England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE QBENI 96/0041/E

HIS HONOUR JUDGE MARR-JOHNSON Royal Courts of Justice

Strand

London WC2

Friday, 6th December 1996

B e f o r e:

LORD JUSTICE McCOWAN

LORD JUSTICE PETER GIBSON

LORD JUSTICE WALLER

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NELSON

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NELSON

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(Computer Aided Transcript of the Stenograph Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

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MR G MANSFIELD QC (Instructed by Messrs Aslam Heath & Co, London, WC1) appeared on behalf of the Appellant.

MR R EVANS (Instructed by Messrs Harris Segal, London, W1) appeared on behalf of the Respondent.

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J U D G M E N T

(As approved )

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Crown Copyright

LORD JUSTICE McCOWAN: This is an appeal brought with leave of Saville L.J. from an order made on 16th May 1995 of His Honour Judge Marr-Johnson sitting as a Judge of the High Court that the Plaintiff's solicitors (hereafter called "the appellant solicitors") should pay the costs of the application for a Mareva injunction including the costs of the hearing of 31st March 1995 and the hearing of the application for costs of 16th May 1995, to be taxed on an indemnity basis (in default of agreement) and paid forthwith.

The Judge found that Mr. Mensah-Dankwah was at all material times a solicitor with the appellant solicitors and that he was instructed by the Plaintiff to act for him and in particular to take all appropriate steps to protect what he claimed was his interest in 18 Arundel Gardens, Ilford, Essex. The Plaintiff was at the time an undischarged bankrupt but he did not disclose that fact to the said solicitors.

The said solicitors instructed counsel and they obtained a Mareva injunction for the Plaintiff on the telephone from Owen J. on 21st March 1995.

On the return day for the injunction, namely 31st March 1995, as a result of an admission made by the Plaintiff in cross-examination, the appellant solicitors learned for the first time that the Plaintiff was an undischarged bankrupt.

The Judge in his Judgment said that he had heard evidence from Mr. Mensah-Dankwah and found that he acted with ordinary diligence throughout. He continued: "Nor had his firm acted in a negligent manner. The true position is that the Plaintiff had grossly misled the solicitors."

The Judge therefore held that there was no basis for making a "wasted costs" order under s.51(6)(7) of the Supreme Court Act, 1981, the said solicitors having acted neither improperly, unreasonably nor negligently.

Instead the Judge purported to make the order for costs against the appellant solicitors under the inherent jurisdiction of the Court over solicitors, based upon the following argument of the Respondents.

Reliance was placed upon Section 306(1) of the Insolvency Act 1986 which reads:

"The bankrupt's estate shall vest in the trustee immediately on his appointment taking effect or, in the case of the official receiver, in his becoming trustee."

Therefore, the Respondents argued to the Judge that the appellant solicitors had no authority to act for the Plaintiff in this case, behaved in a manner analogous to that of a breach of warranty of authority and were thereby in breach of their duty to the Court. The learned Judge accepted this argument and said:

"There is a common misfortune here by both solicitors and defendants alike but, on balance, the authorities have decided that the loss should fall upon the solicitors and not the parties. I accept therefore that this action was brought without authority, and, therefore, though satisfied that the plaintiff's solicitors are wholly innocent in this matter, they must pay the costs."

In justification of ordering that the costs be on an indemnity basis he said that "there was no reason why the defendants should be out of pocket at all".

Before this Court Mr. Evans for the Respondents relied on Order 80 rule 2(1) of the Rules of the Supreme Court, reading:

"A person under a disability may not bring or make a claim in any proceedings except by his next friend......"

Mr. Evans suggested that the situation in the case of an undischarged bankrupt is comparable. I cannot agree. A bankrupt is entitled to bring any action except one relating to his property. Thus he can bring an action for personal injury or defamation. This means that he has the capacity and the authority to retain solicitors. What is lost is the right to bring certain types of action.

Mr. Evans placed heavy reliance on the case of Motion v. Moojen [1872] L.R. 14 Eq. 202. For my part, however, I find this case of no assistance at all. It was decided before the Judicature Act and decided no more than that when a bankrupt pursues an action in the administration of his bankruptcy he has to bring it in the Bankruptcy and not the Chancery Court.

We were also referred, as was the Judge, to:

Yonge v. Toynbee [1910] 1 KB 215

Ridehalgh v. Horsefield [1994] 1 Ch. 205

Myers v. Elman [1940] A.C. 282

Heath v. Tang [1993] 1 W.L.R. 1421

Tolstoy v. Aldington [1995] 1 W.L.R. 736

I see nothing in these authorities to contradict the contention of Mr. Mansfield Q.C. for the appellants that a solicitor who lends his name to the commencement of proceedings is saying:

1. that he has a client.

