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OUTER HOUSE, COURT OF
SESSION
[2006] CSOH 148
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P1788/04
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OPINION
OF
J
GORDON REID Q.C. F.C.I.Arb
Sitting
as a Temporary Judge
in
the Petition of
(FIRST)
JOHN BILLIG
(SECOND)
ALLIED STERLING PLC
Petitioners;
for
Judicial Review
of
a decision of the Council of
the
Law Society of Scotland
made
under section 43
of
the Solicitors (Scotland) Act 1980
________________
|
Petitioners: Dean of Faculty, Wolffe;
Simpson & Marwick
Alt: Johnston Q.C.,
Munro; Brodies
20 September 2006
Introduction
[1] This Petition for
Judicial Review relates to a decision by the Council of the Law Society of
Scotland (the "Council") dated 30 April 2004. The Council
has refused to make a grant out of the Scottish Solicitors Guarantee Fund in
favour of the Petitioners who suffered loss through the dishonesty of a
solicitor, Michael Mullen, who was, at the material time, enrolled on the
Register of Solicitors in Scotland. The
losses concern certain loan transactions and the granting of letters of
undertaking by Mr Mullen whereby he irrevocably and unconditionally undertook
personally to repay the loans being made to his client.
[2] At the First Hearing,
which took place on 4, 5, 6 and 13 July 2006, the Petitioners sought inter alia decrees of declarator
and reduction of the Council's decision, and the Respondents, the Council,
sought dismissal. The issues debated
before me raised questions about the administration of the Scottish Solicitors
Guarantee Fund (the "Guarantee Fund") currently established by section 43
of the Solicitors (Scotland) Act 1980 (the "1980 Act"). There is a lengthy history to these
claims. The background leading up to the
decision under challenge is well documented and is not seriously in
dispute. Although there are two
petitioners, counsel did not draw any distinction between them in their
submissions, and I have not done so.
[3] The issues debated
before me largely concerned the question (which can be expressed in a variety
of ways) whether there was material before the Council entitling them to make a
finding of negligence on the part of the Petitioners, and if there was not,
whether the Council had a general or residual statutory discretion to refuse to
make a grant, and whether the proceedings therefore fell to be remitted to the
Council to consider the exercise of any such statutory discretion. Other related questions were also debated and
fall to be determined.
[4] Finally, by way of
introduction, I record that the petitioners tendered a short Minute of
Amendment which substituted declaratory craves for branches (3) and (4) of Article
3 of the Statement of Facts. The
amendment was not opposed and I allowed it.
Statutory Background
[5] A compensation fund was
established in England and Wales by the Solicitors Act 1941 for the purpose of relieving or mitigating
losses sustained by any person in consequence of dishonesty on the part of any
solicitor. Section 2 of that Act
provided inter alia that
"(1) A fund to be called "the Compensation
Fund" shall be established ... By the
Society for enabling the society to make grants thereout
in any cases which the Council think suitable for such treatment and in their
absolute discretion decide so to treat, for the purpose of relieving or
mitigating losses sustained by any person in consequence of dishonesty on the
part of any solicitor ..."
[6] The Legal Aid and
Solicitors (Scotland) Bill was enacted in 1949; it created the Law
Society of Scotland and introduced legal aid and advice. It also established the Scottish Solicitors
Guarantee Scheme. When debated in
Parliament, it was stated that the Bill inter alia
provided "for the establishment of a guarantee fund to compensate persons
who may suffer loss by reason of the dishonesty of a solicitor to whom money
has been entrusted" (Hansard, Business of the House 16/12/48 columns 1402-3). Before the House of Commons Standing
Committee on 5/4/49, the Lord Advocate of the day stated that the
provisions were
"to cover one of the
great injustices that has sometimes occurred in legal circles, where
unfortunately a solicitor may have gone off the rails; he may have embezzled
money belonging to a client, and the client has unfortunately had to go without
any proper compensation because the solicitor's estate has not been sufficient
to provide proper compensation.
In assessing what the compensation should be, provision is made in this Clause that the compensation
should be the compensation which, in the opinion of the Council of the Law
Society, will be appropriate. It may be
total compensation, or it may be partial compensation, because subsection (3)
makes provision for the limiting of the compensation if there has been
negligence on the part of the client. We
feel that it has to be left very largely on a discretionary basis, having regard
to the merits of each case." (column 367)
[7] When the Bill was
considered in the House of Lords for its Second Reading on 17 July
1949, the
Parliamentary Secretary, Ministry of Works (Lord Morrison) stated inter alia that
"... Clause
22 ... provides for the establishment of a Guarantee Fund to compensate persons
who may suffer loss by reason of dishonesty on the part of any solicitor or a
servant of his. A similar Guarantee Fund
already exists in England, and the establishment of such a fund in Scotland, which has been voluntarily proposed by the
profession, will be welcomed by the public ..." (column 985)
[8] Section 22 of the 1949
Act provided inter alia that
"(2) ... the Guarantee Fund shall be held by the
society for the purposes of making grants in order to compensate persons who in
the opinion of the Council ... suffer pecuniary loss by reason of dishonesty on
the part of any solicitor ...
(3) ... The
Council may refuse to make a grant or may make a grant only to a limited extent
if they are of the opinion that there has been negligence on the part of the
applicant or of any person for whom he is responsible which has contributed to
the loss in question ..."
[9] The relevant provisions
of the English 1941 Act were substantially re-enacted in section 32 of the
Solicitors Act 1957. By subsection (2)
it was provided that if loss sustained in consequence of the dishonesty on the
part of a solicitor is proved "to the satisfaction of the Council" a grant may
be made "if the Council thinks fit".
This provision was in turn substantially re-enacted by section 36 of the
Solicitors Act 1974 which omitted the phrase "if the Council thinks fit" and simply
stated that the Society "may make a grant" of the purpose of relieving such
loss.
[10] The current Scottish
statutory provisions are in section 43 of the Solicitors (Scotland) Act 1980,
which provides inter alia as follows:-
"Protection
of clients
Guarantee Fund
43. - (1) There shall be a fund to be called "The
Scottish Solicitors Guarantee Fund" (in this Act referred to as "the Guarantee
Fund"), which shall be vested in the Society and shall be under the control and
management of the Council.
(2)
Subject to the provisions of this section and of Schedule 3 the
Guarantee Fund shall be held by the Society for the purpose of making grants in
order to compensate persons who in the opinion of the Council suffer pecuniary
loss by reason of dishonesty on the part of
(a) any
solicitor, registered foreign lawyer or registered European lawyer in practice
in the United Kingdom, or any employee of such solicitor, registered foreign
lawyer or registered European lawyer in connection with the practice of the
solicitor, registered foreign lawyer or registered European lawyer, whether or
not he had a practising certificate in force when the act of dishonesty was
committed, and notwithstanding that subsequent to the commission of that act he
may have died or had his name removed from or struck off the roll or may have
ceased to practise or been suspended from practice; or
(b) any
incorporated practice or any director, manager, secretary or other employee of
an incorporated practice, notwithstanding that subsequent to the commission of
that act it may have ceased to be recognised under section 34(1A) or have been
wound up.
(3) No
grant may be made under this section -
(a) in respect of a loss
made good otherwise;
(b) in respect of a loss
which in the opinion f the Council has arisen while the solicitor was suspended
from practice;
(c) to a solicitor or his representatives in
respect of a loss suffered by him or them in connection with his practice as a
solicitor by reason of dishonesty on the part of a partner or employee of his;
(cc) to
an incorporated practice or any director or member thereof in respect of a loss
suffered by it or him by reason of dishonesty on the part of any director,
manager, secretary or other employee of the incorporated practice in connection
with the practice;
(d)
unless an
application for a grant is made to the Society in such manner, and with such
period after the date on which the loss first came to the knowledge of the
applicant, as may be prescribed by rules made under Schedule 3;
(e)
in respect
of any default of a registered European lawyer, or any of his employees or
partners, where such act or default takes place outside Scotland, unless the
Council is satisfied that the act or default is closely connected with the
registered European lawyer's practice in Scotland;
(f)
in respect
of any act or default of a registered foreign lawyer, or any of his employees
or partners, where such act or default takes place outside Scotland, unless the
Council is satisfied that the act or default is closely connected with the
registered foreign lawyer's practice, or any of his partners' practice, in
Scotland; or
(g)
in respect
of any act or default of any member, director, manager, secretary or other
employee of an incorporated practice which is a multi-national practice, where
such act or default takes place outside Scotland, unless the Council is
satisfied that the act or default is closely connected with the incorporated
practice's practice in Scotland.
(4) The
decision of the Council with respect to any application for a grant shall be
final.
(5) The
Council may refuse to make a grant, or may make a grant only to a limited
extent, if they are of opinion that there has been negligence on the part of
the applicant or of any person for whom he is responsible which has contributed
to the loss in question.
(6) The
Council or any committee appointed by them may administer oaths for the purpose
of inquiry into any matters which affect the making or refusal of a grant from
the Guarantee Fund.
(7) Part I of Schedule 3 shall have effect
with respect to the Guarantee Fund, including the making of contributions
thereto by solicitors and the administration and management of the Fund by the
Council;"
[11] Part 1 of Schedule 3 to
the 1980 Act makes provision for payment of annual contributions to the
Guarantee Fund by practising solicitors and for the investment of monies held
therein. Paragraph 4 of Schedule 3
enables the Council to make procedural rules in relation to the form of
application for a grant, and other related matters to give effect to the
provisions of section 43 and include "any matters incidental, ancillary or
supplementary to those provisions or concerning the administration, management,
or protection of the Guarantee Fund".
Factual Background
[12] The first Petitioner ("Mr
Billig") is an experienced businessman, residing in London. In the
late eighties or early nineties, he retired from the property business and
began to make short term loans at high rates of interest to persons who had
urgent need of finance. Initially, he
lent to friends and acquaintances. He
engaged the services of an English solicitor, a Mr Ogus
of Anthony Oberman & Co. The petitioners subsequently sued that firm
(unsuccessfully) for damages for professional negligence arising out of inter
alia the transactions with which the Council's
Decision is concerned. Mr Ogus prepared the necessary loan and security
documentation. Sometimes the loans were
unsecured. Mr Billig
first began to make loans based on solicitors' undertakings in about March
1992. He was concerned about proceeding
in this way but, according to Mr Billig, Mr Ogus reassured him he would be adequately covered and could
look to the Law Society for repayment of the loan and interest (7/12 paragraphs
1-10 (Mr Billig's Proof of Evidence in the professional
negligence action)). That Proof of
Evidence also noted that no loan documentation was ever prepared by Mr Ogus in relation to any of the loans where reliance was
placed on a solicitor's undertaking; the reason being, according to the Proof
of Evidence, that if loan documents were prepared, this would make the
borrowing company primarily liable, with the undertakings effectively becoming
guarantees rather than undertakings given in the course of a solicitor's
business (7/12 paragraph 19, page 12).
When Mr Billig first began to make loans, loan
documentation was prepared and a security was usually taken over property owned
by the borrower (ibid
paragraphs 1‑4).
[13] In about October 1992, Mr
Billig was introduced by a friend to a man named Griffin. Griffin was selling properties to a company named Braundsway Investments Ltd (Braundsway). Mr Mullen was Braundsway's
solicitor. The loan was required to pay
a deposit of 10% of the purchase price.
Mr Billig agreed to consider lending and
instructed Mr Ogus, who spoke to Mr Mullen (the
detail is set out in a statement of Mr Ogus relating
to Mr Mullen's prosecution (page 2) - 7/7) and a Mr Berger, who was Mr Griffin's
solicitor. Mr Mullen provided Mr Ogus with details of the underlying transaction and
informed him that moneys being borrowed to purchase the properties would be
available to repay the loan, when the loan became due on 23
November 1992. Mr Mullen told Mr Ogus
that he was satisfied that the transactions would be completed and that he
appreciated the consequences for him if they were not. Mr Ogus confirmed
with the Law Society of Scotland that Mr Mullen had a practising
certificate. Mr Billig
was very suspicious and wary about
making the advance as Scotland was a "complete unknown quantity" to him;
however, he proceeded; excellent interest rates were being offered (7/12 page 7
paragraph 11). A form of undertaking was
negotiated between Ogus and Mullen, which Mullen
signed and delivered to Ogus. It is in the following terms:-
"Dear Sirs,
In consideration of your client, John Billig,
lending to our clients Braundsway Investments (UK)
Limited the sum of £50,000 we hereby irrevocably and unconditionally undertake
to repay to you on behalf of your client the said sum of £50,000 within 42 days
of the date hereof together with interest thereon and a facility fee of
£7,000. For the avoidance of doubt in
the event that such sum is repaid earlier than the said 42 days fro the date
hereof the full amount of £57,000 will nevertheless be paid to you.
If for any reason we have not fully paid to you the aforementioned sum
of £57,000 within the aforementioned period of 42 days we shall be liable for
and shall pay to you the sum of £4,000 for each period of 4 weeks or part
thereof that the loan or any part remains unpaid together with all accrued
interest and the said facility fee."
[14] On 28
October 1992, the
second petitioners ("Allied Sterling") made a loan of £100,000 to Braundsway repayable by 19 November 1992. Mr Ogus again spoke to Mr Mullen and received
confirmation that there was an underlying transaction for which the loan was
required and in which Mr Mullen was instructed.
