Scottish Court of Session Decisions

Pursuer: Davies; Morton Fraser

Defenders: McBrearty; Dundas & Wilson

25 April 2013

Introduction

[1] In this action the pursuer seeks reparation for loss and damage which she claims to have sustained as a consequence of negligence of the defenders while acting as solicitors on behalf of her aunt, the late Mrs Agnes Thomson Milligan ("Mrs Milligan"). The loss claimed by the pursuer consists of inheritance tax payable on a lifetime gift of a house to her by Mrs Milligan, which tax the pursuer avers could and would have been avoided but for the defenders' negligence. This is one of two parallel actions raised in relation to the same actings by the defenders; in the other action (Steven & Anor v Hewats), Mrs Milligan's executors seek reparation for a loss consisting of additional tax payable on her estate at death as a consequence of the lifetime gift of the house having become chargeable to tax. The two actions came before me together for debate on the procedure roll; this opinion is concerned with the action raised by the pursuer as an individual. For the full picture it may be desirable to read this opinion in conjunction with my opinion in the action by the executors.

The pursuer's averments

[2] The pursuer avers that after the death of Mrs Milligan's husband in 1974, Mrs Milligan had been the sole heritable proprietor of a house known as Ardlaggan, New Galloway, in which she resided. For reasons narrated in the pursuer's pleadings, the dominium utile and superiority of Ardlaggan were held by Mrs Milligan on separate titles. In 1996 Mrs Milligan instructed the defenders in relation to the preparation of a new will. The pursuer avers that the defenders also provided advice on "general estate planning". Mrs Milligan informed the defenders that she wished to make a gift of Ardlaggan to the pursuer with a view to reducing the value of her estate subject to inheritance tax in the event of her death. She wished, however, to continue to reside at Ardlaggan. The defenders advised Mrs Milligan that she should make an outright gift of the house to the pursuer but that she should obtain a separate undertaking from the pursuer to protect her right to stay at Ardlaggan. The defenders drafted a disposition of Ardlaggan in favour of the pursuer, which disposition was executed by Mrs Milligan on 26 March 1997 and registered by the defenders on behalf of the pursuer in the Land Register on 4 September 1998. The defenders also prepared a document for signature by the pursuer confirming that Mrs Milligan could stay at Ardlaggan for as long as she wished. A letter enclosing this document was sent to the pursuer on 20 March 1997 and stated inter alia as follows:

"We understand Mrs Milligan recently discussed with you the possibility of transferring Ardlaggan and the associated lands in New Galloway to you as an outright gift. Mrs Milligan is about the [sic] sign the title deed in your favour but would wish you to sign the enclosed document confirming that she may stay at Ardlaggan for as long as she wishes. In the event that you feel it appropriate, you should not hesitate to take independent legal advice on this document but we would ask you to have it signed and returned to us as soon as possible."

[3] The pursuer avers that in 2006 it was recognised that two errors had been made by the defenders in 1997. Firstly, the disposition granted by Mrs Milligan in favour of the pursuer had conveyed only the superiority and not the dominium utile of Ardlaggan. Secondly, Mrs Milligan's continuing occupation of Ardlaggan on the basis of the pursuer's letter, and without payment of a market rent, had the consequence that for inheritance tax purposes the house remained comprised in Mrs Milligan's estate because the transfer would be treated as a gift subject to reservation of benefit. These matters having come to light, a corrective disposition was prepared by the defenders, executed by Mrs Milligan on 6 October 2006 and registered in the Land Register on 25 October 2006. In return, the pursuer granted Mrs Milligan a lease of Ardlaggan at a market rent. Unfortunately, Mrs Milligan died on 6 January 2008. The transfer of Ardlaggan in 2006, having been made within seven years before her death, fell to be treated as a chargeable lifetime transfer for inheritance tax purposes. In this action the pursuer avers that she has thereby incurred a liability to pay tax of £51,600, being 40% of the value of the house after deduction of two annual exemptions and the £300,000 nil rate band in force at the time of Mrs Milligan's death. She avers that but for the defenders' negligence an effective gift would have been made in 1997 and the value of the house would not have been charged to inheritance tax at all.