2. that the client bears the name of the party to the proceedings; and that

3. that client has authorised the proceedings.

He does not represent that the client has a good cause of action. What the Plaintiff in the present case was lacking was a good cause of action, since any action in respect of a claim to 18 Arundel Gardens was vested in his trustee in bankruptcy.

In my judgment in commencing these proceedings the appellant solicitors had authority from the Plaintiff to do so and warranted no more than that. In particular they are not to be taken to be warranting that the Plaintiff had a good cause of action vested in him.

In those circumstances I see no breach on the part of the appellant solicitors of their duty to the Court. Indeed such a finding seems to me to be inconsistent with the Judge's other findings, first that the solicitors were wholly innocent in the matter and, second, that they were not properly subject to a wasted costs order. At the very least he should have recognised that he had a discretion whether to make the solicitors pay any costs of the case.

In the light of the Judge's findings of fact as to the conduct of the solicitors, any such discretion should have been exercised in favour of the solicitors.

I would add that, in my judgment, in the light of those findings, it could not properly be considered a suitable case for indemnity costs.

For these reasons I would allow the appeal.

LORD JUSTICE PETER GIBSON: The central question on this appeal is not, pace Mr. Evans for the Third Defendant, the effect of the bankruptcy order upon the rights of the bankrupt in relation to the property owned by him. That effect is plain, having regard to s.306 Insolvency Act 1986 which vested in the trustee in bankruptcy property such as the bankrupt's claimed interest in 18 Arundel Gardens, Ilford on the bankruptcy. Instead the question to be answered is whether the bankrupt had the capacity to retain a solicitor to commence the proceedings which he did commence. Those proceedings are not a nullity such as would have been the case if the plaintiff did not exist. But they were liable to be stayed or struck out because the bankrupt did not have any interest in the property, such interest as he did have prior to the bankruptcy order having vested in the trustee in bankruptcy. They might be stayed pending the decision of the trustee in bankruptcy to take over the proceedings. Alternatively if the trustee did not wish to do so, a defendant could apply to strike out the action. The substantive order made by His Honour Judge Marr-Johnson was, entirely correctly, that the action be struck out unless the trustee in bankruptcy of the Plaintiff showed cause.

Mr. Evans submitted that by virtue of s.306 a solicitor who acts on behalf of a bankrupt does so without authority. He described the position as analogous with that of a solicitor who acts on behalf of a mentally disabled person or a minor. But the analogy does not seem to me apt. Subject only to one limited exception, the rules governing procedure in the Supreme Court and in the County Court respectively do not permit a person under disability to bring an action except by his next friend (R.S.C. O.80 r.2(1) and C.C.R. O.10 r.1(1)). The exception is that by s.47 County Courts Act 1988 a minor may prosecute an action in a county court for any sum of money not exceeding the county court limit which may be due to him for wages or piece work or for work as a servant in the same manner and if he were of full age. There is no such procedural bar for the bankrupt.

There are a number of actions which a bankrupt may bring notwithstanding s.306. He may bring any action in which the claim is personal to himself and affects his person or his reputation. Thus he may bring an action in defamation, for personal injury, in assault and in negligence where his person or reputation is injured. He may bring an action as assignee, and there are other actions which the bankrupt has been held to have been able to bring (see, for example, Chitty on Contracts 27th ed. (1994) para. 20-041).

Yet it is said by Mr. Evans, supporting the decision of the Judge, that the bankrupt is not able to retain a solicitor to bring proceedings to assert a property claim when the property is vested in the trustee in bankruptcy. That seems to me to confuse an effective cause of action with an effective retainer, as Mr. Mansfield Q.C. for the Appellants submitted. If a person who has completed an effective assignment in accordance with s.136 Law of Property Act 1925 of a chose in action retains solicitors to enforce that chose in action but omits to tell them of the assignment, the retainer is, in my judgment, effective notwithstanding that he has no effective cause of action. I cannot see why the position is not the same in a case where in effect there has been an assignment by virtue of s.306.

Mr. Evans drew our attention to the Law Society's Guide to the Professional Conduct of Solicitors, 6th ed. (1993) para. 12.17, in which it is stated at p.265:

"3. The retainer may be determined by operation of law, e.g. the client's or solicitor's bankruptcy or mental incapacity."

