England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		18/12/2012

Mr Justice Leggatt :

A. INTRODUCTION

1. Since the Limited Liability Partnerships Act 2000 came into force, it has become increasingly common for professional firms which used to practise as partnerships to transform themselves into limited liability partnerships (LLPs). Unlike a partnership, an LLP is a corporate body with a legal personality separate from that of its members. In the absence of agreement, an LLP has no liability to third parties for any contract made or wrongful act done by its members before the LLP was formed. A claim which is founded on such a contract or wrongful act (for example, a claim alleging professional negligence) must therefore be brought against the members of the old partnership, and not the LLP.
2. If a claim is mistakenly brought against an LLP which should have been brought against the former partnership, and before the error is recognised the limitation period for starting a new action has expired, can the error be corrected by substituting the former partnership for the LLP as the defendant to the claim? That is the principal question raised by this appeal.

The Proceedings

3. This action was begun on 11 November 2010. The defendant named in the claim form was Kingston Smith LLP ("the LLP"), a firm of chartered accountants. Prior to 1 May 2006 its members had practised as a partnership under the name of Kingston Smith ("the Firm").
4. The brief details of the claim given in the claim form state that:

"The Claimants seek damages for losses arising from negligent advice given and/or acts committed by the Defendant and its agents in the course of its duties as an accountant and professional advisor to the Claimants."

As appears from the particulars of claim dated 15 April 2011, almost all the allegedly negligent acts were in fact committed before the LLP had come into existence by members of the Firm.

5. On 11 April 2011 the claimants applied for an order to substitute the Firm as defendant in place of the LLP. Such an order was made the same day by Master Leslie without a hearing.
6. On 26 May 2011 the Firm applied to set aside the order. That application was heard in January 2012 by Master Fontaine who gave Judgment on 10 May 2012. By her Order dated 10 May 2012, the Master set aside the order for substitution. That left the LLP as the defendant. As the claimants accepted that they had no viable claim against the LLP, their whole claim was consequently struck out.
7. This is the claimants' appeal against the Order of Master Fontaine, brought with permission of Eady J.

The Claims

8. As pleaded in the particulars of claim, the second claimant, which is a subsidiary of the first claimant, is in the business of developing and selling accounting software. Until 1997 the second claimant was the owner of the intellectual property rights in the software ("the IPR"). In 1997, allegedly on the advice of the defendant, the IPR were transferred to Designsoft, a company incorporated in Nevis. Designsoft was wholly owned by Shamrock LLC, another Nevis company. Designsoft and Shamrock are together referred to in the particulars of claim as "the Nevis Entities".
9. Unknown to the claimants, the Nevis Entities were struck off the register of companies in Nevis on 1 November 1999 for non-payment of annual registration fees. Under the laws of Nevis a company which has been struck off may be restored to the register within three years. However, that was not done in this case. In consequence, on 1 November 2002 the Nevis Entities commenced a process of winding-up leading to their dissolution. There was a further period of three years during which the directors had power to transfer assets before the companies were dissolved. That also did not happen. On or about 29 April 2005, a corporate reorganisation took place under which the IPR were purportedly transferred by Designsoft to the first claimant. However, the purported transfer was ineffective (as it was made by the company and not the directors). At the end of the three year period, on 1 November 2005, Designsoft was automatically dissolved and the IPR became bona vacantia.
10. The particulars of claim assert claims against the defendant in two capacities. In each case the claims are formulated as claims for breach of a duty of care owed in contract and in tort.
11. First, it is said that the defendant audited the accounts of the second claimant for each financial year from 1999 to 2006. It is alleged that, in auditing those accounts, the defendant should have checked the status of the company which owned the IPR to the software which the second claimant was marketing, and should have advised the second claimant that the Nevis Entities had been struck off and that the IPR were at risk of being lost. It is alleged that the defendant was negligent in failing to do this and in giving unqualified audit reports on the accounts.
12. Second, it is said that throughout the same period the defendant provided "fiduciary or administrative services" which included administering the Nevis Entities. It is alleged that, as part of this responsibility, the defendant had a duty to ensure that the annual registration fees of the Nevis Entities were paid and, if the fees were not paid, to warn of the consequences. These services are said to have been provided, and the relevant duties owed, to the "Clients". The "Clients" are defined in the particulars of claim as the claimants along with an Isle of Man discretionary trust known as The Chatham Trust, which is said to have been the ultimate beneficial owner of the claimants and the Nevis Entities, and another company in the group called Cotterford Limited. The Chatham Trust and Cotterford are said to have assigned their claims to the claimants. The particulars of claim allege that the defendant was negligent in failing to give proper advice as to the status of the Nevis Entities from before they were struck off in 1999 until they were dissolved on 1 November 2005.
13. The losses claimed consist principally of the costs of recovering the IPR after they became bona vacantia, estimated at over £300,000, and an alleged residual diminution in the value of the IPR, estimated at between US$500,000 and US1 million as at June 2010. There is also a small claim, estimated at £15,000, for the costs of the ineffective reorganisation in 2005.

The Impact of the Limitation Period

14. The particulars of claim thus make allegations of negligence which span a long period, from 1999 to 2006. It is clear that by 11 April 2011, when the order substituting the Firm for the LLP as the defendant in this action was made, the limitation period had expired for starting a new action in relation to some of the claims asserted in the particulars of claim.
15. Under the Limitation Act 1980 (sections 2 and 5), the limitation period for actions founded on tort and contract is in each case six years from the date on which the cause of action accrued. In the case of an action founded on contract, the cause of action accrues when a breach of contract occurs. A cause of action founded on the tort of negligence, however, does not accrue until the claimant has suffered loss as a result of the negligent act or omission.
16. As at 11 April 2011, therefore, when the order for substitution was made, the limitation period had expired for suing on any cause of action which accrued before 11 April 2005. That included, at least, any claim founded on a breach of contract which occurred before that date.
17. However, it appears from the particulars of claim that, apart from the costs of the corporate reorganisation on 29 April 2005, no loss resulted from the alleged negligence of the Firm until 1 November 2005 when the Nevis Entities were dissolved and the IPR became bona vacantia. On this basis, at least arguably the right to sue in tort accrued on 1 November 2005 and the limitation period for bringing claims in tort therefore expired on 1 November 2011, almost seven months after the order for substitution was made. In addition, when the order was made, the claimants were still in time to claim damages for loss caused by any breach of contract committed after 11 April 2005.
18. The power of the court to add or substitute a party to proceedings is governed by Part 19 of the Civil Procedure Rules. It is common ground that for the purposes of substitution each cause of action must be looked at separately and that a party can in principle be substituted in respect of one cause of action and not others: see Adelson v Associated Newspapers Ltd [2008] 1 WLR 585, 605 at paras 63 and 66; O'Byrne v Aventis Pasteur MSD Ltd [2008] 1 WLR 1188, 1208 at para 63.
19. Different rules apply depending on whether or not the limitation period has expired. The requirements are more restrictive if the limitation period has not yet expired. Although that may at first sight seem paradoxical, it is explained by the fact that at that stage a fresh action can be started. If instead of starting a fresh action an application is made to add or substitute a new party in the existing action, CPR r.19.2 applies. Rule 19.2(4) states that:

"The court may order a new party be substituted for an existing one if –

(a) the existing party's interest or liability has passed to the new party; and

(b) it is desirable to substitute the new party so that the court can resolve the matters in dispute in the proceedings."

20. The claimants accept that condition (a) was not satisfied in this case. The original defendant to the action (the LLP) did not have a liability which had passed to the new party (the Firm). It follows that the court had no power to order the Firm to be substituted for the LLP in relation to the claims which as at 11 April 2011 were not yet time-barred.
21. This did not prevent the claimants from pursuing those claims. It was open to them on 11 April 2011, and for some months thereafter, to start a new action against the Firm for claims which were not time-barred. However, they failed to do so. A fresh action was eventually commenced, but only on 12 June 2012. By that time the primary limitation period for all the claims had on any view expired. In the second action the claimants tried to get around this difficulty by alleging that the striking off and subsequent dissolution of the Nevis Entities had been deliberately concealed from them by the Firm, with the result that the running of the limitation period was postponed by section 32 of the Limitation Act 1980. However, the Firm applied to strike out the claim on the basis that the particulars of claim disclosed no reasonable grounds for the allegation of deliberate concealment. On 30 November 2012 I granted that application and made an order dismissing the second action. Subject to any appeal, therefore, the claimants cannot now pursue any cause of action which accrued after 11 April 2005.
22. Any causes of action which accrued before 11 November 2004 were already time-barred when the present action was begun on 11 November 2010. The court does not have power to add or substitute a new party after the limitation period has expired if the limitation period was not current when the proceedings were started. In these circumstances the only claims for which the claimants sought to argue on this appeal that substitution was possible on 11 April 2011 are those which accrued between 11 November 2004 and 11 April 2005. Such claims may still be significant. In particular, they include a claim for breach of contract in relation to the audit of the accounts of the second claimant for the year ended 30 April 2004. I will refer to these claims which are in issue on this appeal as the "relevant claims".

