In short

A solicitor stole large sums from client account over several years while his accountants certified, year after year, that the accounts were in order. The Law Society, as trustee of the compensation fund, later paid the stolen money back to clients and sued the accountants in negligence and in fraud. The claim form in negligence was issued more than six years after the thefts, but within six years of the first decision to pay out of the fund.

The Court of Appeal, by a majority, held that the Society suffered no actionable damage, and so had no negligence cause of action, until it first resolved to make a payment from the fund. A mere risk that the fund might one day be called on, even after a later theft, was not enough. The Society's appeal on that limitation point succeeded, so the negligence claim could proceed.

The fraud claim failed. Time under the postponed fraud period had started once the Society could, with reasonable diligence, have discovered the fraud, and it had not shown that it could not have done so by the end of 1996. The accountants were not estopped from taking the limitation point. One member of the court would have held that even the negligence claim was already out of time.

Decision

The Society's appeal on when the negligence cause of action accrued allowed. [158]
The fraud action dismissed. [158]

Issues

Did the Society's negligence cause of action against Sephtons accrue on the first misappropriation after each accountant's report, or only when the Society first resolved to pay a client out of the compensation fund?
Only when the Society first resolved to pay. Until then the fund faced a risk of loss, not measurable damage; the Society was not party to an inadequate transaction that immediately diminished an asset or created a present obligation. [134]
The test
The tort of negligence is not complete until actual damage is suffered. Risk of loss is not enough.
Had the Society discovered Mr Mascord's alleged fraud, or could it with reasonable diligence have discovered it, more than six years before the fraud claim was issued on 2 December 2002?
Yes. Section 32 assumes a claimant who wants to know whether there has been a fraud. The Society failed to prove that it could not with reasonable diligence have discovered the fraud by 1 December 1996. [125]
Did Sephtons' solicitors represent that no limitation defence would be taken, so as to estop Sephtons from relying on the 1980 Act?
No. A request to wait for another case carried no implied promise, and the May 2001 letter was too tentative and without prejudice to amount to a clear representation that limitation would not be raised. [131]

Reasoning

The majority holds that the Society's cause of action on each report accrued on the date it first resolved to pay compensation from the fund to a client whose money was stolen after that report. [134]
No relevant measurable loss was suffered until that first determination to meet a claim; a possible qualification for a wrongful refusal or unreasonable delay does not arise on these facts. [136]
The reports did not involve the Society acquiring an asset or a right; they involved it doing nothing. An increased risk of loss to the fund, without diminution of any right or asset, is not enough to start time under section 2. [144]
The trigger for actual damage is typically a legal transaction to which the claimant is a party, leaving a right less valuable or an obligation more onerous; a mere increased possibility of damage is not enough. [152]
The fund was not party to Mr Payne's dealings with his clients, and those dealings imposed no liability, contingent or otherwise, on the fund. Any potential liability arose from pre-existing statutory functions. [157]
It is inherent in section 32(1) that the claimant is assumed to want to discover whether there has been a fraud; otherwise the word 'could' and the idea of reasonable diligence lose much of their force. [116]
From the date of intervention the Society had all of Payne & Co's papers, and the time it later took from first considering fraud to issuing the claim is a guide to what reasonable diligence could have achieved in 1996. [118]
The Society failed to prove that it could not with reasonable diligence have discovered the fraud by 1 December 1996, and on the findings that conclusion was probably the only one open. [125]
A genuine request that the Society wait for the outcome of another case was not an implied statement that no limitation point would be taken; a proposed defendant is entitled to assume the intending claimant can look after itself on limitation. [127]
The 18 May 2001 letter indicated that a concession of liability was likely, but it was conditional, made clear that liability was not then conceded, and was written without prejudice, so it was not a clear representation that limitation would not be raised. [128]
The Society's estoppel argument is therefore rejected. [131]

Written by AI from the judgment on 2 September 2026. Each ¶ links to the paragraph it came from. Read those before relying on it.

▶Statutes Cited14

▶Case Law Cited26

▶Cited By42

The Law Society v Sephton & Co & Ors [2004] EWCA Civ 1627

Case No A3/2004/0372/CHANF

[2004] EWCA Civ 1627

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

(Michael Briggs QC sitting as a Deputy Judge)

HC020C01293

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date Monday, 13 th December 2004

Before

LORD JUSTICE CARNWATH

LORD JUSTICE NEUBERGER

LORD JUSTICE MAURICE KAY

Between

THE LAW SOCIETYAppellant

SEPHTON & CORespondents

TANIA LINDSEY MASCORDRespondent

JAMES ARTHUR SEPHTONRespondent

PHILIP LESLIE HOUSTONRespondent

ALEXANDER WILLIAM GORDON CUNNINGHAMRespondent

(Transcript of the Handed Down Judgment of

Smith Bernal Wordwave Limited, 190 Fleet Street

London EC4A 2AG

Tel No: 020 7421 4040, Fax No: 020 7831 8838

Official Shorthand Writers to the Court)

Timothy Dutton Esq, QC&Miss Rosalind Phelps

(instructed by Wright Son & Pepper) for Law Society

Michael Pooles Esq, QC, &Derek Holwill Esq

(instructed by Barlow Lyde & Gilbert) for Respondents

Judgment

[1]This is an appeal against a decision of Mr Michael Briggs QC, sitting as a Deputy Judge of the High Court, who effectively dismissed, on the ground that they were time-barred, claims brought by the Law Society (“the Society”). The claims were based on allegations of negligence and of fraud against a firm of accountants, Sephton & Co (“Sephtons”, as I shall refer to the defendants), who had provided unqualified annual reports on a solicitor’s practice, Payne & Co, carried on by a Mr Andrew Payne between 1989 and 1995. In fact, Mr Payne had been misappropriating his clients’ monies, and, as a result of his being permitted to continue in practice he misappropriated further monies. These monies were eventually repaid to the clients concerned out of the Solicitors’ Compensation Fund (“the Fund”), of which the Society is trustee.

[2]The three preliminary issues before the judge were effectively as follows: i) Did all or any of the causes of action in negligence which the Society alleged against Sephtons first accrue more than six years before the action was brought, in light of the provisions of s2 of the Limitation Act 1980 (“the 1980 Act”)? ii) In light of the provisions of s32 of the 1980 Act, did all or any of the Society’s causes of action in fraud against Sephtons first accrue more than six years before the action was brought? iii) If and to the extent that the Society’s claims against Sephtons were time-barred, were Sephtons estopped from relying on the provisions of the 1980 Act?

[3]The judge decided all three issues against the Society, with the result that all its claims were time-barred, and consequently he dismissed the claims in their entirety.

[4]I shall first set out the basic facts, which are all that is needed to deal with the first issue. I shall then turn to the further facts which are relevant to the second and third issues. I shall then briefly deal with the law relating to the functions of the Society and the Fund, and will then turn to each of the three issues which the judge decided.

The basic facts

[5]Mr Payne was admitted as a solicitor in 1977 and started practising on his own under the style of Payne & Co, from 1986 in Knowle, West Midlands. Pursuant to s34 of the Solicitors’ Act 1974 (“the 1974 Act”) he was obliged to deliver to the Society a report signed by an accountant, containing the information prescribed by the Accountant’s Report Rules 1986 and 1991, in respect of each period of 12 months ending on 31st October. Mr Payne retained Sephtons for that purpose, and, for each of the years ending 31st October 1988-1995 inclusive, Mr Payne delivered to the Society an annual report (a “Report”) signed by a Mr Mascord, a partner in Sephtons. The first Report was dated 5th January 1989, and the last 8th November 1995.

[6]There is no need to describe the contents of the Reports in any detail. It suffices to say that each of them recorded that Mr Mascord had examined all the relevant documents of Payne & Co, and was satisfied that Mr Payne had substantially complied with Solicitors’ Accounts Rules, and that the monies in his client accounts were consistent with what was in the relevant ledger accounts.

[7]As Sephtons now admit, none of the matters certified in the Reports was true: Mr Mascord had not examined Mr Payne’s documents, Mr Payne was plainly in breach of the Solicitors’ Accounts Rules, and there was a very large, and increasing client account shortfall throughout the six year period, owing to Mr Payne’s persistent misappropriations of his clients’ funds.

[8]Although not admitted by Sephtons, the Society’s case is that, between January 1990 and March 1996, Mr Payne misappropriated a total of well over £750,000 from his client account. Having been struck off the roll in February 1997, Mr Payne was convicted in July 1998 of theft, forgery and procuring a valuable security by deception, and he was sentenced to five years in prison.

[9]Although it is not admitted on the pleadings, it is right, as the judge said, for the purpose of the preliminary issues, to assume that the Society relied upon the Reports, and the representations in them, when deciding not to exercise any of its powers to investigate, or to intervene in, the practice of Mr Payne, until 1996.

[10]The first complaint that the Society received about Mr Payne was from a Mr Bradley in a letter dated 31st August 1995 to the Solicitors’ Complaints Bureau (“the Bureau”). Mr Bradley explained that Mr Payne had acted for him in connection with a claim which had resulted in an award of £43,000, none of which Mr Bradley had received. On contacting Mr Payne, the Bureau was told that the payment was being held up while he drew up a discretionary deed of trust for which he had instructions from Mr Bradley. At that time, the Society considered that Mr Payne was guilty of no more than unreasonable delay in complying with instructions, and, by March 1996, it appears that he had told the Bureau that Mr Bradley had been paid. However, towards the end of April 1996, Mr Bradley again contacted the Bureau to say that he had not been paid, whereupon the Bureau asked Mr Payne for an explanation, which was not forthcoming. In the judge’s words, “events then took a commendably rapid course”. Mr James, the Chief Investigation Accountant to the Society, caused an inspection of Mr Payne’s books to take place, which was carried out on 14th May 1996. Four days later, he produced a report which showed a deplorable state of affairs, including a minimum deficiency of £763, 956 of which Mr Payne was able to pay only £3,653 from office account. Mr James drew attention to the unqualified nature of Mr Mascord’s Reports. He also reported that there had been a misappropriation of £50,000 as long ago as June 1991, and misuse of another £112,000 as late as December 1995.

