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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> European Risk Insurance Company HF v McManus & Ors (t/a McManus Seddon Runhams (A Firm) [2013] EWCA Civ 1545 (02 December 2013) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2013/1545.html Cite as: [2013] EWCA Civ 1545

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IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MS VIVIEN ROSE
[2013] EWHC 18 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		02/12/2013

Lord Justice Davis :

Introduction

1. The defendant appeals and the claimants cross-appeal against part of an order made by Ms Vivien Rose (sitting in the Chancery Division as a deputy judge of the High Court) dated 17 January 2013. The appeal is brought against the judge's decision, in her discretion, to award the claimants 60% of the trial costs. The cross-appeal is brought against the judge's refusal, in her discretion, to grant any declaratory relief. Permission to appeal was refused by the judge but thereafter was granted on the papers in the Court of Appeal. So far as I can see, no point of principle arises at all.

Background facts

2. The context of the proceedings was one of insurance. The proceedings arose in consequence of the claimants, a firm of solicitors, sending a document entitled "Blanket Notification of Circumstances which may give rise to claims" on 21 September 2012. This purported notification was subsequently rejected by the defendant insurers.
3. The facts are set out fully and with exemplary clarity in the judgment below [2013] EWHC 18 (Ch). The judgment is also now reported at [2013] LL Rep IR 534. Since it will be readily accessible to anyone interested in this field, it is not necessary to give anything other than a relatively brief recital of those facts here.
4. The claimants had, since 1999, been partners in a high street practice in Bradford, specialising principally (although not solely) in legally aided family work. In June 2011 they took over another Bradford legal practice called Runhams and the firm name became McManus Seddon Runhams ("MSR"). Runhams had itself previously taken over, in October 2010, another Bradford firm called Sekhon & Firth, whose work comprised mainly residential conveyancing. None of the partners of the two former firms joined MSR, although some of Sekhon & Firth's fee earners did.
5. There had been problems at Sekhon & Firth. In April and July 2011 three of the former members were subject to proceedings before the Solicitors Disciplinary Tribunal. In due course on 12 October 2011, the Solicitors Disciplinary Tribunal found, on admissions, that one had created false documents and misled clients. But there were no findings of dishonesty. The allegations against the other two were dismissed.
6. The insurance policy of MSR relevant to the present proceedings had been made, through an agent, with the defendant ("European Risk"). It was a policy in "claims made" form. It was for the period 1 October 2011 to 30 September 2012 and extended to predecessor practices. Until the acquisition of Runhams, it may be added, the claimants had an unblemished professional indemnity record.
7. In November 2011 MSR received a claim from a former lender client of Sekhon & Firth, dating back to work undertaken in May and June 2007. This was notified to European Risk. Thereafter other claims – 17 in number – were made, all relating to Sekhon & Firth property files. A significant number involved the same borrower (a Mr L). Three related to another individual borrower. When the first claimant Mrs McManus – the managing partner – became aware of the number of claims emerging she was shocked. She caused detailed investigations to be made. The upshot was that in due course it had to be acknowledged that the due diligence undertaken when Runhams was acquired appeared to have been "grossly inadequate".
8. The judge sets out in detail the enquiries Mrs McManus caused to be made. One step taken was to instruct a professional compliance, risk and regulatory consultancy called the Corre Partnership ("Corre") to investigate on behalf of MSR. Corre's representative attended the office in September 2012 and examined 32 Sekhon & Firth files, from a list prepared by Mrs McManus. Seventeen of these related to the matters which were the subject of the claims already notified. The 15 other files related to the same borrowers as included in the first 17 files. Of those, 13 related to Mr L. Mr L had since been declared bankrupt.
9. Corre also advised MSR to examine further Sekhon & Firth files in order to identify additional problematic matters, giving it a pro forma checklist to work to for this purpose. The exercise was carried out on a selection of such files by certain MSR employees, under Mrs McManus' direction, on Saturday 15 September 2012. It was styled at trial the "Saturday file review". The completed checklists – but not the files – were then sent to Corre. On 19 September 2012 Corre submitted their report ("the Corre Report") based on their own examination of the 32 files and on the completed checklists compiled by MSR from the Saturday file review. The principal conclusions of the Corre Report are set out in paragraphs 18 and 19 of the judgment below. It is to be noted that there was included a conclusion that there was a "consistent pattern of breaches which include but are not limited to" the failure to report to lenders on the seven matters there listed (all potential indicators of mortgage fraud or other impropriety). It was also recorded that there was "evidence to suggest" that some of the many fee earners involved at Sekhon & Firth were not admitted solicitors and that "it is arguable whether they had sufficient expertise to deal with the transactions".

