England and Wales Court of Appeal (Civil Division) Decisions

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR JUSTICE PETER SMITH
HC 09 00901

		Royal Courts of Justice Strand, London, WC2A 2LL
		14/07/2010

The Chancellor:

Introduction
1. Mr Onobrakpeya, a conveyancer, and Mr Ikoku, an immigration law specialist, carried on business as solicitors in partnership in the name of South Bank Solicitors ("SBS") from, at the latest, 1st December 2005. On 20th November 2006 Investigation Officers of the defendant ("the Law Society" including where necessary references to the Solicitors Regulation Authority) inspected the books and accounts of SBS and concluded that they did not comply with the Solicitors' Accounts Rules. Accordingly on 9th January 2007 the partners were interviewed by the Investigation Officers. Such officers reported their findings to the Law Society on 26th February 2007. On 29th June 2007 the Law Society commenced disciplinary proceedings against Mr Onobrakpeya, Mr Ikoku and a Mr Ayeni. On 17th and 18th October 2007 the Law Society intervened in the practice of SBS pursuant to its powers under s.35 of and Schedule 1 to the Solicitors Act 1974 on the ground, in the case of Mr Onobrakpeya, of suspected dishonesty and, in the case of Mr Ikoku, failure to comply with the Accounts Rules. The Law Society appointed Mr J.H.R. Dunn, a partner in Devonshires, as the Intervention Agent and person to take possession of the documents referred to in paragraph 9(1)(a) of Part II of Schedule 1 to the Solicitors Act 1974 ("the Intervention Agent").
2. For the year from 1st October 2007 to 30th September 2008 the professional indemnity insurance of SBS required by the Solicitors' Indemnity Insurance Rules made under s.37 Solicitors Act 1974 was provided by the claimant ("Quinn"). By the terms of that policy ("the Policy") each insured at SBS was entitled to an indemnity in respect of any civil liability in respect of which a claim was first made in the course of that year except to the extent that the claim arose from dishonesty or the fraudulent act or omission committed or condoned by that individual. Clause 6.2 contained provisions for notifying claims in the following terms:

"6.2 Notice and Claims Procedure

In the event of any occurrence which may give rise to liability under this Policy, and regardless of the likelihood or probability of a claim being brought under this Policy:

a) The Insured shall:

1) Notify the Company immediately you become aware of any incident or as soon as practically possible (or in accordance with any agreement made with The Company) and as soon as possible thereafter, provide any other documentation that The Company may require with the regards [sic] to the occurrence.

2) Notify The Company by telephone immediately or as soon as practically possible (and in any event on the next business day) that he has knowledge of any impending prosecution inquest or fatal injury in connection with any occurrence for which there may be liability under this Policy, and shall as soon as possible thereafter, provide that notification in writing.

3) Forward to The Company immediately on receipt every written notice or information as to any verbal notice of claim and any communication whatsoever relating to the occurrence.

4) Give all such information and assistance as The Company may require."

3. A number of claims against SBS by former clients were made and notified to Quinn in the year covered by the Policy. The nature and cause of the claims may be deduced from the witness statement of Quinn's solicitor, Mr Whitfield, made on 23rd March 2009. In paragraph 6 he said:

"I am aware, from examination of statements on the SBS client account, of numerous cases in which SBS received into client account sums of money from lenders for residential property transactions whereafter sums have been paid out usually not in sums consistent with the application of loan monies to property purchase, and where the lender has alleged (usually backed up with Land Registry documentation) that the property purchase contemplated has not taken place and therefore that the monies were paid out (a) without the authority of the person to whose order the funds were received and (b) by necessary implication, dishonestly. The only persons on whose instructions SBS' bankers were to make payments from client account were Messrs Onobrakpeya and Ikoku themselves, the signature of one of them sufficing."

Quinn has declined to indemnify Mr Onobrakpeya in respect of any claim on the ground that "the fraud provision is engaged". It is concerned to know if it is entitled to refuse to indemnify Mr Ikoku in any given case on the ground that he condoned the fraud.