Although no authority is cited in support, in Re Moss (1866) LR 2 Eq 345 at p.348 Lord Romilly M.R. held that if the client becomes bankrupt, and the assignees do not employ the firm of solicitors, that is a discharge by the client of the solicitors. Lord Romilly gives no reasons for this view, but his proposition is said to be correct in Halsbury's Laws 4th ed. (1995 Reissue) Vol. 44(1) para. 116 n.6 on three grounds: "(1) the bankruptcy should terminate the authority of the solicitor which he may have warranted to third persons....; (2) the solicitor is probably acting on the faith of his client's credit and bankruptcy makes it impossible for the client to fulfil his obligations in respect of future services and disbursements; and (3) the relationship of solicitor and client is confidential and fiduciary, and the solicitor never agreed to act for the trustee in bankruptcy."

For my part, I have considerable doubt whether the mere fact of a solicitor's client becoming bankrupt automatically operates to discharge the solicitor's retainer. Of the three reasons given in Halsbury, the first raises the question of what authority a solicitor does have when he accepts a retainer to bring proceedings for a client and what warranty he gives by bringing the proceedings in the client's name. Prima facie his authority is to bring the proceedings in the name of the client and I do not see that he warrants more than that he has a retainer from the client who exists and has authorised the proceedings and against whom a costs order can be made. He does not warrant that the client has a good cause of action or that the client is solvent. Whether the client has made representations to the solicitor as to his ability to pay for future services and disbursements depends on the facts of the particular case. It is of course true that the relationship of solicitor and client is confidential and fiduciary and that the solicitor is hardly likely to have agreed to act for the trustee in bankruptcy, but that does not in itself entail the automatic discharge by the bankruptcy of the retainer. Accordingly I am not persuaded by the reasoning in Halsbury. In any event the present case is not one relating to the termination of an existing retainer but one which raises the question whether a retainer ever came into being.

For the reasons given, in my judgment the retainer did come into being. The bankrupt had the legal capacity to retain a solicitor and he gave authority to the Appellants by instructing them to bring the proceedings in his name. In some cases a solicitor who brings proceedings which are doomed to failure will be at risk of being found guilty of improper or negligent conduct and it may be questioned whether he was knowingly a party to the bringing of an action which he knew to be improperly brought. The Judge's findings in the present case exonerate the Appellants of any charge of culpable conduct.

It follows that the basis on which the Judge ordered the Appellants to pay the costs cannot be sustained. I too would allow the appeal.

LORD JUSTICE WALLER: The Plaintiff at all material times was an undisclosed bankrupt. On 6 March 1995 the Plaintiff instructed Mr Mensah-Dankwah, a solicitor with Messrs Aslam Heath, the Appellant firm, to act for him, and in particular, to take all appropriate steps to protect what the Plaintiff claimed was his interest in 18 Arundel Gardens, Ilford, Essex. At this stage the Plaintiff did not disclose the fact that he was an undischarged bankrupt. The Appellant's solicitors exchanged correspondence with solicitors for the First Defendant, who was the son of the Plaintiff and who, acting under a power of attorney which the Plaintiff disputed, was in the process of selling 18 Arundel Gardens. The Appellant's solicitors sought an undertaking that the property would not be dealt with, but the response received, by letter of 13 March 1995, from solicitors for the First Defendant was that the property had been sold "last week" and that they had remitted the proceeds to the First Defendant "on Friday".

The Appellant obtained Emergency Legal Aid and an application was made for a Mareva Injunction supported by an affidavit sworn by the Plaintiff. On 20 March 1995 an injunction was obtained (over the telephone) from Mr Justice Owen against all three Defendants. A written statement of claim was issued and served with the injunctions on the First and Third Defendants.

On 27 March 1995 the First Defendant told his solicitors of the Plaintiff's bankruptcy. A search confirmed the bankruptcy and revealed a Creditors Notice and Bankruptcy Inhibition registered against the Plaintiff's home, 18 Belgrave Road, not the property the subject of the proceedings. It also appeared that the Plaintiff had not told the Official Receiver of any interest in 18 Arundel Gardens the subject of the proceedings. On 28 March 1995 the Appellant's solicitors were notified of the bankruptcy but it was not until 31 March 1995 on the return date of the Mareva Injunction that the Plaintiff admitted that he was a bankrupt.

On 31 March 1995 the Mareva Injunction was discharged and the question of costs was adjourned until 15 May 1995. On 16 May 1995 His Honour Judge Marr-Johnson, sitting as a Deputy High Court Judge, made an Order that the Appellant firm pay all the costs of the Plaintiff's application for a Mareva Injunction dated 21 March 1995 including those of the hearing of 31 March 1995.