Mr Ogus took advice from the Law Society of
England and Wales as to the value of solicitors' undertakings and received confirmation
that the advice which he had tendered to his client at an earlier date was
correct. The petitioners do not aver in
article 6(3) of the Statement of Facts or elsewhere, what that advice was but
in his Proof of Evidence in the action against Mr Ogus's
firm (see below at paragraph [19]) (paragraph 19 page 12 of 7/12 of process) Mr
Billig states that had he been advised prior to
making the loans that the right to claim reimbursement from the English
Compensation Fund or the Guarantee Fund was not automatic and that he would not
be fully protected by the undertakings he would never have agreed to make the
advances based on the solicitors' undertakings.
An undertaking, dated 28 October 1992, in respect of this loan was given
by Mr Mullen in the following terms:-
"Dear Sirs,
ALLIED STERLING PLC - BRAUNDSWAY INVESTMENTS (UK) LTD
In consideration of your clients, Allied Sterling Plc, lending to our
clients, Braundsway Investments (UK) Limited, the sum
of £100,000, we hereby irrevocably and unconditionally undertake to repay to
you on behalf of your clients the said sum of £100,000 within 21 days of the
date hereof together with interest thereon and a facility fee of £17,000.00. For the avoidance of doubt in the event that
such sum is repaid earlier than the said 21 days from the date hereof the full
amount of £117,000.00 will nevertheless be paid to you.
If for any reason we have not fully paid to you the aforementioned sum
of £117,000.00 within the aforementioned period of 21 days we shall be liable
for and shall pay to you the sum of £17,000 for each period of 21 days or part
thereof that the loan or any part remains unpaid together with all accrued
interest and the said facility fee.
We confirm that we are dealing with various property matters on behalf
of this client and in giving this undertaking we are entirely satisfied that we
shall be in a position to honour the same and make the payment out of the
surplus of funds being made available to my clients secured against properties
currently being purchased prior to the aforementioned repayment date.
We confirm that we do not have any interest in or connection with our
said clients other than the usual Solicitor and client relationship."
[15] There is now no dispute
that Mr Mullen issued these letters of undertaking dishonestly. The loans were not repaid by Braundsway. Mr
Mullen was unable to meet the undertakings from his own resources. He was sequestrated on 12
November 1992 (7/4). His liabilities exceeded his assets by about
£345,000 (7/4). The petitioners aver (article
6(5)) that the loans were advanced in reliance on Mr Mullen but have not been
repaid. Mullen dishonoured the
undertakings.
[16] The petitioners made
various attempts to recover their losses.
They obtained decrees against Mullen at Glasgow Sheriff Court having raised an action against him in
December 1992, but have recovered nothing from his sequestrated estate (7/3).
[17] In December 1992, a
complaint was lodged with the Law Society of Scotland against Mr Mullen (7/2). In January 1993, Messrs Wright Johnston &
Mackenzie, solicitors, Glasgow, intimated, on behalf of the petitioners, a possible claim on the
Guarantee Fund (6/6). The Law Society's
initial view, expressed later that month was that the claim did not appear to
be a matter for the Guarantee Fund (6/7).
A Preliminary Notice of Loss on the Law Society of Scotland's Form A was
lodged on behalf of each petitioner in February 1993 (6/8). The whole matter appeared to lie in abeyance
for some years while Mullen was prosecuted for fraud at Newcastle Crown Court
(6/9 and 6/10).
[18] On 28 July
1993, however, Mr
Mullen appeared before the Scottish Solicitors' Discipline Tribunal. He was found guilty of professional
misconduct in that inter alia he continued to
grant letters of undertaking when he ought to have known that it was unlikely
that he would be able to honour the same.
Mullen had also granted similar undertakings in other transactions in
which the petitioners had no interest.
The Tribunal concluded that Mr Mullen had acted in a reckless and
irresponsible way in issuing, among others, the undertakings in favour of the
petitioners (7/5 page 088). He was
suspended from practice for a period of three years (7/5).
[19] The Petitioners sued
Messrs Anthony Oberman & Co for professional
negligence in the High Court in London but that action failed. Mr Billig's "Proof
of Evidence" has been produced (7/12).
This is essentially a signed precognition. At paragraph 5 he stated that Ogus told him that he would be adequately covered by the
solicitors' undertaking and could look to the Law Society for repayment of the
loan and interest. He notes at paragraph
9 that as he increased the number of loans and the value of the individual
loans, he continued to raise with Mr Ogus the
question of the adequacy of the undertakings; he said that the response of Ogus was always to assure him that there was no problem and
that he was sufficiently protected. Mr Billig also stated in his Proof of Evidence that Ogus never mentioned any conditions which would have to be
satisfied in order to recover the money from the Law Society. The question of instructing counsel for
advice on the validity of solicitors' undertakings was raised with Ogus (paragraph 10 of the Proof of Evidence). Later in his Proof of Evidence, he records
that the Law Society of Scotland had been contacted who verified that Mullen
had a practising certificate. (paragraph 11, page 7); he states that although
he was very suspicious and wary about making the advance as Scotland was a
complete unknown quantity, excellent interest rates were being offered (ibid). He stated that he raised his concerns with Ogus on very many occasions about accepting solicitors'
undertakings, but on each occasion he was reassured that there was no problem
and that the undertakings afforded full protection in the event that the loans
were not repaid (paragraph 19). In his
judgment dated 8 March 1994 (7/8) Evans-Lombe J
examined the facts and circumstances relating to the petitioners' dealings with
Mullen in some detail. The following
matters are recorded in that judgment, which counsel treated as the Judgment;
it is described as a draft but no further or corrected judgment has been
referred to in the proceedings before me:-
(1) The
proceedings considered the two loans involving Mr Mullen and a third loan
involving a company named Victoria Trust Limited and a solicitor named Kilner; Mullen was not involved in that transaction.
(2) Mr
Billig began lending to friends, then acquaintances,
then to borrowers introduced by such acquaintances. The loans were for short periods, at short
notice and at high rates of interest and usually secured by mortgage (pages
2-3).
(3) Mr
Billig first lent in March 1992 on the strength of only
a solicitor's undertaking (page 5). He
was concerned about the value of such undertakings and sought advice from Mr Ogus (pages 8-9; and see
also pages 14-15).
(4) In
relation to the Braudsway loans, Mr Ogus contacted the Law Society of Scotland who confirmed
that Mr Mullen held a practising certificate and that he had paid his dues to a
be a "member of the Scottish Indemnity Fund" (page 12). There is no indication in the judgment that
advice from a Scottish solicitor was taken as to the nature and value of the
undertaking in question or the prudence of accepting one as the sole form of
security. Mr Ogus
did, however, consult the English Law Society (page 15).
(5) The
petitioners' case was inter alia that Mr Ogus advised that if the loan were not repaid the
petitioners would be adequately covered by the solicitor's undertakings, which
were usually given in the ordinary course of their business, and could look to
the Law Society for repayment of the loan and interest; and that he failed to
point out the weakness of such an undertaking as security (pages 5and 23). Mr Billig
apparently thought that such a solicitor's undertaking was the equivalent of a
bank guarantee. The position of Mr Ogus was,
however, that his advice was that if the undertakings were given in the
normal course of a solicitor's business, and the solicitor defaults, then the
Compensation Fund would normally pay the amount due if the solicitor was
fraudulent; and the Solicitor's indemnity Fund would pay if the solicitor was
negligent (page 6).
(6) Mr
Ogus negotiated the form of undertakings with Mr
Mullen (page 13).
(7) In
relation to the Victoria Trust Ltd loan, a similar form of undertaking was
given by the English solicitor (named Kilner) for the
borrower, another sole practitioner. No
financial checks were made about the borrower (pages 17-21 generally and 20 in
particular).
(8) Evans-Lombe J accepted Mr Ogus's
version of the advice given (pages 25-26) and held that it was not
negligent (page 34). He found it
intrinsically unlikely that Mr Ogus was not aware of
the weaknesses of solicitors' undertakings as security for advances (page 26). The petitioners led no expert evidence to
support their contentions (page 37).
(9) Evans-Lombe J also found that the scope of Mr Ogus's
retainer in relation to each loan transaction was to draw the documents
recording each transaction of loan and the security for repayment. In particular, his duty was to ensure that
the undertakings were in a form which rendered them enforceable as such (pages
35-36). It was not his duty to review
the commercial standing of the transactions themselves, or the financial
strength of the borrower or the value of the solicitors' undertakings
(page 36). Nor was it his duty
having been informed of the existence of underlying transactions, to make
further enquiries unless he had been alerted to facts which ought reasonably to
have made him suspicious (page 37). He concluded that Mr Billig
was an experienced businessman conducting the business of lending money to
those who were either not able to obtain loans from other sources or who wanted
money quickly and in circumstances which did not give much opportunity to the
lenders' advisers to take steps to ensure that the transaction involved the
minimum risk to the lender. The
consequent risk element in the business was thus reflected in the very
substantial rates of interest and charges obtainable (pages 43-44).
(10) Evans-Lombe J was also of the view
that had separate Scottish advice been obtained it was unlikely that it would
have affected the conduct of the parties in any way (page 43). So far as appears from the judgment there was
no evidence of Scots law or practice.
[20] An action of damages for
fraudulent misrepresentation was raised against Mr Mullen by the
petitioners in the High Court in London in about August 1996 (7/6). Judgment in default was granted in June 1997
(7/6). The petitioners have made no
recovery under the judgment.
[21] By that stage, Mullen had
been prosecuted at Newcastle for fraud in relation inter alia the
28 October 1992
undertaking but not it appears in relation to the 12 October 1992 undertaking (see 6/25 paragraph 25). The trial took place at Teeside
Crown Court in October and November 1995.
An extract of the proceedings was before the Council (7/9). The extract discloses that Mr Mullen gave evidence. He narrates, in chief, how he came to speak
to Mr Ogus (page 189-191) who asked about the funding
of the project; he describes the arrangements being made for the loans. He acknowledged his responsibility for
meeting the undertakings (page 196), and explained that he did not know whether
his clients had been duped or whether they had duped him (197). An extract from the Judge's Charge to the
Jury is also produced but I was not referred to that document (205‑212). Mullen was, in November 1995, found not
guilty of all charges relating to the petitioners (7/2 - letter dated 20 May
1996). By letter dated 19 January 1996 (6/10) to the petitioners' solicitors, the
Chief Accountant of the Law Society of Scotland intimated that it was "clear
that the funds were not received by Messrs Mullen & Co in the conduct of
his practice" and intimated that he would be recommending rejection of the
petitioners' claims. Further
correspondence ensued for several years.
[22] The second petitioner's
application in relation to the Victoria Trust Ltd transaction for a grant from
the Compensation Fund administered by the Law Society of England and Wales was successful. A cheque for £146,118.75 was received in
September 1996, which comprised the amount misappropriated by the solicitor Kilner. Reasonable
costs of some £67,000 were also paid out of the Compensation Fund (6/28 and
6/29).
[23] Formal applications for a
grant were lodged with the Law Society of Scotland in about April 1998 (7/38 of
process). By letter to the petitioners'
solicitors dated 6 April 1999 (6/13), the Chief Accountant stated that the
Guarantee Fund Committee was not satisfied that evidence had been produced to
demonstrate that the petitioners' loss was caused by the dishonesty of a
solicitor. However, on 5 August
1999, the applications
were considered by the Guarantee Fund Committee. On 13 August 1999 (6/15), the petitioners were informed that
claims had been rejected on the basis that there was no evidence produced which
demonstrated that the loss arose from dishonest actings
on the part of Mr Mullen. On 27 August
1999 the Council approved the recommendation of the Guarantee Fund Committee
and rejected the applications on the grounds that there was no evidence
produced of any dishonesty on the part of Mr Mullen, which placed the claim
within the scope of section 43 of the 1980 Act (see letter dated 17 September
1999; 6/16).
[24] The petitioners then
applied to this Court for judicial review of the Council's decision (RB2/G). The Council lodged Answers in defence of its
decision but at the first Hearing on 16 June 2000, the Council consented to reduction of its
decision. Thereafter, further
correspondence ensued. Written
submissions and documents were lodged with the Council. These included a witness statement by the
first petitioner dated 28 February 2001 (7/12) setting out his position in relation to
his lending business and solicitors' undertakings. I was not referred to this document.
[25] Progress was slow. On 11 July 2002, the petitioners, represented by English
counsel, and English and Scottish solicitors appeared before a Panel appointed
by the Guarantee Fund Committee to review the papers, receive representations and
to report to the Committee (RB2/A & B).
The petitioners lodged further written submissions in October 2002
(RB2/C). The Guarantee Fund Committee
met in October and December 2002 (RB2/D&E) but again concluded that Mr
Mullen had not acted dishonestly. The
lengthy Minute of the Guarantee Fund Committee's meeting held on 5 December
2002 (also in 6/25)
was not referred to at all by counsel in their submissions to me. I do not, therefore
consider this Minute further, beyond noting the lengthy list, in paragraph 1,
of documents which were before the Committee.