[11]As a result of Mr James’s report, the Society immediately wrote to Mr Mascord seeking an explanation and intervened in Mr Payne’s practice on 20th May 1996. This intervention effectively involved taking over Mr Payne’s practice including all the accounts and papers. Unhappily Mr Mascord committed suicide.

[12]On receipt of Mr James’s report, it was clear to the Society that claims would be made against the Fund by former clients of Mr Payne, whose monies he had misappropriated. The first such claim was made on 8th July 1996. Accordingly, in August 1996, the Society instructed solicitors, Wright Son & Pepper (“Wrights”) in connection with possible proceedings on its behalf, as trustee of the Fund against Sephtons in respect of losses to the Fund, arising from the affairs of Payne & Co. Eventually, on 16th May 2002, proceedings based on the negligence of Mr Mascord were issued. By those proceedings, the Society sought damages from Sephtons (or, to be more precise, from Mrs Mascord, the widow and personal representative of Mr Mascord, and the former partners of Mr Mascord). The essence of the Society’s pleaded case was that it was entitled to recover from Sephtons all sums which had been paid out of the Fund to former clients of Payne & Co to compensate them for the sums they had lost through Mr Payne’s misappropriations, starting with the first misappropriation following the receipt of the first of the negligent Reports to the Society.

[13]Subsequently, on 2nd December 2002, a second set of proceedings was issued by the Society seeking substantially the same relief, but based on the alleged fraud of Mr Mascord, as opposed to the negligence alleged in the first proceedings.

[14]Because the defendants alleged that both claims were time-barred, the Master ordered a determination of the preliminary issues which came before Mr Briggs QC. He was understandably concerned about the determination of limitation points by way of a preliminary issue, especially in relation to a disputed allegation of fraud. However, given that the parties both agreed that it was appropriate, indeed desirable, to proceed with the preliminary issues, and, and as he felt able to do so, he determined them.

[15]The facts set out above are sufficient to deal with the first issue, namely when the Society’s causes of action in negligence accrued, but it is now necessary to set out additional facts in order to deal with the other two issues, namely, when time began to run in relation to the causes of action in fraud, and whether the defendants are estopped from relying on the 1980 Act.

Events between July 1996 and December 2002

[16]As mentioned, Mr James’s report of May 1996 to the Bureau drew attention both to the deficiency of over £750,000 in Payne & Co’s client accounts and to the unqualified nature of the Reports prepared by Mr Mascord between 1989 and 1995. Mr Iain Miller was the partner at Wrights acting for the Society. He formed the view, when he was instructed in August 1996, that, to quote the judge, “a comparison between Mr Mascord’s unqualified Reports and Mr James’s report of 17th May 1996 disclosed a clear prima facie case of negligence which called for no deeper investigation of its merits prior to establishing whether [Sephtons] had insurance cover which was likely to respond to the claim”. On 8th October 1996 Mr Miller wrote to Sephtons, enclosing Mr James’s report, and, after referring to the Reports, he stated that no accountant acting with reasonable care could have failed to discover the irregularities at Payne & Co or submitted unqualified Reports.

[17]In early November 1996, Sephtons replied to Mr Miller stating that they had notified their own solicitors, M & S Solicitors of Leicester (“M & S”) and also their insurers’ solicitors. Neither of those solicitors contacted Wrights, and accordingly Mr Miller wrote to M & S, who eventually replied on 17th January 1997 denying any duty of care or any negligence. The fact that it was M & S, Sephtons’ solicitors, who replied to Mr Miller suggested to him that there might be uncertainty as to whether Sephtons had appropriate insurance cover. When he raised that question, the response from M & S, dated 27th January 1997, did not deal with it. Mr Miller then did nothing for over two years, because, as he explained to the judge, the absence of any substantive response on behalf of Sephtons’s insurers led the Society to have real doubts as to whether it was worth pursuing any claim.

[18]By March 1999, most of the claims on the Fund by Mr Payne’s clients had been met. What the judge called “the very substantial size of the Fund’s loss” led to Mr Miller writing to M & S on 10th March 1999, seeking confirmation that they were still instructed, and notifying them of the Society’s intention to proceed with a claim against Sephtons. This led to a response from Barlow Lyde & Gilbert (“Barlows”) six days later, giving notice that they had been instructed in place of M & S. The judge had no doubt that, as a result of this change of solicitors, Mr Miller must have assumed that Sephtons’ insurers had become actively involved.

[19]In light of the then-recent Woolf Report and CPR, Wrights and Barlows agreed that it would be sensible to identify the likely issues in advance of the commencement of proceedings. Pursuant to a request from Barlows dated 5th March 1999, Wrights provided draft Particulars of Claim (together with a schedule of the payments made by the Fund) under cover of a letter dated 12th May 1999. That letter invited Barlows to identify:

“(1) those issues which your client is able to agree; (2) those issues which your client disputes and why.”

[20]On 11th June, Barlows replied pointing out that the draft Particulars of Claim raised “the significant issue of whether Sephtons owed a duty of care to the Law Society [as] trustee of the Compensation Fund”. The letter went on to point out that there were currently proceedings on foot between the Society and KPMG Peat Marwick (“KPMG”) in which that issue would have to be determined “as part of a preliminary issue later this year”.

[21]Although he did not expressly agree to this course, Mr Miller was prepared to adopt it. The judge considered that Mr Miller was not concerned about any limitation point, because he believed that time could not have started to run against the Society until its intervention in Mr Payne’s practice, namely 21st May 1996, at the earliest.

[22]Following the decision of Sir Richard Scott, V-C in the Law Society’s favour in the KPMG case (reported at

[2000] 1 All ER 515

), Mr Miller renewed his invitation to Barlows to identify the issues in the present case, in a letter of 11th November 1999. Barlows replied, indicating that, as KPMG were seeking to appeal, it would be sensible to await the outcome of that appeal. Although Mr Miller was not entirely happy with that course, he went along with it. The Court of Appeal upheld the first instance decision on 29th June 2000, reported at

[2000] 1 WLR 1921

, but further time elapsed while KPMG tried, albeit unsuccessfully, to obtain permission to appeal to the House of Lords (see

[2001] 1 WLR 1122

). Thereafter, on 7th March 2001, Mr Miller asked Barlows to give a considered response to the proposed claim against Sephtons, and Barlows provided such a response in a “without prejudice” letter of 18th May 2001.

[23]The terms of Barlows’ letter of 18th May to Wrights included the following:

“Since we last wrote, we have spent a considerable amount of time discussing this matter with our clients and they have, with some reluctance, now instructed us that they would be prepared to concede liability on breach of duty to the Law Society in respect of the accountant’s reports which were prepared for Payne & Co. However, we have advised our clients that we need to investigate the prospect of establishing contributory negligence by the Law Society and, therefore, before our clients would be prepared to make such a concession in respect of breach of duty, we should like to have access to your client’s files regarding Payne & Co. … Our clients also wish to be satisfied about the quantum of the Law Society’s claim. [The letter then sought details of payments that had been made out of the fund to former clients of Payne & Co]. Thereafter, we would have thought that it would be sensible, once we have been able to review this additional material, to have a without prejudice meeting with you.”

[24]As the judge found, Mr Miller did not consider whether the letter contained any indication on behalf of Sephtons on the issue of limitation, no doubt because it did not occur to him that there was any problem in this connection, because he believed that time could not have started to run until the date of the intervention.

[25]It took the Society some six months to provide, through Wrights the documents requested by Barlows in that letter. Further correspondence then followed. In one letter, dated 10th January 2002, Wrights suggested that Barlows had admitted liability on behalf of Sephtons, but Barlows corrected this in a reply dated 28th January 2002, pointing out that what was characterised by Wrights as a concession had not been made without reservations.

[26]After further correspondence, Wrights wrote to Barlows on 18th April 2002 accusing them of seeking documents as part of a “fishing expedition”, and stating that counsel had been instructed to settle the claim and asking whether Barlows had authority to accept service.

[27]Barlows’ response, some two weeks later, was to press for the negotiations to continue, with a view to having a “without prejudice” meeting, a proposal rejected by Wrights in a letter of 14th May 2002 “in view of the fact that the limitation period will expire shortly”. On 20th May, not knowing that proceedings based on the negligence of Sephtons, had been issued four days earlier, Barlows wrote to Wrights stating that they did not accept that the limitation period had yet to expire. This was said to be on the basis that the recent decision of the House of Lords in Cave -v- Robinson Jarvis & Rolfe

[2003] 1 AC 384

established that “the limitation period for all your client’s claims against our client expired long ago”. This was not accepted by Wrights, who then proceeded to serve the notice of claim in the negligence proceedings.

[28]Although Barlows thereafter continued to act for Mr Mascord’s former partners, they advised Mrs Mascord, as Mr Mascord’s personal representative, to take independent advice, and, on 18th June 2002, Sidney Mitchell wrote to Wrights stating that they were acting for Mrs Mascord, and seeking an extension of time for her defence. The fact that Mrs Mascord had become separately represented prompted Mr Miller to consider whether Mr Mascord may have acted fraudulently, because that would have meant that there was a conflict of interest between him (and consequently his estate) and Sephtons’ insurers. Wrights accordingly sought the advice of counsel in relation to the possibility of alleging fraud against Mr Mascord.

