BUSINESS AND PROPERTY COURTS IN LEEDS
CIRCUIT COMMERCIAL COURT (QBD)
Leeds Combined Court Centre, The Courthouse, 1 Oxford Row, Leeds, LS1 3BG. |
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B e f o r e :
AS A JUDGE OF THE HIGH COURT
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CLYDESDALE FINANCIAL SERVICES LIMITED |
Claimant |
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- and - |
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NESBIT LAW GROUP LLP (IN ADMINISTRATION) |
Defendant |
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- and - |
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ACASTA EUROPEAN INSURANCE COMPANY LIMITED |
Third Party |
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Bridget Williamson (instructed by Coyle White Devine Ltd.) for the Third Party
Hearing date: 6 October 2020
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Crown Copyright ©
HH Judge Klein:
i) Acasta denies that, in fact, the contended-for collateral contract was ever made, in part because it would be inconsistent with STBAs it contends Nesbit entered into from 2007.
ii) If a collateral contract existed, Acasta does not admit that any sum has been payable under it.
iii) Alternatively, if a collateral contract existed, the collateral contract contained a number of implied terms (implied as a matter of obvious inference), including one or more of the following:
a) that Nesbit would carry out preliminary assessments of the lay clients' claims to ensure that they appeared to have reasonable prospects of success or at least a 51% prospect of success;
b) that those preliminary assessments would be carried out with reasonable care and skill;
c) that Nesbit would supply the documentation which under the lay clients' legal expenses insurance policies Acasta was entitled to demand before making a payment under those policies;
d) if no STBAs were entered into:
i) that a comprehensive risk assessment would be carried out before Nesbit sought a legal expenses insurance policy for the particular lay client from Acasta;
ii) that that comprehensive risk assessment would demonstrate at least a 51% prospect of success;
iii) that Nesbit would report to Acasta whenever there was a material change of fact likely to affect the lay client's prospects of success or where the lay client was not co-operating;
iv) that Nesbit would carry out these obligations in a timely manner using appropriately qualified personnel exercising reasonable care and skill;
e) that it was a condition precedent for any payment for Nesbit's benefit that it complied with the STBAs;
f) that Nesbit could be in no better position in relation to those payments than the lay clients might have been.
iv) Nesbit entered into the STBAs (which contained the terms I have summarised at paragraph 7(iii)(d)(i)-(iv) above or similar terms).
v) If a collateral contract existed, Nesbit breached the contended-for implied terms. In any event, Nesbit breached the terms of the STBAs. Acasta claims to set off, against any sums otherwise due from it, the sums which Nesbit would otherwise be liable to pay for those breaches.
vi) In any event, Nesbit has owed Acasta a duty of care to undertake, with reasonable care and skill, preliminary assessments of the lay clients' claims to ensure that they appeared to have reasonable prospects of success or at least a 51% prospect of success. Nesbit has breached that duty of care and, if a collateral contract existed, thereby caused Acasta loss because it has become liable to pay sums which it would not otherwise have had to pay, which sums Acasta claims to set off against any sums otherwise due from it.
i) Acasta does not have a real prospect of establishing that any of the contended-for implied terms were implied in the collateral contract because:
a) they are inconsistent with the express terms of the collateral contract as pleaded in the Amended Particulars of Claim;
b) there is no room for them in the collateral contract, which is part and parcel of a highly regulated arrangement comprising a series of comprehensive agreements between the Claimant, Nesbit and Acasta;
c) to the extent that they depend on the STBAs, Acasta does not have a real prospect of establishing that Nesbit entered into any of the STBAs.
ii) Acasta does not have a real prospect of establishing that Nesbit entered into the STBAs. Mr Nesbit has provided clear and comprehensive evidence which puts beyond doubt that he did not sign any of the STBAs. If Nesbit had entered into them, only he could have signed them.
iii) In any event, Acasta's claim to set off any sums due for any breaches of the implied terms or the STBAs are new claims within the meaning of section 35(2) of the Limitation Act 1980 ("the 1980 Act"), being "claims by way of set off", but are not original set offs within the meaning of section 35(3) of the 1980 Act. The time limits for bringing claims for those breaches have expired and so, by virtue of sections 35(3), (8) of the 1980 Act, Acasta's set off case can only be pleaded if the requirements of CPR 17.4(2) are satisfied. In this case, to the extent that Acasta relies on the STBAs, that case does not satisfy the requirements of CPR 17.4(2).
iv) Acasta does not have a real prospect of establishing that Nesbit owed it a duty of care, in circumstances where there was no equivalent contractual obligation and where the relationship between the parties was highly regulated by a series of comprehensive agreements. Pragmatically, Mr Chapman accepted that, if Acasta is permitted to plead that there was an implied term in any collateral contract requiring Nesbit to exercise reasonable care and skill, Nesbit will not object to the continued pleading by Acasta of a duty of care.
