England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ORDER OF MR JUSTICE BLACKBURNE

		Royal Courts of Justice Strand London WC2 Friday, 29th June 2001

1. LORD JUSTICE CHADWICK: This is an appeal against the order made on 28th July 2000 by Mr Justice Blackburne, sitting as Vice-Chancellor of the County Palantine of Lancaster, in proceedings brought by Mr David Julian against a firm of solicitors, Messrs Rollit Farrell & Bladon, for breach of retainer. The proceedings came before the judge on the preliminary issue whether the firm had fallen below the standard of care required of it in the carrying out of the instructions given by Mr Julian in 1992 in connection with the negotiation of terms for his disengagement from direct involvement in a company, Vertex Optical Ltd, of which he had been managing director and majority shareholder. The judge decided that issue against Mr Julian; and dismissed his claim in the action.
2. Mr Julian appeals with the permission of this Court (Lord Justice Mantell) granted on 15th September 2000. The appeal raises the short question whether, in the circumstances, it was sufficient for Mr Christopher Burton - the member of the firm having conduct of the matter - to rely on the recollection of his client, Mr Ju lian, as to the execution, or non-execution, some two and a half years earlier, of a personal guarantee of the company's liabilities.
3. Vertex Optical ("the company") was incorporated in 1988 to take over the business of an earlier company in which Mr Julian had been engaged for some 17 years. The company traded from leasehold premises at Skerne Road, Driffield, North Humberside. Its business was the manufacture of spectacle frames and lenses. In December 1989 the company purchased the freehold reversion of those premises at a price of £300,000. Of that sum £255,000 was funded by an advance from Woolwich Equitable Building Society secured by a legal charge on the premises. As is not uncommon in such a case, the building society required a personal guarantee from the individual who controlled the company. This was provided by Mr Julian. On 29th December 1989 he executed a continuing guarantee of the company's liabilities under a legal charge and debenture which it granted to the building society on the same day.
4. Over the next two years the company suffered considerable losses, which brought it to the point of insolvency. By the spring of 1992 the company's bankers were calling for a substantial reduction in borrowings, the company was unable to pay its debts as they fell due, it was faced with writs from its creditors and a winding up petition was threatened. As the judge observed, the company stood on the brink of receivership and liquidation. It obtained advice and assistance from Mr Derek Jones, a freelance consultant. He negotiated a re-financing package from outside investors; including, in particular, Yorkshire Enterprise Ltd. The re-financing package required Mr Julian to stand aside. He was to be replaced as managing director by Mr Jones; he was to resign from the board of directors; the shares which he held in the company were to be redesignated as deferred shares, carrying no right to dividend or to vote; and the loan (of which some £40,000 was then outstanding) made by him to the company in November 1990 was to be converted, in part, into shares and the balance repaid over two years.
5. The solicitors, Rollit Farrell & Bladon of Hull, had acted for the company for some years. The firm was retained to advise the company and Mr Julian in connection with the re-financing package which Mr Jones was seeking to negotiate in 1992. Mr Burton was the partner advising in the matter. Although the firm had been instructed in connection with the purchase of the freehold of the premises at Skerne Road in 1989 and in the giving of a guarantee by Mr Julian to the building society, the judge found as a fact that Mr Burton had not, himself, been involved in the 1989 transaction and did not know that a personal guarantee had been given at that time.
6. On 3rd June 1992 Mr Burton wrote to Mr Jones in order to set out -

"the agreed terms in relation to Mr Julian's position with Vertex, insofar as they are not covered in the formal Consultancy Agreement to be entered into between Vertex and Mr Julian."

7. The letter contains ten numbered paragraphs. Paragraph 10 is it in these terms:

"As an additional point, we understand that Mr Julian may have personally guaranteed some of the obligations of Vertex. Any such guarantees must be released on execution of the Consultancy Agreement."