[29]Counsel advised that it would proper to plead fraud on the basis that Mr Mascord could not have carried out the work required by the Accountant’s Report Rules, and therefore could not have honestly stated in each of the Reports that he had done so, provided that Barlows were first asked to disclose Mr Mascord’s working papers. If Barlows refused to disclose those papers, or if the papers were disclosed and showed that Mr Mascord had not carried out the work he said he had carried out, the advice was that proceedings for fraud could be brought. In effect, it appears that counsel took the view that, armed with a refusal to provide the working papers or with helpful evidence from the working papers, there would be sufficient to plead fraud in light of the state of Mr Payne’s accounts, the suicide of Mr Mascord, and the apparent repudiation of liability by Mr Mascord’s insurers.

[30]Accordingly, on 11th September 2002, Wrights wrote to Barlows stating that there was a possibility that some of Mr Mascord’s representations in the Reports were fraudulent, and seeking disclosure of his working papers, together with any correspondence with Payne & Co. After initially refusing to do so, on 17th September, Barlows indicated that they would consider that request if they could see a copy of the proposed pleading of fraud, which was duly supplied to them on 23rd September 2002, in the form of draft amended Particulars of Claim in the first action. The draft amended case in this connection was to the effect that Mr Mascord knew that there had been significant breaches of the Solicitors’ Accounts Rules, at the latest by the date of the final Report. It appears that this was based on the contents of an interview with Mr Payne which had not been provided to the Society’s counsel when they had advised, but was provided to them at the time the draft amended pleading was prepared. The following day, Barlows agreed to disclose the working papers.

[31]The letter of 23rd September, which enclosed the draft amended Particulars of Claim, “read objectively, included a clear statement to the effect that the Society had by then decided to plead fraud, even though it reiterated a request for advance disclosure of Mr Mascord’s working papers”, as the judge rightly recorded. However, according to the evidence given by Mr Miller, such a decision had not actually been made. The judge, understandably, found that inconsistency puzzling, but he resolved it in a plainly sensible way. He concluded that, when Barlows refused to disclose the working papers in their letter of 17th September, Mr Miller decided that fraud could properly be pleaded, although counsel took a different view, and this division of opinion was overtaken when, on 24th September, Barlows agreed to supply the working papers. To quote the judge:

“Thereafter common sense and prudence dictated delaying the finalisation of the amended claim until after perusal of those working papers, and any window of opportunity to plead fraud constituted by their initial refusal was in any event closed by that change of heart.”

[32]Mr Mascord’s working papers were provided on 14th October 2002, and, having been instructed three days later, the Society’s expert accountant, Mr Frank Ilett, provided advice on 25th November. As a result of his advice, on 2nd December 2002, after failing to obtain permission to amend the Particulars of Claim in the earlier action, Wrights, presumably on the advice of counsel, brought a second action against Sephtons, based on the contention that Mr Mascord had been guilty of fraud.

The Law Society and the Solicitors’ Compensation Fund

[33]The Law Society has regulatory functions in respect of the solicitors’ profession. By s34 of the 1974 Act, every solicitor is required “once in each period of 12 months ending 31st October” to deliver to the Society an accountant’s report containing the information required by the Accountant’s Reports Rules, made in accordance with the provisions of that section. The purpose of such reports is to monitor the solicitor’s compliance with the Solicitors’ Accounts Rules, which contain detailed accounting procedures, and are essentially designed to ensure the proper handling of clients’ funds, and to protect clients from misuse of monies held by solicitors.

[34]Section 35 of the 1974 Act is concerned with the Law Society’s powers to intervene in a solicitor’s practice, which powers are set out in Schedule 1 to the 1974 Act. The circumstances in which the Society may intervene are set out in paragraph 1 of that Schedule, and they include, in paragraph (a), where the Council of the Society has “reason to suspect dishonesty”, and, in paragraph (c), where the Council is “satisfied that a solicitor has failed to comply with” inter alia, the Solicitors’ Accounts Rules. The powers exercisable on such an intervention are set out in paragraphs 5-16 of the same Schedule, and they effectively enable the Society to take over all aspects of a practice where it is appropriate to do so.

[35]In addition to these regulatory functions, the Society is also trustee of the Fund for which statutory provision is made in s36 of the 1974 Act. Section 36(1) specifically requires the Fund to “be maintained and administered in accordance with the provisions of Schedule 2”.

[36]Section s36(2) of the 1974 Act provides that “the Society may make a grant out of the Compensation Fund for the purpose of relieving loss or hardship”, in certain circumstances. These circumstances include where that loss or hardship arises, inter alia, “in consequence of dishonesty on the part of a solicitor … in connection with that solicitor’s practice”, or where the hardship has been suffered “in consequence of failure on the part of a solicitor to account for money which has come into his hands in connection with his practice”. Section 36(3) permits the grant to include “a loan upon such terms and conditions … as the Council may determine”. Section 36(4) provides that, where a grant is made, the Society is to be subrogated to “any rights and remedies of the person to whom the grant is made”.

[37]On behalf of the Society in this case, it is emphasised that the Fund is a source of compensation of last resort, and that it is not a bottomless pit. Furthermore, in light of the word “may” in s36(1) it is emphasised that the decision whether to make a grant or loan “lies entirely in the hands of the Fund”, and that “applicants do not have a right to compensation but merely a right to seek a favourable exercise of discretion” albeit that it is accepted that the discretion “has to be exercised in accordance with the Rules of the Fund”.

[38]Paragraph 7 of Schedule 2 to the 1974 Act sets out the various purposes for which the assets of the Fund may be applied, and they include, in subparagraph (e), the “payment of all costs charges and expenses incurred by the Society” in connection with an intervention in a solicitors’ practice under s35. As the judge said, the effect of this provision is that the Fund “is liable for the Society’s costs of an intervention”, and this “statutory liability of the Fund” can be contrasted with “the Society’s discretion to make grants”.

[39]Section 36(8) of the 1974 Act empowers the Society to make rules about the Fund, including the procedure for making grants from it; the Society has exercised that power through the medium of the Solicitors’ Compensation Fund Rules 1995 (“the 1995 Rules”). Albeit to a limited extent, the 1995 Rules regulate the exercise of the discretion to make grants. For instance, paragraph 6 imposes a time limit, and paragraph 11 provides for a cap of £1m. The 1995 Rules permit the Society to take account of, but not to be fettered by, the “Guidelines” contained in a Schedule.

[40]Paragraph 1 of the Guidelines provides:

“The basic object of the Fund is to replace clients’ money misappropriated by a solicitor. (b) A grant out of the Fund is made wholly at the discretion of [the Society]. No person has a right to a grant enforceable at law but the intention of the Council is to seek to administer the Fund in an even handed and consistent manner. (c) The Fund is administered as a small fund of last resort. This means that a grant may be limited or refused to applicant where the loss is an insured risk or where the loss is capable of being made good by recourse to another person.”

[41]Paragraph 3 of the Guidelines specifies various circumstances where a grant will not normally be made. They include:

“(c) the applicant has contributed to his, her or its loss as a result of his, her or its activities, omissions or behaviour either before during or after the transaction giving rise to the application or thereafter.”

The first issue: when did the Society’s cause of action in negligence accrue?

Introductory

[42]It is and was rightly common ground between the parties and accepted by the judge that, following the decision in the KPMG case, the Society had, as a matter of principle, a cause of action in negligence against Sephtons as a result of the issue of each Report. However, what had to be resolved was the date on which the Society’s cause of action accrued, in light of s2 of the 1980 Act, which provides:

The first issue: when did the Society’s cause of action in negligence accrue?

“An action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued.”

[43]A number of different candidates were put forward to the judge as the possible dates upon which the Society’s causes of action in negligence against Sephtons could have accrued. The judge concluded that the cause of action, in relation to each Report, accrued at the latest on the date of the first misappropriation by Mr Payne following the receipt of the Report by the Society.

[44]The reasoning of the judge was based on the proposition that it has been authoritatively established that a cause of action in negligence is complete once the claimant has suffered loss as a result of the negligence, even if the existence of the loss (and indeed of the negligence) is not, and could not be, known to him, and even where that loss is much less than the loss which he ultimately suffers as a result of the negligence. On the facts in this case, Mr Mascord provided, on eight occasions, an unqualified Report in respect of Mr Payne’s practice, whereas he should have provided a qualified Report, or indeed no Report at all. Had he not been negligent in this way, therefore, the Society would not have permitted Mr Payne to carry on practising, at least without supervision or some sort of condition which prevented him from having any control of client monies, as a result of which he would not have been able to misappropriate any such monies. Therefore, as soon as Mr Payne misappropriated any monies after the Society’s receipt of a Report, the Society, in its capacity as trustee of the Fund, was exposed to a liability, which would not have happened in the absence of the negligence, the liability being exposure to a potential claim, which, the judge concluded, constituted sufficient damage to start time running under s2 of the 1980 Act.