The Judge's Findings and Reasons

The Respondents did not allege in their application for the Appellant firm to pay the costs that the firm had conducted the action in an unreasonable or improper manner, but alleged that they had been negligent. The Judge however found that Mr Mensah-Dankwah "acted with ordinary diligence throughout" and that his firm had not "acted in a negligent manner". He found that the Plaintiff had "grossly misled his solicitors". The Judge accordingly declined to make any Order against the Appellant firm on the grounds of negligence.

What however the Judge did find was that so far as the authorities cited to him went they appeared to show

1. that where a solicitor commences an action on behalf of a party he impliedly warrants that he has the authority of that party;

2. that where a party does not have the capacity to instruct a solicitor to commence an action, but an action is nevertheless commenced, there is a breach or something analogous to a breach of that warranty; and

3. that it matters not whether the solicitor is entirely without fault, the result will be that the solicitor is liable to the party against whom proceedings have been taken for all the costs incurred.

We too were taken to certain of the authorities, and Mr Guy Mansfield Q.C. for the Appellant firm sought to persuade us first, that even if a solicitor commenced proceedings without authority, the liability to pay costs was not absolute. He submitted that the court was only exercising its inherent jurisdiction when it made an Order in such a situation and the exercise of that jurisdiction depended on establishing a breach of duty to the court. He relied on certain passages in the speeches of Viscount Maugham, Lord Wright and Lord Porter in Myers v Elman (1940) A.C. 282, supported, as he suggested, by passages in the judgments of the Court of Appeal in Ridehalgh v Horsefield 1994 Ch.205, and Tolstoy-Miloslavsky v Aldington 1996 1 W.L.R. 736. My understanding of his submission was that he was suggesting that unless some fault in the conduct of the solicitor over and above an entirely innocent commencement of proceedings without authority could be established, the jurisdiction did not exist. His alternative submission on this aspect was that there in any event remained a discretion, even if the court had the power under its inherent jurisdiction to award costs.

His second submission was that in any event a distinction must be drawn between the situation in which a Plaintiff's cause of action will be defeated because he or she is the wrong Plaintiff, and the situation in which the Plaintiff has no capacity to instruct a solicitor. His submission was that a bankrupt has the capacity to instruct a solicitor and to commence an action, but in relation to an action concerning property which has vested in his trustee in bankruptcy, the Defendant simply has a right to stay the proceedings because the bankrupt is the wrong Plaintiff i.e. has no locus standi. Mr Mansfield Q.C. submitted that no solicitor warrants that his client has a cause of action; at most he warrants that he has the authority of the client to bring the action.

The submission of Mr Evans was first, that a bankrupt simply has no capacity to instruct solicitors in relation to matters that have vested in the trustee in bankruptcy citing Motion v Moojen (1872) L.R. 14 EQ 202, and Heath v Tang [1993] 1 W.L.R. 1421; second, accordingly the Appellant solicitors were acting without authority; and third, that the cases showed that however innocent, solicitors who act without authority will be liable for the costs on a basis analogous to damages for breach of warranty of authority citing Yonge v Toynbee [1910] 1 K.B.215.

In my view Mr Guy Mansfield Q.C. is right when he says that in a case where the court orders a solicitor to pay the costs when he is acting without authority, the court is acting under its inherent jurisdiction. But I do not think that it follows that in all cases something other than the mere fact that the solicitor is acting without authority would have to be established. Lord Porter in Myers v Elman (supra) at page 336 approving Swinfen Eady J.in Yonge v Toynbee is only pointing out that the solicitor is not being made liable for a breach of warranty of authority because the solicitor is not being sued and is not a party to the action. As Swinfen Eady J. put it, the court is exercising its authority over its officers upon the footing that a solicitor assuming to act in an action for one of the parties, warrants his authority. Furthermore,

(a) none of their Lordships questioned the correctness of Yonge v Tynbee in which a solicitor had totally innocently continued to act for a person of unsound mind, and was found liable for the costs of the other party.

(b) Rose L.J. in Tolstoy (supra) at 746A, far from supporting any theory that fault was a necessary ingredient of the liability for a solicitor acting without authority, contemplates liability for so acting "even unwittingly".

The only support for the view that it should always be necessary to establish some improper, unreasonable or negligent act over and above the mere fact that an action had been commenced or continued without authority comes from the tentative view expressed by Ward L.J. in Tolstoy at 751A. He there suggested that even in relation to commencing actions without authority, liability should now be judged under Section 51(6) and (7) of the Supreme Court Act 1981. As I have said, that view was tentative and since it would in my view involve overruling many previous decisions including Yonge v Toynbee , I do not for my part agree with it.