8. A draft of that letter had been sent by Mr Burton to Mr Julian on 28th May 1992; and its terms were agreed between them in the course of a telephone conversation before the letter was sent to Mr Jones. The importance of the letter is that it provides the basis for the allegation; made in the statement of claim, that the solicitors' retainer required Mr Burton -

"to ensure that the Plaintiff had been released from all his guarantee liabilities and in particular the personal guarantee given to the Woolwich Building Society in connection with company borrowings and/or to advise the Plaintiff that he had not been discharged from such guarantee liability."

9. The first limb of that allegation is no longer pursued. It is accepted - realistically, I think - that the solicitors never accepted a retainer to ensure that Mr Julian was released from all his guarantee liabilities, including his liability under the guarantee to the Woolwich Equitable Building Society. Without knowing that the building society was willing to release Mr Julian, no solicitors could sensibly accept a retainer to ensure that the guarantee were released. What they could do - and what it is contended that they did do in the present case - was to accept a retainer which required them to advise Mr Julian, before he entered into the documents required to give effect to the re-financing package negotiated by Mr Jones, whether or not he had been released from all personal guarantees of the company's liabilities. That, in the context of his proposed disengagement from involvement and control of the company, was plainly a matter upon which he needed advice.
10. In the event, the re-financing arrangements were completed on 8th July 1992 without Mr Julian having been released from the guarantee which he had given to the Woolwich in December 1989. In due course the company failed. It was placed in administrative receivership in November 1994. The Woolwich enforced its charge over the property but recovered only £200,000 on the sale;leaving a shortfall of some £82,500 on the mortgage account which it sought to recover from Mr Julian under his guarantee.
11. It was in those circumstances that these proceedings were commenced by the issue of a writ on 28th January 1999. The primary relief claimed in the writ was a declaration that the plaintiff was entitled to be indemnified by the defendants in respect of any claim made against him by the Woolwich. Absent an allegation in the pleadings to the effect that the building society would have been willing, if asked, to release Mr Julian from his guarantee - and there is no allegation to that effect -I find it impossible to understand how it could have been thought that the plaintiff could be entitled to an indemnity against liability under the guarantee. The real question (if breach of duty on the part of the solicitors were established) was whether, if Mr Julian had been told, before he entered into the re-financing arrangements on 8th July 1992, that he remained liable under his guarantee to the Woolwich, he would (as he asserts in paragraph 8 of his statement of claim) have decided not to proceed with those arrangements; and if so, whether he would have been in any better position financially than that in which he found himself in the events which happened. That raises issues of causation and damage which, if this appeal is allowed, remain to be tried.
12. The judge directed that the question whether breach of duty were established should be tried as a separate issue. He took the view that the issues which arose in connection with that question were short and self-contained. If they were resolved against Mr Julian, the expense of a trial on the issues of causation and damage would be avoided.
13. The judge's task at the trial was undoubtedly made difficult by the fact that Mr Julian's primary case (which the judge rejected) was that he had told Mr Burton, in specific terms and on a number of occasions, about the Woolwich guarantee and had "continuously hammered on" about his obtaining a release from that guarantee. The judge rejected the evidence which Mr Julian gave to that effect. He said this at page 8, lines 14 to 18 in the approved transcript:

"On the first issue, I am firmly of the view, having been taken most carefully through the defendant firm's relevant files and having seen and heard Mr Julian and Mr Burton give evidence on the matter, that Mr Julian did not tell Mr Burton of the existence of the Woolwich guarantee and I have no hesitation in rejecting Mr Julian's evidence that he did."

14. It was against that background that the judge addressed what he described as the second issue: was the defendant firm put on notice as to the existence of the Woolwich guarantee in circumstances where it could and should have discovered its existence? The judge made the following findings of fact:

(1) He held that Mr Burton knew of the importance of discovering whether Mr Julian had given any guarantees of the company's liabilities and, if he had, of endeavouring to secure their release and, if that could not be achieved, of ascertaining from Mr Julian how he wished to proceed - see page 17, lines 21-24 in the transcript of the judgment. That is not in dispute. It follows clearly from the fact that the letter of 3rd June 1992, to which I have already referred, included the paragraph numbered 10.