"For the amendments to be allowed the Appellants need to show that they have a real as opposed to fanciful prospect of success which is one that is more than merely arguable and carries some degree of conviction: ED & F Man Liquid Products Ltd. v. Patel [2003] EWCA Civ 472. A claim does not have such a prospect where (a) it is possible to say with confidence that the factual basis for the claim is fanciful because it is entirely without substance; (b) the claimant does not have material to support at least a prima facie case that the allegations are correct; and/or (c) the claim has pleaded insufficient facts in support of their case to entitle the Court to draw the necessary inferences: Three Rivers District Council v. Bank of England (No3) [2003] 2 AC 1.
The court is entitled to reject a version of the facts which is implausible, self-contradictory or not supported by the contemporaneous documents and it is appropriate for the court to consider whether the proposed pleading is coherent and contains the properly particularised elements of the cause of action relied upon…"
Does Acasta have a real prospect of establishing that Nesbit entered into relevant STBAs?
i) Acasta has not disclosed a copy of any relevant STBA.
ii) It is fanciful to suggest that the STBAs would not have been referred to at the earlier trial which related to the Financial Guarantee Insurance policies.
iii) The STBAs are not referred to in any of the written agreements between the parties.
iv) When opposing Nesbit's amendment application in 2019, Acasta argued that Nesbit and it were not direct contracting parties.
v) Mr Nesbit says that he did not enter into any relevant STBA.
vi) At least one STBA includes an arbitration clause which Acasta has not relied on.
The implication of terms in any collateral contract
i) the proposed implied terms are inconsistent with the express terms of the collateral contract as pleaded in the Amended Particulars of Claim;
ii) there is no room for the proposed implied terms in the collateral contract which is part and parcel of a highly regulated arrangement comprising a series of comprehensive agreements between the Claimant, Nesbit and Acasta.
Limitations
"Lord Denning MR has taken the view that in section 28 of the Limitation Act the word "set off" means only a set off as permitted by the statutes of set off and that no such set off can arise from a cross-claim arising from the same transaction as the claim. No argument to this effect was presented at the Bar and I am not to be taken to accede to this interpretation of the statute. But it does not affect the result of this appeal."
Roskill LJ went somewhat further, at page 264B, where he said:
"Since writing this judgment I have had the opportunity of reading in draft the judgment of Lord Denning MR and in particular the passage in which he expresses the view that section 28 of the Limitation Act 1939 does not apply to equitable set off. I express no final opinion upon this, although, as at present advised, I would respectfully disagree with Lord Denning MR and would accept as correct Mr. Lloyd's submission that section 28 applies to all forms of set off. In these circumstances it is not necessary for me to do more than express my agreement with what Cairns LJ has said on this point at the end of his judgment."
However, as I have said, it was not suggested that Lord Denning's conclusion might be wrong.
"In the textbooks the view expressed by Lord Denning MR is generally accepted. Having heard the argument in the present case, I also consider it to be correct. I reach this conclusion both as a matter of the construction of the actual wording of the statute and as a matter of principle where the set-off raised is truly a matter of defence, as explained in the Aries Tanker case. If a plaintiff, in equity, is not entitled to assert his cause of action without at the same time giving credit to the defendant for the relevant matters, no question of any claim being made by a defendant against the plaintiff arises and the sole question is what is the proper claim that the plaintiff should make against the defendant. In the present case, as I have held, Sandwell has no claim in respect of the first swap against Kleinwort Benson so on any view section 35 of the 1980 Act cannot have any application."