The insurance policy and notification letter

10. As I have said, the insurance policy was of the "claims made" kind. Such policies are commonplace in this area of professional indemnity assurance. Their rationale, and the way in which policies of this particular kind are designed to operate, are very helpfully set out in cases such as J. Rothschild Assurance plc v Collyear [1999] LL Rep IR 6 (Rix J) and Friends Provident Life & Pensions Ltd v Sirius International Insurance Corporation [2005] LL Rep IR 135 (Moore-Bick J). Further detail is not necessary here.
11. The relevant terms of the insurance policy in this case were as follows:

"1. Scope of Cover

1.1 Civil Liability

The Insurer will indemnify each Insured against civil liability to the extent that it arises from private legal practice in connection with the Insured Firm's practice, provided that a claim in respect of such liability:

(a) is first made against an Insured during the period of insurance; or

(b) is made against an Insured during or after the period of insurance and arising from circumstances first notified to the Insurer during the period of insurance.

….

1.4 Prior Practice

The Insurer will indemnify each Insured against civil liability to the extent that it arises from private legal practice in connection with a prior practice, provided that a claim in respect of such liability is first made against an Insured:

(a) during the period of insurance; or

(b) during or after the period of insurance and arising from circumstances first notified to the Insurer during the period of insurance.

….

7.2 Notice of claims and circumstances, etc

The Insured will give notice in writing to the Insurer, as soon as reasonably practicable of any;

(a) claim first made against any Insured during the period of insurance; or

(b) circumstances of which any Insured first becomes aware during the period of insurance;

(c) investigation, inquiry or disciplinary proceeding during or after the period insurance arising from circumstances first notified to the Insurer during the period of insurance.

Circumstances means an incident, occurrence, fact, matter, act or omission which may give rise to a claim in respect of civil liability.

Prior Practice means each practice to which the Insured Firm's practice is ultimately a successor practice by way of one or more mergers, acquisitions, absorptions or other transitions but does not include any such practice which has elected to be insured under run-off cover in accordance with clause 5.3(a) of the [Minimum Terms and Conditions]."

12. As a result of what had been revealed by the investigations, MSR sent (by email) a notification letter – with two appended files – to European Risk, through its agent on 21 September 2012. It was plainly a carefully considered and carefully crafted letter. It was headed "Blanket Notification of Circumstances which may give rise to claims". It was common ground at trial and before us that blanket notifications are not necessarily impermissible, in principle, under insurance contracts of this particular kind. That has been so held in cases such as the Collyear case (supra) and HLB Kidsons v Lloyd's Underwriters subscribing to policy 621 [2009] Lloyd's Rep IR 178. It is to be borne in mind that the notification of such claims or circumstances is not simply designed for the protection of the assured (that is, by seeking to avail itself of cover): it is also for the protection of the insurers (that is, to enable them to make appropriate financial reserves and other arrangements to guard against claims ultimately eventuating).
13. The judge sets out very fully in the judgment relevant parts of this very lengthy notification letter, which do not need replication here. There can be no doubt that, properly read, the letter was designed to have the widest possible reach. Included in it, for example, is this statement:

"…. The conclusion my partners and I come to, which is the inevitable conclusion one must come to is that every file conducted by Sekhon & Firth and Runhams LLP (in the period subsequent to the merger of those two practices), and in respect of which this firm is deemed by the Successor Practice Rules to be the successor practice contains or is more likely than not to contain examples of malpractice, negligence and breach of contract and so each and every file of the predecessor firms Sekhon & Firth, Sekhon & Firth LLP and Runhams LLP should properly be notified to you as individually containing shortcomings on which claimants will rely for the purposes of bringing claims against this firm as successor practice."