(2) He held that Mr Burton learnt from Mr Julian, in the course of a telephone conversation on 4th June 1992, that he (Mr Julian) might have guaranteed the company's obligations to the Woolwich - see page 18, lines 4-8 in the judgment. That appears from a manuscript note made by Mr Burton in the course of a telephone conversation with Mr Julian on 4th June 1992. The manuscript note was, itself, made as an addendum to a typed attendance note of a telephone conversation between Mr Burton and Mr Jones on the previous day, 3rd June 1992, summarising Mr Jones' comments on his receipt of the letter of 3rd June 1992. The typed note contains the entry -

"Paragraph 10: DGJ (corrected by Mr Burton to `Derek Jones') needs to know what guarantees there are."

15. The manuscript note made against that entry by Mr Burton reads "? Woolwich guarantee otherwise none".

(3) The judge held that, following the telephone conversation on 4th June 1992 in which Mr Burton was alerted to the possibility that Mr Julian might have given a personal guarantee to the Woolwich, there was no difficulty in Mr Burton ascertaining for himself whether or not there was such a guarantee. He could have made enquiry of the Woolwich. This would have presented no difficulty in the circumstances that the relevant Woolwich account number was known by his firm; and, indeed, was known to him as a result of a letter copied to him on 18th June 1992. Or he could have made enquiry within his firm. The file evidencing the mortgage transaction in which the firm had been retained in December 1999 was available and would have disclosed the existence of a guarantee. As the judge observed (at page 18, lines 21-22 of his judgment):

"Quite why Mr Burton did not pursue any enquiries of this kind is a mystery. The evidence on this is wholly absent. Mr Burton had no recall of how the matter was left following the conversation."

16. The judge concluded that the probable explanation was that in the midst of the many other pressing matters with which Mr Burton was dealing at the time in order to bring the whole transaction to completion, the question of the Woolwich guarantee was simply overlooked.

(4) The judge held that, twelve days later, at a long meeting on 16th June 1992, Mr Burton again raised the question of personal guarantees with Mr Julian. The context was a discussion about the warranties which had been sought by Yorkshire Enterprise Ltd in connection with the investment it was to make in the company. One of the warranties sought - that numbered 72 - was that the shareholders had not given any personal guarantees of any obligations of the company. Mr Burton's manuscript note, made at the meeting, records "no personal guarantees"; but when he came to prepare a typed note after the meeting, he expanded that to -

"DGJ [Mr Julian] does not feel that he has given any personal guarantees in relation to the company's obligations."

17. The judge accepted Mr Burton's evidence that that was what he had been told at that meeting - see page 13, lines 10-14 in the judgment. The judge commented on the position following the meeting of 16th June 1992 in these terms, at page 19, lines 14-21:

"Two observations, I think, are justified: first, the fact that twelve days earlier Mr Burton had been alerted by Mr Julian to the fact that he might have guaranteed the company's obligations to the Woolwich was entirely overlooked or ignored, both by Mr Burton and by Mr Julian and, second, that Mr Julian's answer to the enquiry was less than a wholly unqualified `no'. The reference to the fact that Mr Julian does not feel that he had given any personal guarantees suggests, as Mr Burton frankly accepted when I asked him about this, that there was an element of uncertainty in Mr Julian's answer."

(5) On the following day, 17th June 1992, Mr Burton learnt of the existence of a guarantee which Mr Julian had given to Independent Factors Ltd ("IFL"), a Lloyds Bank/Black Horse factoring company. He learnt of that guarantee, I think from Mr Jones; but a copy of the guarantee itself was sent to him on 17th June 1992 by IFL. The judge observed at page 19, line 22 to page 20 line 4:

"It must therefore have been evident to him that there were good grounds for the element of uncertainty in the answer given to him by Mr Julian that he had given no personal guarantees, contrary to Mr Julian's feeling, he had indeed guaranteed obligations of the company. That same day or the day after he was reminded of the existence of the charge which the company had given to the Woolwich. It did not occur to him, however, to raise with Mr Julian whether there might have been other guarantees and, in particular, one guaranteeing the company's obligations to the Woolwich."