Hobhouse J's decision was appealed but, as far as I am aware, neither the Court of Appeal nor the House of Lords expressly considered whether an equitable set off was a claim by way of set off for the purposes of section 35 of the 1980 Act. In fact, Jonathan Parker J adopted Hobhouse J's conclusion in Philip Collins Ltd. v. Davis [2000] 3 All ER 808.
"In my judgment, this jurisprudence allows the following conclusions:
(i) The impeachment of title test, although derived from the leading case of Rawson v. Samuel and still stated by Lord Denning in his formulation in The Nanfri, even if it is there immediately glossed by his "so closely connected…that it would be manifestly unjust" test, should no longer be used: The Dominique and Bim Kemi. It is an unhelpful metaphor in the modern world. In the light of the emphasis put on it by Hobhouse J in The Leon and the reliance sought to be placed on it by the charterers in The Dominique, it made sense for the House of Lords to go out of its way to downplay its significance.
(ii) There is clearly a formal requirement of close connection. All the modern cases state that, whether Hanak v Green, The Nanfri, The Dominique (by reference to the Newfoundland Railway case), Dole Dried Fruit or Bim Kemi. The requirement is put in various ways in various cases. Morris LJ in Hanak v. Green spoke of a "close relationship between the dealings and transactions which gave rise to the respective claims". Lord Denning in The Nanfri spoke of claims and cross-claims which are "closely connected". How closely? "[S]o closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim". The Dominique adapted the Newfoundland Railway test and spoke of a cross-claim "flowing out of and inseparably connected with the dealings and transactions which also give rise to the claim". Dole Dried Fruit returned to Lord Denning's test in The Nanfri but also spoke of a claim and cross-claim which was so "inseparably connected that the one ought not to be enforced without taking into account the other". Bim Kemi expressed a preference for the test in The Dominique, while warning against being caught up in the nuances of different formulations.
(iii) Thus the Newfoundland Railway test of "inseparable connection" is one formulation of the close connection test, but it is not the only one. Potter LJ wisely referred to the wise refusal of the courts to become bogged down in the nuances of formulation. Oddly enough, both the Newfoundland Railway case and The Dominique were single contract cases, and therefore probably rather unhelpful contexts in which to judge what is meant by "inseparable connection". In truth, where separate contracts (or dealings or transactions) are concerned, the metaphor of inseparability is not all that helpful. Ex hypothesi, the contracts are separate (as in Bankes v. Jarvis, the case about the veterinary surgeon's practice discussed by Morris LJ in Hanak v. Green). I am not aware of the "inseparable connection" test being used to exclude a set-off, where some other formulation of the close connection requirement would have allowed it. It was not used to exclude a set-off in either the Newfoundland Railway case, nor in The Dominique nor in Bim Kemi. Nor is the test all that helpful in single contract cases: as Potter LJ remarked in Bim Kemi, where a case concerns a claim and cross-claim arising out of the same contract, although that fact is not in itself enough to ensure an equitable set-off, it is on the whole likely to take a special rule excluding set-off, such as the rules about freight, rent and cheques (and now direct debits, see Esso v. Milton), to prevent a set-off. In this connection, Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] AC 689 emphasises that an equitable set-off for defective work is not easily excluded even in building contracts where sums are payable under an architect's certificate. On the other hand, The Nanfri itself shows that in the context of maritime adventures and time charter hire, and against the background of the rule as to freight, a special regime of limited but not general set-off has been fashioned for cross-claims under the charterparty.
(iv) There is also clearly a functional requirement whereby it needs to be unjust to enforce the claim without taking into account the cross-claim. This functional requirement is emphasised in all the modern cases, viz. Hanak v. Green, The Aries, The Nanfri, Dole Dried Fruit, Esso v. Milton, and Bim Kemi. The only modern authority cited above which does not in terms refer to the functional requirement of injustice is Lord Brandon's discussion in The Dominique. This has led Potter LJ in Bim Kemi (at para.38) to remark on the absence of reference to "manifest injustice" by Lord Brandon: but nevertheless it did not lead him to dispense with that requirement (ibid). It seems to me impossible to do so: it is not coherent to have a doctrine of equitable set-off which ignores the need for consideration of aspects of justice and fairness. Mr David Friedman QC, on behalf of SCL, has submitted that the test of "inseparable" connection contains inherently within it the need for a requirement of manifest injustice. That is what, he submits, "inseparable" means. In my judgment, such lack of transparency in a test would be undesirable, and I do not believe that it is as Mr Friedman submits. But I do not in any event think that Lord Brandon was intending to use the Newfoundland Railway formulation as an exclusive test for equitable set-off. Rather, he was using it to dethrone the concept of impeachment.