There had also been included a statement that MSR had carried out a "random review of over 110 files" and that "the overwhelming majority of these 110 files" endorsed and confirmed MSR's "worst suspicions of shortcomings". It was also indicated in the letter that it was estimated that there were some 5,000 files or case matters which were being notified but that it could not be ruled out that there were more. Concern was expressed that the files identified "are but the tip of an iceberg".

14. In the result, European Risk rejected the notification letter by email of 27 September 2012 sent by the agent. The 32 matters identified in the Corre Report, however, were accepted, with reservation as to rights, as having circumstances attached to them which may give rise to a claim. As to the remainder of the notification, this was said:

"The list of matters contained in the List and the Spreadsheet do not amount to valid Circumstances as you have not identified the specific incident, occurrence, fact, matter, act or omission which would give rise to a Claim on each individual file. Simply stating that Sekhon & Firth worked on the files in the List and Spreadsheet does not constitute a valid notification, and as such, the notifications are firmly rejected in their entirety and without question…."

15. This rejection apparently came as a great blow to MSR. It found itself unable to obtain insurance from qualifying insurers for the year commencing October 2012. Ultimately it had to enter, on a short term basis, the Assigned Risk Pool: in effect, insurance of the last resort. It was pointed out by European Risk at trial that at least some of such difficulties in MSR's obtaining insurance had in fact been emerging even prior to receipt of the rejection email. Be that as it may, the greatly increased cost of such insurance was considered crippling and as having the potential to cause MSR to have to close down. Happily, this has not transpired; and, as we were told, MSR has now been able to obtain insurance from a qualifying insurer. But it has done so, as we were told, at a premium approaching nearly double its previous premium rate.

The proceedings

16. The litigation seems to have been marked by a mutual perception of tactical manoeuvring. The stance of MSR was that its entire future was being jeopardised by European Risk wrongfully failing to confirm the availability of cover for potential claims properly notified under the insurance contract. The stance of European Risk was that MSR was seeking unjustifiably to foist on to European Risk overstated, unspecified and speculative "claims" or "circumstances" with a view to enhancing its ability to obtain insurance at relatively moderate rates from qualifying insurers in succeeding years.
17. The proceedings were issued on 19 October 2012. The trial (on preliminary issues) was expedited. MSR initially claimed, by way of declaratory relief, a declaration that a valid notification was made in relation to the circumstances notified in the notification letter: as well as other relief, including a mandatory injunction and damages. By Amended Particulars of Claim, there was then sought, among other things, a declaration that a valid notification of the circumstances specified in paragraph 14 of the Amended Particulars of Claim had been made on 21 September 2012. There was also sought a declaration that the claimants were entitled to be indemnified against all claims arising out of such circumstances. Paragraph 14 of the Amended Particulars of Claim, which follows extensive pleading of the notification letter, read as follows:

"14. It follows that, subsequent to the aforementioned internal and external investigations, the claimants became aware of a range of facts and matters that were indicative of serial malpractice in the conduct of conveyancing transactions carried out on behalf of purchaser clients and/or lender clients by Sekhon & Firth and/or Sekhon & Firth LLP and/or Runhams LLP or those acting on behalf of those partnerships."

This, then, is extremely wide: it relates to "serial malpractice in the conduct of conveyancing transactions" carried out on behalf of "purchaser and/or lender clients" of Sekhon & Firth and Runhams. In due course, however, this was adjusted so as at least to exclude "sale only" files, and was adjusted again at trial.

18. By its defence, European Risk among other things pleaded that the Amended Particulars of Claim were stating that the notification was far more extensive in effect than pleaded in the original Particulars of Claim. It disputed that there had been a valid notification of circumstances by the notification letter. It disputed that the grant of the declaratory relief as claimed was justified.
19. One point also raised in the defence was that MSR had "improperly exaggerated" in the notification letter the extent of the problems it had uncovered. There was, however, no express plea of breach of the implied duty of utmost good faith and there was no plea that the notification letter had been invalidated by reason of want of good faith. Nevertheless, accusations of bad faith seem to have been introduced into submissions at trial.