Eventually, following the production of further information the Council
concluded on 30 May 2003 that on the balance of probabilities there had
been dishonesty on the part of Mr Mullen.
The applications were remitted to the Guarantee Fund Committee for
further consideration.
[26] The Guarantee Fund
Committee met in June 2003 (RB2/H) and July 2003 (RB2/J) August 2003. They recommended rejection of the
applications on the basis that (i) the Council had a discretion whether or not to make a payment from the
Guarantee Fund, and (ii) these applications were not the sort of applications
which called for a grant from the Guarantee Fund. The Council met in November 2003 (RB2/T). It acknowledged that the petitioners had
suffered pecuniary loss, that the claims were being
made on the Guarantee Fund as a last resort, that the transactions at the
centre of the claims had been in connection with a solicitors' business, and
that there had been dishonesty on the part of Mr Mullen. The Council noted that there appeared to be
no policy in relation to the consideration of claims made against the Guarantee
Fund; instead, each claim was considered on its merits. The Council remitted matters to the Guarantee
Fund Committee to consider all aspects of the claims (RB2/T - Council Minute of
Meeting held on 28 November 2003).
[27] The Committee met once
more in February 2004 (RB2/W- Minute of Meeting). It was of the view that the claims did not
have "the characteristics of the sort of case which deserved payment of a grant
from the Guarantee Fund". They concluded
that the petitioners' loss was caused by their "own carelessness and negligence
in not making financial checks on the relevant parties". The Committee considered that the petitioners
were "entirely responsible for their loss".
They considered that no payment of grant was appropriate. The petitioners' English solicitors wrote a
lengthy letter to the Council's solicitors (Brodies) criticising in
considerable detail, the content of the Committee's Minute (RB2/X; 7/35 and
6/27). Some of those criticisms were
reflected in the submissions made to me by counsel for the petitioners.
[28] The applications were
finally considered by the Council at a meeting on 30 April 2004. The
petitioners had intimated further detailed written submissions in advance of
the meeting (7/39, 7/40). Scottish
junior counsel, attended by Scottish and English solicitors, addressed the
Council. The applications were rejected
once again.
[29] The Minutes of the
Council meeting held on 30 April 2004 (6/2 of process) record that decision. Their whole terms are of some
importance.
[30] It is recorded in the
Minutes inter alia that (i)
counsel for the petitioners submitted that (a) the key issue was whether there
was negligence (i.e. a failure to take reasonable care in relation to one's own
affairs) on the part of the claimants with respect to the loss they had
sustained due to the dishonesty of Mr Mullen; (b) there was no such negligence;
(c) the Council had therefore no residuary discretion to refuse a grant; (d) there
being no such negligence a full grant had to be made; (e) if there was a
finding of negligence the Council would also have to consider whether that
negligence contributed to the petitioners' losses; (f) the petitioners cannot
be said to have acted unreasonably by relying on a solicitor's undertaking, and
their solicitor had no duty to look behind Mr Mullen's undertaking; (g) the
Council could only find the applicants negligent if no reasonably careful
person would have relied on an undertaking given by a Scottish solicitor as had
been given by Mr Mullen; the implication of such a conclusion was that it would
be unreasonable to rely on an undertaking given by a Scottish solicitor; and
(h) on quantum, grants which included interest at the judicial rate plus costs
should be made; (ii) the Convenor of the Guarantee Fund Committee spoke to the
recommendation contained within the Minute of the Guarantee Fund Committee
meeting held on 6 February 2004 (7/34; Respondents' Bundle Volume 2 tab W
(RB2/W)); he noted that the advice received by the Committee was that the
Council had a (residual) discretion to refuse a grant; he noted that it was
necessary to examine the actings of Billig and Allied Sterling; he noted that the undertakings
given by Mr Mullen were "extremely unusual" and concluded that the claims
should be rejected; (iii) the Council considered the key issue to be whether
the petitioners had or had not contributed to their loss due to their
negligence; and (iv) the Council considered that the undertakings were written
in such terms that "no reasonable Scottish solicitor would have given". Having "aired" the above matters, the Minutes
proceeded as follows:-
"CLAIMS BY ALLIED STERLING
plc AND JOHN BILLIG AGAINST MULLEN & CO
1. Attendance
Council AGREED that the
shorthand writer Catherine McCuish of William Hodge
attend the first part of the meeting on the above subject matter for the
duration of the applicant's legal advisers' oral submissions to Council. Council also AGREED that the Society's solicitor Robin Macpherson
attend the meeting for the duration of the full debate on these claims.
Council first considered whether the former Convener of the Guarantee
Fund Committee and other members of that Committee should absent themselves
from the Council deliberations with respect to the claims from Allied Sterling
plc and John Billig. Council AGREED
that there were no reasons why a member of the Guarantee Fund Committee should
not sit in Council and contribute to the debate on these claims. Council members should only absent themselves
from the meeting if they had a direct personal interest in the claims which was
not the case.
Council also AGREED that it
was essential that former and current Guarantee Fund Committee members who had
a detailed knowledge of the claims make their knowledge and experience
available to the Council.
It was the unanimous will of the Council that the former Guarantee Fund
Committee Convener attend and participate in this part
of the Council meeting.
The Council had received and considered a file of papers containing,
amongst other things, copies of documentation forwarded by the applicants in
support of their claims and notes and copies of representations made by them.
The legal representatives for Allied Sterling plc and John Billig joined the meeting - 10.15am.
The claimants Allied Sterling plc and John Billig
were represented by James Wolffe, Advocate,
Douglas Russell of Simpson & Marwick and Grenville Reeves
of Andrew Jay & Co. Mr. Wolffe spoke on behalf of the applicants.
No Council member had any interest to declare in the proceedings.
2. Applicants' Submissions -
General
Mr. Wolffe stated that the key issue which
required to be addressed was whether there was negligence on the part of the
claimants with respect to the loss they had sustained due to the dishonesty of
Mr. Mullen. Mr. Wolffe
stated that he would argue that there was no basis for finding contributory
negligence by the applicants and if that was the case the Council of the Law
Society of Scotland by law has no discretion in the matter and must grant the
applicants their full award of compensation.
He contended that it is only where there is contributory negligence that
the Council can exercise its discretion in determining the size of the award to
make to any applicant.
Mr. Wolffe reminded Council of the statutory
provisions with respect to the Guarantee Fund which are set out in Section 43
of the Solicitors (Scotland) Act 1980.
Mr. Wolffe reminded Council that in terms of
Section 43(5) of the 1980 Act that the Council:-
'may refuse to make a grant, or make a grant,
only to a limited extent, if they are of the opinion that there has been
negligence on the part of the applicant or of any other person for whom he is
responsible which has contributed to the loss in question.'
Mr. Wolffe emphasised that it is only where
there had been contributory negligence on the part of the applicants, in those
limited circumstances that the Council can either refuse to make a grant or
limit the size of the grant. Mr. Wolffe stated that if Parliament had wished to grant the
Council a general discretion, the wording in Section 43 of the 1980 Act would
have been different and would likely have been used on the wording in Section
36 of the Solicitors Act 1974. It is
this Act which establishes and governs the operation of the Compensation Fund
of the Law Society of England and Wales and under that Act the Council of the Law
Society of England and Wales is given the general discretion in making
awards from its compensation fund.
Mr Wolffe stated that if Council decided that
there was no contributory negligence on the part of the applicants then Council
was bound to make the full grant from the Guarantee Fund which the applicants
sought in their claims. However, Mr. Wolffe stated that if Council decided there was
contributory negligence by the applicants in terms of Section 43(5) of the 1980
Act, in order to bring such contributory negligence into play, the Council
would have to make two findings. First,
Council would have to decide that there was negligence on the part of the
applicant and second, that the applicants' negligence contributed to the loss
in question. Mr. Wolffe
defined negligence as a failure by the applicants to act with reasonable care
in relation to their own affairs.
Mr. Wolffe then outlined to Council the
circumstances which had led to the losses suffered by the applicants. The applicants were involved in providing
loans to clients of Mullen & Co. The
applicants' monies had been advanced on the reliance of undertakings given by
Mr. Mullen. Mr. Mullen had given written
undertakings to Ian Ogus, Solicitor on behalf of Mr. Ogus's client John Billig one of
the applicants and Allied Sterling plc the other applicant. The loans advanced were in relation to property
transactions in which Mr. Mullen had been instructed.
The English solicitor acting for the applicants had been told by Mr.
Mullen that there were underlying property
transactions which would secure the money borrowed and that there would be
funds to repay the loans at the end of the transaction. It was against this background that the
applicants made the loans based on the undertakings from Mr. Mullen.
Mr. Wolffe directed Council to page 151 of the
papers which recorded that Mr. Mullen had confirmed that there was an
underlying transaction for which the loan, as advanced by the applicants, was
required and in which he (Mr. Mullen) was instructed. Noted that Mr Ogus
had negotiated with Mr. Mullen the form of the latter's undertaking. Mr. Wolffe emphasised
to Council that the nature of the transactions between the applicants and Mr.
Mullen was important as a lender, he argued, cannot be said to have acted
unreasonably if a lender had relied on a solicitor's undertaking. A lender should not be expected to look to a
borrower for the repayment of a loan if the lender had been told by the
solicitor acting for the borrower that repayment of the loan will be made from
funds available from the underlying property transaction. Mr. Wolffe stated
that the applicants correctly believed that a solicitor would not give an
undertaking, as Mr. Mullen had, unless there were funds available to repay the
loan, any lender must reasonably have confidence in such an undertaking where
it is given.
Mr. Wolffe then drew Council's attention to
page 174 of the papers and advised Council that the applicants' solicitors had
no duty to look behind Mr. Mullen's undertaking. Mr. Wolffe
therefore argued that the Council could only find the applicants negligent if
no reasonably careful person would have relied on an undertaking given by a
Scottish solicitor as had been given by Mr. Mullen. The broader implication of such a decision by
the Council would be that in future it would be unreasonable to rely on an
undertaking given by a Scottish solicitor without looking beyond that
undertaking to the credit worthiness of the solicitor or his clients.
Mr. Wolffe stated that to suggest that a
person should have to check on the credit worthiness of a solicitor when such
solicitor provides an undertaking is not a course of action which would be
regarded as either normal or reasonable.
Mr. Wolffe also stated that it was not
reasonable, as had been suggested, that Mr. Mullen's relative inexperience
as a solicitor and the fact that he was a sole practitioner should have any
bearing on the question of whether there was any contributorily
negligence on behalf of the applicant.
To suggest otherwise could imply that the undertakings given by a sole
practitioner or relatively junior solicitor should be relied on to a lesser
extent than undertakings given by other solicitors.
Mr. Wolffe advised Council that on the basis
of this analysis it would be wrong for the Council to assert that the
applicants were contributorily negligent and that the
Council should therefore make a full grant from the Guarantee Fund with respect
to the applicants' claims for compensation.
However, if Council concluded that the applicants were contributorily negligent while Council did have a discretion in such circumstances this discretion had to be
applied fairly. Thus it was argued that
as the undertakings given in the transactions were the real cause of the loss
and the solicitor had given the undertakings dishonestly, and had there been no
undertakings, the applicants would not have provided their loans, the Council
should therefore grant the applicants' request for compensation.
Mr. Wolffe concluded the submissions by
stating that the applicants had relied on the dishonest undertakings of Mr.
Mullen and had not contributed by their negligence to their loss were therefore
justified in having their requests for compensation paid in full. For the Council to fail to make a grant for
compensation from the Guarantee Fund would leave the applicants in no better
position than a client who had had their funds stolen by a dishonest solicitor.
3. Applicants' Submission -
Quantum
Mr. Wolffe then turned to the issue of quantum
and advised that Mr. Billig was seeking the principal
sum of £50,000 plus interest plus costs and that Allied Sterling plc were
seeking the principal sum of £100,000 plus interest plus costs - these two
principal sums being the monies originally advanced on the basis of the
dishonest undertakings by Mr. Mullen.
The interest which the applicants were seeking was interest at the
judicial rate as the applicants had been deprived of the use of their monies
for over 11 years. Mr. Wolffe also advised Council that the applicants had
incurred costs in pursuing Mr. Ogus and Mr. Mullen as
well as pursuing their claims under the Guarantee Fund. The grants which the applicants sought from
the Guarantee Fund were in respect of the loss of the principal sum plus
interest at the judicial rate plus costs in terms of paragraph 4, Schedule 3 of
the 1980 Act. Mr. Wolffe
advised Council that the applicants, through their legal advisers, could at a
later date provide the exact sums of interest and costs which were sought as
these sums were not currently available.
The applicants' legal team left the meeting together with the shorthand
writer - 10.55am.
4. Council's Deliberations
Council noted that the applicants' solicitors had made their oral
representations to Council within the one hour allotted and AGREED by Council at a previous
meeting.
The Guarantee Fund Committee Convener then spoke to the recommendation
within the Guarantee Fund Committee Minute of 6th February
2004.
The Convener advised Council that the circumstances of the applications
for an award of compensation from the Guarantee Fund were unique and very complicated. Noted that legal advice had
been sought at each stage of the proceedings. The Committee had received Opinions from
three leading QCs as well as advice from the Society's solicitors, Brodies, on
the applicants' claims. The Convener
reminded Council that claims which go to the Guarantee Fund are dealt with in a
staged process where four questions have to be answered. These four questions are:-
1. Has pecuniary loss been suffered?
2. Has there been dishonesty by
solicitors?