What however I do think is that it is important to appreciate that if the court is exercising its supervisory jurisdiction, there may be more than one route to the same conclusion. In other words, there may be cases in which in one sense the want of authority analogy will be used, but there will also be a degree of negligence on the part of the solicitor which would render him liable in any event. Thus, there is little doubt, if the solicitor commences an action without obtaining the authority of a corporation, the solicitor will be liable for the costs incurred by a party who relied on the solicitor having such authority, but the route could as well have been by the negligence route as the breach of warranty of authority route. Similarly, if the solicitor commences an action for a bankrupt in relation to a cause of action which is vested in the bankrupt's trustee, there will on most occasions be negligence bringing into play the jurisdiction which does not depend on an analogy with breach of warranty of authority.

It is in a situation in which a solicitor is entirely innocent but may be acting without authority that it becomes really important to analyse the basis on which he may be held liable to pay the costs of the opposing party. There is no question that if the person for whom the solicitor purports to act does not exist e.g. a defunct corporation, the solicitor is, on the analogy of breach of warranty of authority, held liable to pay the costs. Similarly, if the capacity of the would be client is such that the client is simply not able to instruct a solicitor, the solicitor will be held liable to pay the costs on the same analogous basis e.g. a minor or a person of unsound mind. Yonge v Toynbee is an example of the latter case. But, in such cases, it is I think of some importance (1) that the persons or entities simply have no power to retain solicitors at all; and thus (2), applying the analogy of want of authority, it need go no further than warranting that the solicitors have a principal who has authorised them, as opposed to a warranty that the solicitor has the principal who is himself authorised. There is a distinction between those warranties, and in exercising its supervisory jurisdiction it seems to me important to analyse precisely what warranty by analogy should be imposed on a solicitor if he is to be rendered liable in costs.

I would have thought that the court is not concerned to make a solicitor strictly liable simply because the person who instructs him turns out not to be the right Plaintiff, as opposed to ensuring that there is a party against whom the opposing party can obtain an order for costs. Even in the latter context a solicitor does not warrant that his client is solvent, albeit if he brings an action for an insolvent client there may be circumstances where the solicitor's conduct of such proceedings will render him liable as in Tolstoy v Aldington.

How then should an action brought on behalf of a bankrupt be viewed? A bankrupt may bring proceedings as regards property acquired after adjudication before intervention of the trustee, and may bring actions in respect of personal rights, and indeed may even bring actions in relation to property which has transferred to his trustee but which the trustee authorises him to keep. So on any view there are circumstances in which the bankrupt can retain a solicitor and instruct him to bring proceedings.However, that said, the language used by for example Hoffman L.J. in Heath v Tang (supra) is of the "incapacity" of the bankrupt to bring proceedings see; (1423 at D where those proceedings relate to property including any causes of action which have vested in the trustee as a result of adjudication). Furthermore, Williams and Muir Hunter on the Law of Bankruptcy 19th Edition suggest a bankrupt in relation to such actions "cannot bring any action or other legal proceedings to enforce rights relating to his "property". (see page 247 reliance being placed on inter alia Motion v Moojen (supra)) .Thus if one poses the question did the bankrupt Mr Nelson have the power to commence these actual proceedings, I think the answer to that question is that he did not. But that does not necessarily provide the answer to the question. If the warranty which by analogy should be implied is that the solicitor had the authority of the person entitled to enforce the rights in relation to the property, then that warranty would be broken. If however all that was warranted was that the solicitor had a retainer from Mr Nelson and Mr Nelson was a person against whom a costs order could be made, that warranty was complied with.

In my view the latter warranty is the maximum that should be applied by analogy.

I should finally make clear two things. First, because even in the want of authority case the Court is exercising its inherent jurisdiction, it must be right to say that the Court ultimately has a discretion. But second, it is of such importance that solicitors do not commence proceedings without authority leaving the opposing party without even a person or entity against whom an Order for costs can be obtained, that it is difficult to contemplate circumstances where, if the lack of authority leads to that result, the discretion would be exercised in favour of the solicitors. The warranty by analogy however is not a warranty of solvency or that the costs will be recovered, it is that the Plaintiff exists and has authorised the proceedings and no more.

I would thus, on the Judge's findings of fact that the Appellant firm in this case was totally innocent, allow the Appeal.

Order: Appeal allowed.

No order as to costs