The judgment

20. The judge, as I have said, reviewed the background facts extensively. She noted the oral evidence of Mrs McManus, finding her "an entirely straightforward and credible witness doing her best to assist the court". Any implied allegations of bad faith can be taken as rebutted by that finding.
21. On the important issue of whether European Risk's rejection email was justified, and whether it was entitled to say that its liability was limited to identified files, the judge carefully considered the evidence and applicable case law. She found (paragraphs 44 and 45 of the judgment) that the stance taken by European Risk in its rejection email was "clearly wrong". She said that it was at odds with the case law. There is no need to consider that further, however, as there is no appeal against that conclusion.
22. The ensuing question, MSR having succeeded on this point, was as to remedy. Was this an appropriate case for declaratory relief?
23. It is to be noted that, on the final day of the hearing, counsel for MSR redrafted once more the proposed terms of the declaratory relief sought. The revision to the declaratory relief sought was wide ranging. It extended over five paragraphs. It is summarised by the judge at paragraph 48 of her judgment.
24. The judge directed herself having regard to, among other things, the case of Rolls Royce plc v Unite the Union [2009] EWCA Civ 387. That can be taken as an illustration of circumstances where a court might properly conclude, in its discretion, that the grant of declaratory relief was not appropriate; and that so far as the parties themselves were concerned "everybody knows where they stand" from the judgment itself.
25. The judge went on to consider where the balance of justice lay in deciding whether to grant or withhold declaratory relief. She noted, in paragraph 55 of her judgment, by reference to the wording of the proposed declaratory relief then being sought, that it was "not at all clear" what the effect of such a declaration would be. She found:

"I am not in a position to say whether the circumstances notified indicate that errors were likely to be made by all fee earners in Sekhon & Firth rather than a few 'bad apples'."

The judge also expressed concern that:

"….Insofar as such a declaration would be relied on by MSR as a finding by me that claims made in relation to files created during any particular period after Sekhon Firth had been acquired by Runhams must be treated as arising from the circumstances notified, that would also go beyond any finding that would be justified by the evidence before me…."

By reference to other paragraphs of the proposed declaratory relief she expressed this concern at paragraph 56:

"….The case law is clear that a notification can only be valid insofar as it is based on circumstances which are known to the insured at the time the notification is made: there must be 'a substratum of underlying external fact, over and above the [insured's] mere concerns': see Kidsons at paragraph 74. A declaration setting out the circumstances which have been 'validly notified' would appear to prevent European Risk from being able, once a claim is made, from arguing that the underlying matters to which MSR referred as circumstances in the Notification Letter were not in fact true and so could not validly be notified to European Risk..."

The judge considered that issues about the limits of the circumstances notified and the range of claims that might be said to arise from them were matters better left to be determined if and when a claim arose.

26. She further indicated in paragraph 62 that she must conclude that:

"….almost inevitably any declaratory relief would be either too narrow or too broad. It would also risk raising more problems than it solves rather than providing assistance to the parties or any future court faced with deciding whether a particular claim arose from circumstances notified in the Notification Letter….."

27. She decided, overall, that the best course was to restate her conclusions on the issues raised by the parties but to decline to grant declaratory relief. She clearly and concisely restated her four main conclusions in the last paragraph (paragraph 63) of her judgment in these terms:

"63. I consider that the best course to follow is that which was adopted by the courts in the Rolls Royce case, namely for me to restate my conclusions on the issues raised by the parties so far as I can but to decline to grant declaratory relief. My conclusions, therefore, are as follows:

(1) The Rejection Email sent by European Risk was wrong insofar as it purported to limit the insurer's future liability to claims arising from the 32 transactions examined in the Corre Report.

(2) The Rejection Email was also wrong insofar as it appeared to require each particular transaction to be identified and notified to European Risk as a separate circumstance before European Risk could be liable for a claim arising out of that transaction.

(3) To the extent that the Notification Letter validly notified European Risk of circumstances of which MSR was aware relating to problems in the handling of transactions by Sekhon Firth or Runhams, European Risk will be liable to pay out under the policy on any successful claim against MSR if that claim is a claim to which the validly notified circumstances give rise.

(4) The precise scope of the circumstances validly notified in the Notification Letter is an issue to be determined as and when it arises in the context of an actual claim."