18. The judge went on at page 20, line 24 to page 21, line 15 to explain what happened thereafter. He said:

"When, two days later, the existence of the IFL guarantee came to light and was brought to Mr Julian's attention, there was no mention of any further guarantee. There is an attendance note on the file dated the 18th June, recording a conversation between Mr Burton and Mr Julian, which is in the following terms: `I took the opportunity of mentioning the personal guarantee which he has given to IFL. DGJ (i.e. Mr Julian) was very relaxed about this so far as it relates to customers up to the 7th May. I explained that the guarantee would not simply lapse and positive action needs to be taken for it to be removed.' If the possibility of other guarantees had been raised, I have little doubt that Mr Burton would have noted it and taken up the matter.

There is a similar attendance note of a conversation between himself and Mr Julian dated the 23rd June. The note covers other matters but, as regards the topic of guarantees, it is as follows: `I took the opportunity of mentioning the guarantee. DGJ does not feel that there is a problem with this because they have had very little bad debt and he is prepared to let the guarantee stand for a while. I said that, notwithstanding that, we would need some definite indication from IFL as to their proposals for its release."

19. Subsequently the side letter which had been sent to Mr Jones on 3rd June 1992 was amended: first, by including an express reference to the IFL guarantee in what had become paragraph 9 of that letter; and, thereafter, by removing any reference at all to personal guarantees. The judge was satisfied that that amendment was made with the consent of Mr Julian.
20. In the result, therefore, Mr Julian entered into the re-financing arrangements on 8th July 1992 without any provision as to the release of guarantees; and without having ascertained whether or not he was liable under the guarantee which he had given to the Woolwich some two and a half years earlier.
21. It was against that background that the judge had to consider whether Mr Burton fell below the duty of care which he and his firm owed to Mr Julian in carrying out the retainer to which I have referred. The judge declined to find that Mr Burton fell below the duty of care. He was entitled to take his client at his word; and was not required to do anything more to ascertain whether or not his client's rcollection was relibale. The judge said this at page 22, line 7 to 15:

"If, on any of the occasions subsequent to the 4th June, Mr Julian had raised again as a possibility that he might have guaranteed the company's obligations to the Woolwich, the position might well be different, but given Mr Julian's silence on the matter, not least when the issue `What (if any) guarantees have been given?' was put to him on the 16th June, it would be wrong, in my view, to come to a finding of negligence or breach of duty, based upon what was at most a tentative suggestion of a possibility that such a guarantee might exist, made in the course of a telephone conversation some time earlier and with no evidence indicating what (if any) action should be taken and by whom, to lay the possibility to rest."