(v) Although the test for equitable set-off plainly therefore involves considerations of both the closeness of the connection between claim and cross-claim, and of the justice of the case, I do not think that one should speak in terms of a two-stage test. I would prefer to say that there is both a formal element in the test and a functional element. The importance of the formal element is to ensure that the doctrine of equitable set-off is based on principle and not discretion. The importance of the functional element is to remind litigants and courts that the ultimate rationality of the regime is equity. The two elements cannot ultimately be divorced from each other. It may be that at times some judges have emphasised the test of equity at the expense of the requirement of close connection, while other judges have put the emphasis the other way round.
(vi) For all these reasons, I would underline Lord Denning's test, freed of any reference to the concept of impeachment, as the best restatement of the test, and the one most frequently referred to and applied, namely: "cross-claims…so closely connected with [the plaintiff's] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim". That emphasises the importance of the two elements identified in Hanak v. Green; it defines the necessity of a close connection by reference to the rationality of justice and the avoidance of injustice; and its general formulation, "without taking into account", avoids any traps of quasi-statutory language which otherwise might seem to require that the crossclaim must arise out of the same dealings as the claim, as distinct from vice versa. Thus, if the Newfoundland Railway test were applied as if it were a statute, very few of the examples of two-contract equitable set-off discussed above could be fitted within its language. I note that in Chitty on Contracts (30th ed., 2008), vol. II, at 37-152, the test for equitable set-off is formulated in terms of Lord Denning's test."
Although the parties did not refer me to Geldof, I think that this extract is uncontroversial as between them.
Duty of Care
Disposal
i) I am not satisfied that Acasta does not have a real prospect of establishing that terms were implied in the collateral contract Nesbit contends for;
ii) I am satisfied that Acasta has a real prospect of establishing that there was implied in such a collateral contract an obligation that Nesbit would carry out, with reasonable care and skill, preliminary assessments of the lay clients' claims to ensure that they appeared to have reasonable prospects of success or at least a 51% prospect of success;
iii) I am satisfied that Acasta has a real prospect of establishing that Nesbit entered into relevant STBAs;
iv) I am satisfied that Acasta has a real prospect of establishing that Nesbit owed it the disputed duty of care;
v) Acasta's proposed set off defences rely on equitable set offs and so are not subject to section 35 of the 1980 Act;
vi) Acasta does not need to satisfy CPR 17.4 before the court can permit its proposed re-amendments pleading its set off defences.
7.3 The Claimant would…provide a loan to the Former Partnership so that the Former Partnership may fund or pay disbursements reasonably and properly incurred by the Former Partnership on behalf of its lay clients and that were recoverable between the parties in the underlying personal injury proceedings including, inter alia, the cost of acquiring legal expenses insurance, in the form of the premium, from the Third Party (the "Recoverable Disbursements" and the "Recoverable Disbursements Loan" respectively). The Recoverable Disbursements Loan would…be repayable by the Former Partnership, notwithstanding that it was for the benefit of its lay clients.
7.6 The Third Party would provide post event LEI [(legal expenses insurance)] to each of the lay clients of the Former Partnership whereby the Third Party would indemnify the lay clients in respect of adverse costs incurred by the lay clients in the underlying personal injury proceedings and/or in respect of the amount of Recoverable Disbursements or proportion thereof that were not recovered by the Former Partnership on behalf of the lay clients between the parties in the underlying personal injury proceedings (the "LEI Policy").
7.8. … [Nevertheless,] Mrs Turnbull on behalf of the Claimant and Mr Sayer on behalf of the Third Party assured the Former Partnership and the Second Defendant and impressed upon him that:- …(c) in the event that the underlying personal injury proceedings concluded unsuccessfully, the Third Party would repay to the Claimant any sums outstanding under the Recoverable Disbursements Loans…[T]hereby whilst the Former Partnership would be liable in principle to discharge the said loans, no demand would be served upon the Former Partnership and the Former Partnership would incur no outlay by virtue of the indemnity afforded under…the LEI Policy (the "First Assurance").