[4] As regards duty of care, the pursuer makes inter alia the following averments: It was the defenders' duty in 1997 to take reasonable care to draft the description of the subjects to be conveyed so that the dominium utile of Ardlaggan was included in the conveyance. Further, the defenders knew or ought to have known that if Mrs Milligan continued to reside at Ardlaggan without paying a market rent then the transfer would be regarded as a gift with reservation of benefit with the effect that on her death the house would be treated as comprised within her estate for inheritance tax purposes. They knew or ought to have known that in these circumstances the pursuer would incur liability for inheritance tax which would diminish the value of the gift. In these circumstances, it was the defenders' duty to take reasonable care to advise Mrs Milligan that if she wished to remain at Ardlaggan she should enter into a lease of the house by the pursuer at a market rent. The defenders acted for the pursuer in drafting and arranging signature of the letter permitting Mrs Milligan to stay at Ardlaggan, and in registering the disposition on the pursuer's behalf. In any event they knew or ought to have known that the purpose of the gift was to mitigate the liability of Mrs Milligan's estate for inheritance tax and to transfer Ardlaggan to the pursuer free of any inheritance tax liability. In these circumstances, the pursuer avers that the defenders owed a duty of care to her as the beneficiary of the gift by Mrs Milligan.

The issue

[5] The issue debated before me in this action was whether, in the circumstances averred by the pursuer, the defenders owed a duty of care to her, in her capacity as the recipient of a lifetime gift of Ardlaggan by Mrs Milligan, so as to be liable to make reparation to her in respect of the loss that she claims to have sustained.

Arguments for the parties
Argument for the defenders

[6] On behalf of the defenders it was contended that the pursuer had failed to aver circumstances in which the defenders owed a duty of care to her to prevent her from sustaining the loss which she claimed to have suffered. Although the pursuer pleaded that the defenders acted for her in two specific matters (drafting and arranging for her to sign the letter permitting Mrs Milligan to remain at Ardlaggan, and registering the disposition in the pursuer's favour), this did not assist her case. Even if she succeeded in proving that the defenders acted for her - as opposed to Mrs Milligan - in relation to both of these matters, the former not being admitted, it was not suggested that the defenders' performance of these duties was negligent or caused the pursuer loss. Her case could only succeed by means of an unwarranted extension of the principle enunciated by the House of Lords in White v Jones [1995] 2 AC 207. The ratio of that decision was to be found in the speech of Lord Goff of Chieveley, whose concern was one of doing practical justice: there would be a lacuna if, as he put it, the only persons who might have a valid claim (the testator and his estate) have suffered no loss, and the only person who has suffered a loss (the disappointed beneficiary) has no claim. The solution to this "extraordinary fact" which Lord Goff proposed was to hold that the assumption of responsibility by a solicitor towards his client extended to an intended beneficiary who (as the solicitor can reasonably foresee) may, as a result of the solicitor's negligence, be deprived of his legacy in circumstances where neither the testator nor the estate will have a remedy against the solicitor. Counsel submitted that it would be wrong to extend this principle to the circumstances of the present case. In particular, where there was an actual or even a potential conflict of interest between the solicitor's client on the one hand and the beneficiary on the other, the solicitor ought not to be held to owe a duty of care to the latter. Reference was made to McLeod v Crawford 2010 SLT 1035. The present case concerned an inter vivos gift, a situation which Lord Goff distinguished from a testamentary disposition in White v Jones at page 262. The absence of conflict of interest in White v Jones was clear: the disappointed beneficiaries wanted legacies which the testator had wanted to give to them. In contrast, the course of action advocated by the pursuer in the present case required a two-stage transaction in which Ardlaggan was conveyed to the pursuer and then a lease was granted to Mrs Milligan at a market rent. Determination of an appropriate rent, and other conditions of the lease, would give rise at least to a potential conflict of interest between the donee and the pursuer. The transactional element of the present case took it outwith the scope of White v Jones. Circumstances in which a solicitor might owe a duty of care to the other party to a transaction were very limited: see Frank Houlgate Investment Co v Biggart Baillie 2010 SLT 527, Lord Drummond Young at para 19. This was not one of them. The pursuer had been aware of Mrs Milligan's intention to make the gift in her favour and, in particular, of the tax-saving motive for it. Had the defenders given the advice which the pursuer now averred they ought to have given, she would have been aware that she would require to grant a lease and assume the obligations of a landlord. There was no reason why she should not have obtained separate legal advice (as indeed the defenders had suggested when sending her the letter for signature). It could not be said, in these circumstances, that there had been an assumption of responsibility by the defenders towards the pursuer.

[7] The present case was also distinguishable from White v Jones on the ground that there was no lacuna, and hence no extraordinary situation requiring the fashioning of a remedy. The errors were discovered during the lifetime of Mrs Milligan, who would herself have had a right of action, at the very least, for the cost of the remedial action taken in 2006. Any claim by the client or the client's representative was sufficient to exclude the existence of a lacuna, even if it was a claim for a different loss. Reference was again made to McLeod v Crawford, at paras 29-32.

