England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LEEDS DISTRICT REGISTRY
(HIS HONOUR JUDGE BEHRENS)

		Royal Courts of Justice Strand London WC2 Thursday, 5th October 2000

Thursday, 5th October 2000

1. LORD JUSTICE OTTON: I shall invite Lord Justice Ward to give the first judgment.
2. LORD JUSTICE WARD: On 18th July of this year His Honour Judge Behrens sitting in Leeds as a deputy judge of the Chancery Division gave the claimant leave to amend the statement of claim. He also fixed a case management conference for 26th September and on that occasion he ordered that the trial of the action which had been part heard following the grant of leave to amend should continue on 12th October with a time estimate of two days. The defendant seeks permission to appeal both orders.
3. The action is brought by the Leeds and Holbeck Building Society against their solicitor Mark Ellis, trading as Mark Ellis & Co, who acted both for the Building Society and for two of the Society's borrowers in connection with mortgages which secured those loans. The conveyancing business took place as long ago as 1989. A writ was issued in November 1985 against the expiration of the six-year period of limitation. The claim was for damages in respect of the defendant's negligence or breach of contract and there was also at that stage a claim for breach of trust which has not been pursued as is common ground.
4. The nature of the Building Society's case as pleaded in the statement of claim served on 13th December 1995, a long time ago, which incidentally was not settled by Mr Higginson who now appears for the Building Society was in summary this. A property development company known as Deviland Limited built a block of 20 residential flats known as Chaley Court in Billericay, Essex. The directors were Mr J F Davis and Mrs P J Hannaway who was later to become Mrs Davis. They lived at Chadwell Cottage.
5. Early in 1989 the defendant was retained by six members of the Davis/Hannaway family being their children in connection with several purchases of flats in that block of flats. The loans of the six members of the family were secured by mortgages granted by the Abbey National Society and by UCB Home Loans. They are the so-called antecedent transactions which are central to this appeal.
6. On 30th October 1989 Mr Peter Hannaway applied to the Leeds & Holbeck Building Society for a mortgage advance of £68,000 to purchase Flat 2 from Deviland for £85,000, and on the same day Terry Davis applied to borrow £85,000 to purchase Flat 5 for £115,000. Both of them named the defendant solicitor as their solicitor and he was retained by the Building Society to act in connection with the various advances.
7. Paragraph 10 of the Statement of Claim pleads the retainer and the defendant's duties in these terms:

"It was an implied term of the said contracts of retainer that the Defendant would exercise the care and skill to be expected of a reasonably competent solicitor. Further, or in the alternative, the Defendant owed a duty of care to the Plaintiff at common law. Further, the Defendant owed to the Plaintiff the fiduciary duties a solicitor owes to his client. The said term and duties included:

(a) a duty to inform the Plaintiff of any information of which he was or became aware which a competent solicitor would reasonably expect the Plaintiff to take into account in deciding whether, or on what terms, it would make the mortgage advances available;

(b) a duty to inform the Plaintiff of any matters which would put a reasonably competent solicitor on enquiry as to the bona fide of the purchase transactions."

8. In November of that year the solicitor submitted a Report on Title giving the all clear to the advance of the monies which were duly paid over towards the end of the year. It seems that by about September of 1990 the borrowers defaulted and so possession was taken of the mortgaged properties. They were sold for significantly less than was outstanding on the mortgages and by this action the claimants seek to recover their loss.
9. Returning to the pleadings, the breach of duty as it was originally pleaded was set out in paragraph 16 of the statement of claim. It alleged as follows:

"In breach of the implied term and duty of care pleaded in paragraph 10 hereof the Defendant failed to consider the implications of the facts and matters hereinafter particularised with regard to the bona fides of the Antecedent Transactions and of the sale and purchase of Flat 2 to Peter Hannaway by Deviland and of the sale and purchase of Flat 5 to Terry Davis by Deviland and to inform the Plaintiff:..."