CPR r.19.5 and Limitation Act 1980, s.35

23. Where an application is made to add or substitute a new party after the limitation period has expired, the rule applicable is CPR r.19.5. This provides:

"(1) This rule applies to a change of parties after the end of a period of limitation under —

(a) the Limitation Act 1980;

...

(2) The court may add or substitute a party only if—

(a) the relevant limitation period was current when the proceedings were started; and

(b) the addition or substitution is necessary.

(3) The addition or substitution of a party is necessary only if the court is satisfied that—

(a) the new party is to be substituted for a party who was named in the claim form in mistake for the new party; [or]

(b) the claim cannot properly be carried on by or against the original party unless the new party is added or substituted as claimant or defendant;

..."

24. CPR r.19.5 gives effect to section 35(4) of the Limitation Act 1980, which states that rules of court may provide for allowing a new claim after a relevant limitation period has expired, but only if the conditions specified in section 35(5) are satisfied and subject to any further restriction the rules may impose.
25. In the case of a claim involving a new party, the relevant condition specified in section 35(5) is that the addition or substitution of the new party is "necessary for the determination of the original action". Pursuant to section 35(6), that condition is not satisfied unless either:

"(a) the new party is substituted for a party whose name was given in any claim made in the original action in mistake for the new party's name; or

(b) any claim already made in the original action cannot be maintained by or against an existing party unless the new party is joined or substituted as plaintiff of defendant in that action."

26. It has been held that on the proper construction of the statute these conditions exhaustively define when addition or substitution of a new party is "necessary for the determination of the original action". In other words, if there is a mistake of a kind sufficient to satisfy section 35(6)(a) or the kind of necessity identified in section 35(6)(b), then the test of necessity in section 35(5) is satisfied, but not otherwise: see O'Byrne v Aventis Pasteur MSD Ltd [2008] 1 WLR 1188, 1206-7 at paras 54-61.
27. It was not suggested in this case, and so far as I am aware has never been suggested, that the slightly different wording of CPR r.19.5(3) imposes any further restriction beyond the restrictions imposed by section 35(6) of the Act.

The Issues

28. On this appeal, the claimants have relied principally on section 35(6)(a) and CPR r.19.5(3)(a), arguing that when the action was commenced the name of the LLP was given "in mistake" for the name of the Firm. They also, in the alternative, rely on section 35(6)(b) and CPR r.19.5(3)(b), arguing that the relevant claims cannot properly be carried on by them unless the Firm is substituted as defendant in the action. I will consider these two arguments in turn.

B. THE MISTAKE ARGUMENT

The Sardinia Sulcis Test

29. There is a considerable body of case law on the question of what type of mistake the court has power to relieve by substituting a new party for one named in mistake. In Adelson v Associated Newspapers Ltd [2008] 1 WLR 585, 598, at para 5, the Court of Appeal described this as a "difficult area of procedural law" and set out to clarify it. The Court of Appeal decided that, in order to fall within CPR r.19.5(3)(a), the mistake must be as to the name of the party rather than as to the identity of the party, applying "the generous test of this type of mistake" laid down in The Sardinia Sulcis [1991] 1 Lloyd's Rep 201. In that case the proceedings were mistakenly brought in the name of the owners of the ship Sardinia Sulcis, when the owners had in fact assigned their claims to another party. The issue was whether that other party could be substituted as plaintiff after the limitation period had expired. Lloyd LJ (subsequently Lord Lloyd of Berwick) said at p.207:

"In one sense a plaintiff always intends to sue the person who is liable for the wrong which he has suffered. But the test cannot be as wide as that. Otherwise there could never be any doubt as to the person intended to be sued, and leave to amend would always be given. So there must be some narrower test. In Mitchell v Harris Engineering [1967] 2 QB 703 the identity of the person intended to be sued was the plaintiff's employers. In Evans v Charrington [1983] QB 810 it was the current landlord. In Thistle Hotels v McAlpine (unreported) 6 April 1989 the identity of the person intending to sue was the proprietor of the hotel. In The Joanna Borchard [1988] 2 Lloyd's Rep 274 it was the cargo-owner or consignee. In all these cases it was possible to identify the intending plaintiff or intended defendant by reference to a description which was more or less specific to the particular case. Thus if, in the case of an intended defendant, the plaintiff gets the right description but the wrong name, there is unlikely to be any doubt as to the identity of the person intended to be sued. But if he gets the wrong description, it will be otherwise."

30. In The Sardinia Sulcis Lloyd LJ was not considering CPR r.19.5(3)(a) but an earlier rule of court in different terms, RSC Order 20, r.5. That rule stated:

"(3) An amendment to correct the name of a party may be allowed [after any relevant period of limitation current at the date of issue of the writ has expired] notwithstanding that it is alleged that the effect of the amendment will be to substitute a new party if the court is satisfied that the mistake sought to be corrected was a genuine mistake and was not misleading or such as to cause any reasonable doubt as to the identity of the person intending to sue or, as the case may be, intended to be sued."

31. It was thus a requirement of RSC Order 20, r.5(3) that the mistake was "not misleading or such as to cause any reasonable doubt as to the identity of the person ... intended to be sued". Lloyd LJ was clearly addressing that requirement when he referred at the start and at the end of the passage I have quoted above to whether there could be any doubt as to the person intended to be sued.
32. CPR r.19.5(3) does not contain such a requirement. (The requirement survives only in CPR r.17.4(3), which applies to an amendment made after the end of the limitation period to correct the name of a party where this does not involve the addition or substitution of a new party.) Not least for that reason, after the Civil Procedure Rules replaced the old Rules of the Supreme Court, there was uncertainty as to whether the Sardinia Sulcis test still applied. In Morgan Est (Scotland) Ltd v Hanson Concrete Products Ltd [2005] 1 WLR 2557 the Court of Appeal held that it did not. Jacob LJ (with whom Hooper LJ agreed), after reviewing the earlier cases, decided that under the new rule there was no longer any restriction on the kind of mistake required. Jacob LJ said (at para 37) that The Sardinia Sulcis should be allowed to sink back to the ocean bottom.
33. Reports of the sinking, however, proved premature. In Adelson Lord Phillips of Worth Matravers CJ, giving the judgment of the court (which also included Jacob LJ), said that the Morgan Est case had been decided on the assumption that the Limitation Act 1980 (under which CPR r.19.5 but not RSC Order 20, r.5 was made) was intended to liberalise the law in this area. However, the legislative history of the 1980 Act showed that assumption to have been mistaken. The Morgan Est case should not be followed. The Sardinia Sulcis test still applies.
34. The Court of Appeal in Adelson concluded (at paras 55-56) that, for CPR r.19.5(3)(a) to apply, three requirements must be met: (1) the person who has made the mistake must be the person responsible, directly or through an agent, for the issue of the claim form; (2) it must be shown that, had the mistake not been made, the new party would have been named; and (3) the mistake must be as to the name of the party, applying the Sardinia Sulcis test.
35. There is a footnote which should be added to the Adelson case. In holding that the Sardinia Sulcis test still applies, the Court of Appeal cannot have intended to suggest that it remains necessary to show that the mistake was not misleading or such as to cause any reasonable doubt as to the identity of the person intended to be sued. As already mentioned, and as was noted in Adelson at para 44, that was a requirement of the old RSC Order 20, r.5 but it is not a requirement of CPR r.19.5(3). To that extent at least, therefore, the law has been liberalised.
36. This is confirmed by the decision of the Court of Appeal in Horne-Roberts v SmithKline Beecham plc [2002] 1 WLR 1662. In that case the claimant initially sued Merck believing it to be the manufacturer of a vaccine which the claimant had received and which he claimed had caused him personal injury. In fact, the vaccine had been manufactured by SmithKline. After the expiry of the limitation period Bell J granted an application to substitute SmithKline as the defendant. The order was upheld by the Court of Appeal. Keene LJ said at para 45 that "the claimant always intended to sue the manufacturer of the identified vaccine and that is sufficient to give the court the power to substitute the true manufacturer."
37. It could not be said, and was not suggested in the SmithKline case, that the claimant's mistake in naming Merck as defendant instead of SmithKline was not misleading or such as to cause doubt as to the identity of the party intended to be sued. It obviously was. Indeed, SmithKline did not even become aware of the claim until after the limitation period had expired. Nevertheless, as was noted in Adelson at para 57, the Court of Appeal still held in the SmithKline case that the Sardinia Sulcis test could be, and was, satisfied. It cannot therefore be an element of the test, at any rate as it now applies, that the mistake was not misleading or such as to cause doubt as to the identity of the person intending to sue or intended to be sued.
38. This conclusion is supported by the observations of Rix LJ (albeit obiter) in Lockheed Martin Corp v Willis Group [2010] PNLR 34 at paras 41-42:

"41 This is a difficult area of the law, but I would hazard the possible explanation that the Sardinia Sulcis test properly so-called does not, at any rate as it has survived in the new world of the CPR and the altered language of r.19.5, embrace all the wording of the old rule RSC Ord.20, r.5, but is properly confined to the substantive test that it is possible to identify the intending claimant or intended defendant "by reference to a description which was more or less specific to the particular case" (per Lloyd LJ at p.207 ...). That after all will ensure that the court can be satisfied that a genuine mistake has been made and that the mistake in question has caused the wrong party to be named.

42 It is only in this way that justice can be done to the fact that the language "and not one which could cause reasonable doubt as to the identity of the party in question" is now confined to r.17.4(3), and is not to be found in r.19.5. It is plainly not an inherent requirement of s.35. It is only in this way that SmithKline can survive as a correct application of the new r.19.5. SmithKline was approved in Adelson, and binds us."

39. One may wonder why in these circumstances the Sardinia Sulcis test should still be retained at all. The reason given by the Court of Appeal in Adelson was that section 35 of the 1980 Act should be construed by reference to the Law Reform Committee's 21^st Report, Final Report on Limitation of Actions (Cmnd 6923), published in 1977, whose recommendations led to the enactment of section 35. In its report (at para 5.16) the Law Reform Committee generally commended RSC Order 20, r.5 as it then stood. The Committee recommended that legislation should confer a new power to make rules dealing with the addition or substitution of new parties after the expiry of the limitation period but did not recommend that new rules were needed except to enable parties to be added out of time in certain specific cases, which were later addressed by amending RSC Order 15, r.6. The Court of Appeal in Adelson (at paras 22-26, 44 and 47) inferred from this legislative history that section 35 of the 1980 Act and CPR r.19.5(3) were intended to reflect the provisions of RSC Order 20, r.5.
40. Once it is accepted, however, that section 35 and CPR r.19.5(3) are less restrictive than RSC Order 20, r.5 because they do not specify, as the old rule did, that the mistake must not be misleading or such as to cause any reasonable doubt as to the party intending to sue or be sued (see Adelson at para 44), then this inference seems hard to maintain. Since section 35 and CPR r.19.5(3) are on any view broader than RSC Order 20, r.5, it is difficult to see how it can be right to infer that there was no intention to liberalise the law. Rather the natural inference would seem to be that Parliament intended to give the rules committee power to introduce a wider test if it saw fit, and that the committee has since seen fit to do this when the Civil Procedure Rules were introduced. In these circumstances it is not obvious why the test outlined in The Sardinia Sulcis should be taken to apply to the new rule.
41. That is particularly so given that the Sardinia Sulcis test was formulated to reflect the very requirements of RSC Order 20, r.5 which have not been replicated in the new rule. The reason given by Lloyd LJ (at p.207) as to why there had to be a restriction on the type of mistake which would satisfy RSC Order 20, r.5 was that "[o]therwise there could never be any doubt as to the person intended to be sued, and leave to amend would always be given." However, as noted above, the question of whether there is doubt as to the person intended to be sued is no longer relevant under the new rule. Nor is it true that, if all kinds of mistake fell within the rule, leave to amend would always be given. Where the requirements of section 35(6)(a) of the 1980 Act and CPR r.19.5(3)(a) are satisfied, the court has a discretion whether or not to allow substitution. The existence of this discretion might be thought sufficient to enable any potential injustice to be avoided, without the need to try to draw distinctions between different categories of mistake.
42. It is also notable that, as will be seen later, the Court of Appeal has more recently rejected an argument that section 35 should be given a narrow interpretation in the light of its legislative history when considering the second limb of section 35(6).

The Limits of the Sardinia Sulcis Test

43. It may be that at some point in the future this area of the law will be considered again by a higher court. As the law now stands, however, following Adelson, the Sardinia Sulcis test must still be applied. That is not a task which courts have found easy. It is always possible to describe the person whom a claimant intends to sue at many different levels of generality. In the SmithKline case, for example, it could accurately be said that the claimant intended to name in the claim form: (a) the company called Merck & Co Inc; (b) the manufacturer of vaccine batch No 108A41A; (c) the manufacturer of the vaccine which the claimant received; (d) the producer of an allegedly defective product which had caused the claimant's injuries; and (e) the person who was legally liable for those injuries. If the claimant is mistaken in believing that the person sued fits all of those descriptions, how does one decide whether the claimant has got "the wrong description" or "the right description but the wrong name"?
44. It has to be said that the example used by Lloyd LJ in the Sardinia Sulcis case to illustrate the application of the test does not make the task any easier. Immediately after the passage quoted earlier, Lloyd LJ said (at p.207):

"The point can be illustrated by the facts of Rodriguez v R J Parker (Male) [1967] 1 QB 116. In that case the identity of the intended defendant was the driver of a particular car. It was held that there was a mistake as to name. But if the plaintiffs had sued the driver of a different car, there would have been a mistake as to identity. He would have got the wrong description."

This appears to suggest that the relevant description of the intended defendant in the Rodriguez case was not as general as, say, "the driver of the motor vehicle which knocked down and injured the plaintiff" but should be regarded as specific to the particular vehicle (in fact a van) allegedly being driven, so that if the plaintiff had made a mistake about the identity of the vehicle he would have "got the wrong description". However, it is not clear by what criterion the court can select the more specific rather than the more general description as the "right" one in that case. Moreover, it seems arbitrary that the court should have the power to correct the mistake if the plaintiff misidentifies the driver of the vehicle which knocked him down but not if he misidentifies the vehicle.

45. In practice, as was noted in Morgan Est (at para 20) and Adelson (at para 43), the courts have adopted a generous interpretation of what can be treated as a mistake as to name. This is illustrated by the result of the Sardinia Sulcis case itself. When Lloyd LJ came to apply his test he said (at p.207):

"Returning to the facts of the present case, there could be no reasonable doubt as to the identity of the person intending to sue, namely, the person in whom the rights of ownership were vested at the date when the writ was issued. ... The description of the intending plaintiffs was clear enough. It follows that Mr Pertwee's mistake was a mistake as to name, and not a mistake as to identity."

As Jacob LJ observed in Morgan Est at para 20, this is very close to saying that the relevant description amounted to the person who had the right to sue.