Argument for the pursuer

[8] Counsel for the pursuer moved me to allow a proof before answer. It could not be said at this stage that the action was certain to fail. The core issue was whether there had been an assumption of responsibility by the defenders towards the pursuer. The principles enunciated by the House of Lords in White v Jones and in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, which cases were heard consecutively, were broad enough to be capable of encompassing the circumstances of the present case. In particular, they were capable of applying to an inter vivos transfer: see e.g. McDonald-Grant v Sutherland & Co [2008] CSOH 150, Lord Matthews (obiter) at para 880. The case of McLeod v Crawford founded on by the defenders was distinguishable; indeed Lord Woolman in that case (at para 50) had expressly distinguished "disappointed beneficiary" cases. A transactional element did not as a matter of law exclude the application of White v Jones: by way of example, the English case of Vinton v Fladgate Fielder [2010] PNLR 26 concerned family transactions carried out for purposes of tax mitigation but it was not accepted that there was clearly such conflict of interest as to render liability on the basis of White v Jones impossible. The authorities regarding the absence of duty owed by a solicitor to the other party to an arm's length transaction were not relevant to an intra-family transaction with a shared purpose.

[9] With regard to the lacuna argument, it was not correct to assert that where more than one party suffered a loss, a claim by one excluded any claim by another, provided that there is no double recovery of the same loss. Reference was made to Carr-Glynn v Frearsons [1999] Ch 326, Chadwick LJ at 337-8. Even if the testatrix would have had a claim for remedial costs incurred during her lifetime, this would not have excluded the pursuer's claim for a different loss.

Discussion

[10] There can be little doubt, in my opinion, that the principle enunciated in White v Jones is applicable in Scotland: see Robertson v Watt & Co, 2^nd Division, 4 July 1995, unreported, and the discussion of that case by the Lord Ordinary (Kingarth) in Holmes v Bank of Scotland 2002 SLT 544 at paras 8-11. The defenders did not suggest otherwise in the argument before me. It is noteworthy that in some of the English decisions that have followed White v Jones, the court has referred to "extending" the principle to the circumstances of the instant case. For my part I would respectfully prefer, according to Scots methodology, to seek to identify the principle and then to assess whether the facts averred by the pursuer are or are not capable of falling within its scope.

[11] Approaching the matter in this way, I accept the submission of counsel for the pursuer that the key concept underlying the decision in White v Jones is assumption of responsibility. More specifically, responsibility to an intended beneficiary may be held to have been assumed where the solicitor can reasonably foresee that negligence on his part would deprive the beneficiary of a benefit which the solicitor's client intended that beneficiary to receive, in circumstances where no right of action is available to the client or his or her estate. The purpose of the principle, in my opinion, is to ensure, on the one hand, that there is no lacuna in which a loss sustained as a result of the solicitor's negligence cannot be recovered by anyone and, on the other hand, that the same loss cannot be recovered twice.

[12] There is, in my opinion, no reason why inter vivos gifts should not be capable of falling within the scope of the White v Jones principle. I find the following passage from Lord Goff's speech instructive in this regard:

"Let me take the example of an inter vivos gift where, as a result of the solicitor's negligence, the instrument in question is for some reason not effective for its purpose. The mistake comes to light some time later during the lifetime of the donor, after the gift to the intended donee should have taken effect. The donor, having by then changed his mind, declines to perfect the imperfect gift in favour of the intended donee... I for my part do not think that the intended donee could in these circumstances have any claim against the solicitor. It is enough, as I see it, that the donor is able to do what he wishes to put matters right. From this it would appear to follow that the real reason for concern in cases such as the present lies in the extraordinary fact that, if a duty owed by the testator's solicitor to the disappointed beneficiary is not recognised, the only person who may have a valid claim has suffered no loss, and the only person who has suffered a loss has no claim."

This passage seems to me to make clear that what matters, so far as the principle is concerned, is not whether the gift is testamentary but rather whether the consequences of the negligent act are capable of being rectified by the solicitor's client. Only if they are not does the concern underlying the principle arise.