10. And then follows four sets of facts which were relied upon. Paragraph (a) was in summary that he was in receipt of instructions from six other members of the family, that they all gave the same address Chadwell Cottage, that the company's secretary and directors' names should have alerted the competent solicitor to the possibility that they were all related, and the respective deposits of the flats were paid directly to Deviland.
11. Paragraph 17 then asserted that a reasonably competent solicitor with knowledge of those facts and matters would have taken the following steps thusly to verify the identity and bona fides of the purchasers by meeting them in person; secondly, by making a company search to check on the names and addresses of the prospective purchasers.
12. Paragraph 19 alleged that had the defendant taken those steps he would have discovered the following facts and matters material to the bona fides of the transactions, and then sets out the names of the shareholders and directors of the company, their relationship one with the other and (c) that in the premises all the purchased transactions were in reality sales by the vendors to the members of their own family funded by advances from the Abbey National and the plaintiff.
13. That was the state of the pleadings when the matter came on for trial before the judge commencing on 3rd July. By that time there had been a discovery, and discovery had eventually been obtained after some application to the district judge for the conveyancing files of the six antecedent transactions. They formed part of the agreed bundle of documents before the judge. Mr Ellis had prepared a lengthy witness statement which we have not seen but that had been exchanged and the expectation was no doubt that he would give evidence to confirm it.
14. During the course of the opening Mr Higginson for the Building Society submitted, as the judge was to record it, that it was as plain as a pikestaff that the circumstances of the eight transactions amounted to a fraudulent scheme. Mr Warnock for the defendant solicitor pointed out that if fraud was being alleged it had to be fully particularised, and that little exchange of interlocutory jostling ended with the judge observing at page 68 that he was minded not to rule whether any application to amend should be dealt with at that stage and he seemed to indicate his willingness in time-honoured fashion to "go on with the evidence and I shall make up my mind in due course when I have heard everything". And so the evidence was given.
15. But in the middle of the second day Mr Ellis who had been present in court seemed to leave court and his absence may have been noted, but perhaps Mr Higginson and perhaps even the judge had not fully expected what was to happen, that is that the defendant indicated that he would close his case without giving evidence at all. That somewhat threw the cat among the pigeons so far as the plaintiff was concerned because he was relying on cross-examination of the solicitor to place before the judge all the information contained in the conveyancing files which the plaintiff was anxious to adduce in order to support the claim that some hanky-panky had taken place.
16. So the question arose what should be done. There was discussion between counsel and a ruling by the judge that in effect the pleading as it stood was not sufficient. The judge concluded on 5th July:

"At the end of the day, however, I have to decide and rule as to whether the pleading as it currently stands is sufficient to allege iniquity in the other six transactions. I am bound to say that my mind has wavered throughout the submissions, but at the end of the day I have come to the conclusion that Mr Warnock's submissions are to be preferred. It is not, in my view, sufficient to leave the allegation of iniquity or not bona fides to be inferred. It seems to me that if Mr Higginson wishes to raise those allegations, he does need specifically to plead them and, therefore, I do rule that it is necessary to plead that the other six transactions were not bona fide in whichever way he wishes to do so, if he wishes to rely on that in the trial. Whether he would get leave to amend at this stage I choose not to rule on for the moment."

17. So the matter was stood over for the claimant to consider its position.
18. On the resumed hearing on the 18th Mr Higginson did seek leave to amend his statement of claim and to introduce amendments to this effect. There was to be no amendment of the nature of the duty imposed upon the defendant whether under contract or in tort. The breach of the duty pleaded in paragraph 16 was amended in this way: It was to be alleged that the defendant failed to consider the implications of the facts and matters hereinafter particularised, and for my part I would emphasise the words "the implications" with regard to the bona fides, and then were introduced the words "of the Antecedent Transactions" and of the two sales of the two material flats.
19. Paragraphs (a) to (d) remain as they were but the further matters which it was alleged the solicitor had failed to consider and which he had failed to inform the plaintiff about were pleaded in paragraph (e) this way:

"of the facts and matters in relation to the Antecedent Transactions which are particularised in the Schedule hereto."