46. Just how generous, then, is the Sardinia Sulcis test and what is the limit to its generosity? In trying to answer that question it is relevant to consider later cases in which the Court of Appeal has found that the test was not satisfied. Two such cases were decided while RSC Order 15, r.6 was still in force.
47. In International Bulk Shipping and Services Ltd v Minerals and Metals Trading Corp of India [1996] 1 All ER 1017 proceedings were brought in the names of two companies which had in fact been dissolved before the proceedings were commenced. After the limitation period had expired an application was made to substitute as plaintiff the trustee in bankruptcy in whom the companies' assets were vested. Waller J held that there was no power to permit substitution as there was "no mistake either as to the name of the plaintiff or as to the identity of the party intending to sue but only an error as to the rights of the correctly identified party". Both the judge's decision and the test he applied were approved by the Court of Appeal (at p.1026).
48. It is not easy to distinguish the facts of International Bulk Shipping from those of The Sardinia Sulcis. In The Sardinia Sulcis the person responsible for issuing the proceedings was mistaken in believing that the right to sue remained vested in the owners of the vessel, being unaware that the right had been assigned. In International Bulk Shipping the mistake made was also in thinking that the companies were still in existence and entitled to sue when the right of action had been transferred to another party. However, in the former case substitution was allowed whereas in the latter case it was held to be impermissible as the error was one as to the rights of the original party.
49. The second case in which substitution was held to be impermissible was Ramsey v Leonard Curtis (a firm) [2001] BPIR 389. There a claim was made against the accountancy firm in which the two administrative receivers of a company were partners. The only tenable claim was one against the administrative receivers in their personal capacity. They had no liability as partners; nor were their partners vicariously liable for their actions. The claim as formulated was therefore bound to fail. After the limitation period had expired the claimants applied to substitute the administrative receivers as the defendants to the action. The application was dismissed and this decision was upheld by the Court of Appeal. Henry LJ (with whom Pill LJ agreed) said that there was no power to order substitution because the claimants' mistake "was not as to name or identity, but as to the partnership's legal liability" (see p.398A).
50. It is unclear why, in Ramsey, the amendment under consideration was thought to involve the substitution of a new party. The two administrative receivers were parties to the proceedings from the beginning. They were two of the nine partners in the firm which was named in the writ. As a partnership is not a legal entity separate from its members, the action against the firm was an action against them along with their seven partners. The mistake made was to sue the two administrative receivers in the wrong capacity (and to sue their partners unnecessarily). The necessary saving amendment, as Henry LJ observed at p.394A, involved "the two administrative receivers ceasing to be defendants as partners but becoming defendants in their capacity as receivers." That, however, did not involve substituting a new party as a defendant in the action. A person cannot be made a party to proceedings more than once, albeit that he may be sued in more than one capacity. It is therefore, with respect, difficult to see how any question of substitution under section 35 of the Limitation Act 1980 was engaged. The decision can be explained on the basis that the amendment to change the capacity in which the two administrative receivers were sued involved the substitution of a new cause of action, and was impermissible either because it did not arise out of the same facts or substantially the same facts as were already in issue (see e.g. Fannon v Backhouse, 30 July 1987) or on the second ground which the Court of Appeal in Ramsey gave for its decision – namely, that on the facts of the case it was not just to allow the amendment.
51. Ramsey was distinguished in Kesslar v Moore & Tibbits (a firm) [2005] PNLR 17, a case (unlike Ramsey) decided under the Civil Procedure Rules. In Kesslar the claimant sued a firm of solicitors (Moore & Tibbits) which had taken over another firm (Kundert & Co) whose partner had allegedly given the claimant negligent advice. In fact, neither of the two partners in the firm of Kundert & Co ever became a partner in the firm of Moore & Tibbits. After the expiry of the limitation period, the claimant applied to substitute the partners of Kundert & Co as defendants in place of Moore & Tibbits. The application was refused by the judge but the Court of Appeal allowed the claimant's appeal. Buxton LJ, who gave the leading judgment, held that substitution was permissible as the claimant had intended to sue the partners of Kundert & Co and had made a mistake in thinking that she was doing so by formulating the action against Moore & Tibbits. The Ramsey case was distinguished (at p.294) on the basis that "the facts in Ramsey were very particular, and certainly were based upon an error as to whether partnership liability could arise at all in respect of the conduct complained of."
52. It is not easy to derive from these authorities any clear guidance as to where and how the line is to be drawn between those mistakes which on the Sardinia Sulcis test the court has power to correct by substitution and those which it does not. It seems to me, however, that the only way in which the Sardinia Sulcis test is workable at all is to identify the relevant description of the intended claimant or defendant by reference to what description is material from a legal point of view to the claim made. For example, in the SmithKline case the claim was founded on the Consumer Protection Act which gives a right to a person injured by a defective product to recover compensation from the producer of the product. It was thus material to allege that the party sued was the producer of such a product. On the other hand, the fact that the product was a vaccine and identity of the batch from which it came were not material to the existence of the cause of action and are therefore not essential facets of the description of the party whom the claimant intended to sue.
53. If one leaves aside the puzzling reference to the Rodriguez case, the descriptions given as examples by Lloyd LJ in The Sardinia Sulcis – of employer, landlord, property owner and cargo owner – were all of this kind. A person who is an employer or a landlord or who owns property or cargo carried on board a ship acquires by virtue of that role a set of legal rights and obligations which will generally be material to the claim made in the action. Thus, where for example the defendant is sued for breach of a duty owed by reason of being the claimant's employer, or landlord, then that will be the relevant description of the intended defendant, and if the claimant turns out to have been mistaken in thinking that the person sued fitted that description because the actual employer or landlord was someone else, the mistake can be characterised as one as to name.
54. The clearest case in which the Sardinia Sulcis test was held not to be satisfied is International Bulk Shipping. The claims in that case were brought to enforce arbitration awards and were founded on the fact that the plaintiffs had obtained arbitration awards in their favour against the defendant. The assertion of this fact was sufficient to plead a cause of action and was therefore the relevant description of the intended plaintiffs. The companies named as the plaintiffs in the writ satisfied that description. There was accordingly no mistake "as to name". The mistake made was in overlooking the fact that the companies had subsequently been dissolved and their rights had passed to their trustee in bankruptcy. The error was accordingly classified as one as to the legal rights of the person intending to sue, which was outside the scope of the rule.
55. In his concurring judgment in the Sardinia Sulcis case, Stocker LJ said (at p.209):

"I agree with Lord Justice Lloyd that the distinction between the identity of a party and the name of that party may present great difficulties. If a solution to the problem is to be stated in terms of general application I do not feel I can improve on the test suggested by Lord Justice Lloyd – can the intending plaintiff or defendant be identified by reference to a description which is specific to the particular case – e.g. landlord, employer, owners or shipowners? … The nature of the claim will usually provide the answer to this problem."

I respectfully agree that, if it is necessary to draw this distinction, it may be impossible to improve on the Sardinia Sulcis test, seen as a method for distinguishing in effect between errors of fact and law. The difficulties in drawing the distinction, however, seem to me to be at least three. The first is that the distinction between what counts as an error of fact and one of law can itself be elusive. Second, even where the distinction can in principle be drawn with reasonable clarity, there may be considerable practical and evidential difficulty in identifying the precise nature of the mistake made by the person responsible for preparing the claim form – not least because the mistake may often have arisen as a result of the failure of that person to give the matter any proper thought. The third difficulty is that it is not clear why it should matter which type of mistake was made. There is no obvious rationality in drawing a distinction between mistakes of fact and mistakes of law in this context any more than there is in other contexts, such as the recovery of money paid under a mistake, where a similar distinction has been abolished or questioned in recent years.

Suing an LLP instead of the Previous Firm

56. On the basis, however, that the distinction between mistakes as to identity and as to name is one which the law still requires to be drawn, I turn to consider the situation with which the present case is concerned, where a claim for damages for alleged professional negligence has been mistakenly brought against an LLP rather than the partnership whose business the LLP took over. Applying the Sardinia Sulcis test as discussed above, it seems to me that the relevant description of the defendant in a case of this kind is that of professional adviser. It is the fact that the defendant has provided professional services and has allegedly done so negligently which potentially gives rise to legal liability.
57. In order to decide whether the claimant's mistake can be regarded as one of name rather than description, it is thus necessary to distinguish between the following two possible cases:

(1) The claimant sues the LLP in the mistaken belief that the LLP provided the services which are said to have been performed negligently, failing to recognise that the services were provided by the former partnership and not the LLP.

(2) The claimant knows that that the services were provided by the former partnership but mistakenly believes that the LLP is legally liable for the negligence of the earlier firm.

The court has the power to grant relief in case (1) but not in case (2).

58. To determine into which category a particular case falls, it is necessary to consider the whole of the evidence which may serve to explain why the LLP, and not the firm, was named as the defendant in the claim form. Such evidence will of course include any explanation given by the person who was responsible for preparing the claim form. But any such explanation may well not be conclusive, not least because the person responsible for the mistake may have given no proper thought to the decision to name the LLP as the defendant and may not consciously have followed either of the possible thought processes distinguished above. Any explanation given of the nature of the mistake may thus be an attempt to rationalise what was done in hindsight. For that reason other, objective evidence is likely to be just as, if not more, important. If particulars of claim were prepared when the claim was issued or at any rate before the mistake was recognised, they may be the best source for inferring what the claimant intended. It is also potentially relevant to consider what was said in any correspondence which preceded the issue of the claim form and in subsequent correspondence in so far as it sheds light on what the reason was for naming the LLP as the defendant.