[13] The position of a donee may, however, differ from that of a testamentary beneficiary in one respect. The testamentary beneficiary will inevitably be an entirely passive recipient of benefit. A donee may or may not be a passive recipient. The question then arises of whether the existence of a transactional element in a lifetime gift takes it outwith the scope of the White v Jones principle. In my opinion the answer to that question will vary according to circumstances. The test, in my view, is still the same, namely whether the donor's solicitor can be held to have assumed responsibility towards the recipient of the gift. In some cases the existence of a conflict of interest between donor and donee may afford an indication that there has been no such assumption of responsibility. I do not, however, consider that a hypothetical possibility of a conflict of interest arising is necessarily sufficient in itself. The case of McLeod v Crawford does not, in my opinion, provide support for the latter proposition. That case (which pre-dated the entry into force of the Rights of Relatives to Damages (Mesothelioma) Scotland) Act 2007) concerned a decision made by a man who developed breathing difficulties as a result of exposure to asbestos. His employers' insurers sent a settlement offer to his solicitors of a payment in full settlement or, alternatively, a lesser sum by way of provisional damages. Having been informed by his solicitors of the former offer but not the alternative, he accepted the offer. He subsequently developed mesothelioma and died. His widow and family sued the solicitors for the loss they claimed to have sustained as a consequence of the failure to advise him of the alternative, arguing that if he had been properly informed, he would have elected for provisional damages, which was also what the family members would have wished. The Lord Ordinary (Woolman) held that no duty of care was owed by the solicitors to the family members. His Lordship observed (para 42) that at the stage when the defenders advised their client of the offer, "...the potential for a conflict of interest could clearly arise". The family might have divergent views on whether the offer of provisional damages should be accepted; if indeed they had shared the same view and wished the same outcome, that was fortuitous. It appears to me that in the circumstances of that case the conflict was real and readily apparent at the time when the decision on the insurers' offer had to be made. I note also that this was only one of a number of factors which, in Lord Woolman's view, distinguished the case from White v Jones. Another was the issue of assumption of responsibility. Lord Woolman's view (paras 49 and 50) was as follows:

"...It is hard to see why the defenders should be deemed to have assumed to take responsibility for the interests of the pursuers when they advised Mr McLeod. He was the best judge of what was correct for him. If he had been presented with the choice offered by the insurers, he may have had a host of reasons for deciding to elect for a full and final settlement, rather than provisional damages.

I believe that an extension of liability is not warranted, because the necessary proximity is not present... The position is very different in the 'disappointed beneficiary' cases where - without making any further inquiry - the solicitor knows the names of the beneficiaries and the effect any failure to comply with the testator's instructions will have upon them. As Lord Browne-Wilkinson stated 'the solicitor who accepts instruction to draw a will knows that the future economic welfare of the intended beneficiary is dependent upon the careful execution of his task' (p 275F-G)."

I respectfully agree with Lord Woolman's distinction.

[14] Nor, in my opinion, is the present case determined by application of the authorities to which I was referred concerning the restricted circumstances in which a solicitor may be held to owe a duty of care to the other party to a transaction. Cases such as Frank Houlgate Investment Co Ltd v Biggart Baillie LLP, and the authorities cited therein by Lord Drummond Young, are concerned with transactions between persons dealing with one another at arm's length, and it is not difficult to understand why the solicitor for one party should not, save in exceptional circumstances, be held to have assumed a responsibility to avoid causing loss by negligence to the other party. In my view, there is nothing in this line of case law to exclude assumption of responsibility where the solicitor is instructed by a party to an intra-family transaction whose sole or principal purpose is to confer benefit upon the other party at the expense of the solicitor's client.

[15] In the course of the hearing before me I was referred to a number of English authorities. It was common ground between the parties that these should be approached with circumspection because there are certain statutory provisions relevant to the English law analysis which have no application in Scotland. I do, however, derive assistance from the decision of Norris J in Vinton v Fladgate Fielder [2010] PNLR 510, in which a firm of solicitors sought unsuccessfully to strike out claims by the executors and beneficiaries of a deceased client as disclosing no reasonable grounds for bringing the claims, and accordingly being bound to fail. In this case a family company (Wilton) required an injection of funds at a time when one of its shareholders (referred to in the judgment as "the Widow") was seriously ill. The solicitors were instructed to effect the injection of funds in a way which would maximise the availability of business property relief from inheritance tax on the death of the Widow. It was alleged that they had negligently failed to do so, so that a substantial amount of relief was lost. The defendants contended that White v Jones could not be applied to any case in which the interests of the beneficiaries conflicted or potentially conflicted with those of the client. Norris J declined to accept that there was a conflict of interest such that application of the White v Jones principle was impossible. He observed (para 25):

"...Wilton had need of capital. It was looking to its existing shareholders for that capital. It therefore needed to raise capital in a way that appealed to its existing shareholders... The Particulars of Claim allege (and it must on this application be accepted as true) that successful inheritance tax planning was an overriding consideration in that nothing was to be undertaken which did not achieve it. Wilton's need for capital did not conflict with the Widow's desire for inheritance tax planning. The Widow was willing to provide capital to Wilton if it could be done in a tax-efficient manner. Both Wilton and the Widow wanted [the defendants] to come up with a tax efficient (rather than a tax inefficient) scheme. There is a real prospect of establishing that there was a unity of interest in raising capital in an inheritance tax efficient way."