22. The last words in that passage indicate the difficulty with which the judge was faced. In the circumstances that Mr Julian was advancing the case that he had given express instructions to Mr Burton that Mr Burton was to ensure that he be released from the Woolwich guarantee, the question what, if any, action should be taken and by whom was not a question which Mr Julian could address in any terms other than those consistent with the evidence which he was giving and which the judge rejected. But, in my view, that is the relevant question in this case.
23. Faced with the position that Mr Burton was plainly instructed on 3rd June 1992, if not before that date, to look after the interests of Mr Julian in relation to personal guarantees; and that there was clearly a doubt as to the reliability of Mr Julian's own recollections in the matter, as disclosed by the fact that he had forgotten about the IFL guarantee which came to light on 17th June 1992 - there were, as it seems to me, only three courses which a solicitor in Mr Burton's position could take. First, he could investigate for himself whether or not there was an existing personal guarantee given to the Woolwich. The possibility of such a guarantee had been raised as early as 4th June and it was by no means fanciful, in the circumstances that there was an existing Woolwich charge which might well have been supported by a personal guarantee. It would not have been difficult for Mr Burton to take that course but it is plain that he did not do so.
24. The second course that Mr Burton could have taken was to tell his client, Mr Julian, that he (Mr Burton) had made no enquiries as to the existence or otherwise of the Woolwich guarantee and that if the popossible existence of such guarantee, which had been raised on 4th June 1992, remained unresolved there was a risk that, in the future, that guarantee might be enforced. That was a risk which Mr Julian could take; but it was not a risk which any client could sensibly be advised to take in the circumstances that it was so easy to put the matter beyond doubt. Be that as it may, that was not advice which, on the evidence, Mr Burton ever gave to his client, Mr Julian. He never explained to him that he was exposed to this risk.
25. The third course open toMr Burton was to obtain clear instructions from his client, Mr Julian, that Mr Julian did not want him, Mr Burton, to spend any time or money investigating the existence of the Woolwich charge because he, Mr Julian, was quite confident that it did not exist. Again, any competent solicitor, in my view, would have drawn his client's attention to the danger of that course in the light of the defect in the client's recollection which had already been shown to exist in connection with the IFL charge. But Mr Burton did not take the course, on the evidence adduced, of saying to his client "Do you release me from any obligation to make enquiries on your behalf?" There is no doubt, given the care with which Mr Burton noted the steps whichhe did take inrelation to the matters on which he was instructed, that he would have noted any such instruction if it had been sought and if it had been given.
26. None of those three courses was taken in the present circumstances. That was unfortunate. No doubt the explanation is that the matters to which the judge referred: namely, that Mr Burton was extremely busy at the time in relation to other aspects of the transaction. The question of the Woolwich guarantee was simply overlooked. But I am driven to the conclusion that, in the circumstances of this case, Mr Burton's failure to deal with the Woolwich guarantee fell below the standard of care which the client was entitled to expect of his solicitor. It is to my mind a pertinent factor that the courses open to Mr Burton required no more than minimal ntime and expense, whichever one were adopted. Regrettably, none of them were adopted.
27. For those reasons I come to the conclusion, contrary to the view of the judge, that this was a case where Mr Burton (who, as the judge found, was a careful and competent solicitor) fell below the duty of care which he owed in carrying out his retainer. On that basis I would allow this appeal.
28. I should not leave this matter, however, without drawing attention to the final paragraph in the judgment of Mr Justice Blackburne. He said this at page 23, line 22 to page 24 line 9:

"Although I am not concerned with issues of causation and quantum, I should add that I have seen nothing which suggests that, if the existence of the guarantee to the Woolwich had been discovered and brought to his attention, Mr Julian would have done other than leave it in being. His relaxed attitude to the IFL guarantee, the belief that the Driffield premises had a value which fully secured the amount owed to the Woolwich, his acceptance when asked about it in cross-examination that at the time he saw no real prospect of the Woolwich ever needing to call in its guarantee and, not least, the parlous state of the company's financial position, the imminence of some form of insolvent administration if the proposed restructuring and re-financing package was not put in place and the difficulty in seeing what other options were realistically open to Mr Julian if the package negotiated with Yorkshire Enterprise and the others did not proceed, all suggest that Mr Julian would have adopted a no less relaxed attitude to the discovery of the Woolwich guarantee."

29. We have been shown nothing which suggests that the judge's observations in that paragraph are other than well founded. The fact that I would allow this appeal on the question of liability for the reasons which I have indicated should not be taken as any encouragement to a belief that these are proceedinggs which have any prospect of success. There has yet to be a trial on issues of quantum and causation in relatiion to which there are formidable difficulties for Mr Julian to overcome.
30. MR JUSTICE ROUGIER: I agree that this appeal should be allowed and I also wish to express my support of my Lord's concluding words on the subject of causation.
31. LORD JUSTICE KENNEDY: I agree with both of the judgments which have just been delivered.
Order: Appeal dismissed