[45]In reaching this conclusion, the judge relied on a number of cases, whose effect was conveniently summarised by Clarke LJ in Polley -v- Warner Goodman & Street [2003] PNLR 40 at paragraphs 15 and 16: “15. In Hatton -v- Chafes (13.3.2003)

[2003] EWCA Civ 341

, in a judgment with which Peter Gibson LJ and Sir Anthony Evans agreed, I summarised the principles in this way in paragraph 12: ‘(i) A cause of action in negligence does not arise until the claimant suffers damage as a result of the defendant's negligent act or omission. (ii) The damage must be ‘real’ as distinct from minimal: Cartledge -v- Jopling

[1963] AC 758

per Lord Reid at 771 and Lord Evershed MR at 773-4. (iii) Actual damage is any detriment, liability or loss capable of assessment in money terms and includes liability which may arise on a contingency: Forster -v- Outred

[1982] 1 WLR 86

per Stephenson LJ at 94, approved by the House of Lords in Nykredit Mortgage Bank plc -v- Edward Erdman Group Ltd (No 2)

[1997] 1 WLR 1627

, per Lord Nicholls (with whom the other members of the appellate committee agreed) at 1630F. (iv) The loss must be relevant in the sense that it falls within the measure of damages applicable to the wrong in question: Nykredit at 1630F. (Propositions(i) to (iv) were confirmed by Sir Murray Stuart-Smith in Khan -v- Falvey

[2002] EWCA Civ 400

, [2002] PNLR 28, at paragraphs 11 and 12.) (v) A claimant cannot defeat the statute of limitations by claiming only in respect of damage which occurs within the limitation period if he has suffered damage from the same wrongful act outside that period: Khan -v- Falvey at paragraph 23, following Knapp -v- Ecclesiastical Insurance Group Plc [1998] PNLR 172 per Hobhouse LJ at 184 and 187.’ 16. Having regard to the submissions in the instant case I would add a sixth proposition, namely: damage often occurs before it can be crystallised, and difficulties of quantification do not prevent damage from being said to have occurred (see Nykredit at 1632).” ‘(i) A cause of action in negligence does not arise until the claimant suffers damage as a result of the defendant's negligent act or omission.

(ii) The damage must be ‘real’ as distinct from minimal: Cartledge -v- Jopling

[1963] AC 758

per Lord Reid at 771 and Lord Evershed MR at 773-4.

(iii) Actual damage is any detriment, liability or loss capable of assessment in money terms and includes liability which may arise on a contingency: Forster -v- Outred

[1982] 1 WLR 86

per Stephenson LJ at 94, approved by the House of Lords in Nykredit Mortgage Bank plc -v- Edward Erdman Group Ltd (No 2)

[1997] 1 WLR 1627

, per Lord Nicholls (with whom the other members of the appellate committee agreed) at 1630F.

(iv) The loss must be relevant in the sense that it falls within the measure of damages applicable to the wrong in question: Nykredit at 1630F. (Propositions (i) to (iv) were confirmed by Sir Murray Stuart-Smith in Khan -v- Falvey

[2002] EWCA Civ 400

, [2002] PNLR 28, at paragraphs 11 and 12.)

(v) A claimant cannot defeat the statute of limitations by claiming only in respect of damage which occurs within the limitation period if he has suffered damage from the same wrongful act outside that period: Khan -v- Falvey at paragraph 23, following Knapp -v- Ecclesiastical Insurance Group Plc [1998] PNLR 172 per Hobhouse LJ at 184 and 187.’

[46]I do not need to discuss any of the leading cases on this topic in any detail, at any rate at this stage. However, it would be wrong not to cite what Lord Nicholls of Birkenhead said in Nykredit at 1630C-F “In Forster v. Outred & Co. [1982] 1 W.L.R. 86, 94, Stephenson LJ recorded the submission of Mr Stuart-Smith Q.C.:

‘What is meant by actual damage? Mr Stuart-Smith says that it is any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases. They are all illustrations of a kind of loss which is meant by “actual” damage. It was also suggested in argument … that “actual” is really used in contrast to “presumed” or “assumed”. Whereas damage is presumed in trespass and libel, it is not presumed in negligence and has to be proved. There has to be some actual damage.’

Stephenson L.J., at page 98D, accepted this submission. I agree with him. I add only the cautionary reminder that the loss must be relevant loss. To constitute actual damage for the purpose of constituting a tort, the loss sustained must be loss falling within the measure of damage applicable to the wrong in question.” ‘What is meant by actual damage? Mr Stuart-Smith says that it is any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases. They are all illustrations of a kind of loss which is meant by “actual” damage. It was also suggested in argument … that “actual” is really used in contrast to “presumed” or “assumed”. Whereas damage is presumed in trespass and libel, it is not presumed in negligence and has to be proved. There has to be some actual damage.’

[47]Nykredit itself was concerned with the question of when the cause of action accrued in favour a lender who lent money secured on property, on the basis of a negligently high value ascribed to the property by the defendant valuer. (The question arose in connection with determining the date from when interest was to run, rather than for limitation purposes, but the principles are clearly the same). The House of Lords held that the cause of action in tort accrued on the date when it could first be shown that the value of the rights acquired by the lender, namely the value of the security plus the value of the debtor’s covenant, fell below the amount of the loan (always assuming, as was the case there, that the amount of the loan was less than the value of the rights acquired, at least if one ascribed to the property the value it had been given by the valuer).

[48]The Society’s case, as developed by Mr Timothy Dutton QC and Ms Rosalind Phelps, raises three separate arguments why the conclusion of the judge was wrong. Those arguments are as follows: i) The authorities relied on by the judge, whose effect was summarised by Clarke LJ in Polley, all involved the claimant acquiring or losing an asset or a right, or at least something akin thereto, whereas in the present case, the Society merely suffered a potential or contingent liability at the moment at which the judge held that its cause of action accrued; ii) The principles governing the Fund give the Society a discretion whether or not to pay out any client whose monies have been misappropriated by a solicitor, and, consequently, a cause of action in the present case could not have accrued until the Society had first decided to pay out a claim in respect of an appropriation made by Mr Payne after the relevant Report; iii) The reasoning and authorities which found the basis for the summary of the law as stated by Clarke LJ in Polley do not apply to the statutory scheme which governs the Fund, and accordingly the authorities and principles relied on by the judge are not really in point.

[49]If the first or second argument is right, then, the Society’s cause of action would have first accrued in relation to a particular Report on the date on which the Society first resolved to pay out from the Fund a client whose funds had been misappropriated by Mr Payne after the Report in question had been provided. If the third argument is correct, then it is possible that the court might be able to take an approach based more on policy than principle, and may be able to fasten on a date for accrual of cause of action which makes practical common sense, such as the date on which the Society actually intervened in Mr Payne’s practice.

The Society’s first argument: the incurring of a future risk is not enough

[50]I turn, first, to the contention that the judge drew the wrong conclusion from Forster and the authorities considered in Polley, as they were all cases where the defendant’s negligence occurred in connection with a transaction where the claimant was executing a document and acquiring an asset or a right whose value was reduced or lost as a result of the negligence. In the present case, by contrast, it is said, the Society suffered no loss, merely a risk of loss or a contingent liability, as a result of any subsequent misappropriation, until the Society decided to pay out to the client whose monies were misappropriated.

[51]In my view, the judge’s conclusion here receives some support, over and above the principles summarised in Polley, from another observation of the House of Lords in Nykredit. Lord Nicholls said that “the first step in answering [the] question” of when a claimant “first sustains a measurable relevant loss” involves identifying “the relevant measure of loss” (see 1631D-E), which in turn involves identifying the scope of the defendant’s duty (see at 1631G). In this case, as I see it, the scope of Sephtons’ duty, so far as relevant, was not directly related to the risk of receiving or paying out claims by clients whose funds had been misappropriated; it was directly related to the risk of such misappropriations occurring in the first place. As Lord Woolf CJ said, in para 22 in the KPMG case at

[2000] 1 WLR 1929

B, “the reports were required so that protective steps could be taken” (although it is only right to mention that he immediately went on to say that it was “obvious” that the Fund could suffer loss if such steps were not taken). That suggests that damage first arose when the first such misappropriation occurred. However, it is argued on behalf of the Society that measurable damage did not accrue, at least until the first client made his claim, and probably not until the Society first decided to meet such a claim.

[52]Support for this line of argument is to be found in the decision of the High Court of Australia in Wardley Australia Limited -v- State of Western Australia

(1992) 175 CLR 514

, 109 ALR 247. The facts of that case were not dissimilar to the present, in that the claim was based on a statutory trade indemnity scheme (contained in s82(1) of the Australian Trade Practices Act 1974). The insurers claimed damages from Wardley, on the basis that its alleged deceit induced them to grant an indemnity, which was subsequently called on. The High Court of Australia held that the claim accrued, not when the indemnity was granted, but when the event which gave rise to a claim on the indemnity occurred. (In this connection, I should add that it is clear from the judgment that the basic principles as to when an action in tort accrues in Australia are the same as in this jurisdiction.)

[53]The reasoning of the majority of the Australian High Court (Mason CJ and Dawson, Gaudron and McHugh JJ), at least so far as relevant to this appeal, can be extracted from three passages at 175 CLR 530-533, 109 ALR 257-259 to the following effect: “[T]he English decisions have proceeded according to the view that, where the plaintiff is induced by a negligent misrepresentation to enter into a contract and the contract, as a result of the negligence, yields property or contractual rights of lesser value, the plaintiff first suffers financial loss on entry into the contract, notwithstanding that the full extent of the plaintiff's financial loss may be incapable of ascertainment until some later date … [175 CLR 530, 109 ALR 257 ll 12-18] If, contrary to the view which we have just expressed, the English decisions properly understood support the proposition that where, as a result of the defendant's negligent misrepresentation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred. A deferred liability may stand in a different position but there is no occasion here to discuss that matter. … [175 CLR 532, 109 ALR 258 ll 29-38] The conclusion which we have reached is reinforced by the general considerations …. It is unjust and unreasonable to expect the plaintiff to commence proceedings before the contingency is fulfilled. If an action is commenced before that date, it will fail if the events so transpire that it becomes clear that no loss is, or will be, incurred. Moreover, the plaintiff will run the risk that damages will be estimated on a contingency basis, in which event the compensation awarded may not fully compensate the plaintiff for the loss ultimately suffered. These practical consequences which would follow from an adoption of the view for which the appellants contend outweigh the strength of the argument that the principle applicable to the cases in which the plaintiff acquires property (or a chose in action) should be extended to cases where an agreement subjects the plaintiff to a contingent loss. In such cases, it is fair and sensible to say that the plaintiff does not incur loss until the contingency is fulfilled.” [175 CLR 533, 109 ALR 259 ll 21-34]

[54]It may be that, on a close analysis, the decision in Wardley is of no real assistance here. First, it is clear from the judgment of Brennan J (at 175 CLR 535, 109 ALR 261 ll 22-34) that four different dates were put forward as candidates for the accrual date, and that only the earliest of those dates resulted in the action being time barred. The earliest date was the actual execution of the indemnity. Yet, even on the judge’s reasoning on this case, that would have been too early a date: it would be equivalent to the date on which the Report was provided. Secondly, the determination of the majority in Wardley was governed, at least in part, by the way in which s82(1) and (2) of the Australian statute concerned were worded (see 175 CLR 525-527, 541-542 and 545, 109 ALR 253 l.5 - 254 l.15, 266 ll 14-35 and 268 l.28 - 259 l.8).