3. Is
the dishonesty by the solicitors in connection with a solicitor's practice?
4. Is
the claim against the Guarantee Fund - a claim of last resort?
The Convener advised Council that the answers to all of the above
questions with respect to the claims before the Council meeting today were all
'yes'. The Convener then reminded
Council of the statutory provisions in relation to grants from the Guarantee
Fund under Section 43 of the 1980 Act.
The Convener stated that it was the applicants' position that the
Council has no discretion in making grants from the Guarantee Fund under
Section 43 where dishonesty of a solicitor has been proved other than under
Section 43(5). The advice which the
Guarantee Fund Committee has received is that the Society does have discretion
in making grants from the Guarantee Fund.
This advice is set out on pages 415, 420, 431 and 445 of the Opinions
provided to the Guarantee Fund Committee over the course of its consideration
of the claims. Furthermore, the Convener
argued that the very use of the term 'grant' implies a
discretion on the part of the Society and that awards from the Guarantee
Fund are not guaranteed even if dishonesty has been established. Awards from the Guarantee Fund relate to
compensation and not restitution.
The Convener drew Council's attention to the advice contained at pages
416 and 450 in the papers before Council which refuted the applicants'
suggestion that the issue of the exercise of discretion had in some way been
'dreamt up' by the Guarantee Fund Committee.
The Convener accepted that while there was no judicial authority in
Scotland on the issue of payments from the Guarantee Fund, the issue had been
considered in a number of English cases albeit that they were applying the
English legislation which is differently worded. The issue of the Guarantee Fund's discretion
was also clearly narrated in the Opinion from the late David Williamson, QC., at page 450.
Contributory Negligence
The Convener then turned to the terms of Section 43(5) and whether the
applicants were negligent. Noted that a
definition of negligence is provided in the Opinion at page 422 where it is
described as a lack of reasonable care.
The Convener then advised Council that it was necessary in making an
assessment of the applicants' negligence to look at the actings
of Mr. Billig and his company Allied Sterling
plc. The Convener drew Council's
attention to pages 248 and 253 of the papers where Mr. Billig
states that no loan documentation had been prepared with respect to the loans
provided to the clients of Mr. Mullen.
Mr. Billig stated 'Although I was very
suspicious and wary about making the advance as Scotland was a complete unknown quantity to me,
excellent interest rates were being offered.'
The absence of any loan documentation should be taken as evidence of the
negligence of the applicants with respect to the loss they had suffered.
Procedure
The Convener then addressed the issue of the Guarantee Fund Committee's
procedures in dealing with the claims.
Again the Convener emphasised to Council that in each step of the
Committee's proceedings legal advice had been sought and obtained. Furthermore the applicants had previously
been given an opportunity to be heard and make oral representations. There had been delays in the proceedings but
a number of these delays were due to the applicants wishing to make further
representations and obtain further advice.
The Convener also reminded Council that it was extremely rare for
solicitors to give personal undertakings and that the undertakings given by Mr.
Mullen were extremely unusual.
The Convener concluded his remarks by advising the Council that based on
both the written and oral submissions presented to Council, the claims by Mr.
John Billig should be rejected and the claim by
Allied Sterling plc should be rejected.
Council AGREED that there
were no matters on which it required clarification from the legal team of
Allied Sterling plc and John Billig.
Council aired a number of matters in its initial consideration of the
submissions and documentary evidence as follows:-
·
AGREED that the claims could be fully considered and disposed of at the
Council meeting as the key issue to determine was whether the applicants had or
had not contributed to their loss due to their negligence. It was clear to many members of Council that
the applicants had acted negligently with respect to the undertakings provided
by Mr. Mullen as the applicants had neither consulted the Law Society of
Scotland nor a Scottish solicitor for advice on the terms of Mr. Mullen's
undertakings. It is also clear that Mr. Billig had acted negligently as from his statements within
the papers he was suspicious of Mr. Mullen but as a result of those suspicions he
had contacted an English solicitor for views on Mr. Mullen's undertaking who in
turn contacted the Law Society of England and Wales.
Furthermore it could be argued that Mr. Billig
should have looked carefully at the terms of the undertaking provided by Mr.
Mullen and had regard to his credit-worthiness as it was Mr. Billig's monies which were being lent. However Mr. Billig
was only interested in 'the deal to be struck under the terms of the loan' due
to the very good and exceptionally high interest rates to be applied to the
loans. Mr. Billig
had ignored all the warning signs and 'had shut his eyes to everything but the
interest rates on the loans'. Mr. Billig had therefore acted in a negligent manner.
·
Council
also AGREED that Mr. Billg and Allied Sterling plc should have looked at the
exact terms of the letter of undertaking as it was written in such terms that
no reasonable Scottish solicitor would have given. Given the very unusual terms and nature of
Mr. Mullen's undertakings, any reasonable person would have made investigations
to the appropriate Scottish authority and made the appropriate searches in
order to look behind the undertakings.
Mr. Billig and Allied Sterling plc had not
done this and their failure to do so amounted to a lack of reasonable care.
Council AGREED to adjourn its
consideration of the claims by Allied Sterling plc and John Billig against the Guarantee Fund to allow Sheila Spicer,
Secretary to the Clementi Review of the Regulatory
Framework for Legal Services in England and Wales, to give a presentation to
Council - 12.10pm.
CLAIMS BY ALLIED STERLING
plc AND JOHN BILLIG AGAINST MULLEN & CO
The Council continued its deliberations on the above matter - 12.55pm.
Council noted the following matters with respect to the written evidence
and oral submissions:-
1. Statutory Background
Section 43(5) of the 1980 Act is quite clear in that where the Council
is of the opinion that there has been negligence on the part of an applicant or
of any person for whom the applicant is responsible which has contributed to
the loss in question Council can refuse to make a grant, or make a grant only
to a limited extent.
2. Absence of Loan Documentation
Council also AGREED that the
applicants had been negligent in securing no loan documentation for the loans
and in this context the undertakings given by Mr. Mullen could only be
viewed as guarantees and not undertakings to be given in the course of his
business. This point was strengthened on
the basis of the papers which showed that it was Mr. Billig's
regular practice to obtain the appropriate loan documentation. Further, the Council noted that it was a
deliberate decision on the part of the lenders and their advisers not to
prepare loan documentation. Council
considered that the failure to obtain such loan documentation showed a lack of
reasonable care in the whole circumstances of the undertakings relied on and
had contributed to the losses.
3. Extraordinary Nature of the Letters of
Undertaking
Council AGREED that the
undertakings given by Mr. Mullen were so exceptional and outwith
the boundaries of any reasonable undertaking a Scottish solicitor would provide
that any reasonable person would not have relied on such undertakings.
The form of words used in the undertakings, being so
unusual and so unlikely to have been given by a Scottish solicitor, were
probably drafted by Mr. Ogus and that it had only
been signed by Mr. Mullen. There was
therefore negligence on the part of the lenders - Mr. Billig
and Allied Sterling plc as principals and Mr. Ogus
as their solicitor, on the basis of a principal being responsible for the actings of his agent, and had contributed to their loss.
4. Failure to Follow Standard Procedure
Council AGREED that there had
been a lack of reasonable care on the part of Mr. Billig
and Allied Sterling plc as with regard to this case Mr. Billig
and Allied Sterling plc had not followed all their normal and standard
procedures in providing these loans. As
such they had contributed to their loss.
5. Lack of Scottish Advice and Reliance on Wrong
Advice
Mr. Billig and Allied Sterling plc in relation
to the undertakings had only relied on the advice of an English solicitor and
the Law Society of England and Wales.
Council AGREED that the
applicants had acted negligently by failing to consult a Scottish solicitor or
the Law Society of Scotland on the nature and implications of Mr. Mullen's
undertakings. This had contributed to
their loss.
6. Failure to Check Mr. Mullen's Credit-Worthiness
Council AGREED that in the
particular circumstances of this case the applicants did have a duty to look
behind the status of a solicitor and the undertakings which he was
providing. Council further AGREED that there had been a lack of
reasonable care by Mr. Billig and Allied Sterling plc
in failing to undertake such reasonable checks.
This was particularly the case as the undertakings were so exceptional
and outwith the form of undertaking which any
reasonable solicitor would provide or could be relied upon. Accordingly the applicants had, thus,
contributed to their loss.
7. Second Loan - Letter of Undertaking
Council AGREED that Mr. Billig should have been on even greater notice with respect
to the second loan but had failed to be because of the greater interest rates
which were to be charged on the second loan.
Conclusion
Council AGREED for all of the
above reasons that, in the particular and exceptional circumstances of this
case, the applicants had acted with a lack of reasonable care which had
contributed wholly to their losses.
Council AGREED that the
exceptional nature of the undertakings would have been identified had advice
been taken from a Scottish solicitor and the loans would not have been made and
the loss not incurred. Council AGREED that the failure to obtain loan
documentation and the failure to check Mr. Mullen's credit-worthiness showed a
lack of reasonable care on the part of the applicants and contributed to the
loss. Council considered that the
applicants had proceeded on the basis of misguided advice but that as
principals they have to be held responsible for their agents and had acted with
a lack of reasonable care. Council AGREED that these various
considerations showed a lack of care on the part of the applicants which wholly
contributed to the loss.
The Council AGREED that the negligence on the part of the applicants had
caused their loss. Their failure led to
the loans being made and therefore the losses being incurred.
Council after a full and careful consideration of all the papers and
oral submissions made at the meeting in relation to the claims by Allied
Sterling plc and John Billig against Mullen & Co
voted on the following motion proposed by Kenneth Baddon
and seconded by Hew Campbell:-
Motion
That in respect of the claims made by Allied Sterling plc and John Billig against Mullen & Co that Council is of the
opinion that there has been negligence on the part of each applicant and that
the negligence has contributed wholly to their loss and that the Council should
refuse to make grants from the Guarantee Fund in relation to their losses.
Vote
Council voted by 29 votes to 1 with 4 abstentions in favour of the
Motion.
Decision
Council decided in terms of
Section 43(5) of the Solicitors (Scotland) Act
1980 that there has been negligence on the part of John Billig
which has contributed wholly to his loss.
Accordingly Council REFUSED to make a grant from the Guarantee Fund in
respect of his loss.
Council decided in terms of
Section 43(5) of the Solicitors (Scotland) Act
1980 that there has been negligence on the part of Allied Sterling plc which
has contributed wholly to their loss.
Accordingly Council REFUSED to make a grant from the Guarantee Fund in
respect of their loss."
[31] Counsel concentrated
most, but not all, of their submissions on the foregoing passages in the
Minutes. Part of the material before the
Council included the Minute of the Meeting of the Guarantee Fund Committee held
on 6 February 2004
(7/34, RB2/W). The following general
points, among others, are recorded in that Minute: (i)
no policy existed as to the criteria to be applied to applications other than
those set out in section 43 of the 1980 Act; (ii) there had been dishonesty on
the part of Mr Mullen and the petitioners suffered pecuniary loss; (iii) the
claims of the petitioners were essentially the same and were dealt with
together; (iv) on a balance of probabilities, Mr Mullen was acting in
connection with his practice as a solicitor when dealing with the petitioners
and their agents; (v) there were no other means of recovery; (vi) the Committee
were advised that the Council's power to make a grant was discretionary; and
that such discretion had to be exercised reasonably, fairly, in good faith and
consistently with the objects of the legislation; (vii) the petitioners were
not clients of Mr Mullen; (viii) the principal cause of the petitioners' loss
was the borrower's default; (ix) the first petitioner, who was an experienced
businessman had engaged in high risk loans with high returns although he seemed
to believe that if Mullen defaulted the Guarantee Fund would be obliged to pay;
(x) the claims did not have the characteristics of the sort which deserved
payment of a grant and a cautious approach was therefore required; and (xi) the Guarantee Fund was limited, its
resources finite, but its liability was potentially unlimited.
[32] The following further
points, among others, are recorded in the Committee's Minute on the question of
negligence with reference to section 43(5) of the 1980 Act: (xi) at an
earlier hearing before a Panel of the Committee, English counsel representing
the petitioners stated that with the exception of their reliance on the
undertakings given by Mr Mullen no further checks as to the financial status of
Mr Mullen or the borrower were carried out; no loan documentation was prepared
because the undertakings were seen as "copper bottomed"; (xii) the reliance so
placed was as a result of advice given by the petitioners' English solicitor;
(xiii) the Committee was of the view that a prudent commercial lender would
have taken further steps to check the financial status or ability to repay of
the borrower or those giving undertakings; (xiv) in failing to carry out such
checks the Committee considered that the petitioners were negligent and
entirely responsible for their loss.
[33] I have set out the
background in some detail from the documents before me and the submissions
presented to me at the First Hearing.
Counsel informed me that all the material contained in the Council's two
volumes of productions RB1 and RB2 i.e. 7/1-7/40 of process were before the
Council for the purposes of their decision.
