The Law Society v Sephton & Co & Ors

For a negligence claim arising from an accountant’s report concerning a solicitor’s practice, a compensation fund does not suffer actionable loss merely because a client’s money is later misappropriated. Where the fund has a statutory discretion to compensate, loss first occurs when it resolves to make a compensatory payment.

For fraud, Limitation Act 1980 section 32 requires reasonable diligence directed to discovering the fraud. An intending claimant must show that it could not have obtained material sufficient to plead fraud within the relevant period. Negotiations and a tentative, without-prejudice indication that liability may be conceded do not, without a clear assurance, estop a defendant from relying on limitation.

The Law Society, as trustee of the Solicitors’ Compensation Fund, alleged that Sephton & Co negligently and fraudulently provided unqualified annual reports on a solicitor’s practice. The solicitor had misappropriated client money. The Fund later compensated former clients.

A Deputy Judge in the Chancery Division held that the Society’s negligence and fraud claims were time-barred and rejected its estoppel argument. The Society appealed. The central questions were when loss accrued for the negligence claim, whether fraud could with reasonable diligence have been discovered before the statutory cut-off, and whether correspondence prevented reliance on limitation.

1. Appeal allowed in part. By a majority of Maurice Kay and Carnwath LJJ, the negligence action was not time-barred. The Society’s cause of action in respect of each report accrued when it first resolved to pay compensation from the Fund to a former client whose money had been misappropriated after that report.

2. The majority held that the negligent reports and subsequent misappropriations created an increasing risk that the Fund might compensate clients. They did not themselves create a present legal liability or an inadequate transaction to which the Fund was party. A risk of loss is insufficient in this statutory setting. The relevant measurable loss arose only when the Society exercised its principled discretion to make payment.

3. Neuberger LJ dissented on that issue. He would have held that the first subsequent misappropriation exposed the Fund to a contingent liability and therefore caused actionable loss.

4. All members of the court agreed with Neuberger LJ that the fraud action was time-barred. Under Limitation Act 1980 section 32, the Society had to establish that reasonable diligence could not have discovered material sufficient properly to plead fraud. The information available following the intervention, together with a request for the accountant’s papers and any proper adverse inference from unjustified non-production, meant that fraud could have been discovered before 1 December 1996. The claim issued in December 2002 was therefore too late.

5. The court also rejected estoppel. The solicitors’ correspondence proposed delay and contained only a conditional, without-prejudice indication that liability might be conceded. It gave no clear assurance that a limitation defence would not be taken.

6. The order below was set aside as to the negligence action. Judgment was entered for the defendants in the fraud action only.

• Court of Appeal (Civil Division): In [2004] EWCA Civ 1627, allowed the appeal as to the negligence action, but dismissed it as to the fraud and estoppel issues.
• High Court of Justice, Chancery Division (Deputy Judge): Held all claims time-barred and rejected the estoppel argument; the claims were dismissed.