[55]Nonetheless, I am inclined to accept the contention that at least some of the reasoning in Wardley supports the Society’s argument, and is inconsistent with the judge’s approach. Whether or not to follow the reasoning of the High Court of Australia in Wardley is, in my view, a difficult question. On the one hand, it could be said to be somewhat arbitrary that, when determining whether a cause of action accrues in negligence, very different answers might be given depending on whether or not the negligence was in a case where the claimant was executing a document and acquiring an asset or a right. On the other hand, the reasoning in Wardley, which is of particular force bearing in mind its source, has considerable attraction.

[56]The Society reinforces its argument on this point by reference to the decision of Neill J in Telfair Shipping Operation SA -v- Inersea Carriers SA, the Caroline P

[1985] 1 WLR 553

. In that case, a contractual claim based on an indemnity was held not to be time-barred on the basis that the cause of action in contract accrued not on the date of the occurrence of the damage for which the indemnified was liable, but on the date on which the court found the indemnified to be so liable: see at 568H. The decision itself, and some of the observations of Neill J (for instance at 566G where he distinguished Forster) certainly appear to give some assistance to the Society’s case. It is true that The Caroline P concerned a claim in contract, not tort. Nonetheless, it appears to me that, both as a matter of policy and as a matter of principle, one should try to minimise the differences between the date of accrual of a cause of action in contract and that in tort, where there are parallel causes of action (a view supported by Lord Nicholls in Nykredit at 1633D-F).

[57]There is no doubt that there are grounds for contending that damage should not be treated as having been suffered by the Society in this case until its decision to pay out claim, notwithstanding the reasoning in cases such as Forster, Nykredit and Polley. The principal ground is that the Society did not acquire an asset or right, whose value was diminished owing to the negligence of Sephtons, as a result of, or in connection with, any of the Reports. A second ground is that the Society did not act on receipt of the Reports: the Society merely let things continue as they were. I accept that these do represent grounds of distinctions between the present case and (at least in relation to the first ground) Wardley, on the one hand, and, on the other hand, cases such as Forster and Nykredit, as considered in Polley.

[58]While acknowledging the existence of these distinctions, I have, however, reached the conclusion, that, at any rate in this court, they do not justify distinguishing the earlier cases such as Forster. The law relating to the date on which a cause of action accrues in negligence is, I think, generally accepted as being somewhat arbitrary and unpredictable, and, in some cases, capable of leading to unsatisfactory results. Unless clearly satisfied that the reasoning in previous decisions is distinguishable on an intellectually and practically satisfactory basis, I consider that it would be wrong in principle, and would merely add to the uncertainty and arbitrariness which already exists in this field, if we were to depart from them. In that connection, apart from the cases already mentioned, I must deal in a little detail with two decisions of this court of particular relevance.

[59]The first of the two decisions is Knapp -v- Ecclesiastical Insurance Group plc [1998] PNLR 172. In that case, the plaintiffs’ property had been damaged by fire, and their insurer had refused to pay out on the basis that the insurance cover they had taken out was voidable. The plaintiffs claimed, inter alia, that the voidability was attributable to the negligence of their insurance broker at the time they took out the cover. The Court of Appeal unanimously held that the action against the insurance broker was time-barred because the cause of action arose at the time the cover was taken out, not the time at which the fire occurred.

[60]At 177F-178B, after referring to some earlier decisions, Hobhouse LJ (with whom Butler-Sloss LJ agreed) said this:

“The cause of action in negligence accrued as soon as damage was caused independently of whether or not at that time the plaintiff was aware of it. It was in the light of these decisions that the legislature made additional statutory provision to deal with the cases of injustice and hardship which arose from the application of the primary limitation period. English law has therefore preserved the strict primary rules governing the accrual of causes of action but has sought to avoid or mitigate injustice by specific statutory provision. … [T]he approach in other Commonwealth jurisdictions has not been the same. For instance, in New Zealand the decision in Pirelli -v- Oscar Faber has not been followed (Invercargill CC -v- Hamlin [1996] AC 624.) In Australia a similarly distinct approach has been adopted and the English cases such as Forster -v- Outred have not been followed (Wardley…). Both the Invercargill and the Wardley cases clearly demonstrate that those countries have adopted different solutions to the potential injustices which arise from the strict application of the primary limitation period.”

[61]After considering many of the authorities which were considered by Clark LJ in Polley and by the High Court of Australia in Wardley, Hobhouse LJ concluded at 184E-F:

“From these authorities it can be seen that the cause of action can accrue and the plaintiff have suffered damage once he has acted upon the relevant advice ‘to his detriment’ and failed to get that to which he was entitled. He is less well off than he would have been if the defendant had not been negligent. Applying this to the present case, the plaintiffs paid their renewal premium without getting in return a binding contract of indemnity from the insurance company. They had acted to their detriment: they did not get that to which they were entitled.”

[62]It seems to me that in the first passage Hobhouse LJ made it clear that he considered that the conclusion of the Australian High Court in Wardley did not represent the law in this country. As to the second passage, it is fair to say that, at least if looked at on its own, it could be read as being limited to cases where the negligence is connected to the plaintiff’s acquisition or intended acquisition of property or an asset (especially in light of the words “that to which he was entitled”). But, especially when read together with Hobhouse LJ’s earlier observations relating to Wardley, it seem to me a little unrealistic to read the second observation as being other than of general application.

[63]In his judgment in Knapp, Buxton LJ (with whom Butler-Sloss LJ also agreed) said at 188C-D:

“It was conceded by the [plaintiffs that from its inception they] received a policy that was not valid but voidable. The short answer to the appeal would therefore seem to be that the plaintiffs were then, and thereafter, suffering actual damage in legal terms. The quantification of that damage might be difficult, and might depend on contingencies that had not arisen, either [at the inception of the policy] itself or indeed at the date of trial. That, however, does not affect the existence of damage at the date of the [insurer brokers’] failure of duty.”

[64]Towards the end of his judgment, Buxton LJ turned to the decision in Wardley. He first quoted with approval the passage I have cited from

(1992) 175 CLR 530

, 189 ALR 257. Importantly, for present purposes, he went to say this at 192B-D:

“The [High Court of Australia] however rejected, or at least doubted, the argument put to it that [certain English] decisions establish that the plaintiff necessarily suffers loss on entry to an agreement notwithstanding that the loss to which the plaintiff is subjected by the agreement is loss upon a contingency: what is required is actual loss on entry, quite apart from the contingent loss threatened at a later date (see … [(1992)] at 109 ALR 247 at p.257). Since P's guarantee only ‘generat[ed] an executory and contingent liability upon the part of [P], [P] suffered no loss until that contingency was fulfilled and time did not begin to run until that event’: see 109 ALR 247 at p.260, l4. None of these propositions seem to me, any more than they seemed to the High Court of Australia, to be inconsistent with the current English law. True it is that some further passages in the leading judgment in Wardley, 109 ALR 247 at pp.258, 40-259, 35, suggest that in some cases that court might take a different view from the English courts when identifying what it calls actionable actual loss (as opposed to a mere potential for loss).”

[65]In relation to the present case, those observations might appear, at least at first sight, to cut both ways. In favour of Sephtons, the point can be made that Buxton LJ clearly did not consider that all aspects of the reasoning and decision in Wardley would apply in this jurisdiction, in particular the passage at 109 ALR 258-259 which included the third extract I have quoted from that decision. On the other hand, the passage he expressly quoted with apparent approval from 109 ALR 260 may appear to be of assistance to the Society’s argument in this appeal. However, it seems to me that what Buxton LJ called “a mere potential for loss” could fairly describe the Society’s position after receipt of a Report, and “actionable actual loss” its position following the first misappropriation thereafter.

[66]In these circumstances, I consider that the obiter observations of Hobhouse LJ fairly clearly, and those of Buxton LJ probably, indicate that the reasoning in Wardley cannot safely be relied on to support the Society’s case. Further, at least in my judgment, a comparison of the outcomes in Wardley and Knapp indicates that, at least as a matter of common sense (possibly a dangerous concept to invoke in this field), they are mutually inconsistent. Compare a case where, owing to the negligence of his agent, an insured fails to insure against a specific risk, with a case where, due to the negligence of their agents, the insurers insure against a risk they do not intend to cover. On the face of it, the insured in the first case, and the insurers in the second case, have claims which are mirror images. One would expect time to start running against the claimant (insured or insurers) in each case with effect from the same date, or least from a date arrived at by reference to the same principles. Yet Knapp results in time running from the date of the insurance contract in the first case, and the reasoning in Wardley indicates, I think, that time runs from the date that the insured risk occurs in the second case.