4. On 17th February 2009 the solicitors for Quinn wrote to the Intervention Agent asking whether he had any files in respect of 16 specific and identified purchase transactions and if so whether Quinn might have access to them. The letter concluded:

"In addition to these individual files we would like access to the accounting documentation of [SBS] and in particular the bank statement reconciliations and any reports sent by the Accountants to the former partners of Southbank."

In his reply the Intervention Agent indicated that his team had been unable to locate any of the files relating to the 16 specific transactions and was unable to provide access to general accounting documentation or bank statement reconciliations for the reasons previously explained in his letter of 10th February, namely "to preserve client confidentiality in accordance with its primary concern to protect the interests of the former clients and in accordance with the Code of Conduct".

5. On 25th March 2009 Quinn commenced these proceedings by the issue of a Part 8 claim against the Law Society. The relief sought is an order that the Law Society do permit Quinn to inspect "all documents of South Bank Solicitors within [its] power and control" and to take copies thereof. The purpose for which that order is sought (as specified in paragraph 6f) is to consider whether Quinn is or is not obliged to indemnify Mr Ikoku. On 23rd October 2009 Peter Smith J dismissed the application for the reasons given in his judgment handed down that day and now reported at [2010] Lloyd's Rep. I. & R. 336. Quinn now appeals with the permission of the Master of the Rolls.
6. There is no issue in respect of files in respect of transactions where the client has made a claim against SBS which has been notified to Quinn. In such a case the Law Society takes the view that the making of the claim constitutes a waiver of client confidentiality and privilege and has allowed Quinn to have access to those files. In addition copies of all bank statements of SBS have been provided to Quinn. As to the remainder of the documents of SBS in the possession of the Law Society it appears to be common ground that they all contain information confidential to one or more former clients of SBS whose privilege has not been waived.
The Statutory Regulation of Solicitors
7. Before considering the detailed submissions of counsel for Quinn it is necessary to say something of the regulatory system. This is necessary in order to provide the context for some of the submissions of counsel for Quinn, in particular his contention that the insurance industry is thereby 'meshed in' to the supervisory jurisdiction of the Law Society as a conduit of information to alert the Law Society to the possibility of fraud.
8. The Law Society is the regulatory body for solicitors in England and Wales. A person is not qualified to act as a solicitor unless he has in force a practising certificate issued by the Law Society (Solicitors Act 1974 s.1(c)). The Law Society is responsible for the content of their education and training through the regulations it is entitled to promulgate (s.2). It makes rules as to professional practice, conduct and discipline (s.31), accounts and trust accounts (s.32), inspection of practice bank accounts (s.33A) and the production of Accountants' Reports (s.34). In any of the circumstances specified in Part I of Schedule 1 it may intervene in a solicitor's practice (s.35), it may make rules regarding the compensation of, amongst others, a client for loss occasioned by the conduct of a solicitor (s.36) and may require solicitors to fund a compensation fund (s.36A).
9. The Law Society annually makes rules requiring solicitors to carry insurance sufficient to provide them with an indemnity in respect of any description of civil liability (s.37). The Indemnity Insurance Rules (The Solicitors' Indemnity Insurance Rules 2007 being those applicable to this case) require each firm to have professional indemnity insurance with one or more qualifying insurers or to be admitted to the Assigned Risks Pool ("ARP"). In relation to the former the rules prescribe certain minimum terms to be found in Appendix 1 to both the rules and to Schedule 3 to the Qualifying Insurers Agreement which is entered into between the Law Society and the individual insurer. In relation to the latter the conditions of ARP insurance were prescribed by the rules and Schedules 1 and 2 to the Qualifying Insurers Agreement 2007. The benefit to an insurer from being a qualifying insurer may be tempered by the fact that he thereby becomes an insurer of the ARP.