Submissions on cross-appeal

28. It is convenient to deal with the cross-appeal first.
29. Before us, Mr Cannon QC (who did not appear below) leading Mr McGurk (who did appear below) proffered a yet further form of declaratory relief sought. This too is very lengthy. It is appended to this judgment.
30. The complexity of the declaratory relief sought by this draft order continues to be such as not to make it comprehensible without a close understanding of the facts and circumstances recorded in the judgment under appeal: and even then, I would venture to suggest, not readily comprehensible in all respects in any event.
31. It is to be noted that the present draft (at paragraph 1.1) is prefaced, as part of the circumstances said to be "validly" notified, by the words: "Persistent failure to report…." Paragraphs 1.2 and 1.3 re-introduce matters raised by the Corre Report and mentioned in the notification letter. I place on record that, on the second day of the hearing before us, Mr Cannon – in the light of the sustained criticisms in argument of Mr Pooles QC (appearing, with Mr Holwill, for European Risk) – then withdrew those particular two sub-paragraphs.
32. Mr Cannon's submissions can be quite shortly summarised. He said that the judge, in effect, lost the wood for the trees. He submitted that the issue of whether or not there had been valid notification of circumstances and the issue of the scope of the notification fell to be assessed at the time of the notification – and nothing, he said, could be achieved by waiting until the time of claims actually being made. He also emphasised that the word "may", as used in the policy, set a low bar. He said that since MSR had succeeded on the principal issue there was no reason to withhold from it any or all declaratory relief to reflect that success. On the contrary, there was real potential advantage for MSR, if not European Risk also, for such declaratory relief to be granted: it could avoid, for MSR, higher premiums and reduce, for all concerned, uncertainty.
33. Mr Pooles on the other hand submitted that it was most awkward to assess whether any future claim was, or was not, within the scope of the notification without knowing what the claim actually was. He submitted further that, in any event, whether or not there was a "persistent failure" or "consistent pattern" was, in truth, a matter of fact which could not at present be established. Nor could there be at present established what were indeed known to be "circumstances" at the time of the notification. He said that the declaratory relief as sought thus could operate potentially to fix European Risk with a notification which may not have been correct. He accordingly submitted that it would have been and would be unfair to preclude, by grant of the declaratory relief sought, European Risk from arguing hereafter that the matters purportedly notified in the notification letter were incorrect or were not known to MSR at the time of the notification letter. He also alluded to the potential difficulties arising at present from the decision in Quinn v Law Society [2011] 1 WLR 308: a difficulty appreciated only very late in the day by MSR itself. This authority would indicate that privileged material may not be disclosed by solicitors to their insurers unless there has been a waiver of privilege by the client concerned. That, he observed, also currently limits European Risk in its assessment of the accuracy of what was said by the purported notification. He said, in sum, that the judge had a discretion and her fully expressed reasoning in refusing to grant declaratory relief was amply justified.