Certain written legal advice provided to the Council has been excluded
from these bundles. The contents of the petitioners' productions 6/1-27 was either
before the Council or their solicitors; there is a considerable degree of
duplication as between the two sets of productions. The important point is that the foregoing
narrative demonstrates the very extensive amount of detailed material which was
before the decision making body i.e. the Council. Much of that material seems to have been
produced by or on behalf of the petitioners.
There was no significant dispute between counsel
on the facts. Productions 7/41-46 were
not before the Council at the time of their Decision dated 30 April
2004. These consisted of Annual Reports and
Accounts of the Scottish Solicitors Guarantee Fund for the years to 31
October 2001-2005, and
an Affidavit dated 30 June 2006 by Leslie Cumming CA, the Chief Accountant of
the Law Society. That Affidavit
describes the nature of the Guarantee Fund and its control and management. It notes (paragraph 4) that the entire cost
of claims and administration is borne by solicitors who are principals and hold
a practising certificate. Mr Cumming
states that in order to minimise the occurrence of fraud or dishonesty and consequent
claims, a robust monitoring system through regular inspection of all firms
handling client funds, has been developed (paragraphs 5 and 7) since the early
1990s. This has led to a significant
reduction in the amount paid out by the Council from the Guarantee Fund. This compares favourably with the English Law
Society where the system of monitoring is less rigorous.
Issues
[34] From the submissions
presented to me, the following issues arise for consideration:-
(1) whether the Council were entitled to make a finding of
negligence on the part of the petitioners which contributed to their losses
(2) whether, having made such a finding, the Council were
entitled to refuse to make any grant out of the Guarantee Fund in favour of the
petitioners.
(3) Whether
the Council have a general residual discretion, apart from section 43(5) of the
1980 Act, to refuse to make a grant out of the Guarantee Fund.
Submissions
[35] In summary, counsel for the petitioners made the following
submissions:-
i.
It was
perverse to say that the dishonesty of the solicitor Mullen, which was in
connection with his practice as a solicitor, had no part to play in
contributing to the petitioners' losses;
ii.
The
Council proceeded on the footing that someone dealing with a Scottish solicitor
is not entitled to rely on his undertaking even although the Council made no
finding that there were circumstances which should have led the petitioners to
be suspicious of the honesty of the solicitor;
iii.
A
solicitor's undertaking is binding in law and is enforceable; it is also
binding as a matter of professional obligation and may be the subject of
disciplinary proceedings. Reference was
made to United Mining & Finance Corporation
Ltd v Becher
1910 2 KB 296 at 307; Johnston v Little 1960 SLT 129; Dryburgh v Gordon 1896 24R 1; McGillivray v Davidson
1993 SLT 693; Cheval Property Finance plc
v Bernard Hill, 4 November 2003, Lord
Johnston (unreported) paragraph 18; Burnett's
Tr. v Grainger 2004 SC (HL) 19
paragraph 25; Webster, Professional
Ethics and Practice for Scottish Solicitors (4th edition); Smith
& Barton, Procedures and Decisions of
the Scottish Solicitors' Discipline Tribunal, 1995, pages 142-4, and to an
article by Professor GLF Henry entitled "Letters of Obligation" published in
the Journal of the Law Society of Scotland in 1959 and republished in 1973 at
1973 18 JLSS 121. It was therefore not
careless for the petitioners to rely on the letters of undertaking, despite
their unusual nature. This type of
undertaking was not prohibited in any code of conduct even although it was
plain from the decision that the Council did not like these undertakings. The petitioners relied upon the fact that
Mullen was a solicitor with a practising certificate and all that follows from
that. The faith and credit which third
parties give to solicitors' undertakings is an asset to solicitors and to the
profession as a whole. The petitioners
were relying upon the integrity of a solicitor.
Reference was also made to Derry v Peak
1889 14 App Cases 374 on the question of dishonesty. The effect of the Council's Decision was that
"you cannot trust a Scottish solicitor".
That was not a reasonable position for the Council to adopt.
iv.
In
relation to the 1980 Act, section 43 created a statutory trust to be held and
administered for statutory purposes. The
Council has no general or residuary discretion to refuse to make a grant,
unlike the equivalent English provisions the terms of which were materially
different. If there was a general
statutory discretion section 43(5) would be unnecessary. Where there is a discretion
it is express e.g. Schedule 3 paragraph 4 to the 1980 Act. Holding a fund implied an obligation to pay
out. The fact that the Guarantee Fund's
resources were finite did not imply a general discretion. Section 43(5) fell into two parts, negligence
and causation. The question of
negligence is a question of fact. Having
found negligence the Council would have three options, viz (i)
refuse to make a grant, (ii) make a limited grant, or (iii) make a full
grant. Quantification was a separate
exercise from the finding of negligence; they were not directly linked and the
Council must be seen to apply their minds to both processes. There was nothing in the Decision to indicate
the basis on which the discretionary part as to quantum was exercised. Reference was made to the Solicitors Act
1941, section 2(1), the Solicitors Act 1957 section 32, and the Solicitors Act
1974 section 36, the Legal Aid and Solicitors (Scotland) Act 1949 section 22, and
to R v Law Society, ex parte Mortgage Express Ltd
1997 2 AER 348 at pages 359 and 360 for the analysis of the English statutory
provisions and the policy of the English Law Society. Counsel were unable
to explain why, if their analysis of the Scottish provisions were sound, the
schemes in England and Scotland operated quite differently.
v.
Counsel
reminded me of the principal authorities in relation to the examination by the
court of the exercise of discretion by an administrative body or tribunal and
referred to Associated Provincial Picture
Houses Ltd 1948 1KB 223, SHBA Ltd
v The Scottish Ministers 2002 SLT
1321 at 1328I, 1335L-1336B, Ashbridge Investments
Ltd v Minister of Housing and Local
Government 1965 1 WLR 1320 at 1326D and Secretary
of State for Education v Tameside
BC1977 AC 1014 at 1047D-E.
vi.
There was
no dispute about what was embraced by the word "negligence" in section 43- a
lack of reasonable care in relation to one's own affairs.
vii.
In support
of the proposition that there was no material from which a finding of
negligence could be made, it was submitted that there had to be a reason why
the person found to have been negligent ought to have been put on his guard.
viii.
The noted
absence of loan documentation was an irrelevant consideration; it did not
matter who the borrower was or what his creditworthiness was; there were
inconsistencies between page 7 paragraph 2 of the Decision and page 4. There was no material entitling the Council
to find that it was Mr Billig's regular practice
to obtain the appropriate loan documentation.
ix.
The nature
of the undertaking was not a relevant consideration; it was not said that the
petitioners were aware or ought to have known that the undertaking was unusual;
there was no material upon which the Council as decision maker, could have
found that the petitioners should have been put on their guard; there was no
finding that the petitioners should have suspected dishonesty on the part of
Mullen.
x.
There was
no evidence that the petitioners departed from standard procedure.
xi.
The lack
of Scottish legal advice was irrelevant because such advice would have stated
that a third party was entitled to rely on a Scottish solicitor's undertaking;
Evans-Lombe J found no negligence on the part of Mr Ogus; and that the position would be the same in Scotland;
no reasons have been given for differing from that finding.
xii.
There had
to be facts upon which it could be said that the petitioners were aware, at the
time, of the exceptional nature of the undertaking.
xiii.
There was
no factual basis entitling the Council to decide that the petitioners were
aware of the need for any additional step beyond what the petitioners actually
did; there was no such factual basis in the material before or in the Decision
of the Council. If there is no such factual
basis then the Decision must be ultra vires. R v
Law Society ex parte
Ingman Foods Oy AB 1997 2 AER 666 was distinguishable on its
facts, the different statutory regime, and the fact that the English Law
Society had adopted a particular policy.
xiv.
The real
reliance here was on the Guarantee Fund (at an earlier stage counsel had
submitted that the petitioners were relying on the integrity of the solicitor
branch of the Scottish legal profession); the profession guarantees the honesty
of its solicitors; it was perverse to hold that someone who relies on the
undertaking of a Scottish solicitor exhibits a want of reasonable care; the
Council's decision that the petitioners' negligence contributed wholly to their
losses was tantamount to saying that Mullen's dishonesty played no relevant
role in the losses which the petitioners sustained; there was a dishonest
representation which induced the lender to make the loan and thus achieved its
end; it must therefore have causative potency; at common law contributory
negligence was no answer to an action based on deceit; reference was made to Redgrave v Hurd 1881 20 Ch 1
at 13-14 and Standard Chartered Bank
v Pakistan National Shipping Corp &c
2003 1 AC 959 and Gran Gelato Ltd v Richcliff (Group) Ltd 1992 Ch 560 at 574C-D.
xv.
While the
size of the loan might be a factor in determining negligence, it is not said by
the Council that the sums claimed would have disproportionate effect on the
Guarantee Fund the resources of which were said to be finite.
xvi.
Counsel
submitted that if the petitioners were entitled to declarator
and reduction, then if the Court also found that the Council had no general or
residuary discretion then the Court should grant declarator
of entitlement to payment of the principal sums plus interest and such other
costs and expenses as represent the pecuniary loss sustained by the petitioners
by reason of Mullen's dishonesty.
In summary, counsel for the Respondents made the following submissions:-
i. The
question for the Court was whether, on the materials before the Council, it was
entitled to find negligence on the part of the petitioners which contributed to
their losses. That question was
entrusted to the Council; it was for the Council to weigh the evidence, assess
whether there was negligence and whether it contributed to the petitioners' loss. That assessment can only be reviewed if it is
shown to be unlawful or irrational.
Reference was made to Associated
Provincial Picture Houses Ltd v Wednesbury Corporation
1948 1KB 223; SHBA Ltd v The Scottish Ministers 2002 SLT 1321, at
1335-6, Council of Civil Service Unions
v Minister for the Civil Service 1985 AC 374 at 410. Here, the Council
addressed the correct question and on the material before them, were entitled
to conclude that there had been negligence on the part of the petitioners which
contributed to their loss.
ii.
The
Council's decision should be read and considered as a whole and should not be
exposed to a process of minute textual analysis. The word "wholly" in the Council's Decision
was redundant or used as a word of emphasis.
That word is unnecessary to justify a refusal to make a grant. Any finding of negligence on the part of the
petitioners entitled the Council, in principle, and subject to questions of
rationality and reasonableness, to refuse to make a grant. While the use of the word "wholly" was
perhaps not the best way of expressing matters, decision makers should be given
a certain latitude in how they express themselves;
judicial exactitude is not required.
Reference was made to R v Brent London Borough Council ex parte Baruwa 1997 29 HLR 915
at 929.
iii.
There was
ample material entitling the Council to make a finding of negligence on the
part of the petitioners. Negligence
means a lack of reasonable care in the particular circumstances of a given
case. The Court cannot interfere with
the evaluation or assessment of the facts and circumstances unless there was no
rational basis for it (R v Monopolies Commission ex parte
S. Yorks. Ltd 1993 1 WLR 23 at 32G-33A. Each of the factors considered by the Council
was relevant. The decision cannot be
said to be manifestly ill-founded.
iv.
The
authorities on undertakings are not disputed but the mere taking of a
solicitor's undertaking does not unlock the Guarantee Fund. The petitioners'
faith in the undertakings is difficult to reconcile with his recorded concerns
and suspicions about solicitors' undertakings, and the high interest rates
charged which presumably reflected the risk element in the transaction.
v.
The
proposition being advanced by the petitioners that it was sufficient to rely
solely on the solicitor's undertakings was untenable as it could not discharge
the lender's duty to take reasonable care for the protection of his own
interests. The undertaking backed by a
right of recourse to the Guarantee Fund was not a complete security. The right depends on dishonesty, may be lost
through the claimant's negligence or the honest solicitor's sequestration.
vi.
The
petitioners were essentially relying on the statutory fund as security. To say reliance was being placed on the
integrity of the solicitor did not reflect the reality of the situation. The attraction of the solicitor's undertaking
was the Guarantee Fund.
vii.
Had advice
on Scots law been taken, attention would have been drawn to the limited extent
of protection.
viii.
The
authorities on deceit were not helpful as the Council was entitled to take
account of the petitioners' negligence no matter how egregious the conduct of
the solicitor. Once negligence has been
established the Council is entitled to reject the application or limit the
amount of grant awarded.
ix.
The facts
in Ingman Foods were similar to the present
case. The equivalent of section 43(5)
was applied to reject the claim.
x.
The
factors upon which the Council founded in arriving at a finding of negligence
were relevant. The conclusion arrived at
on the basis of the material before the Council was within the permissible
field of judgment. The exercise of
discretion to refuse to make a grant must always be made in a manner consistent
with the policy and objects of the legislation.
The rationality of the exercise of that discretion must be considered in
that light. Reference was made to the history of the legislation and certain
passages in Hansard, namely Business of the House
16/12/48, the Legal Aid and Solicitors Bill column 1394 at column 1402-3,
5/4/49 columns 366-7, and 7/7/49 column 985 (House of Lords). This shows an identity as between England and Scotland in relation to the purposes, policy and
objects of the respective compensation funds. Parliament had in mind the paradigm case of
the solicitor misappropriating his client's money entrusted to him. The heading to section 43 is "Protection of
clients". Reference was made to Bennion, Statutory
Interpretation, 4th edition pages 635-636. The further the claim departs from the
paradigm case is a factor to be taken into account in exercising discretion
under section 43(5). Reference was made
to R v Law Society ex parte Mortgage Express Ltd
1997 2 AER 348. It is far from
irrational or perverse for the Council to take the view that the carelessness
on the part of the petitioners was of sufficient gravity to decide that no
grant should be made.
xi.