10. A qualifying insurer has obligations to the Law Society. The qualifying insurer must comply with the terms of the Qualifying Insurers Agreement both in respect of individual policies on the minimum terms and also in the ARP. Thus by clause 6 if a qualifying insurer in dealing with a firm of solicitors suspects or becomes aware of dishonesty or fraud on the part of the firm and reserves its position in relation to a claim made by that firm it is bound to notify the Law Society. By clause 7 it is bound to act at all times with the utmost good faith both with the solicitors' profession generally and the firm which it insures in particular. Clause 8 provides for a liaison committee comprising qualifying insurers, the Law Society and the ARP Manager. Clause 10 requires the insurer to co-operate with the Law Society and those discharging its functions. Clause 16 requires each party to keep confidential all information regarding persons insured by the qualifying insurer. There is also a protocol under which a qualifying insurer must report any solicitor it considers has acted dishonestly. The report must give details of the claim and the evidence thought to justify the conclusion.
11. In the case of an ARP policy Condition 7.2 of Schedule 2 and in the case of individual indemnity insurance Condition 7.8 of Schedule 3 require the insured to provide to the insurer (be it the ARP Manager or a Qualifying Insurer) all information and documents it may require and to give full co-operation and assistance in the investigation, defence, settlement, avoidance or reduction of any actual or possible claim or any related proceeding. Both are a type of insurance known as a "claims made" policy, that is to say that the risk insured is that for which a claim is made in the period of the insurance whenever the damage or its cause arose, as explained by Rix J in J.Rothschild Assurance plc v Collyear [1999] 1Ll.L.R 6 and Rix LJ in HLB Kidsons and others v Lloyds Underwriters Subscribing to Policy 621/PK1D00101 and others [2009] Lloyd's Reports I.R 6. Thus both at the inception of the policy and in the period of its operation the firm must notify the insurer of relevant circumstances, the extent of which may vary according to the terms of the policy. There is no exception to the obligation of disclosure in the case of information subject to a privilege enjoyed by the firm, as opposed to its client (see March Cabaret Club & Casino Ltd v The London Assurance [1975] 2 Ll.L.R 169, 177).
12. The indemnity insurance of SBS with Quinn satisfied the minimum terms prescribed by the Rules. It was a condition of the policy that all incidents which might give rise to a liability or claim under the Policy should be notified to Quinn immediately to enable a proper investigation to be carried out. There was excluded from the indemnity thereby provided any claims arising from dishonesty or a fraudulent act or omission committed or condoned by a partner. I have already quoted in paragraph 2 above the provisions dealing with notice and claims procedure.
13. We were also referred to the Solicitors Accounts Rules 1998. Rules 6 and 7 place the responsibility for ensuring their observation on the principals of a firm and require them promptly upon discovery to remedy any breach. Rule 35 requires a solicitor for any accounting period in which he held or received clients' money to obtain an accountant's report. Rule 42 provides for the accountant to carry out certain specified checks and tests, but rule 45 recognises that the solicitor may refuse to produce a document requested by an accountant on the grounds of client privilege.
14. Finally I should refer to the right of intervention conferred by s.35 Solicitors Act 1974. The right is exercisable in the circumstances specified in Part I of the Schedule to that Act. When exercised the powers for which Part II of that schedule provides arise and are exercisable by the Law Society or its agents. As I have already noted the power was exercised in relation to Mr Onobrakpeya on the ground of suspected dishonesty but in the case of Mr Ikoku for failure to comply with the Accounts rules. Paragraph 9 of Part II deals with the documents of the solicitor and obliges him to deliver to the Law Society or its nominee "all documents in the possession or under the control of the solicitor or his firm in connection with his practice". Rule 12 provides that that power may be exercised notwithstanding any lien or other right to their possession. It is not disputed that the solicitor is obliged to deliver to the Law Society or its nominee any document notwithstanding any obligation of confidence owed to or privilege of his client.
The case for Quinn
15. Quinn submits that the Law Society has no right to withhold from Quinn documents in its possession pursuant to the powers contained in Schedule 1 Part II on the grounds of any obligation of confidence owed to its client by SBS or privilege of a client of SBS in relation to that document. It relies on the facts that:

(1) As between Quinn and SBS the latter is obliged to produce to Quinn all documents relevant to an actual or potential claim under Clause 6 of the policy conditions quoted in paragraph 2 above or on renewal as part of its normal good faith obligations.

(2) Quinn is obliged to communicate to the Law Society circumstances suggestive of fraud under clauses 6 and 7 of the Qualifying Insurers Regulations and Condition 7.8 of Schedule 3.

