wrong.

Issue estoppel between former co-defendants requires the conditions governing estoppel between co-defendants to be met. A shared interest in resisting the earlier claim does not establish the necessary conflict of interest. A strike-out is inappropriate where loss and abuse issues require factual determination.

Sweetman, acting as assignee of his trustee in bankruptcy, sued the former partners of his solicitor, Nathan. He alleged negligent conveyancing in failing to identify that the proposed purchaser was the worthless Darvis rather than the apparently substantial Darvist. He claimed losses arising from the second Coutts loan, payments made in reliance on the proposed sale, bankruptcy-related losses, and money allegedly retained by Nathan.

In earlier deceit proceedings, a deputy High Court judge had found that Sweetman and Nathan had fraudulently obtained the £1.5 million second loan from Coutts. Stanley Burnton J struck out the present claim on issue estoppel and abuse-of-process grounds. The appeal concerned whether that fraud finding necessarily defeated the negligence claim and whether the claim had any real prospect of establishing recoverable loss.

1. Appeal allowed. The court held that Sweetman should not be held to his earlier legal concession that a finding of fraud against Coutts necessarily defeated his claim against Nathan’s partners.

2. A claimant is barred by illegality only where the claim is founded on the illegal act. The alleged negligent conveyancing was conceptually separate from the fraud on Coutts. The claim could be pleaded and proved without relying on that fraud. The fact that the loss would not have occurred but for the decision to deceive Coutts was therefore not determinative. The court followed Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [2000] 1 Lloyd’s Rep 218 and applied the pragmatic approach in Saunders v Edwards [1987] 1 WLR 1116.

3. The court did not accept the earlier reasoning in the Shepherds proceedings that the duty to mitigate prevented recovery. On the assumed facts, Sweetman incurred the loan liabilities and made the relevant payments while unaware that the purchaser was worthless. The duty to mitigate any loss caused by the solicitor’s negligence was therefore not engaged at that stage.

4. The court considered it unnecessary to decide issue estoppel, but recorded that the Munni Bibi conditions for estoppel between co-defendants were not satisfied. There had been no conflict of interest between Sweetman and Nathan’s partners in resisting Coutts’ claim. Whether it would be an abuse of process at trial to contest the fraud finding was left for the trial judge, having regard to Secretary of State for Trade and Industry v Bairstow [2003] 1 BCLC 696.

5. The claim was also not bound to fail for want of loss. The trustee acquired Sweetman’s rights on bankruptcy under Insolvency Act 1986, section 306. The evidence did not establish that Sweetman’s gains necessarily exceeded his losses, or that payments made to Coutts by others extinguished every possible claim. The defendants were entitled to security for costs in an amount Sweetman could afford, to be determined by the costs judge.

• Court of Appeal (Civil Division): Allowed Sweetman’s appeal in [2003] EWCA Civ 1115. The prior costs order was to stand; the appeal costs were costs in the case; and the security-for-costs order remained in place.
• High Court, Queen’s Bench Division (Stanley Burnton J): Struck out the surviving negligence claims on issue estoppel and abuse-of-process grounds. No citation was stated in the judgment.