It is apparent that Norris J did not see the transactional element of the tax planning scheme as precluding the application of White v Jones, and that the issue of whether or not there was unity of interest was regarded as an issue to be decided after evidence was led. In my opinion the case affords support for the proposition that potential conflict of interest is not sufficient to exclude its application, and that the question whether the existence of an actual conflict of interest is sufficient to do so is a matter to be decided on the whole facts and circumstances of the case.

[15] In the present case the pursuer avers that the course of action which ought to have been adopted, following the transfer of the house by Mrs Milligan, was the grant of a lease at a market rent by herself to Mrs Milligan. The pursuer offers to prove that if she and (more importantly) Mrs Milligan had been advised that this was what was required in order for the gift not be treated as made subject to reservation of benefit, then they would have entered into such a lease. In support of this averment the pursuer is able to assert that this is what in fact was done in 2006 when the defenders' two errors came to light. In my opinion these are matters for proof. It cannot, in my view, be said at this stage that the pursuer's case must necessarily fail on the ground that there is a conflict of interest sufficient to exclude the application of the White v Jones principle. Putting the matter a little more broadly, it cannot be said at this stage that the circumstances are such that the defenders could not be held to have assumed responsibility to the pursuer to take reasonable care to avoid causing her loss through negligence in their advice to and actings on behalf of Mrs Milligan. These, in my opinion, are matters to be addressed after evidence has been led. It may be that the pursuer's averments that the defenders acted for her (rather than Mrs Milligan) in the two respects mentioned in paragraph 4 above will also have some relevance in this context.

[16] I reject the defenders' contention that in the present case there is no lacuna necessitating the application of the White v Jones principle. In the end, as I understood the defenders' position, the only basis of this contention was an argument that the deceased herself might have sustained a loss during her lifetime, even if that loss consisted only of the cost of the legal work carried out in 2006 in an attempt to put right the previous errors. (I observe in passing that there are no pleadings to the effect that Mrs Milligan incurred any such cost.) In my opinion, even if it were to be established that some kind of loss was sustained by Mrs Milligan or by some other person, this would not of itself exclude the pursuer's claim on the basis that no lacuna was demonstrated. I am in respectful agreement with the approach adopted by the Court of Appeal in Carr-Glynn v Frearsons (above). In this case the testatrix bequeathed to the plaintiff a share of a property which the testatrix owned jointly with a nephew. The plaintiff alleged that the testatrix's solicitors had negligently failed to advise her to sever the joint tenancy, with the consequence that the property vested automatically in the nephew on the testatrix's death and the legacy to the plaintiff failed to take effect. One of the arguments presented by the solicitors was that no lacuna existed because a claim lay at the instance of the testatrix's estate, to the benefit of the residuary beneficiary (who was not the plaintiff). To allow a claim by the plaintiff based on White v Jones, it was said, would lead to double recovery and double liability. The court rejected this argument, Chadwick LJ observing (page 337-8):

"...There is no reason in principle, as it seems to me, why, in cases of this nature, the law should not impose complementary duties; so that for breach of the one the specific legatee is enabled to recover the loss which he has suffered and for breach of the other the personal representatives are enabled to recover, and recover only, the loss suffered by the other persons interested in the estate. Justice will be done to each of the three interests concerned - the specific legatee, the estate and the solicitors - if solicitors who, in the course of carrying out the testators' testamentary instructions, have failed to take care to ensure that the relevant property forms part of the estate are liable to compensate the specific legatee for the loss which he has suffered as a result of the breach of duty owed to him; and are liable to compensate the estate for the loss (if any) suffered by the other persons interested in the estate for breach of the duty owed to the testator."

It seems to me that these observations may be applied with equal force in the present case. There is, in my opinion, no reason in principle why the existence of a claim for loss sustained as a consequence of a solicitor's negligent act or omission should of itself exclude the making of a White v Jones claim for a different loss sustained by a different person as a consequence of the same act or omission. In the circumstances of the present case it would seem to me to be absurd to hold that the pursuer's claim would be excluded if it were the case that Mrs Milligan had sustained an entirely different loss consisting of the cost of the ultimately unsuccessful remedial conveyancing.

Disposal

[17] For these reasons I conclude that the relevancy of the pursuer's case falls to be determined after inquiry, and I shall allow a proof before answer, with all pleas in law left standing. In the light of my decision in the parallel action at the instance of the executors, I propose to put the two actions out By Order together to enable parties to address me on further procedure.