The
petitioners appear to argue that that there had to be facts to put the
petitioners on their guard or on notice in relation either to solicitors'
undertakings in general or the ones given by Mullen in particular, before a
finding of negligence can be made.
However, the test for negligence is objective, the standard of the
reasonable man (e.g. Muir v Glasgow Corporation 1943 SC (HL)3 at 8 per Lord Thankerton and at page 10 per Lord MacMillan). An argument along same lines as the
petitioners was rejected in Ingman Foods
(above at 675B-D and 676G). In any
event, the facts here were such that the petitioners ought to have been put on
their guard, and indeed were on their guard.
xii.
The
Guarantee Fund Committee concluded that the petitioners were "entirely
responsible for their loss" (7/34 - tab W page 467). That was a better expression than "wholly
contributed". Mullen's dishonesty was
the causa sine qua non. What brought about the petitioners' loss
was their failure to make appropriate checks or examine carefully the terms of
section 43(5).
xiii.
Even if
the Council's finding about failing to follow standard procedure was
unjustified, there remained ample material to justify a finding of negligence.
xiv.
The
Council, as a specialist body, was entitled to form a view as to the likely
content of Scottish legal advice in relation to the undertakings in question.
xv.
If the
Council erred in concluding that there was negligence on the part of the
petitioners or in concluding that no grant should be made the matter should be
remitted to the Council to consider whether in the exercise of their general or
residual statutory discretion a grant should be refused. That discretion existed even if there was no
basis for a finding of negligence on the part of the petitioners.
xvi.
Section 43
cannot be read so as to create a general duty to pay where dishonesty is
established. Reference was made to Bennion at pages 472-3 on the commonsense construction
rule. Where a statutory fund is created
for a particular purpose, a power to make payment is readily implied, but no
absolute entitlement to payment can be inferred. An express statutory discretion in particular
circumstances does not mean that there is no discretion in other
circumstances. Section 43(3) simply
delimits the circumstances in which a grant can be made. The phrase "under the control and management
of the Council" was consistent with the exercise of discretion as is the word
"grant". Given the limited nature of the
Guarantee Fund, which itself points towards the existence of a statutory
discretion, there was an obligation to manage prudently which was consistent
with the exercise of a statutory discretion.
If there were no discretion,
the Council could not frame any policies unlike their counterpart in England which would be odd
given the history of the legislation.
Payments in undeserving cases would have to be made.
xvii.
Even if
the petition is well founded there are still issues about interest and other
heads of claim which should be dealt with by the Council.
Discussion
First Issue: Whether the Council was entitled to make a finding of
negligence on the part of the petitioners which contributed to their losses
[36] For the petitioners to
succeed, I have to be satisfied that the Council reached a conclusion which no
decision making body, correctly applying the law to the particular
circumstances before them, could properly reach. This raises questions of that aspect of Wednesbury reasonableness subsequently
described in the authorities as irrationality.
That, in turn, involves or may involve several areas of the decision
making process. These include (i) an assessment of the material before the decision maker
to ascertain whether that material entitled the decision maker to make the
findings of fact and reach the conclusions actually made; (ii) an assessment of
the logic and rationality of the decision making process; and (iii) an
examination of the criteria applied by the decision maker to the facts found,
and the application of that criteria to reach the conclusion made. My task is not to consider what findings of
fact I would have made on the basis of that material or to consider what
conclusions I would have drawn but to consider whether material existed which
entitled the decision maker to reach the decision challenged.
[37] In making such an
assessment, it is not for me to weigh the evidence. That is the task of the decision maker. Rather, I must examine the substance of the
text of the decision as a whole in order fairly and reasonably to ascertain the
approach of the decision maker to the material before him and the logic or lack
of logic of his analysis.
[38] Frequently, parties
challenging a decision by way of judicial review will tend to examine the
decision in detail and highlight, what they consider to be flaws,
inconsistencies and infelicities of language while those seeking to uphold its
validity will take a broad approach, and seek to brush aside such matters. Without in any way wishing to detract from
the high quality of the submissions presented to me, this broadly reflected the
approach of the parties in this case. For
my part, I consider that a middle course is appropriate. I agree that the decision should be read
fairly and reasonably as a whole (see e.g. Mortgage Express at 358j, and
R v Monopolies Commission
(above) at page 29F) in a common sense way, and should not be subjected to a
minute textual analysis. The substance
of a decision, rather than its form is what is important. On the other hand, significant
inconsistencies may point to flaws in the reasoning and a lack of logic in the
overall approach of the decision maker.
This may also lead one to question whether the decision making body
properly understood the material before it and whether it was entitled to make
factual findings actually made. There
can plainly be an overlap between a challenge on the basis of factual errors,
and irrationality. One can equally say
that there was no material justifying the making of an important factual
finding, and therefore the decision maker fell into error, possibly rendering
the decision ultra vires, and that it was
perverse or irrational to make that finding of fact because of the complete absence
of material or evidence from which such a finding could competently be made; no
reasonable decision maker would have done so; and it defied logic to do so.
[39] Normally, the greater the
amount of material before a decision maker, the greater will be the scope for
making findings of fact and it will be all the more difficult for a petitioner
to challenge the entitlement to make findings of fact or the rationality of the
decision. It is obvious from the
background set out above that a great deal of material was placed before the
Council for consideration. The substance
of the Council's findings and conclusions, reading the decision as a whole,
fairly and reasonably in a common sense way, seem to me to be as follows:-
1.
The
Council found that the petitioners had suffered pecuniary loss; that there had
been dishonesty by Mullen in connection with his practice as a solicitor; and
that the claim against the Guarantee Fund was a claim of last resort (6/2 pages
4-5).
2.
The
Council found that the key issue was whether the petitioners had or had not
contributed to their loss due to their negligence (6/2 page 6).
3.
The
Council found that there was no loan documentation (other than Mullen's
undertakings), and that this was contrary to the petitioners' regular practice (6/2
page 7).
4.
The
Council found that the form of undertaking was exceptional and rare (6/2 pages
6 and 7); they thus accepted the view of the Convenor of the Guarantee Fund
Committee that the undertakings given by Mullen were extremely unusual (6/2 page
6).
5.
The
Council found that the petitioners were suspicious of Mr Mullen and that he had
contacted an English solicitor for advice on the terms of the undertakings (6/2
page 6). They found that that advice was
misguided (6/2 page 8).
6.
The
Council found that the petitioners, while seeking advice from an English
solicitor in relation to the undertakings, had not consulted a Scottish
solicitor on the nature and implications of the undertakings (6/2 page 8).
7.
The
Council found that the petitioners did not check the credit-worthiness of
Mullen (6/2 page 8).
8.
The
Council found that the petitioners had not followed all their normal and
standard procedures in providing the loans (6/2 page 7).
The Council considered whether each and all of these findings
demonstrated negligence on the part of the petitioners within the meaning of
section 43(5) of the Solicitors (Scotland) Act 1980 (6/2 page 5). They construed negligence as therein mentioned
as a lack of reasonable care (6/2 pages 5 and 8).
[40] At first blush, it is not
easy to see how any causal connection can be made between the lack of loan
documentation and the petitioners' losses.
The borrowers failed to pay.
There is nothing in the material before the Council which indicates that
the borrower would have paid had loan documentation been prepared. However, when properly understood, what the
Council seem to be saying is that the deliberate decision to dispense with loan
documentation to enable total reliance to be placed on the unusual undertakings
was imprudent and therefore demonstrated a lack of reasonable care (see 6/2
page 7 and paragraph [12] above).
[41] The Council also found
that failure to follow all their (i.e. the petitioners') normal and standard
procedures in providing the loans demonstrated a lack of reasonable care which
had contributed to their losses. I doubt
whether the Council are adding much, if anything, to their findings about lack
of loan documentation. Counsel for the
petitioners were critical of this part of the Decision (6/2 page 7 numbered
paragraph 4) contending that there was no material upon which such a finding
could be made. It seems from the
available material, which I have summarised above, that the petitioners'
initial practice was to have full documentation which included security for the
loan in one form or another. However,
when solicitors' undertakings were provided, loan documentation was dispensed
with. It seems to me that the Council
are simply again contrasting the normal and standard procedure in relation to a
commercial loan, namely that it is documented as between lender and
borrower. Even if this part of the
decision (page 7 paragraph 4) contains a finding and conclusion which no
reasonable decision maker could properly have made (which I doubt), I agree
with senior counsel for the Council that the overall finding of negligence and
the conclusion is amply justified by the other findings made elsewhere in the
decision. Putting it another way, it
seems to me that the decision, read as a whole fairly and reasonably in a common
sense way would have inevitably been the same even if findings contained in
paragraph 4 on page 7 of the decision are disregarded. I am satisfied that the same overall
conclusion would have been reached.
[42] The Council also found
that the failure to obtain Scottish legal advice was negligent and that had
such advice been obtained the petitioners would not have made the loans. That negligence therefore contributed to the
petitioners' losses. This finding was
criticised by counsel for the petitioners on the basis that it was speculation
as to what that advice would have been.
I cannot accept such an argument.
The decision maker is a specialist body of solicitors with a wealth of
legal experience. It is plainly within
their expertise and their competence as a decision making body to express an
opinion based on that expertise and experience as to what advice would have
been given. Common sense dictates that
this must be so. I note that nowhere is
it suggested by or on behalf of the petitioners that Scottish legal advice
would have been to the effect that such an undertaking may be relied upon as a
security or that it may safely be relied upon without further enquiry of the
financial standing of the borrower or the granter of the undertaking. To assert simply that Scottish legal advice
would have been that a third party was entitled to rely on a Scottish
solicitor's undertaking is unsound. I
discuss the issue of undertakings below.
[43] There is no dispute that
the petitioners did not check the financial standing of either the borrower or
Mullen. I can find nothing in the
submissions to persuade me that the Council was not entitled to conclude that
this demonstrated a lack of reasonable care on the part of the petitioners for
their own financial interests. Nor can I
find anything in the submissions to show that the Council were not entitled to
conclude that such lack of reasonable care contributed to the petitioners'
losses. Counsel for the petitioners
addressed me at length on the law relating to undertakings. Counsel for the Council took no issue with
these submissions. In the course of his
submissions, junior counsel for the petitioners drew my attention to the article
by Professor Henry referred to above, which deals principally with letters of
obligation (which of course contain personal undertakings granted by
solicitors) in conveyancing transactions. No doubt conveyancing
law and practice has changed since the article was written in 1959 (some years
after the statutory Guarantee Fund had been established) and republished in
1973. However, it is interesting to note
that the learned Professor observes that "From the angle of the purchaser's
solicitor he likewise must ponder the value of the letter of obligation as
regards the credit of the grantor and in the process his speculations should
not be restricted to the particular transaction".
[44] This is somewhat
inconsistent with the leitmotiv which permeated the petitioners'
submissions that they were entitled to rely on the integrity of the solicitor
granting the undertaking and that the effect of the Council's decision was that
one could not trust a solicitor. I am
unable to accept such submissions. In
the first place, reliance upon the solicitor cannot discharge a commercial
lender's duty to consider the prudence of making a loan by assessing the
financial standing of the borrower or the adequacy of any guarantee or security
being offered; if he does not do so, he must accept the possible consequences
of being unable to recover the loan or part of it. In the second place, what underlies this
submission is the view that the Guarantee Fund provides a full proof commercial
security where the solicitor, through dishonesty, defaults on the undertaking. It does not, as an examination of section 43
reveals. In the third place, to suggest
that the undertaking was accepted because the petitioners relied upon the
integrity of Scottish solicitors, is unrealistic. It is obvious from the history as disclosed
in the material presented to the Council that the petitioners embarked upon the
strategy of documenting substantial loans at very high rates of interest with
only a solicitor's undertaking because they thought the Compensation Fund or
the Guarantee Fund would be bound to pay in the event of solicitor
default. That was the perceived
advantage of taking an undertaking from a solicitor as opposed to some other
professional such as an accountant or financial adviser, who might well also be
subject to Codes of Conduct but did not have the strength of a statutory
Guarantee Fund around them.
[45] One cannot assume that if
undertakings in such terms are not implemented the Guarantee Fund will
underwrite any loss flowing therefrom. One cannot treat the Guarantee Fund as a
commercial security or some form of insurance or commercial guarantee. The fact that the solicitor branch of the
profession has a statutory fund to make payments in respect of loss suffered
through solicitors' dishonesty does not mean that a commercial lender can
dispense with the usual and prudent precautions which any sensible man of
business would carry out before lending substantial sums.
[46] The material before the
Council convinced them that the petitioners took no steps to satisfy themselves
of the financial standing of the borrower or Mullen, and failed to appreciate
the limited value of the undertaking and the circumstances in which payments
could be made out of the Scottish Solicitors Guarantee Fund.