20. In that schedule the six material transactions were analysed and the salient facts which the claimant relied upon were extracted. Advancing to the way Judge Barrett summarised that, I usefully adopt his summary which he characterises this way:

"It is right to say, as Mr Warnock does, that some of the words that he [Mr Higginson] has used in his pleading may be rather more forceful than is justified, and one can say that, because this case has been going on for three days, I have actually seen the evidence in support of his allegations. For example, he makes an allegation that, so far as Flat 1 is concerned, there was channelling of the advance through another ledger card. That is based on the fact that Abbey National did indeed lend £75,000 to the borrower in relation to Flat 1, and that the loan of £75,000 found its way, on the same day as it was made, on to her ledger card, but what the ledger card did not say was Abbey National Building Society. What it did say was 'Transfer from another file', which at the moment has been undisclosed. There may be any number of explanations for that. The position is as I have indicated, that on the very day of the advance the figure appeared on her ledger card. Whether it went through another account first, to my mind that does not come anywhere near being either the evidence of, or really justifying, an allegation of fraud, and it may well be that the use of the word 'channelling' is inappropriate, but it does not seem to me that the fact that it has been used means that there is an allegation of fraud in relation to that. It is equally right to say that the words 'purported' and 'inexplicably', and other such words, have appeared in the draft pleading, but at the end of the day I do not think, notwithstanding the submissions of Mr Warnock, that there is here an express allegation of fraud against Mr Ellis.... "

21. In effect what was being pleaded was certain facts and matters which the plaintiff was anxious to submit called for explanation, and the use of the word "inexplicably" with reference to the deposit being paid to the vendor solicitors, says Mr Higginson, is simply a flagging of the fact that it calls for explanation.
22. The pleading then went on to introduce as paragraph 16A these allegations:

"(1) The Claimant will say that the matters pleaded in paragraphs 16(a) to 16(e) amounted to a fraudulent scheme in which all 8 borrowers, the officers of Deviland, Mr J F Davis and Mrs P J Hannaway were involved and that the Defendant knew all of this because of his having been retained in the Antecedent Transactions as well as in the instant transactions.

(2) In the premises the Defendant should have either informed the Claimant as aforesaid or declined or ceased to act for it."

23. Paragraph 17 was amended by alleging that a reasonably competent solicitor with knowledge of the facts would have taken the following steps, and the further step pleaded at (c) is:

"correlated the circumstances of the Antecedent Transactions with the instant transaction so as to identify what was in any event obvious, namely that together these circumstances amounted to a fraudulent scheme as aforesaid."