[67]I turn now to the second decision of this court namely Gordon -v- J B Wheatley & Co [2000] Lloyds LR PN 605. In that case, the claimant engaged the defendants to advise him in connection with a mortgage scheme he operated for customers. His case was that the defendants had negligently failed to advise him to register under s3 of the Financial Services Act 1986 (“the FSA”). After the defendants had ceased to act for him, the claimant was required to agree to underwrite his customers’ losses under the scheme, at the insistence of the Securities and Investment Board (“the SIB”). This was pursuant to a right given to the SIB under the FSA owing to the claimant’s failure to register. The SIB had commenced its investigation into the claimant’s business less than six years before he brought his action against the defendants, and therefore any obligation to underwrite customers’ losses was imposed on the claimant well within the limitation period. However, his claim against the defendants for failure to advise him of his duties under the FSA was held to be time-barred, because the claimant had first suffered actionable loss, and therefore his cause of action had accrued, when the first customer entered into the mortgage scheme.

[68]The point made on behalf of the unsuccessful claimant was recorded in the judgment of Kennedy LJ (with whom Kay LJ agreed) at 607, first column, as:

“… actual loss is not the same as a serious risk of loss, and … that until at the earliest the claimant signed the Deed of Undertaking and Indemnity (which was within the six year period) there was no more than a serious risk of loss.”

Kennedy LJ referred in the second column on the same page to the claimant’s argument in slightly different terms, namely:

“Forster's case there was immediate damage to a discernible asset, the plaintiff's equity of redemption, not merely a risk of damage to her assets as a whole.”

[69]Kennedy LJ rejected those submissions initially by reference to a decision of first instance of Nourse J, Milton -v- Walker & Stanger (1981) 125 SJ 861, where the claim was based on the contention that the defendant solicitors had failed properly to protect the plaintiff so far as concerned his potential future liabilities for capital gains tax (which, of course, would only arise if he sold the property concerned). Kennedy LJ quoted Nourse J as saying:

“If shortly after executing the agreement the plaintiff had issued a writ against the defendants, however difficult or even speculative the process might have been, the court would have awarded damages.”

[70]Kennedy LJ then went on to say that this court adopted the same approach in D W Moore & Co -v- Ferrier

[1988] 1 WLR 267

(cited with approval in Nykredit at 1634A). At 608, first column, Kennedy LJ described Bingham LJ at 279H ff in Moore as having “followed the approach adopted by Nourse J in Milton’s case”, in a passage which he then quoted. I accept that Moore can fairly be characterised as a case where the claimant acquired an asset, namely the benefit of a contract with a director, which contract included a restrictive covenant. However, the way in which Bingham LJ expressed himself is hard to reconcile with the Society’s case here, or with the reasoning in Wardley.

[71]The claim in Moore was by the employer (the first plaintiff) against solicitors for including an ineffective restrictive covenant in the employment contracts of two of its directors. Bingham LJ, holding that the cause of action against the solicitors accrued when the contract was entered into, said this at 280A-B:

“[S]o long as there was any risk that one of the first plaintiff’s two directors might leave … to establish a competing business, there must necessarily have been a depressive effect on the value of the first plaintiff’s business ….”

(emphasis added) Thus, there was a cause of action by reference to the potential financial risk to the first plaintiff’s business, not by reference to the value of the particular asset or right acquired, namely the benefit of the director’s contract.

[72]Reverting to Gordon, at 609, first and second columns, Kennedy LJ identified the submission for the claimant as being that:

“… in the earlier cases, there was immediate damage to a definite proprietary interest other than the plaintiff's general wealth, and that, he submits, is important. There must be, as he put it, a tangible loss to a bank balance, or something you can point your finger to.”

[73]After considering judicial observations in other cases, Kennedy LJ went on to say this at 610, first and second columns:

“… it is necessary to identify the loss claimed, and to measure it against the duty allegedly breached. Here the breach of duty relied upon is an alleged failure to advise the claimant how to operate in such a way as not to be likely to attract adverse criticism for the SIB, in consequence of which negligence vulnerable transactions were made which were all completed before the beginning of the six year period, and before the SIB began to investigate.”

[74]He then referred to Knapp and Nykredit, and said this at 612, first column:

“[Counsel for the claimant] submitted that in the present case when investments were made the claimant was not actually worse off as a result of the … defendant’s alleged negligent failure to advise. He was only potentially worse off, but in my judgment that is not right. After the investments were made the plaintiff was exposed to the risk of being required by a court, pursuant to … the 1986 Act, to restore … investors and borrowers … to the position in which they were before the transactions were entered into. That was a liability, albeit a contingent liability, a fetter on his assets, from which on his case he would have been protected if the … defendant had exercised proper care.”

Accordingly, in the second column on the same page, he said that he “must conclude that the claimant did sustain actual loss sufficient to complete his cause of action … when each investment was made”, although he did say that he “did not find the question … an easy one”.

[75]The various passages I have quoted from Gordon show that the claimant in that case ran arguments very much along the lines of the Society’s principal ground for not following the approach in cases such as Forster and Nykredit, and that those arguments were rejected. The decision and reasoning of this court in Gordon, when considered with the other cases I have been considering, renders it, therefore, very hard, at least in my view, to accede to the principal argument of the Society.

[76]Even in the absence of the decisions in Knapp and Gordon, I find it hard to see why, as a matter of principle or practical reality, there should be a difference in approach to the question of the accrual of a cause of action in negligence, between cases where the negligence occurs in connection with a transaction where the claimant acquires an asset or right, and cases where it occurs in connection with a transaction under which he merely incurs a liability. Nor do the principles as they emerge in the leading cases, considered and summarised in Polley, seem to me to turn on whether or not the claimant had acquired an asset or a right. The last passage I have quoted from Wardley suggests that the High Court of Australia restricted the effect of the English cases in this way at least partly because of the difficulty in assessing damages and because of fairness. In my judgment, those reasons are hard to justify as a matter of principle.

[77]This view so far as difficulty of quantification is concerned, is reinforced by what Lord Nicholls said in Nykredit at 1632E-F:

“Quantification of the lender’s loss is bound to be less certain, and, therefore, less satisfactory, if the quantification exercise is carried out before, rather than after, the security is ultimately sold. This consideration weighed heavily with the High Court of Australia in Wardley … but the difficulties of assessment at the early stage do not seem to me to lead to the conclusion that at the earlier stage the lender has suffered no measurable loss and has no cause of action, and that it is only when the assessment becomes more straightforward or final that the loss first arises and with it the cause of action.”

[78]Further, apparently unlike in Australia, it seems to me unnecessary to invoke reasons of fairness in this jurisdiction (as Hobhouse LJ briefly implied in Knapp at 177G), in light of the provisions of s14A of the 1980 Act. That section (as explained by Lord Nicholls in Nykredit at 1630H-1631A) has the effect of extending the six-year limitation period, subject to a cut-off date of 15 years, to a date which (at the risk of over-simplification) is three years from the date on which the claimant could reasonably have discovered the material facts giving rise to his claim.

[79]The fact that the actual liability of the Society (in the sense of having to pay out money from the Fund) turns on a contingency does not seem to me to be a valid reason for departing from the principles summarised in Polley. The essential point is that the Society was, as Nicholls LJ put it in Bell -v- Peter Browne & Co

[1990] 2 QB 495

at 503C, “at risk from the outset”, i.e. from the first misappropriation after each Report.

[80]In Nykredit, the risk or potential for a loss arose as soon as the loan was made, but no actionable loss was suffered, and hence no cause of action accrued, until the value of the bundle of rights obtained by the lender was less than the amount of the loan he had made. At that point a loss crystallised, although that loss was contingent, in the sense that it may never have been realised, because the value of the security and/or the borrower’s covenant to repay could have increased, to the extent of exceeding the amount of the loan. In Gordon, the risk or potential for loss arose, when the mortgage scheme was marketed, but no loss crystallised until a customer joined the scheme. That loss may never have been realised in the sense that the claimant may never have been subjected to an investigation by the SIB, or to a requirement by the SIB that he indemnified his customers, or to that indemnity being called on.

[81]So here, on the judge’s reasoning. The risk of loss, in the sense of a potential for a claim being made against the Fund, arose when each Report was provided to the Society, and Mr Payne was permitted to carry on his practice freely. But no loss was suffered and no cause of action accrued until he first subsequently misappropriated client monies, thereby exposing the Fund to a possible claim, which the Society could not prevent being made. Although a loss crystallised at that point, it was contingent, in the sense that Mr Payne may have made good the deficiency or, even if he had not, the client may not have made a claim against the Fund. However, to my mind at least, the Fund, at the moment of the misappropriation, suffered loss in the sense that it was exposed to a potential liability, with the result that its net worth was reduced, by virtue of its exposure to that liability.

[82]I do not consider that The Caroline P justifies rejecting the result which I believe follows from a proper application of the reasoning in the cases I have been discussing. The issue in The Caroline P concerned the question of when time began running under the 1980 Act in relation to a claim based on contract, there was no question of a parallel claim in tort. Here, the claim is in tort, and there is no question of a parallel claim in contract. Neill J was influenced in reaching his decision by the fact “that at common law a person who is entitled to an indemnity cannot enforce it until he has made a payment to the third party” - see at 568E. That is not a ground which, to my mind, justifies our refusing to follow the reasoning developed in subsequent cases concerned with claims in tort, particularly in the light of the refinement of the law in that field since 1985, in decisions such as Knapp, Gordon and Nykredit, as well as most of the decisions which were considered and applied in those cases.