(3) In those circumstances, Quinn submits, Qualifying Insurers should be allowed to inspect documents in the possession of the Law Society or its intervention agent without infringement of any obligation of confidence owed by SBS to its client or privilege of that client. Reliance is placed on the speech of Lord Hoffmann in R (Morgan Grenfell Ltd) v Special Commissioners of Income Tax [2003] 1 AC 563, 612 [32] and [33] and B v Auckland District Law Society [2003] 2 AC 736, 762 [69].

Judgment of Peter Smith J
16. The judge noted that the argument for Quinn was put on two bases. The first was, as he put it, that the insurance obligation is part and parcel of the statutory regulatory regime so that the primary insurer as part of that regime is entitled to access to documents in the same way as the Law Society when it intervenes [22]. The second basis was the terms of clause 6.2 a) 4) of the policy conditions quoted in paragraph 2 [24].
17. The judge rejected the first basis on the grounds that had that been the intention the statutory regime would have said so. In addition, as he said in [41]:

"...whilst there is a public interest in maintaining an insurance policy the purpose of the regulatory procedure is to enable the Law Society to regulate solicitors. There are many potential reasons for intervention or investigation which to do not affect insurance. There is not in my view a sufficient linkage between the clearly regulatory role of the Law Society to that of insurers to confer on the insurers an unfettered right to access to the solicitors documents. The Law Society is entitled to that access in its role as being a supervisory body of solicitors and to ensure compliance with the obligations as set out in the Solicitors Act 1974 and any subordinate rules arising thereunder. Not all concerns that arise under that will be matched with corresponding interest for the insurers. The whole purpose of the present application is not to exercise any kind of supervisory role in the conduct of the firm; it is merely an attempt to gather evidence for use to enable the Claimant to refuse an indemnity. Its purpose therefore is completely at odds with the regulatory role and in particular the insurers' alleged role in it. The purpose of the application is to obtain documents in the expectation that material will be found so as to refuse an indemnity to Mr Ikoku. The public at large will therefore be worse off if the exercise is carried out as the Claimant believes it will be as there will be no indemnity."

18. The judge also rejected the second basis to the effect that as under clause 6.2 a)4) Quinn would have been entitled to the documents from SBS there is no reason why now, as they are in the possession of the Law Society, that entitlement should cease. The judge concluded [60]:

"In my view when looking at the clause in its entirety clause 6.2 a) 4) is not a freestanding obligation to provide information [and] assistance whenever the insurer requires it. It is clear that when one looks at the clause as a whole the provision is dealing with an occurrence which might give rise to the likelihood of a claim. In that eventuality the obligations under 6.2(a)-(c) arise. Here there is no claim; the documents sought are where there has not yet been any claim. I am reinforced in that in my view by reference to the Court of Appeal in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 3) [2002] ECWA Civ 248. It is of course necessary to be cautious in having regard to a decision on the construction of a different document. What the Court of Appeal made clear however (see paragraphs 24-26 of the judgment of Mance LJ (as he then was)) is that the insured is only required to provide information to assist in a claim that is already made. An insured is not required to provide information solely for investigating whether or not a breach of the insured obligations can be established."