Evidence of the Mistake

59. No particulars of claim had been prepared when the claim form in this action was issued on 11 November 2010. As quoted earlier, the claim form referred to "negligent advice given and/or acts committed by the Defendant and its agents in the course of its duties as an accountant and professional advisor to the Claimants." This wording and in particular the reference to "its duties as an accountant and professional advisor" tends to suggest that the understanding of the person(s) responsible for issuing the claim form was that the named defendant (i.e. the LLP) had provided the professional services in the course of which the negligent acts were allegedly committed; and not that the LLP had taken over liability for the negligent performance of duties owed by others. The claim form is very loosely worded, however, and it would be unsafe to place too much weight on the particular phraseology used.
60. By the time that the particulars of claim were served in April 2011 the claimants had realised that they had sued the wrong defendant and the allegations in the particulars of claim were directed solely against the Firm, and not the LLP. In these circumstances the particulars of claim are of no assistance in this case in identifying the nature of the operative mistake.
61. Counsel for the claimants, Mr David Halpern QC, submitted – and I accept – that given the brief and general description of the claim given in claim form, and the absence of contemporaneous particulars of claim, the pre-action correspondence is of particular importance in this case, because it forms the background to the issue of the claim form and in the light of which the claim form is to be understood.

Pre-Action Correspondence

62. Before the action was commenced the claimants' solicitors, Jirehouse Capital ("Jirehouse"), sent two detailed letters under the Professional Negligence Pre-Action Protocol. The first letter dated 24 July 2008 was a preliminary notice under the Protocol. The second letter dated 10 December 2008 was a formal letter of claim. Both letters were addressed to "Kingston Smith LLP" and asserted claims against the LLP as well as certain other parties described as the "KS Parties". The KS Parties included various companies said to be affiliated with the LLP and two individuals, Mr Gregory and Mr Timms, who were described as, respectively, an employee and partner of the LLP. The KS Parties did not, however, include the Firm. Indeed, neither letter made any mention of the Firm.
63. The Protocol letters alleged that "at all material times between November 1997 and September 2007" the LLP and/or the KS Parties had provided to the claimants professional audit services and professional fiduciary services. It was specifically alleged that throughout the relevant period the LLP had audited the accounts of the second claimant up to and including the accounts for the financial year ended 30 April 2006. It was further alleged that at all material times the KS Parties were "controlled and owned" by the LLP and were responsible for administering the Nevis Entities. The letter of claim asserted that the striking off and dissolution of the Nevis Entities and the losses which allegedly flowed from that were "a direct consequence of the acts and omissions of [the LLP] and other related KS Parties".
64. Thus, the Protocol letters clearly proceeded on the basis that (1) the services provided to the claimants throughout the whole period from 1997 to 2007 were provided by the LLP (and the KS Parties) and (2) the allegedly negligent acts and omissions which gave rise to the claim were acts and omissions of the LLP (and the KS Parties).
65. The same assumption that the relevant services had been provided by the LLP was evidently made by Fishburns, the solicitors who – as they stated in a letter dated 31 March 2009 – were instructed on behalf of the LLP, its employees and partners in relation to the claims. In particular, paragraph 4 of that letter impliedly accepted that the LLP had audited the accounts of the second claimant throughout the relevant period.
66. On 24 December 2009, a year after the letter of claim had been sent, Fishburns had still not provided any substantive letter of response but said that they anticipated doing so in the New Year. There had still been no substantive response to the letter of claim, however, when the claim form was finally issued on 11 November 2010. A copy the claim form was sent to Fishburns, although not formally served, on 30 November 2010.
67. As mentioned earlier, the sole defendant named in the claim form was the LLP. Some insight into the thinking (and lack of thinking) which explains this is provided by a letter from Jirehouse to Fishburns dated 20 October 2010, in which Jirehouse said:

"All known potential defendants have, rightly, been put on notice of Our Client's claim. Our understanding is that you only act for Kingston Smith LLP. For the time being Our Client's focus is on recovery against your client in this jurisdiction."

It is clear from the earlier correspondence that, apart from the LLP, the only other potential defendants who had been put on notice of the claim were the KS Parties. It is therefore again apparent from this letter that Jirehouse had overlooked the fact that relevant services had been provided by a different body, the Firm, which was accordingly a potential defendant to the claim.

Subsequent Correspondence

68. After receiving the draft claim form, Fishburns at last sent a substantive letter of response to the letter of claim. This letter of response was dated 10 December 2010, exactly two years after the date of the letter of claim. It was sent on behalf of the LLP, Mr Timms and Mr Gregory who were together referred to in the letter of response as "Kingston Smith". Amongst other things, the letter of response accepted that "Kingston Smith" (as defined) provided professional audit services to the second claimant while denying that this gave rise to a duty of care to check that the Nevis Entities were still registered. The letter also accepted that "Kingston Smith" provided various administrative services in relation to the Nevis Entities, while again denying that any relevant duty was owed. Fishburns were still proceeding, therefore, on the shared assumption that all the relevant services had been provided by the LLP.
69. On 17 December 2010 Jirehouse wrote proposing alternative dispute resolution and enclosing a draft standstill agreement. A schedule to the draft agreement listed separately for the first time as "Defendants" (1) "Kingston Smith" and (2) "Kingston Smith LLP". Fishburns did not accept the draft standstill agreement but instead made a counter-proposal.
70. The claim form was formally served on 9 March 2011. On 11 March 2011 Jirehouse sent a letter responding to a contention that the claim was time-barred in which they stated that:

"Your client [i.e. the LLP] had ongoing professional duties from commencement of the relationship up to the time it was terminated in 2007, not least as auditors and accountants, and during which period the actions or steps giving rise to the claims were taken (or omitted to be taken) by your client"

This letter, therefore, was still assuming that the LLP had provided services and owed duties throughout the whole period of the relationship from its commencement in 1997 until 2007.

71. On 24 March 2011 Jirehouse sent a further draft standstill agreement in response to Fishburns counter-proposal. In this draft the only "Defendant" was the LLP, but it was described as "Kingston Smith LLP, successor to the firm known as 'Kingston Smith'." It appears to have been at or around this time that Jirehouse finally realised that they had sued the wrong defendant. On 11 April 2011 the application was issued to substitute the Firm as the defendant to the action.

The Evidence of Mr Jones

72. The application was supported by the second witness statement of Mr Stephen Jones. At paragraph 12 of this witness statement Mr Jones explained that the negotiations with Fishburns over the terms of a standstill agreement had recently broken down "when Fishburns indicated that it was not instructed on behalf of the Firm in response to a draft of the agreement which included the Firm as a party." At paragraph 13 of his witness statement Mr Jones said:

"The Pre-Action Protocol letter was addressed to the LLP because that is the current name of Kingston Smith. No point was taken in the Response that it was the wrong defendant. Unfortunately I overlooked the fact that the correct defendant was the former firm, since it was that firm who acted as auditor during the relevant years when the loss arose."

73. This evidence seems to me to be equally consistent with either of the possible mistakes distinguished earlier. Mr Jones does not make clear whether what he overlooked was the fact that it was the Firm, and not the LLP, which acted as auditor during the relevant years or the fact that, because it was the Firm, the correct defendant from a legal point of view was the Firm and not the LLP.
74. Mr Jones went on to say that the LLP had never denied being a proper party to the claim and that in around November 2010, in a telephone conversation between himself and Mr Nayer (of Fishburns), "Mr Nayer indicated that the defendant did not seek to draw any distinction between the LLP and the Firm for the purposes of the claim."
75. In connection with the present appeal Mr Jones has made a further witness statement dated 28 November 2012 in which he has explained that, for various reasons, his telephone conversation with Mr Nayer cannot have taken place until after the claim form had been sent to Fishburns on 30 November 2010. On behalf of the Firm Mr Christopher Parker QC objected to the admission on appeal to this new evidence. There is certainly no good reason why the evidence could not with reasonable diligence have been adduced at the hearing before the Master. However, particularly given its very limited compass, it seems to me to be in the overall interests of justice that I should admit the evidence rather than proceed on a false factual basis that the telephone conversation referred to by Mr Jones might have taken place before the claim form was issued.