[83]It is true that none of the cases (with the possible exception of Gordon) can be said to involve the claimant having done nothing as a result of the negligence of the defendant. I do not, however, consider that the fact that the Society’s case is that it did nothing (rather than intervening in Mr Payne’s practice) as a result of Sephtons’ negligence, is a satisfactory reason for adopting a different approach to identifying the accrual date from that which would be adopted if the Society’s case was that it had done something as a result of the negligence. Whether as a matter of legal principle or of logic, I am not attracted by the notion that the question of when damage is first suffered should be assessed by reference to a different date and indeed on different principles, just because the claimant did nothing, rather than did something, as a result of the defendant’s negligence. Commission may be morally distinguishable from omission, and the distinction is relevant in some areas of law (probably those which can be said to involve a moral element, e.g. duty of care). However, I see no reason why the distinction should be of relevance, potentially of crucial relevance, in the law of limitation.

[84]What if the plaintiffs in Knapp had obtained a voidable policy through their own fault, had then sought the advice of the defendant broker as to whether the policy was valid, had been negligently advised that it was not voidable? If, as a consequence, they did nothing so that the policy remained voidable, rather than informing the insurer so that the policy ceased to be voidable, I find it hard to think that the Court of Appeal would have concluded that time began to run when the risk eventuated, rather than when the plaintiffs failed to act on the negligent advice.

[85]Quite apart from this, I consider that any reliance on the fact that the Society did nothing, rather than something, as a reason for distinguishing the earlier cases, falls foul of the decision of this court in Gordon. The claimant’s case there was that as a result of the defendants’ failure to advise him properly, he failed to do something, namely so to register under s3 of the FSA; it was not that, as a result of the defendants’ negligence he actually did something, namely getting customers to enter into his scheme. It is true that the positive act of getting the first customer to enter into the scheme was relevant, but it was only because that was the act which gave rise to actual damage. It was entirely consistent with the judge’s conclusion here that the positive act of the first misappropriation following each Report was what gave rise to actionable damage in this case.

[86]I should add this. It may be that the proper application to the facts of this case of the reasoning in Knapp could be said to result in the accrual date being the date of issue of each Report, and not the date of the first misappropriation of monies thereafter. It would be inappropriate to decide that question, because it was not argued before us, and it is not necessary to do so as it would not affect the outcome in this case. The fact that the application of the principles which I consider appropriate could lead to the conclusion that the accrual date was a little earlier than that identified by the judge does not cause me to doubt (or at least to doubt more strongly) the correctness of that principle. Having said that, my provisional view is that, in this case, the judge was probably right, even if, in a normal case, a claim by the insurers in tort may start running from the date the insurance policy is entered into. Applying the reasoning in Nykredit to the normal case, it may be that, at the moment the insurer signed the policy, it could be said that he suffered a loss (at least if the value of the premium he received was less than the value of his risk under the policy): from that moment matters were out of his control.

[87]However, in the present case, the Society did not enter into such a policy as the result of any of the Reports; it merely continued to let Mr Payne practise freely, while being able to intervene at any time in his practice. The Society could therefore be said to have been no worse off as the result of receipt of a Report, because it was free to intervene without being exposed to any loss, until Mr Payne made a subsequent misappropriation. In other words, the risk only sufficiently crystallised to have the quality of actionable loss on the first misappropriation. On this basis, the distinction between this case and the normal case is that, in this case, the Society could avoid any loss by intervening before the first misappropriation, whereas a normal insurer is bound for the term of the policy concerned. This is a distinction which may get a little support from the reference to “particularly a contingency over which the plaintiff has no control” in the passage in Forster cited with approval in Nykredit.

[88]Thus, in my judgment, application of the principles to be extracted from the various decisions of this court and the House of Lords leads to this conclusion. At least in the absence of evidence to the contrary, there was no loss to the Fund at the date of receipt of a Report, any more than, in the absence of evidence to the contrary, there is a loss to a lender who lends on the security of a negligently over-valued property. It was only when there was a misappropriation subsequent to a Report that a loss was incurred here, albeit that it was a loss which might never have been realised, just as it is only when the bundle of rights enjoyed by the lender is less than the loan that a loss was incurred in Nykredit, albeit that that loss also may never have been realised.

[89]Finally on this point, I derive a little comfort in reaching my conclusion on this difficult point from what was said by Lord Nicholls in Nykredit at 1633D, in a passage cited by the judge:

“[W]ithin the bounds of sense and reasonableness the policy of the law should be advance, rather than retard, the accrual of a cause of action. This is especially so if the law provides parallel courses of action in contract and in tort in respect of the same conduct.”

I accept, of course, that the second sentence does not apply here, but the first sentence seems to me to be freestanding. It indicates an approach rather different from that advocated on behalf of the Society or that adopted by the High Court of Australia in Wardley.

The Society’s second argument: the Society is not liable unless it exercises its discretion

[90]I turn to the second argument, which turns on the fact that a client whose monies have been misappropriated by a solicitor does not have a claim as of right as against the Fund, as it would have against a normal insurer, surety, or indemnifier. The Society, as the trustee of the Fund, has a discretion whether to meet any such claim, and it is a discretion with real content. There is no doubt that the discretion may be exercised in such a way as to deprive the client whose funds have been misappropriated of any, or a proportion, of the compensation he claims. Thus, the Society may form the view that the client was very substantially to blame for the misappropriation - as in R -v- The Law Society ex parte Ingman Foods Oy AB

[1997] 2 All ER 666

. Or there might be insufficient monies in the Fund to meet all claims, so that the Society decides not to meet certain classes of claim. Further, it would be wrong to think that one could imagine every type of circumstance in which the Society might exercise its discretion against admitting a claim.

[91]In these circumstances, it is submitted on behalf of the Society that, unless and until a claim is made and the Society decides to exercise its discretion to pay the claim, it cannot fairly be said that the Fund has suffered any loss, from which it follows that the Fund cannot, until that time, have an accrued cause of action in respect of the relevant Report. (There is a refinement on this point, which might arise where the Society wrongly rejects, or unreasonably delays in considering, a claim. In such a case, there would be an argument for saying that, if the claim is one which the Society should admit, time would run from the date on which the admission should have been made, as it is from that time that the Fund is effectively liable to pay the claim. However, it is unnecessary to decide that point, because, on any view, it would not affect the outcome of this appeal.)

[92]I do not consider that the fact that the Fund’s liability to compensate in respect of any particular misappropriation turns on the exercise of a discretion is a reason for concluding that the accrual of its cause of action against Sephtons should be moved, indeed potentially (and, on the facts of this case, actually) moved radically, from the date of the first misappropriation after the Report to the date when the Society exercises its discretion to meet its claim by a client whose monies have been misappropriated.

[93]In the first place, as I have already mentioned, the discretion is one which is to be exercised in accordance with principle. Indeed, in the absence of special circumstances, it is a discretion which one would expect to be exercised in favour of meeting a claim, where, as here, the misappropriation was plainly dishonest (see the provisions of the 1974 Act, the 1995 Rules and the Guidelines which I have set out or summarised above). Accordingly, if I am right on the first point, when Mr Payne misappropriated monies, the Society was potentially exposed to a liability, and the existence of the discretion is not a valid reason for moving the accrual date forward as the Society argues - see the point made in paragraph 16 of Polley, and at 188D in Knapp. While it may have been difficult in many cases to value that liability at the time it arose, neither evidence and nor argument has been advanced which suggests that this is one of those rare cases where the detriment cannot be valued, and where, therefore, the action cannot be treated as having accrued.

[94]There is the small additional point in this connection. Even if the claim for a misappropriation is one which the Society ultimately decides not to meet, it can nonetheless be said that the Society would have to spend a certain amount of money, no doubt from the Fund, investigating the claim. I accept that the sum involved would be small, and it can fairly be said that there may be no claim, so that there is not even a certainty that this small sum of money will be spent. Nonetheless, the point is not dissimilar from that made by Nicholls LJ in Bell at 503F-G where he was explaining why time began to run in respect of a claim against a solicitor for failing to protect his plaintiff client by registering his interest when it was created in 1978:

“In considering whether damage was suffered in 1978 one can test the matter by considering what would have happened if in, say, 1980 the plaintiff had learnt of his solicitors’ default and brought an action for damages. Of course, he would have taken steps to remedy the default. But he would have been entitled at least to recover from the defendants the costs incurred in going to other solicitors for advice on what would be done and for their assistance in lodging the appropriate caution. The costs would have been modest, but not negligible.”

[95]Secondly, it appears to me that the reasoning and decision of the Court of Appeal in Knapp assists the conclusion I have reached. In that case, the plaintiffs argued that, because the insurer had what one might characterise as a discretion whether or not to disclaim liability on the grounds of non-disclosure (where the non-disclosure was said to be the fault of the defendant insurance broker), time began to run in respect of the claim against the insurance broker, not from the date on which cover was obtained, but from the date on which liability was sought to be disclaimed. In that case, there was no certainty that the insurer would disclaim liability, just as in this case there is no certainty that the Society would meet a claim made on the Fund. However, that uncertainty did not alter the date from which time started running.

[96]There could be said to be a distinction between Knapp and this case. In Knapp, either the policy was voidable at the suit of the insurer or it was not; if it was not, then no significant damage would be claimed, but if it was, then the policy was voidable, and that was clearly a disadvantage in the policy from the inception. In the present case, one could say that it would be uncertain whether or not a particular misappropriation would, in the event, lead to a claim which was accepted by the Society. On reflection, I do not find that distinction persuasive. First, it seems to me that it would have been sufficient to found a claim against the insurance broker in Knapp from the moment the policy was granted if, due to his negligence, the policy was no more than arguably voidable, because the plaintiff would have obtained something less valuable than that to which he was entitled, due to the insurance broker’s negligence. Secondly even if it ultimately transpired that the policy was not voidable, its arguable voidability could have involved the plaintiff in expenditure in arguing with, and, if necessary, litigating against, the insurer in order to establish that the policy was not voidable (and in this connection see the observations of Nicholls LJ in Peter Browne cited above). So in this case. As soon as Mr Payne misappropriated money from a client, the Fund was potentially at risk (and the fact that it was unaware of this is of no more assistance to the Society than the fact that the plaintiffs were unaware of the voidability of the policy was of assistance to him in Knapp). However, I would go this far with the Society’s argument: if it could be shown that the first misappropriation effected by Mr Payne after a Report was one in respect of which there was no real prospect of the Society having to pay compensation, then time may well not start running from that misappropriation, but from the next misappropriation, unless, of course, the same could be said about that next misappropriation.