19. Quinn now contends that the judge was wrong on both points. In addition it submits that the judge failed to deal with an argument advanced in its written argument to the case of a "claims made" policy. It is submitted that in the case of such a policy it is necessary for the insurer to have access to documents in the possession of the firm but not to make them available to others. It is asserted that the insurer comes within "the circle of confidence", as indicated by Lord Hoffmann in R (Morgan Grenfell Ltd) v Special Commissioners of Income Tax [2003] 1 AC 563, 612 [32] and [33], so that Quinn would be entitled to see the documents for which it asks but not be entitled to make any further disclosure of them.
20. The Law Society seeks to uphold the decision of the judge for the reasons he gave. It does not accept that the judge did not deal with the "claims made" and "circle of confidence" point. If and insofar as he may not have done then they seek to rely on the passages in their skeleton argument in the court below directed to this argument.
Consideration and conclusion
21. It is clear that neither the Law Society nor the client of SBS is a party to the Policy. Accordingly Quinn can have no contractual claim to production of the privileged documents it seeks based on clause 6.2 a) 4) or any other provision of the Policy unless the client has consented either expressly or by implication from its claim against SBS. It follows that the refusal of the Law Society in the exercise of its public functions, to disclose the documents sought by Quinn can only be challenged by Quinn on public law grounds, namely that the Law Society is acting unlawfully in refusing to comply with Quinn's request. As I have pointed out, the request for production is a blanket request in respect of all documents but is only material in relation to privileged documents where privilege has not been waived by the client of SBS because no claim against SBS and by SBS under the Policy has been made. The Law Society claims to be not only entitled to withhold production of them but to be bound to withhold them to preserve client confidentiality in accordance with its primary concern to protect the interests of the former clients of SBS and in accordance with the Code of Conduct.
22. It is not suggested either that some term is to be implied into the retainer between the client and SBS to the effect that confidential documents of the client may be disclosed to the insurer of SBS in the case of either a "claims made" policy or an intervention by the Law Society unless, in either case, the client has waived his right of confidence or privilege. The case for Quinn was summarised by counsel for Quinn in the closing moments of his reply to the effect that the entitlement, indeed obligation, of the Law Society to disclose confidential documents of a client formerly in the possession of the solicitor and delivered up to the Law Society under the power contained in paragraph 9 of Schedule 1 Part II of the Solicitors Act 1074 is a necessary implication in the regulatory scheme as a whole.
23. I am unable to accept that submission for a number of reasons. First, I do not accept that an insured solicitor under any form of "claims made" policy is either entitled or bound to disclose to his insurer, either on inception, renewal or notification, confidential and privileged documents or information of the client without the client's consent. The documents and information are held by the solicitor subject to the right and privilege of the client requiring them to be kept confidential. The privilege of the client has been described as "a fundamental human right long established in the common law" by Lord Hoffmann in R (Morgan Grenfell Ltd) v Special Commissioners of Income Tax [2003] 1 AC 563 [7]. Any claim to its relaxation should be approached with the greatest circumspection, see R v Derbyshire Justices [1996] AC 487, 512. If the client will not waive his privilege to enable a proper notification to be made by the solicitor either before inception or during the currency of the policy then the solicitor will no doubt so inform the qualifying insurer. The solicitor is not entitled to ignore the client's privilege.
24. Second, no doubt the solicitor/insured owes duties of good faith to the insurer. He cannot justify any concealment of a material matter on the ground that he, personally, is privileged from disclosing it (see March Cabaret Club & Casino Ltd v The London Assurance [1975] 2 Ll.L.R 169, 177) nor, perhaps, on the ground that the information he failed to disclose was confidential (see Blackburn Low & Co. v Haslam (1888) 21 QBD 144, 153/4). Nevertheless the privilege is that of his client and cannot be broken or waived without the client's consent. It may be that, if the client will not waive his privilege to enable proper disclosure to be made, the consequence of the resulting conflict of interest will be that the insurance is vitiated or the notification inadequate but that is the problem of the solicitor not the client, cf Hilton v Barker Booth & Eastwood [2005] 1 WLR 567. The solicitor's duty of disclosure cannot override the entitlement of the client.