Further Correspondence

76. Further correspondence was exchanged between the solicitors after Master Leslie had made the Order dated 11 April 2011 substituting the Firm as defendant. In a letter dated 19 April 2011 Fishburns emphasised that, until the standstill agreement was proposed, there was "never an indication from the claimants that the former partnership was considered by the claimants to be a relevant entity." That was true. In a letter dated 20 April 2011 sent in reply, Jirehouse rebuked Fishburns for not making the point two years earlier if they were now saying that the LLP had no liability in respect of the claim. Jirehouse stated:

"In our view, you have consistently represented by your conduct in correspondence over the past two years that there is little distinction between [the Firm and the LLP] on the basis that all the assets and liabilities of the Firm, including the liability the subject of the Claim, were assumed by the LLP in or around 2006."

This statement was undoubtedly an attempt to justify having proceeded only against the LLP on the basis that the LLP had assumed responsibility in law for liabilities of the Firm. To be fair to Fishburns, they had not made any representation of the kind suggested in this letter. Nor is it apparent when or how Jirehouse had established that the business of the Firm (although not its liabilities) was taken over by the LLP in or around 2006.

The Master's Decision

77. In her Judgment dated 10 May 2012, Master Fontaine approached the question whether the court has power to order substitution under section 35(6)(a) of the Limitation Act 1980 and CPR r.19.5(3)(a) by referring to the Sardinia Sulcis test (at paragraph 63) and asking herself (at paragraph 66) whether Mr Jones "named the LLP in mistake as to [the] identity of the correct defendant, as in Kesslar or whether he acted under a mistake of law as in Ramsey." Her conclusion (at paragraph 70) was that "the evidence does overwhelmingly indicate that Mr Jones acted under an error of law and not an error of fact." This was on the basis that:

"[Mr Jones] was aware from at least 17 December 2010 of the identity of both the Firm and the LLP, but named the LLP, not in mistake for the Firm, but believing that it had either continuing duties in respect of the Firm's earlier acts up to the time when it ceased to be auditor in 2007 and/or in law it took over the liabilities of the Firm including liabilities in respect of its negligence and/or breaches or contract."

78. As for when exactly Mr Jones became aware of the separate identities of the Firm and the LLP, Master Fontaine inferred from the letter of 20 October 2010 which I have mentioned above that Mr Jones "was aware of this at all relevant times". The Master also placed some reliance (in paragraph 71) on what she took to be the evidence of Mr Jones that he issued proceedings based on the oral assurance of Mr Nayer that the LLP would accept responsibility for the actions of the Firm. She regarded this as demonstrating that the LLP "was not named by mistake but intentionally".

Submissions

79. On behalf of the Firm, Mr Parker QC submitted that the Master applied the correct test and was right to conclude that the mistake made by Mr Jones was one of law in believing that an LLP is liable in law for negligent acts or omissions of the prior partnership.
80. Mr Parker also emphasised that the burden of proof rested on the claimants to show that they had made a mistake of a kind which satisfied the Sardinia Sulcis test. He criticised the evidence of Mr Jones for failing to give any full or clear explanation of his reasons for naming the LLP as defendant and for failing to say when, how or why he came to the conclusion that those reasons were untenable and that the proper defendant was the Firm.
81. Mr Parker however accepted that the Master's finding was an inference drawn from the same material (save that she did not have Mr Jones' short further witness statement) as is before the court on this appeal, and that I am in just as good a position as the Master to consider the relevant material and draw my own inferences from it. Indeed, I consider that I am bound to do so in accordance with CPR r.52.11(4).

Conclusions

82. I agree with Mr Parker that the Master essentially applied the correct test. Having considered the evidence, however, I have reached a different conclusion from the Master as to the nature of the mistake made in naming the LLP as defendant in the claim form, for the following reasons:

(1) As the Master recognised (in paragraphs 12, 68 and 69 of her Judgment), all the allegations made by the claimants' solicitors in the pre-action correspondence were directed solely at the LLP, and the first indication that any thought had been given to the distinction between the Firm and the LLP was in the draft standstill agreement provided by Jirehouse in their letter of 17 December 2010. That letter was only sent, however, over a month after the claim form had been issued.

(2) In paragraph 70 of her Judgment, in contradiction to what she had previously said, the Master suggested that Jirehouse had in mind the separate identities of the LLP and the Firm before the issue of proceedings when writing in their letter of 20 October 2010 "It is our understanding that you only act for Kingston Smith LLP." However, it seems to me, with respect, that the Master has misinterpreted the letter of 20 October 2010. It is clear in context that the distinction intended to be drawn in the letter was not between the LLP and the Firm but between the LLP and the "KS Parties", and that this letter like all those which preceded it showed no awareness of any involvement of the Firm.

(3) Thus, all the pre-action correspondence, including the letter from Jirehouse dated 20 October 2010, proceeded on the basis that the LLP had provided all the professional services which were the subject of the claim.

(4) That belief was undoubtedly ill-considered or, more likely, unconsidered. But it is fair to say that Fishburns did nothing to disabuse Jirehouse of this assumption and appear to have made the same error themselves.

(5) When read against the background of the pre-action correspondence, I think it clear that the claim form was intended to allege that the LLP had been negligent in the course of acting as auditor and professional adviser to the claimants throughout the period referred to in the Protocol letters.

(6) The correspondence indicates that it was only in the context of drafting a standstill agreement that Jirehouse came to recognise that the Firm was a potential defendant and that it was only at some point after the claim form was served in March 2011 that Jirehouse registered on the fact that it was the Firm which had provided the relevant professional services and, as such, was the appropriate defendant to the claim.

(7) The witness evidence of Mr Jones, though I agree with Mr Parker's criticisms of its inadequacies, is consistent with this and does not suggest that Mr Jones was aware, when the claim form was issued, that the LLP was not the entity which acted as auditor and provided other professional services throughout the relevant period. In so far as the Master placed reliance on Mr Jones' alleged conversation with Mr Nayer, she did so based on what, as is now clear, was an incorrect understanding that the conversation took place before the proceedings were issued.

(8) Although in their letter of 20 April 2011 sent after the order for substitution had been made Jirehouse attempted retrospectively to justify having proceeded against the wrong defendant on the basis that the liabilities of the Firm were assumed by the LLP in 2006, I see no reason to suppose that Mr Jones had actually had such a thought process when the Protocol letters were written and the claim form issued. There was nothing in the Protocol letters or any other earlier correspondence to suggest that the Firm (or its agents) had incurred liabilities which the LLP had subsequently assumed. On the contrary, the earlier correspondence – including all the pre-action correspondence from Fishburns, notwithstanding what Jirehouse wrongly alleged in their letter of 20 April 2011 – is inconsistent with that suggestion.

83. I accordingly consider that the Master's conclusion was wrong and that the proper conclusion to draw from the evidence is that the LLP was named in the claim form as the defendant to the action in the mistaken belief that it had provided the professional services which were the subject of the claim. The mistake was therefore as to which body satisfied the description of auditor of the second claimant and provider of fiduciary services in relation to the Nevis Entities during the relevant period. It was not simply an error of law as to the legal liability of the LLP for prior negligence of the Firm. The mistake accordingly satisfies the Sardinia Sulcis test.
84. At paragraph 72 of her Judgment the Master stated, as an additional reason for her conclusion, that the Sardinia Sulcis test was not satisfied because there was reasonable doubt as to the identity of the person whom the claimant intended to sue. For the reasons given earlier, the Master was in my view wrong to think that this aspect of the Sardinia Sulcis test has survived the introduction of the Civil Procedure Rules.
85. I conclude that the requirements of section 35(6)(a) of the Limitation Act 1980 and CPR r.19.5(2)(a) were satisfied in this case and that the court had power under these provisions to order that the Firm be substituted for the LLP as defendant.

C. THE NECESSARY PARTY ARGUMENT

86. The claimants contend that, even if the requirements of section 35(6)(a) of the 1980 Act and CPR r.19.5(3)(a) are not satisfied in this case, the court had power to order substitution under section 35(6)(b) and CPR r.19.5(3)(b), as the relevant claims could not be "maintained" or "properly carried on" by the claimants unless the Firm was substituted as defendant.
87. The Master appears to have accepted that contention. At paragraph 74 of her Judgment she held that, on the basis that the claimants were not seeking to maintain any claim relating to the period after 1 May 2006 when the LLP took over the practice of the Firm, "prima facie the requirement of the rule is met." The Master went on at paragraphs 75-89 of her Judgment to consider whether there was a viable claim against the Firm. She was not able to reach any conclusion on that question (see paragraphs 83 and 85). Although the Master did not say anything further about whether CPR r.19.5(3)(b) applied, there is nothing in this section of her Judgment to displace her prima facie view that the requirements of the rule were met.
88. On behalf of the Firm, Mr Parker QC disputed the contention that CPR r.19.5(3)(b) is applicable to this case. He submitted that it is wrong to construe that rule as permitting the addition or substitution of a new claimant or defendant whenever the facts fall within one of the two situations identified in the rule – namely, that the claim cannot properly be carried on by, or cannot properly be carried on against, the original party.