[47] For these reasons, the
integrity of Scottish solicitors and their standing in the business community
generally are not affected at all by the Council's decision. Moreover, it is, in these circumstances,
impossible to hold that the Council was not entitled to find that the
petitioners contributed to and were entirely responsible for their losses.
[48] It is accordingly
unnecessary to discuss the authorities cited by the petitioners in relation to
undertakings as there was no dispute between the parties that undertakings
granted by solicitors in relation to transactions involving their clients bound
the solicitors personally. However, a
letter of obligation or other undertaking is invariably subsidiary to the main
transaction and other documentation creating rights and obligations between the
solicitor's client and a third party or several third parties. Such an undertaking enables a transaction to
be carried through; it is, as Professor Henry points out, a service provided by
solicitors which acts as a lubricant to oil the daily settlement of a variety
of transactions. Here, the letters of
undertaking were the only documents.
They appear, so far as the petitioners were concerned, to have been the raison d'être of the transaction. Yet, according to the material presented to
the Council, the petitioners took no steps to satisfy themselves, as a matter
of Scots law and practice, whether it would be prudent to rely on them without
more; they took no steps to consider the circumstances in which the Scottish
Solicitors Guarantee Fund would require to meet a claim. The Council plainly considered this to be ill
advised and constituted negligence on the part of the petitioners. The logic of and the reasoning for doing so
is understandable and I can detect nothing in the approach of the Council as
disclosed in the decision which would lead me to conclude that their reasons
were inadequate or unintelligible on this aspect of their decision or, indeed,
on any other aspect.
[49] Although there might be
thought to be some tension between the Council's view that the advice given to
the petitioners was misguided, and Evan-Lombe J's
rejection of the claim for damages for professional negligence, it must be
remembered that the Council was not bound by that decision, no expert evidence
was led by the petitioners in that action to support the claim, and no evidence
of Scots law or practice was led.
Moreover, Evans-Lombe J preferred the evidence
of Mr Ogus to Mr Billig,
and concluded that the scope of his retainer was restricted (see paragraph [19](9) above).
[50] Counsel for the
petitioners also argued, in effect, that there was nothing in the decision to
demonstrate the basis on which the Council considered the question of
quantum. I reject that argument. Reading the decision as a whole, fairly and
reasonably in a common sense way, it seems to me obvious that the Council took
the view that the petitioners' imprudence was of such significance that it was
the causa causans
the losses (see 6/2 page 8 "negligence on the part of the applicants had
caused their loss", and the use of the word "wholly"). The dishonesty of the solicitor Mullen was
the causa sine qua non. The whole flavour (to use Latham J's
expression in Ingman at 678g) of the
decision of the Council is that the petitioners were to blame for their loss
and should therefore receive no compensation from the Guarantee Fund. That view, on the material placed before the
Council, is understandable and one I consider they were entitled to take. Whether I agree with it is of no moment.
[51] Even if one is left with
a finding that the conduct of the petitioners contributed to some extent to
their losses, it was still open to the Council to concluded that no grant
should be paid. Counsel
were agreed that there was no necessary correlation, unlike section 1 of
the Law Reform (Contributory Negligence) Act 1945, between the extent of the
negligence or the responsibility for the loss, and the extent, if any, to which
the grant is reduced. Thus, if an
applicant was equally to blame for his loss, this could, in appropriate
circumstances, result in a grant being refused, or limited to 50% or some other
proportion, or being paid in full.
[52] Counsel argued that there
was no material entitling the Council to find that the petitioners were aware
that the undertakings were unusual or ought to have been put on their
guard. At the conclusion of the
petitioners' submissions I, like senior counsel for the Council, was a little
unclear as to whether this whole line of argument was predicated on what the
petitioners' actual state of knowledge was, or what they ought reasonably to
have known. In a short third speech for
the petitioners, the Dean of Faculty made it clear that he was not suggesting a
subjective test.
[53] The standard of care is
that of the reasonable man of ordinary intelligence and experience. The standard of foresight of the reasonable
man is in one sense an impersonal or objective test (per Lord MacMillan in Muir above at 1943 SC HL at 10; see also
Lord Wright at 13 and 15). However, at
the end of the day, there is a subjective element because it is left to the
decision maker to decide, what, in the particular circumstances of the case,
the reasonable man ought to have had in contemplation and therefore what the
petitioners ought to have foreseen. At
this point there is room for diversity of view.
The Council were entrusted with the decision on these matters and it is
not for me to interfere with that decision unless I take the view that the
decision was one no reasonable decision maker could have reached. I do not take that view, because I consider
the material before the Council to have been amply sufficient to support the
view which they took. They considered inter
alia what a prudent lender would have done. They adopted an objective test and thus
applied the correct criteria. In any
event, as Senior Counsel for the Council pointed, there was material before the
Council indicating, to put it at its lowest, that at some stage the petitioners
were, in fact, on their guard (see paragraphs [12] and [14] above).
[54] I should also record that
Counsel for the petitioners referred to Mr Cumming's affidavit and seemed to
suggest, if I understood the submission correctly that, if the form of
undertaking was unacceptable to the Council, one would expect their monitoring
regime to detect the use of such undertakings and issue guidance prohibiting it
use. That was not done and therefore the
unusual nature of the undertaking was somehow irrelevant. In the first place, the affidavit of Mr
Cumming was not before the Council so I do not see how any material in it can
be used to test whether the decision was ultra vires,
although no doubt the Council can be assumed to be generally aware of such
background information. In the second
place, it seems plain from the decision that these undertakings were "very
unusual" (6/2 page 6) and "so exceptional and outwith
the boundaries of any reasonable undertaking a Scottish solicitor would
provide" (ibid page 7 and 8), that it
is difficult to envisage, insofar as this is relevant at all, how any
reasonable monitoring regime would detect such a document. It is also to be noted that these
undertakings were granted within a few weeks of each other. Futhermore, it would
also appear, as senior counsel for the Council observed, that the monitoring
regime to which Mr Cumming referred in his affidavit, relates to a period
after the events in question.
[55] Of the authorities cited
to me, it is only necessary to mention two in any detail. Mortgage Express concerned two
separate cases of dishonesty. In the
first, the solicitor failed to inform the commercial lender inter alia that a professional valuation over the proposed
security subjects had substantially overvalued the property. The loan was made, the security granted, and
the borrower eventually defaulted. The lender
sold the security subjects but there was a shortfall partly because of the
overvaluation and partly because of a decline in the property market. The lender's first application for judicial
review, which proceeded on the basis that the relevant committee had erred in
law in holding that the solicitor's dishonesty had not been a cause of the loss
suffered by the lender, was compromised and the Law Society undertook to
reconsider the claim, thus echoing, to some extent, the history of the present
petitioners' application. On
reconsideration, the Law Society committee refused to make a grant, taking the
view that the principal object of the fund was to replace a client's money
misappropriated by a solicitor, and the function of a solicitor was usually to
ensure that the lender obtained an effective security for its loan; while the
solicitor's dishonesty had been a cause of the loss, the lender had obtained a
valid mortgage and the principal cause of the loss was the overvaluation and
the fall in the property market. In what
appears to have been a second application for judicial review, the judge at
first instance held that the committee had erred in law. That decision was reversed by the Court of
Appeal. In delivering the judgment of
the Court, Lord Bingham of Cornhill (CJ), noted that
the Law Society accepted that the solicitor had been dishonest and that the
lender had suffered loss as a result (351d).
His Lordship reviewed the history of the relevant legislation, noting
the Parliamentary intention (351h), and the procedural rules set up to
implement the statutory provisions. He
noted that the Council of the Law Society had approved statements of guidance
which recorded, inter alia, that (i) the object of the Fund was to replace "clients' money"
misappropriated by a solicitor, but an applicant for a grant need not
necessarily have been a client; (ii) making a grant out the fund was
discretionary; (iii) as a general rule, a grant will only be made where the
applicant's money has been misappropriated by the dishonest solicitor; (iv)
grants will not be approved for consequential losses; and (v) where the
applicant has contributed towards his own misfortune this could militate
against the making of a full grant; it would only be in extreme cases that the
Council would on this ground refuse a grant (353-4). When the matter came back before the relevant
Committee it had before it an agenda note which contained the following passage
(355f-h):-
"In the exercise of its discretion the
Committee is entitled to have regard to all the factors which may have caused
or contributed to the loss, and the existence of factors other than the
dishonesty of the solicitor in question does not mean that the Committee will
automatically refuse to make a grant.
The Committee's practice is to consider the extent to which each of the
factors caused or contributed to the loss.
If the Committee considers that the dishonesty of the solicitor is a
major contributory factor then an award of compensation may well be made. If other factors caused or
contributed to the loss the Committee will normally try to apportion the loss
between them. In regard to this
application the 'other factors' are the overvaluation and the fall in the
property market at the time of the sale.
The Committee's previous practice in such circumstances has been not to
award any compensation on the ground that the loss has resulted from the
overvaluation and/or fall in the property market as distinct from the
dishonesty of the relevant solicitor.
Mortgage Express contend that the exercise of
the Committee's discretion in this way is improper, since it appears to ignore
the dishonesty of the solicitor."
[56] The contention of Mortgage Express echoes the petitioners'
submission (see xiv at paragraph [35] above) that the Council's decision was
tantamount to saying that Mullen's dishonesty played no relevant role in the
losses which the petitioners sustained.
[57] Lord Bingham quotes from
the Committee's decision which found that:-
"whilst the solicitor's dishonesty was a cause
of the loss, the Committee considered it was principally suffered in
consequence of the overvaluation and the subsequent fall in the property market
..." (357f)
[58] Lord Bingham noted that
the committee clearly and expressly accepted that the solicitor's dishonesty
was in law a cause of the loss (358e).
He accepted an argument that the judge at first instance was wrong to
hold that the committee had erred in law (the detail is not material). He proceeded to consider and reject Mortgage
Express's other
arguments one of which was that it was wrong to attribute the whole loss to
causes other than the solicitor's dishonesty (359d). As a preliminary he observed that (i) whether a grant should be made required an exercise of
discretion or judgment; (ii) from the current English legislation the history
of the fund and the mode of operating it, it was clear that the solicitors'
profession was never intended or required to assume an open-ended liability
where the resources of its membership are finite and the fund limited; (iii)
the Law Society were entitled to give priority to those classes of claim which
they regarded as having the most pressing claim to be met in whole or in part
out of the fund; (iv) the clearest case for making a grant will be where the
solicitor misappropriates the client's money for his own benefit, and that the
Law Society is entitled to say that the further the application departs from
that particular set of circumstances the more cautious the Law Society should
be in making a grant. His Lordship
proceeded to express the view, in relation to the facts before him that (361e):-
"If the market has fallen and the lender has
suffered loss as a result, that loss is not caused by the solicitor save in the
sense that but for the his dishonesty (and the overvaluation, where there is
such) the lender would not have entered into the transaction at all"
[59] It seems to me that where
other causes of the loss are in issue the Court of Appeal were content to
accept that while the causa sine qua non was the solicitor's dishonesty (which gives
the applicant a foot in the door, as it were, and jurisdiction to the Council
to consider the application) the causa causans the whole loss could be something quite
different such as an overvaluation, a drop in the property market, or, as in
the present case as the Council have found, a lack of reasonable care for their
own financial interests on the part of the petitioners. I agree with that approach and it is properly
applicable to the circumstances of a petitioner, where there is negligence on
his part, by virtue of section 43(5) of the 1980 Act notwithstanding the
other differences in the wording of the statutory provision in the English and
Scottish Acts. In finding that the
petitioners had acted with a lack of reasonable care which had "contributed
wholly to their losses" or "wholly contributed" to the loss" (6/2 page 8) the
Council are in effect following the approach of the Law Society of England in Mortgage
Express which was endorsed by the Court of Appeal. The approach could equally work to an
applicant's advantage where there has been some negligence on his part; he may
be able to establish the solicitor's dishonesty was not only the causa sine qua non but also the causa causans, and
any negligence on his part made only a minimal contribution and should be
disregarded. In the foregoing
circumstances, I must therefore reject the argument that the Council's decision
was vitiated because it was tantamount to saying that Mullen's dishonesty
played no role in the petitioners' losses.
[60] The other case which
requires some consideration is Ingman
Foods. There, a company proposed to
borrow $50m. Part of the arrangement was
for the borrower to make a deposit of $5m (to show the lender that it was
financially sound) with the lender's English solicitor, a sole
practitioner. The borrower made
enquiries of the solicitor's status, who granted an undertaking relating to the
transaction. The undertaking granted by
the solicitor was lengthy (670j-671f) but included a personal obligation to
refund the $5m in certain circumstances.
The borrower did not receive the loan and the solicitor became
bankrupt. In refusing a grant from the
Compensation Fund, the Law Society recognised that the loss of $5m had been
caused by the solicitor's dishonesty but concluded that the borrower had acted
imprudently. In dismissing an
application for judicial review, Latham J held that the Law Society was
entitled to consider the applicant borrower's conduct. Although there is no statutory equivalent to
section 43(5) of the 1980 Act, Guidance issued by the Law Society runs along
similar lines (668j and 672j‑673a).