25. Third, even if the various provisions of the Policy or the regulatory scheme on which Quinn relies, either individually or collectively, entitled or required the solicitor/insured to disclose clients' privileged material to Quinn/the insurer there is no corresponding obligation on Quinn/the insurer to disclose to the solicitor/insured privileged material or information of others possessed by Quinn/the insurer. On an intervention by the Law Society the solicitor/insured is bound to give up possession of all documents under paragraph 9 Schedule 1 Part II Solicitors Act 1974, including those which are subject to clients' privilege, but the Law Society is under no corresponding obligation of disclosure of other privileged matter to SBS. In those circumstances I can see no justification for any requirement for the Law Society to provide information to Quinn/the insurer. There is no reciprocity in this respect between the solicitor/insured and Quinn/the insurer on the one hand or between the Law Society and Quinn/the insurer on the other.
26. Fourth, as the regulator of the Solicitors' profession in accordance with the provisions of the Solicitors Act 1974 and its subordinate legislation the Law Society has public functions to perform both for the protection of the public and the clients of the firm or solicitor in respect of whom the intervention was made. If and insofar as the qualifying insurer is "meshed in" to the regulatory system it is as the provider of indemnity insurance to solicitors and of information to the Law Society. It is not 'meshed in' to the system as the recipient of any services or information, let alone privileged information of the clients of the firm the intervention was designed to protect.
27. Fifth, the objective of Quinn in seeking the information and documents to which I have referred is not the advancement of any public purpose or regulatory responsibility but the private purpose of seeking evidence to justify a refusal of an indemnity to Mr Ikoku in respect of clients' claims made against him. So, even if Quinn is 'meshed in' to the regulatory system to the extent for which Quinn contends, its request for the documents to which this application relates is not made for the purpose of the advancement of any such public or regulatory purpose, compare Gan Insurance v Tai Ping Insurance [2002] Ll.L.R 612, 620[24]. Indeed, as Peter Smith J recognised in paragraph 41 of his judgment, quoted in paragraph 17 above, Quinn's purpose is completely at odds with the regulatory role and the insurers' alleged part in it.
28. Sixth, accepting, as I must, that in some circumstances there may exist a 'circle of confidence', as described by counsel for Quinn and recognised by Lord Hoffmann in R (Morgan Grenfell Ltd) v Special Commissioners of Income Tax [2003] 1 AC 563, and assuming it to exist in this case, at least to the extent of the various emanations of the Law Society and the Intervention Agent, I can see no reason why it should include the qualifying insurer. As I have already pointed out there is no reciprocity between the functions of the qualifying insurer and either its insured or the Law Society. Further, it is not only the qualifying insurer who is bound to inform the Law Society of misconduct of a solicitor. Under Rule 20.06 of the Solicitors' Code of Conduct 2007 each solicitor is obliged, subject to his client's consent, to report serious misconduct of any other solicitor of which he becomes aware. To that extent each solicitor is 'meshed in' to the regulatory system but it would be absurd if that admitted every solicitor into the 'circle of confidence' so as to entitle him to information subject to the privilege of the client of another for use for his own private purpose. If that is the case with a solicitor I can see no reason why a qualifying insurer should be treated any differently.
29. For all these reasons I would reject the submission that there is to be implied into the scheme for the regulation of solicitors constituted by the Solicitors Act 1974, subordinate legislation and agreements made thereunder (particularly the Qualifying Insurers Agreement and solicitors' indemnity insurance based on the minimum terms) any provision or term entitling or obliging the Law Society to produce to a qualifying insurer documents emanating from a firm of solicitors into which it has intervened which are subject to the privilege of a client of the firm. If the client consents or his privilege is impliedly waived by a claim against the solicitor then there is no reason why the Law Society may not produce such documents to a qualifying insurer. It has sensibly done so in this case. In those circumstances it is unnecessary to decide, and I express no view, whether the Law Society is not only entitled but obliged to produce them.
30. Accordingly, in my view, this appeal should be dismissed. Counsel for Quinn criticised the judgment of Peter Smith J on other grounds which do not now appear to be material. For the sake of completeness I should add that if the true interpretation of clause 6.2a)4) was in point, I would agree with the views expressed by Peter Smith J in paragraphs 48 and 60 of his judgment. It was suggested that he had not dealt with the argument based on the nature of a 'claims made' policy of insurance. It is clear from paragraphs 31 and 32 of his judgment that he was well aware of the nature of the Policy and clearly he had the point in mind in paragraph 60 which I have quoted in paragraph 18 above. Quinn might not like the way the argument was disposed of, but I cannot accept that it was not dealt with. It was also suggested that he was not entitled [35] to stigmatise Quinn's application as "simply a fishing expedition". Whilst it may be a matter for regret that such a peaceful and pleasurable pastime should have attracted such pejorative overtones, the judge went on to explain what he meant, namely "to go through all of the firm's documents in the hope that they can find material which implicates Mr Ikoku". That appears to me to be an accurate description of Quinn's purpose in making this application.
31. I would dismiss this appeal.

Lord Justice Rimer:

32. I agree.

Lord Justice Jackson:

33. I also agree.