Authorities

89. No authority on the proper interpretation of section 35(6)(a) of the Act or CPR r.19.5(3)(a) was cited in argument at the hearing of the appeal. I subsequently asked for further assistance from counsel on the law by way of written submissions, and am grateful for the helpful submissions received.
90. In support of his argument that the rule should be given a narrow construction, Mr Parker has relied on a recent decision of His Honour Judge Cotter QC, sitting as a Judge of the High Court in Nemeti v Sabre Insurance Co Ltd [2012] EWHC 3355 (QB). In that case the claimants were injured in a car accident in Romania. They initially brought proceedings against an insurance company which insured the owner of the vehicle on the ground that the insurance company was directly liable to the claimants for the negligence of their insured pursuant to section 3 of the European (Rights against Insurers) Regulations 2002. The claimants had, however, made two mistakes: (1) the Regulations only applied to accidents occurring in the United Kingdom (and this accident occurred in Romania); and (2) the allegedly negligent driver of the vehicle was not the insured owner (but his son). After the limitation period had expired, the claimants applied under CPR r.19.5(3)(b) to substitute the estate of the driver as the defendant in place of the insurance company. The Master granted the application, but his order was set aside on appeal.
91. The judge held (at para 41) that CPR r.19.5(3)(b) did not apply as "it simply cannot be said that the substitution of the estate is necessary for the determination of the original action." On the facts of that case, I respectfully do not doubt the correctness of this conclusion. However, in considering the scope of the rule, the judge expressed the view that it is "solely aimed at errors in the constitution or formality of the action, relating to the parties joinied to it, or the capacity in which they sue or are sued, which made the extant action unsustainable" (see para 41). The judge derived this view from examining the legislative history of section 35, and in particular the Law Reform Committee report to which I have referred earlier. That report identified a need to enable new parties to be added after the end of the limitation period in certain specific cases where the action was not properly constituted unless the new party were joined. The Committee gave five examples of such cases. These were described by the Committee as cases where "the plaintiff had made an error of law or procedure, the correction of which would not have caused anyone to be taken by surprise": see Nemeti at para 37.
92. The Nemeti case, however, appears to have been decided without the court's attention having been drawn to two recent decisions of the Court of Appeal in which the scope of the power to allow substitution of a new party under CPR r.19.5(3)(b) was considered. The two cases are Parkinson Engineering Services plc v Swan [2010] PNLR 17 and Irwin v Lynch [2011] 1 WLR 1364.
93. In Parkinson Engineering the Court of Appeal held that the rule permitted the liquidator of a company to be substituted for the company as claimant in circumstances where the defendant had a complete defence to the company's claim which could, however, be overcome if the same claim were carried on by the liquidator. In Irwin v Lynch, the Court of Appeal held that the rule allowed a company to be substituted for its administrator as claimant in circumstances where the administrator did not have standing to bring the relevant claim but the company did. The Court of Appeal did not regard it as a material distinction that this case was not merely one where (as in Parkinson Engineering) the defendant had a good defence to the original claim but was one where the original claim was liable to be struck out because of the administrator's lack of standing.
94. The Court of Appeal also considered in Irwin v Lynch the argument which found favour in Nemeti that section 35(6)(b) of the 1980 Act and CPR r.19.5(3)(b) should be given a narrow construction based on the legislative history. The Court of Appeal rejected that argument. Lloyd LJ (with whom Wilson and Gross LJJ agreed) said at para 19:

"In my judgment, while it may be useful to have regard to the historical development of the legislation and the rules on this topic, the court's task on this appeal is, as the judge's was below, to construe CPR r.19.5(3)(b) in the light of section 35 of the 1980 Act and in accordance with normal principles of construction. Whether or not the members of the Law Reform Committee would have foreseen what is found to be allowed under the current regime is not of any assistance either way."

95. In both Parkinson Engineering and Irwin v Lynch the Court of Appeal considered that substitution was permissible because the claim, as amended with the substituted claimant, was identical to that made originally. It was argued in Irwin v Lynch that the new claim would not be the same because of the identity of the claimant. That argument too was rejected. Lloyd LJ said at para 26:

"Sometimes the identity of the party might be, indeed often it might be, a vital distinction, but here Mr Irwin plainly asserted the company's cause of action and asserted it on behalf of the company, just as the substituted liquidator did in the Parkinson Engineering case. So the cause of action is identical; it is already pursued for the benefit of the company, but it is doomed to failure because of the lack on Mr Irwin's part of the necessary locus standi. It seems to me that it is possible and appropriate for the court to exercise its discretion under rule 19.5 to allow the joinder of the company so as to assert the relevant claims."

96. The principle which I derive from these two decisions of the Court of Appeal is that the court has power to order substitution under section 35(6)(b) and CPR r.19.5(3)(b) if: (1) a claim made in the original action is not sustainable by or against the existing party; and (2) it is the same claim which will be carried on by or against the new party.

Application of the Law to this Case

97. Applying this test to the facts of the present case, it is common ground that the claims made in this action were unsustainable against the LLP. The first requirement was therefore satisfied. However, the second requirement was not satisfied, as the claims which the claimants sought to carry on against the Firm were not the same claims as were made against the LLP. I have concluded earlier that the claims originally made against the LLP alleged that the LLP had been negligent in auditing the accounts of the second claimant and providing administrative and fiduciary services during the relevant period. In contrast, the claims asserted against the Firm after the claimants had realised their mistake alleged that the Firm (and not the LLP) acted as auditor and provided the relevant services. The new claims, therefore, allege different facts and are not identical to the original claims.
98. My conclusion on this issue would have been different if I had agreed with the Master's view as to the nature of the mistake made by the claimants when they issued the proceedings against the LLP. As mentioned earlier, on the Master's view the claims were originally brought against the LLP on the basis that the Firm had provided the relevant services but in the mistaken belief that the LLP had taken over the liabilities of the Firm. If I had accepted that analysis of the claims, then I would also have agreed with Master Fontaine that the requirements of CPR r.19.5(3)(b) were met in this case. That is because, if the original claims had asserted negligence in the provision of professional services by the Firm, they would have been the same claims as those which are now pursued. The only difference would have been that the claimants were no longer contending that the LLP was liable in law for the acts alleged. Substituting the Firm because that contention was abandoned would seem to me to be equivalent in its effect to the substitution of the liquidator for the company in Parkinson Engineering and of the company for the administrator in Irwin v Lynch.
99. It may be said that the result of this interpretation of CPR r.19.5(3)(b) means that it is likely to be available in cases, such as International Bulk Shipping, where an error of law has been made as to the legal rights or liability of the person suing or being sued, which are just those cases where CPR r.19.5(3)(a) does not apply. I do not regard it as an objection but as an advantage of the interpretation that it has such a consequence and thus reduces the importance of what seems to me to be an essentially arbitrary distinction between mistakes of fact and law.

D. THE EXERCISE OF DISCRETION

100. If the substitution of a new party after the end of the limitation period meets the test under section 35(5)(b) and rule 19.5(2) of being "necessary", because the requirements of either CPR r.19.5(3)(a) or (b) are met, then the court has a discretion whether to order substitution. As with any power under the Civil Procedure Rules, the discretion must be exercised in accordance with the overriding objective of enabling the court to deal with cases justly.

The Master's Decision

101. It was common ground before Master Fontaine, and on this appeal, that the hearing before her should be treated as a rehearing of the decision made by Master Leslie on 11 April 2011 to permit substitution. Master Fontaine decided that as at 11 April 2011 the court's discretion should not have been exercised in favour of the claimants.
102. The factors that Master Fontaine considered relevant to the exercise of the court's discretion are set out at paragraph 93 of her Judgment as follows:

"(i) The fact that both parties appeared to proceed on the same basis, namely that the distinction between the Firm and the LLP was immaterial, and that there is no prejudice to the Firm, the relevant personnel having been aware of the claim, for all practical purposes, since July 2008.