24. Paragraph 19(c) again asserted that the transactions were in reality a fraudulent scheme.
25. Objection is taken to that amendment because it is said that the court has no jurisdiction to permit it to be made a new cause of action having been introduced by those amendments. There are, it is submitted, two causes of action which may have been made by the amendment. The first is that it amounts to a plea of fraud against the defendant. Mr Davidson QC, who now appears for the defendant but did not appear below, points to the fact that this is not a pleading where the time-honoured words that the defendant knew or ought to have known of the relevant wrongdoing are alleged, and had that been the case then he seems to accept that on the basis of Millett LJ's judgment, as he then was, in Bristol and West Building Society v Mothew [1998] Ch 1 page 15, that pleading held a significant distinction between such a state of affairs and one which broadly asserts that the defendant knew of the wrongdoing. Mr Davidson submits that where the new allegation is of intentional wrongdoing that constitutes a new cause of action.
26. I would agree that the question here is whether there is an allegation of fraud being made. The judge was very happy to accept, and having read the transcript I can readily understand why he was ready to accept it, that Mr Higginson had made it perfectly plain throughout the hearing that he was not alleging fraud.
27. Mr Higginson has pleaded that to us today, but as it is pleaded the allegation in paragraph 16A does, to read it again, assert that the claimant will say that the matters alleged amount to a fraudulent scheme and that the defendant knew all of this. The question to my mind is effectively what is meant by or encompassed within the words "all of this". Is it being asserted positively that the defendant knew that what had been going on did in fact amount to a fraudulent scheme? If that is what the pleading is intended to assert, then I understand the force of Mr Davidson's submissions. The answer to that must in my judgment depend partly on the circumstances in which this application arose in the middle of a trial on what had gone before it, how the case had been presented to the judge who was going to decide it shortly, but more importantly upon a construction of the pleading as a whole. It seems to me plain from paragraph 16 that the negligence, if I can use that composite term, which is being alleged is the failure to consider the implications of the facts and matters pleaded; in other words, failing to consider what inferences might be drawn from those facts including the new facts set out in the schedule to the statement of claim. Moreover, paragraph 17 asserts in fairly standard negligence terms that the solicitor with knowledge would have taken the steps and they are as pleaded in (c) to correlate the circumstances of the Antecedent Transaction with the instant transaction so as to identify what was in any event obvious, namely that they amounted to a fraudulent scheme. That is a pleading in negligence and for my part although I find the words "knew all of this" not to be the most felicitous pleading that I dare say has ever fallen from the pen or word processor of Mr Higginson. Nevertheless looking at the pleading as a whole it does not in my view amount to a plea of fraud.
28. Mr Higginson under the modest prompting from the court was willing to make assurance double sure and to proffer an amendment or a re-amendment in which he would assert as a new paragraph 16A that the claimant would say the matters pleaded in 16(a) to (e) amounted to and then he would add the words "or gave rise to the inference that they amounted to" the fraudulent scheme, and then he would have clarified the defendant's knowledge by saying that the defendant knew, and he would add the words "or ought to have known" about those matters and ought to have drawn the inference that such matters amounted to a fraudulent scheme. That would have removed any possible shadow of doubt of ambiguity, but Mr Davidson was not prepared to accept it, and so the appeal goes on.
29. In my view the judge was quite right to find that it did not amount to an allegation of fraud. He was also quite right to have taken the position he did in the passage I have already read that the innuendo of which Mr Davidson complains arising from words such as channelling the advance through another ledger card, recording entries which purport to indicate something or other, inexplicably opening up ledger cards and inexplicably paying monies which are not cross-firing amounts, are not words which by themselves are sufficient to give rise to an allegation of fraud. They are on the contrary the signpost of the matters that ought to have called for explanation and investigation.
30. The second attack on the pleading is that even if it does not amount to a new charge of fraud, it introduces wholly new elements which fall outside the ambit of the old pleading. The judge was troubled by that. He felt that it was finely balanced whether the amplification in paragraphs 16(e) was simply an elaboration of the known main facts or the introduction of wholly new facts. He found that the antecedent transactions had been sufficiently alluded to in the pleading so that this was nothing new. This was simply bringing home the particular facts and matters in those transactions and that did not introduce a fresh course of action. I agree with him. In my judgment this does not introduce something new, it simply expands upon the old. Therefore the court in my judgment had the jurisdiction to grant the amendments and the judge cannot be faulted on that ground.
31. The next attack is to the exercise of the judge's discretion. Mr Davidson submits that it should not have been allowed coming at the late stage it did. I have considerable sympathy with that submission as this case was very stale indeed. I fully accept the words of stricture that fell from my Lord, Waller LJ. His Lordship there castigated the position of the party who was "mucked about" in the litigation, and I see full well that Mr Ellis has, to quite a considerable extent, been so mucked about by having to deal with these matters in detail. But the degree to which he was mucked about was pre-eminently a matter for the assessment of the trial judge. This was an application made in the middle of a trial and if anybody was able to determine the extent to which it would interfere with the fair conduct of the trial it was the judge. I would not interfere with his judgment in that regard.
32. Then it is said that he ought not to have allowed the adjournment before his learning when the case could come back. At one stage it was thought it could not come back until the middle of next year. As events have turned out we know it will be back next week, and having to live in the real world that seems to me to knock that point out completely.
33. I, for my part, do not see that the judge erred in the exercise of discretion in the matter of case management such as this and I would therefore dismiss the appeal.
34. MR JUSTICE EVANS-LOMBE: I agree.
35. LORD JUSTICE OTTON: I also agree.

(Permission to appeal granted; appeal dismissed; costs to claimant)