Latham J noted that (i) the applicants
stressed the importance of the status of the solicitor about whom they had made
some enquiries of the Law Society, the solicitor's bank and his insurers (670e
and h); (ii) the Law Society's decision recorded that the application was
rejected on the grounds that the borrowers were negligent and imprudent to
proceed with the transaction and acted outside normal and prudent commercial
practice (673g); the only documentation was the undertaking and had an English
solicitor been consulted, advice not to accept it would have been given (674a);
it was unreasonable to rely on an undertaking as sole security for $5m (674e);
(iii) the applicants argued that there was no or no adequate material which
could have put them on notice that the solicitor was not to be trusted as there
was nothing known to the detriment of the solicitor (675a-c); (iv) the issue
was whether the committee was entitled to come to the conclusion on the facts
that the contribution made by the applicants its loss was such as to justify
making no grant (677b). It was argued
before the Court that the committee had misunderstood the facts as the money
had been entrusted to an apparently reputable solicitor (677f). Latham J appears to have rejected that
argument as he observed that the committee took the view that the transaction
was an extraordinary one and were entitled to do so (677f-g). His Lordship concluded that the committee was
entitled on the facts to come to the conclusion that this was a case in which
the applicant had contributed to its own loss.
The extent of that contribution need not be restricted to the
applicant's assessment of the honesty or trustworthiness of the solicitor
(676g); the committee was also entitled to take the view that the degree of
fault on the part of the applicant was extraordinary and exceptional and
justified a refusal to make a grant. He
noted that the facts were far removed from the case of an innocent client
entrusting money to his solicitor in the course of an ordinary transaction (678d-e).
[61] While Ingman
is not identical to the present petition, there is a degree of similarity
in the facts and the argument. They both
involved an unusual undertaking by a sole practitioner. Both applicants were held to be negligent and
to have contributed to their loss. Both
relied on the argument that they were entitled to trust the integrity of a solicitor. Both decision makers were critical of the
lack of documentation; both said that had appropriate legal advice been taken
the applicants would have been advised not to accept the undertakings and not
make the deposit or loan. Although Ingman is not binding and concerns different
statutory provisions, it is essentially concerned with the equivalent of
section 45(3) of the 1980 Act the substance of which, in the English scheme,
takes the form of guidance rather than express statutory enactment. The approach of the Law Society was similar
to the approach of the Council in the present case. As in Ingman, I also consider that there
was sufficient material entitling the Council to conclude that the petitioners
contributed to their loss. I also reject
the notion that the extent of contribution is restricted to the applicant's
assessment of the honesty and trustworthiness of the solicitor. Such a subjective test is at odds with the
traditional and modern view of negligence.
[62] For all the foregoing reasons,
the petitioners have failed to satisfy me that the Council was not entitled to
make a finding of negligence on the part of the petitioners. They have also failed to satisfy me that the
Council was not entitled to make a finding that negligence on the part of the
petitioners contributed to their losses.
Second Issue: Whether, having made such a finding (of negligence
contributing to the petitioners' losses) the Council were entitled to refuse to
make any grant out of the Guarantee Fund in favour of the petitioners.
[63] The essential criticism
by the petitioners, as I understood it, was that the Council had not applied
their minds to the question of quantum or had not considered this issue
separately from the findings on negligence.
There is thus no or no adequate or intelligible reasoning process
informing the reader of how the conclusion, that no grant at all should be
made, was reached. Underlying this
argument was the proposition that the exercise to be carried out under section
43(5) of the 1980 Act was a two or possibly three stage process. The first stage was to ask whether there was
negligence on the part of the applicant; the second stage was to ask whether
that negligence contributed to the loss in question; and the third stage was to
ask to what extent, if any, should the grant otherwise
payable be reduced.
[64] In my opinion, this
argument is unsound and falls to be rejected.
Reading the decision as a whole, fairly and reasonably in a common sense
way without demanding undue judicial exactitude, it seems to me obvious that
the Council simply took the view that the various factors which led them to
conclude that the petitioners contributed to their own losses were of such
significance and the circumstances so unusual that no grant should be
made. That is reasonably apparent from
the Conclusion recorded on page 8 of the decision (6/2). It seems to me that the Council were entitled
to conclude that, in the unusual circumstances, far removed from the paradigm
case, the refusal to make any grant was appropriate. It was certainly within the permissible field
of judgment or within the spectrum of reasonable decisions open to the
Council. Reading their decision as a
whole, fairly and reasonably in a common sense way, the refusal to make a grant
is intelligible and rational.
[65] In my opinion, therefore,
I cannot conclude that decision contains no or no adequate or intelligible
reasons for refusing to make a grant.
[66] Counsel seemed to be
agreed that there was no necessary correlation between the degree of negligence
by an applicant and the extent to which any grant falls to be restricted. That makes it particularly difficult to argue
that there has been an unreasonable exercise of discretion. Like Latham J in Ingman
(678d-e), where the degree of fault was said to be extraordinary and
exceptional, justifying the refusal to make any grant (674e), I am of the
opinion that, where the Council have found that the undertakings were of an
"exceptional nature", the transactions proceeded without Scottish legal advice,
and the circumstances of the case were exceptional (6/2 page 8), these
considerations alone entitled the Council to refuse to make any grant. That constitutes a sufficient, rational basis
for the exercise of the Council's discretion on quantum. Whether a differently
constituted Council or a Court would have made an award in full or restricted, does not matter.
[67] I doubt whether it is
necessary to embark upon such a rigid or discrete statutory analysis as
proposed by the petitioners. Whether the
Council asked themselves these questions, the answers to them are to be found
within the decision. They repeatedly
stated that there was lack of reasonable care on the part of the petitioners;
that such lack of reasonable care or negligence contributed to the petitioners'
losses. They also stated that no award
should be made i.e. a reduction of 100% (as in Ingman
at 674e).
Third Issue: Whether the Council have a general residual discretion,
apart from section 43(5) of the 1980 Act, to refuse to make a grant out of
the Guarantee Fund.
[68] In the light of my
opinion on the first and second issues, it is no longer necessary to decide the
third issue. However, as (i) it was argued before me, (ii) it is of some general
importance, and (iii) the dispute may not rest with my decision, I shall
express my views.
[69] Section 43 vests the
Guarantee Fund in the Law Society of Society.
It does not impose any express statutory duty to make payments out of
the Fund in specified circumstances. It
does not confer express statutory rights on persons who apply for grants and
meet certain criteria. Nor does it
expressly confer a statutory discretion, as the comparable provisions in England do, to make payments in appropriate
circumstances.
[70] From the passages in Hansard referred to in argument, the Parliamentary
intention in enacting the relevant part of the Legal Aid and Solicitors
(Scotland) Act in 1949 seems to have been to establish a Fund along similar
lines to the Fund established a few years earlier in England and Wales, with
some emphasis placed on the exercise of discretion having regard to the merits
of each case. Counsel
were unable to offer any explanation as to why the administration of the
English Fund should include a residual discretion to refuse applications but
the administration of the Scottish Fund should not. The underlying policy and objective of the
English and Scottish statutory schemes are substantially the same, if not
identical. The practices of solicitors
north and south of the border operate in a similar way albeit within a
different legal framework. Property is
bought and sold, estates are wound up; clients' money is held on or passes
through solicitors' accounts. Solicitors
stand in a position of trust. Similar
difficulties arise when that trust is breached, as some of the cases to which I
have been referred, demonstrate. Why
then should the later Scottish regime be construed as conferring by implication
statutory rights to payment of a grant and a statutory duty to pay, when the
English scheme on which it is broadly based does not do so? I cannot think of any reason.
[71] The absence of a residual
discretion might require the Council to pay an undeserving applicant, whether
or not he was far removed from the paradigm case mentioned above. Suppose a client and his solicitor enter into
an unlawful scheme or transaction e.g. which was contrary to public policy or
which involved defrauding a third party; the scheme involves the client
depositing £100,000 with the solicitor or his retaining such a sum in his hands
as a result of an earlier legitimate transaction; suppose the solicitor,
instead of carrying the scheme into effect, simply absconds with the £100,000
and is hopelessly insolvent. The client
has suffered pecuniary loss by reason of the dishonesty of the solicitor. But for that dishonesty, the client would not
have suffered that loss. Had the scheme
proceeded, the client might well have made off with a profit. Unless it could be said that the client was
negligent in depositing the money with the solicitor in the first place,
allowing him to retain it, or agreeing to the unlawful scheme, a grant would
have to be paid in the absence of a residual or general discretion to
refuse. No doubt further and better
examples can be found. It would seem odd
that a grant would have to be made to an applicant tainted with the very
dishonesty of the solicitor which enabled the application to be made in the
first place. I am reluctant to construe
section 43 as creating a scheme which imposes or might impose a statutory duty
to make a payment of a grant out of the Guarantee Fund in such circumstances.
[72] However, I consider that
my initial reluctance to accede to the petitioners' submissions should be
tested without reference to the English statutory provisions. Section 43 of the 1980 Act creates a
statutory fund, which is vested in the Law Society of Scotland. The fund is under the control and management
of the Council. The purpose of holding
the fund is to make grants in order to compensate persons who, in the opinion
of the Council suffer pecuniary loss by reason of dishonesty on the part of a
solicitor. Section 43(3) provides that
no grant may be made in certain circumstances. One might infer that if those circumstances
do not apply, and subject to any other provision, a grant may be
made. The distinction between mandatory
and directory provisions in Part II, and elsewhere in
Part III is relatively clear. Thus,
section 6 provides inter alia that no person shall
be admitted as a solicitor unless he is aged 21 years or over. In my view, the flavour of section 43 is
discretionary. That comes from the
absence of express statutory duties and rights, the phrases "control",
"management"; even the word "grant" has at least a mild discretionary
connotation. Counsel for the petitioners
submitted that in effect a statutory trust had been created. I agree.
I also agree with the Council's submissions that where no mandatory
words are used a power, and thus a discretion are more readily implied than a
duty. Moreover, the express provision
for the exercise of discretion in one situation does not imply a duty to pay in
all other situations. In England there is a general discretion. There is also, following the promulgation of
certain non statutory policies, a specific discretion where the applicant has
contributed to the loss (Ingman Foods at page 668j). If there is no general or residuary
discretion in the Scottish scheme, it is difficult to see how the Council could
issue guidance or policy statements.
Finally, it seems to me that the existence of a general or residuary
discretion is consistent with the finite nature of the fund and the limited
resources of those who are under obligation to contribute to it. In my opinion, therefore, the Council have a
general residual discretion, apart from section 43(5) of the 1980 Act, to
refuse to make a grant out of the Guarantee Fund. The provisions of Schedule 3 to the 1980
Act to which I was referred, do not affect that conclusion.
Remedy
[73] Had I decided the first
or second issue, and the third issue in favour of the petitioners, I would have
granted decree of declarator in terms of article 3(1)
of the Statement of Facts in the Petition and reduced the Decision of the
Council dated 30 April 2004 in terms of article 3(2). I would not have pronounced decree of declarator in terms of article 3(3) or 3(4) as amended, as
these raise matters which require the consideration of the decision maker,
namely the Council. Had I decided the
first or second issue in favour of the petitioner, and the third issue in
favour of the Council, I would not have pronounced decree in terms of article
3(3) and (4) as amended. The Council
would require to consider the question of the exercise
of their general or residuary discretion.
Summary
[74] 1. The Council applied the correct criteria to
the factual findings they made in order to determine whether there was
negligence on the part of the petitioners.
2. The petitioners have failed to satisfy me
that the Council was not entitled to make a finding of negligence on the part
of the petitioners. They have also
failed to satisfy me that the Council was not entitled to make a finding that
negligence on the part of the petitioners contributed to their losses.
3. The Council has a general residual
discretion, apart from section 43(5) of the 1980 Act, to refuse to make a grant
out of the Scottish Solicitors Guarantee Fund.
Result
[75] I shall sustain the
first, third, fourth and fifth pleas-in-law for the Council,
repel the pleas-in-law for the petitioners and dismiss the petition
Expenses
[76] I shall reserve all
questions of expenses meantime. I record
that at the conclusion of the third day of the Hearing on Thursday 6 July, by
which stage, the Dean of Faculty had completed part of his submissions, senior
counsel for the Council intimated that he was not available on the following
day, Friday 7 July, due to a commitment (a consultation) in London on that
day which it would be very difficult to re-arrange. He indicated that he had only been instructed
for three days. Fortunately, following
an adjournment, parties and the Court were able to find another date (Thursday
13 July) acceptable to all. At the
conclusion of his submissions on 13 July, the Dean of Faculty moved for "the
expenses of this continuation" principally because, as I understood him, this
caused extra expense to the petitioners' English solicitor, who required, so I
was informed, to be present throughout the Hearing. Following discussion with Mr Johnston at the
conclusion of his submissions, it was agreed that the question of such expenses
should be deferred meantime. There
seemed to be some doubt as to whether the First Hearing had been fixed for four
days or for three days. Parties produced
some correspondence on the matter. I
have asked the clerk of court to obtain information from the Keeper of the
Rolls on the allocation of the diet.
That information will be made available to the parties; the parties
themselves may wish to lodge relevant correspondence on the question if the
motion is to be pursued. It may be that
what is in issue is the extra travelling and subsistence expenses incurred by
the petitioners' English solicitor having to make an extra journey to and from Edinburgh. There
may, of course, be more to it than that.