Conclusion on cross-appeal

34. I am in no doubt that the cross-appeal should be dismissed. I can see no basis for interfering with the exercise of the discretion by the judge to withhold declaratory relief, for which she gave detailed and rational explanations.
35. Mr Cannon had great difficulty in pointing to firm evidence of any "persistent failure" or "consistent pattern". Certainly the judgment below, by reference to the cross-examination of Mrs McManus, had identified significant inroads made into MSR's previous assessment, as put forward, of the position: and significant disputes had emerged as to matters advanced in the notification letter. For example, aspects of the Saturday file review had been treated in the Corre Report as, in effect, representative of errors made. But that was in fact shown not necessarily to be so. Mrs McManus herself conceded that mistakes had been made in the Saturday file review. Moreover, the assertion in the notification letter that the "overwhelming majority" of the examined 110 files indicated potential claims really has transpired to be an assertion which was not substantiated. It was at all events shown, on investigation at trial, that there was not an "overwhelming majority" of such files, on any view. Some of the files included in the Saturday file review in fact had already been the subject of the Corre Report; and over 30 of the files, it transpired, represented transactions which were not proceeded with. Yet others were identified as revealing no fault at all.
36. Furthermore, and as I have indicated, it could not safely be said at all that the matters identified in the Corre Report – incorporating the Saturday file review of the 110 files – could in fact be properly taken as representative or random samples as the notification letter had asserted. For one thing, they were not all randomly selected: it emerged at trial that some of those 110 files were already identified, and selected, as potential risk files or relating to potential "risk" clients. And to the extent that the Corre Report had identified 32 specific cases – which, indeed, European Risk had accepted, under reservation – it would, in my view, be of potential concern if declaratory relief were at this stage to be obtained (and thereafter potentially used in the market) by treating those particular matters as though they were truly representative and as though much wider conclusions could properly be extrapolated from them. It is also rather disconcerting that – the nature of the declaratory relief sought having already shifted significantly from time to time in the course of the proceedings below – Mr Cannon then was further constrained to abandon two aspects of the version initially presented to this court, as indicated above. It is also revealing: for the judge herself in her judgment had noted that the point stated in the Corre Report that a number of the fee earners were not qualified "may or may not turn out to be significant in relation to later claims". The late withdrawal of this part of the draft order placed before us is a tacit acceptance of the judge's stance on this.
37. I have to say that I in any case found to be highly speculative Mr Cannon's assertion that the grant of the declaratory relief sought would be of considerable benefit to the parties over and above the existence of the judgment itself.
38. I do not propose to say more. I have recited some of the central aspects of the judge's reasoning at some length; but the entirety of her reasoning is powerful and cogent. There is, in my view, no proper basis for challenging her refusal in her discretion to grant declaratory relief.

Appeal on costs

39. That leaves European Risk's appeal on costs.
40. The judge gave a full ruling on costs on 17 January 2013, when she handed down the main judgment. European Risk had boldly sought an order that MSR pay European Risk's costs, on the basis that MSR's claim for declaratory relief (and mandatory injunction) had failed for essentially the reasons advanced by European Risk at the outset. The judge, however, observed:

"This submission, it seems to me, airbrushes out of the judgment the main finding, which was that the email rejection was clearly wrong, and the stance that the defendant has maintained throughout these proceedings, namely that the claims covered by the notification letter can go no further than the specific files identified in the letter and that future claims will only be covered by the defendant if they arise from these files, was not correct."

She noted that her invitations during the hearing to counsel for European Risk to modify that stance had not been taken up. She found in terms that European Risk's stance was such that "it really gave the claimants no option but to come to court to clarify the matter".

41. In such circumstances she found that MSR was "clearly entitled to a proportion of their costs". She considered that a reduction was appropriate in order to reflect MSR's failure to obtain declaratory relief. She decided that the right order was that MSR should receive 60% of the costs of the hearing (including a prior expedition application).
42. It is now sought to be said this order did not properly reflect the outcome of the trial. In particular, it is said, the claim by MSR for declaratory relief was entirely rejected. It is said the judge attached too much weight to the wording of the rejection email and not enough to the basis – corresponding to what European Risk had itself been saying – on which she refused declaratory relief. Yet further, it is said that MSR's notification letter had been found to contain significant inaccuracies. Various other points are put forward.
43. This will not do. In the light of the judge's judgment MSR had had a degree of success. That is reflected by the first two conclusions restated by the judge in paragraph 63 of her judgment: and the other two conclusions as restated in that paragraph were not adverse to MSR, even if falling some way short of what it had sought. It is true that MSR entirely failed in its claim for declaratory relief: and that had been an issue much debated at trial. European Risk succeeded in that regard. But it was a matter for the judge's discretion and evaluation as to the appropriate apportionment of costs to reflect that. She was best placed to assess the position, having had the conduct of trial. There is no proper basis, on usual principles, for this court to interfere with the judge's exercise of discretion on costs in this respect.
44. A further, and separate, complaint is made that MSR delivered the trial bundles very late and in contravention of the provisions of the Chancery Guide. It was said that caused inconvenience and also extra work for European Risk's legal team. It is submitted that, at all events, all the costs of preparing the bundles (including necessary redactions) should be borne by MSR. No doubt the judge might have made such an order. But she expressly had regard to the point about the bundles before adjudging that in the round MSR should receive 60% of its costs. That was a matter for her overall discretion.

Conclusion

45. I would dismiss both appeal and cross-appeal.

Lady Justice Black:

46. I agree.

Lady Justice Arden:

47. I also agree.