9.5 …Mrs Turnbull and Mr Sayer further assured the Second Defendant that…the LEI Policy would indemnify the sums outstanding under Recoverable Disbursements Loans in the event that the underlying personal injury proceedings of the lay clients concluded unsuccessfully (the "Second Assurance").
18.4. The First Assurance and the Second Assurance (together "the Assurances") were intended to have contractual effect and/or constituted contractual offers which the Former Partnership duly accepted and agreed to.
18.5 In the premises, the following were express terms of the Collateral Agreement insofar as the same related to Recoverable Disbursements, Recoverable Disbursements Loans and the LEI Polices:
(1) The Third Party would abide by the LEI Policies.
(2) The Third Party would make payment of the Recoverable Disbursements pursuant to (or alternatively in the same sums as provided for in) the LEI Policies in the event of cases being unsuccessful.
(3) The Recoverable Disbursements would be paid by the Third Party to the Claimant on behalf of the Former Partnership as repayment of the Recoverable Disbursements Loans.
(4) The Former Partnership would incur no outlay by virtue of the indemnity afforded under the LEI Policy.
18.6. In the alternative, the terms set out above were implied terms of the Collateral Agreement by virtue of the same being obvious inferences in all the circumstances and/or by virtue of the same being necessary in order to give business efficacy to the Collateral Agreement.
18.7. The consideration for the Collateral Agreement was the Former Partnership's entry into the Litigation Funding Agreement and/or the Former Partnership agreeing to obtain and/or obtaining Recoverable Disbursements Loans and Irrecoverable Costs Loans from the Claimant and/or the Former Partnership agreeing to obtain and/or obtaining insurance from the Third Party by way of the FGI Policies and/or the Former Partnership agreeing to procure and/or procuring their clients' entry into the LEI Policies.
22.1 such agreement was subject to implied terms, to be implied as a matter of obvious inference, requiring the Defendant to act in accordance with the duties and obligations set out in paragraphs 32 and 34 below, alternatively in accordance with the Solicitors Terms of Business Agreement referred to in paragraph 28 below;
22.2.1 that enforcement by the Defendant of any LEI Policy was conditional upon compliance with the said Solicitors Terms of Business Agreement in relation to the LEI Policy concerned;
22.2.2 that the Defendant could be in no better position in relation to the enforcement of the LEI Policies than the Insured could be.
…Prior to the issue of a Policy, the Scheme Solicitor must:
…[e]nsure before requesting a Policy from the Insurers, that a comprehensive risk assessment has been undertaken (which is available in hard copy format detailing same) which demonstrates that…[t]he Claim pursued has at least a 51% prospect of success...
…be in a position, if requested, to provide case risk analysis to the Insurer for each Client Claim requiring a Policy which gives risk details and the risk assessment processes that have taken place.
Once a Policy has been issued to a Client, the Scheme Solicitor must…
report by Monthly Schedule to the Insurer in relation to any individual Policy and act according to the Policy where it so prescribes, in the following circumstances…
- where there has been a material change of fact that is likely to affect prospects of success…
- [where there has been] Insured non-cooperation…
at any stage in the life of a Claim be prepared to discontinue the Claim should prospects fall below 51%...
The Scheme Solicitor shall discharge their duties and exercise their powers under the terms of this Agreement in a timely manner using sufficient appropriately qualified personnel exercising due care, diligence and skill...
34.1 where the claim was unsuccessful, a copy of the order giving judgment against the lay client;
34.2 where the claim had not been proceeded with because, on reconsideration of the merits, the Defendant determined that it had low or no prospects of success (whether by reason of an allegation of fraud or otherwise), a copy of the Defendant's internal re-assessment or correspondence with the client notifying the client accordingly;
34.3 where the claim had been discontinued or withdrawn, a copy of Acasta's approval thereto in accordance with paragraph (1) of the Terms and Conditions of the LEI Policy.
Note 1 In fact, the first of the contended-for STBAs will have been entered into (if at all) by Nesbit & Co. The parties did not distinguish between Nesbit & Co. and Nesbit at the hearing, because they did not need to do so. I propose to adopt the same approach and, for the rest of this judgment, do not distinguish between the two. [Back]