(ii) It is the duty of a claimant's legal representatives to identify the correct party or parties against whom to make particular claims, and it is clear that was not properly done.

(iii) The obvious difficulty on the merits of the pleaded case, both in the claim form and the particulars of claim, identified by the Defendant which, in the main, were not attempted to be answered by the claimants.

(iv) The claimants' conduct of the claim, including delay."

103. Having listed these factors, the Master then stated her conclusion and the reasons for it at paragraph 94 of the Judgment as follows:

"If it were the only factor, that set out in (i) above would overwhelmingly suggest that the court's discretion should be exercised in favour of the claimants, the court seeking to do justice to the parties and not, where possible, allowing a technical or procedural error to defeat a bona fide claim, particularly where a party has not been prejudiced by the error, and the striking out would give a 'windfall' to a defendant. However, I have concluded in this case that other factors outweigh that factor. In particular:

(i) The fact that the majority of the difficulties that the application faced were as a consequence of errors of law in properly identifying the claims, the limitation periods and the correct defendants. The court should be generally unwilling to excuse such mistakes, unless there is a very good explanation, and a party has a remedy against his legal representatives. Save to this extent I draw no conclusions as to what extent the other factors were caused by the claimants or their legal representatives.

(ii) The lack of evidence before the court as to when and in what circumstances the claimants acquired knowledge as to the existence of the Firm, and the fact that it was responsible for the relevant services during the period complained of. In particular, there was no explanation of the curious way in which the two draft standstill agreements were drafted.

(iii) The fact that the inadequacies identified in the pleaded case, that no draft amended particulars of claim were put before the court, and the lack of any evidence at all in respect of the assigned claims or as to how the claim in respect of professional fiduciary services was made, has meant that I considered that I was unable to reach a conclusion that there was a viable claim.

(iv) The failure to deal with the merits of the audit claims, in the light of the issues raised in Mr Mason's evidence.

(v) The delay in bringing the claim where limitation was obviously a major concern, from mid 2008 to November 2010, and the lack of explanation for this. This has been partly responsible for some of the difficulties faced in this application.

(vi) The delay in making the application (which the court is entitled to take into account …), although this has been a very minor, if not negligible, factor in the overall balance of considerations, save to the extent that it supports the conclusion that there was a failure to deal with these proceeding expeditiously and competently."

Review of the Master's Decision

104. The fact that I would have given different weight to factors taken into account by the Master is not of course a sufficient reason to interfere with her decision. It is common ground that, as the appeal court, this court should interfere only if the Master made an error of principle or exceeded the bounds within which a reasonable disagreement is possible as to how the court's discretion should have been exercised.
105. I consider, however, that the test for intervention is satisfied in this case as the Master's exercise of discretion was flawed in a number of respects.
106. Taking in turn the factors on which the Master relied at paragraph 94 of her Judgment, the Master was undoubtedly right to say that it is the duty of a claimant's legal representatives to identify the correct defendant, and that it is clear that in the present case this was not properly done. However, it was in my view wrong in principle to approach the exercise of the court's discretion on the basis that "[t]he court should be generally unwilling to excuse such mistakes unless there is a very good explanation, and a party has a remedy against his legal representatives." On the contrary, it seems to me that the court should generally be willing to "excuse such mistakes", in the sense of permitting substitution, even if there is no good explanation, where – as the Master found to be the case here – there is no prejudice to the party who is substituted. The court's discretion should not be exercised in a way that amounts, in effect, to punishing a party for the harmless error of its legal representatives. That is all the more true where, as in this case, the relevant mistake in believing the LLP to be the correct defendant was also made by the legal representatives of the other party. The fact that Fishburns carried on correspondence for some 2 ½ years on the footing that the LLP was the correct defendant was clearly a factor which contributed to the commencement of the proceedings against the wrong party. However, the Master does not appear to have taken this into account.
107. Nor can the Master's approach be justified by the fact that the claimant has a potential remedy against its legal representatives. As has been recognised in cases dealing with the exercise of the court's discretion to grant relief from sanctions, such a remedy is not an adequate substitute for the loss of the original claim. As Mance LJ pointed out in Welsh v Parnianzadeh [2004] EWCA Civ 1832 at para 32:

"A claimant who is reduced to a claim which would perforce be on a percentage basis for loss of a chance against her legal advisors is not only suffering a real loss in the sense of being caused further delay and expense, but is also suffering a real reduction in the value of her claim."

108. Turning to the second factor relied on by the Master, I consider that it was also wrong in principle to regard the lack of evidence of the matters referred to at paragraph 74(ii) of her Judgment as relevant to the exercise of the court's discretion. At best, such evidence might have helped to explain when the claimant's solicitors became aware of their mistake. However, that in turn would only have been relevant to whether there was any culpable delay in making the application for substitution – a matter addressed by the Master at paragraph 74(vi) of her Judgment which I consider below.
109. Next, the Master was in my view wrong to treat the hearing of an application to substitute a party as an occasion when it was appropriate to investigate the merits of the claims. As on any application to amend a party's case, consideration of the merits was appropriate only if and to the extent that it was clear that any of the relevant claims had no real prospect of success and should be struck out. I do not understand the Master to have concluded that any of the claims had no real prospect of success. Rather, she felt unable to reach any conclusion on that question having earlier stated (at paragraph 85 of the Judgment) that "there has not been a real opportunity for me to take a properly informed view as to the merits". In those circumstances it was wrong to treat potential inadequacies or difficulties in the pleaded case as a reason for refusing the application. I am satisfied in any event that the relevant claims included at least one claim which has a real prospect of success, being the claim for breach of contract in relation to the 2006 audit.
110. As regards paragraph 74(v) of the Master's Judgment, the delay in bringing the claim undoubtedly contributed to the situation in which the application to substitute was made after the end of the limitation period. But it does not, in my view, affect the justice of whether or not to allow substitution, particularly where the delay was partly caused by the defendant's failure to respond in a timely manner to the letter of claim served under the Pre-Action Protocol.
111. The final factor mentioned by the Master was delay in making the application. It is not apparent that there was any material delay after the claimant's solicitors had appreciated that they had named the wrong defendant. But in so far as there was any such delay, the Master was right to regard it as "a very minor, if not negligible, factor in the overall balance of considerations".
112. Accordingly, none of the factors identified by the Master was in my view reasonably capable of justifying the court's refusal to permit substitution. The Master was plainly right to find that the error in naming the LLP as defendant had caused no prejudice, as those representing the Firm had been aware of the claim since long before the proceedings were issued and had themselves contributed to the error. I also think it reasonable to assume in the absence of any contrary suggestion that the former partners of the Firm will have the benefit of an indemnity from the LLP for any liability which they may incur as well as the same insurance cover and the same legal representation. In commercial reality, therefore, even though not in law, the change of party has made no difference to the defence of the claim. The point taken by the Firm is thus a purely technical one which if successful would, as the Master also rightly observed, give a windfall to the Firm (and the LLP). I am satisfied that the Master's first instinct was correct and that, provided there was power to order substitution as I have held that there was, the justice of the case was overwhelmingly in favour of doing so.

E. CONCLUSIONS

113. In summary, my conclusions are as follows:

(1) The LLP was named in the claim form in mistake for the Firm within the meaning of CPR r.19.5(3)(a) and section 35(6)(a) of the Limitation Act 1980. It follows that there was power to substitute the Firm as defendant in relation to those claims which were not time-barred when the claim form was issued on 11 November 2010 but had become so by 11 April 2011 when the Order for substitution was made.

(2) CPR r.19.5(3)(b) and section 35(6)(b) of the 1980 Act are not applicable, as the claims now made against the Firm are different claims from those originally asserted against the LLP.

(3) The Master erred in principle in holding that substitution should not be ordered in the exercise of the court's discretion. None of the factors on which the Master relied could justify refusing to make an order for substitution which was necessary to enable viable claims to be carried on and which caused no prejudice to the new party (i.e. the Firm).

114. For these reasons, the appeal is allowed. The Order of Master Fontaine must be varied so as to substitute the Firm as defendant in relation to claims which became time-barred between 11 November 2010 and 11 April 2011. To confine the action to these claims, the particulars of claim will need to be amended. If the requisite amendments cannot be agreed, or if there is any other matter consequent on this Judgment which cannot be dealt with by agreement or by written submissions, a further hearing will need to be fixed for the earliest possible date next term.