[97]It is true that the Fund will not have to pay out on a claim unless and until the Society has exercised its discretion, and that, although the exercise of this discretion can be called a “contingency”, it is arguably not the sort of contingency which was specifically referred to in the passage in the judgment in Foster approved in Nykredit, namely “a contingency, … over which the plaintiff has no control”. However, as the judge pointed out in this case, the contingency involves the exercise of a discretion which has to be exercised in accordance with provisions set out in a statute, in rules and in guidelines, and that, indeed, “the alleviation of losses suffered by Mr Payne’s clients by reason of his dishonesty falls squarely within the primary purpose of the compensation fund: see paragraph 1 of the Guidelines”.

[98]If the Society had an unfettered discretion to refuse to meet a claim that could lead to the argument that it had no claim against Sephtons because the cause of any payment was the Society’s choice to pay, not the provision of the negligent Report. That would be a fanciful argument, but may it serve to illustrate the unreality of treating the discretion in the sort of way in which the Society’s argument treats it in connection with this issue.

The Society’s third argument: the claim is based on a statutory scheme

[99]I turn, then, finally, on this part of the case, to the contention that the Fund’s liability to compensate clients whose monies have been misappropriated by a dishonest solicitor is sufficiently sui generis and subject to its own statutory rules and guidelines, as to permit of a rather different approach to the question of when time starts running than might seem justified by reference to the authorities dealing with more usual types of case.

[100]The first, and most obvious, way of approaching that submission is by seeking to identify the specific relevant features of the Fund’s regime which might justify treatment as a special case. It can fairly be said that the only two such features which have been specifically identified as those which give rise to the first two grounds for challenging the judge’s conclusion as to when time started running. I have rejected each of those two features as helping the Society, and I do not consider that the Society’s case would be assisted by considering the impact of the two features together. Indeed, I do not understand Mr Dutton to suggest otherwise.

[101]The other feature of the Fund is that, as pointed out by Carnwath LJ, it can be seen as part and parcel of the Society’s functions and activities in relation to controlling and managing the solicitors’ profession for the benefit of the public. At any rate in general terms, I do not see how the fact that the Fund exists as part of the statutory and quasi-statutory features of the Society’s control and management of solicitors can alter the principles which govern the determination of when time starts running in relation to a negligence claim brought by the Society against an accountant who provides a negligent Report in respect of a solicitor’s practice.

[102]It was suggested that it would be a sensible practical solution to the present case if time was to start running in respect of a claim such as that under consideration, from the date on which the Society decided to intervene in the practice of the solicitor concerned. The argument was supported by reference to the fact that it is at the point of intervention that the Society acquires a “damaged asset” in the form of a depleted client account (see Schedule 1 paragraph 6 of the Solicitors Act 1974). If the decision as to the date upon which time begins to run were to turn on a sensible, practical date in relation to a particular type of action, such as an action by the Society against an accountant who provided a negligent Report, then I could see considerable force in the submission. However, so long as the 1980 Act represents the law, the choice of the limitation period does not depend on the court’s perception of a fair date in relation to a particular claim, or even a particular type of claim (see again per Lord Nicholls in Nykredit at 1630H). Once one identifies the cause of action as tort, the date upon which the cause of action accrues is to be determined in accordance with principle, and that principle is to be identified by reference to the decided cases.

[103]Finally on this point, I cannot accept that the Society first suffered relevant damage in this case, when it intervened in Mr Payne’s practice. The reason for the intervention was Mr Payne’s misappropriations, which were not the result of any negligence or fraud on the part of Sephtons. In any event, the misappropriations started before any of the Reports was prepared. Accordingly, the intervention would have happened, and its attendant costs would have been incurred, irrespective of the issue of any of the Reports. While I readily accept that the Reports led to a delay in the intervention, which could have resulted in increased costs of intervening, there was no evidence to support such a case, as Mr Dutton very fairly accepts.

Conclusion

[104]In all these circumstances, I am of the view that the judge was right in his conclusion as to when the Society’s cause of action in negligence in relation to each of the Reports in the present case accrued. It is therefore necessary to consider the other two points namely(a) whether the Society’s claim in fraud is similarly time-barred, or whether it can rely upon s32 of the 1980 Act, and

(b) whether Sephtons are estopped from relying on any limitation defence.

[105]I should briefly mention four other matters. First, each party relied on passages in the judgment of the Court of Appeal in the KPMG case. The issue in that case was whether an accountant making a report under the Accountant’s Reporting Rules owed a duty of care to the Society, and given that the date on which any cause of action would accrue to the Society was not in issue and did not form part of the reasoning process of the Court. Accordingly, I do not consider that that decision can be of a great deal of assistance, although, as mentioned briefly above, it may provide a small degree of support to Sephtons’ case on the first argument.

[106]Secondly, each party relied on the difficulties to which the other party’s preferred accrual date could give rise where a dishonest solicitor indulged in “teeming and lading” (ie, robbing Peter, in the form of the funds held for one client, to pay Paul, in the form of making up misappropriated funds of another client). It seems to me that problems could arise in that connection whatever the correct accrual date. In any event, the cases indicate that the selection of a correct accrual date should be based more on principle, than on practicality or fairness. (Whether that is desirable is another matter.)

[107]Thirdly, so far as practicality and fairness are concerned, the conclusion I have reached does not strike me as being particularly impractical or unfair in this case, or in its implication for other cases. Section 14A of the 1980 Act, to which I have referred more than once, would, in this case and in the great majority of cases of this type, enable the Society to extend the period for bringing an action such as the present, up to the third anniversary of the date of intervention. This would be on the basis that the Society could not reasonably be expected to discover the facts giving rise to a possible claim against the reporting accountants, until the date of its intervention in the practice of the solicitor concerned. In this case, the Society intervened in May 1996 and had sufficient information to instruct solicitors by August 1996. There was no reason why it could not have brought proceedings in negligence against Sephtons well before May 1999, at least in the absence of a written agreement with Sephtons or their solicitors that time would be extended.

[108]Finally, in this connection, it has been observed in a number of cases that an action may accrue before, even long before, the claimant knew he had a claim, or had suffered any loss, or even had any reason to suspect that that was the case, and, indeed, in some cases, the limitation period can expire before the claimant could reasonably be aware of the existence of any claim. This was pointed out by Lord Nicholls in Nykredit at 1630H. As he went on to explain, the remedy for that problem is for the legislature, not for the courts, and it has been dealt with by the legislature, through the medium of provisions such as s14A - and indeed 32 - of the 1980 Act. The point was also made by Hobhouse LJ in the first passage quoted above from Knapp.

The second issue: when did the Society’s alleged cause of action in fraud first accrue?

[109]As in relation to the claim in negligence, it was rightly common ground between the parties that, if the Society had a claim against Sephtons in fraud, a fresh cause of action arose out of each Report. The claim in fraud, being in tort, is governed by s2 of the 1980 Act, but the conclusion I have reached in relation to the claim in negligence does not necessarily apply to the claim in fraud. This is because the date when a cause of action in fraud becomes time-barred depends on s32 of the 1980 Act which provides, so far as relevant:

“(1) … [W]here in the case of any action for which a period of limitation is prescribed by this Act, … the action is based upon the fraud of the defendant … the period of limitation shall not begin to run until the plaintiff has discovered the fraud … or could with reasonable diligence have discovered it ….”

[110]As the judge said, a claimant does not “discover” a fraud until he has “material sufficient to enable him properly to plead it”. Authoritative guidance on that topic was given by Millett LJ in Paragon Finance -v- D B Thackerar & Co

[1999] 1 All ER 400

at 418B-D, in a passage cited by the judge:

“The question is not whether the plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. In this context the length of the applicable period of limitation is irrelevant. In the course of argument May LJ observed that reasonable diligence must be measured against some standard, but that the six-year limitation period did not provide the relevant standard. He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency. I respectfully agree.”

[111]The judge in this case concluded that the Society had failed to establish that time had not started to run under the provisions of s32 of the 1980 Act after December 1996, ie within the period of six years before the second action was begun in November 2002. In other words, he held that the Society had not established that the frauds could not have been discovered before 1st December 1996. His reasoning proceeded along the following lines.

[112]First, while accepting that it was “not unreasonable” for a claimant with a clear case in negligence to take no steps to discover a possible underlying fraud, he nonetheless was of the view that “Millett LJ’s formulation of the burden imposed by section 32 seems to me to require an assumption of a desire to discover whether there is a fraud. Otherwise there is a question whether [the claimant] could have discovered it with reasonable diligence makes no sense. Reasonable diligence pre-supposes a desire to investigate.” This, the first step in the judge’s reasoning, involves a short point of construction of s32 of the 1980 Act, which is obviously open to this court to reconsider.

[113]The second step in the judge’s reasoning, however, involved pure findings of fact, most of which were agreed, and none of which was controversial. The Society began investigating the question of fraud immediately after 18th June 2002, when it was first alerted to that possibility by being told that Mrs Mascord, as the personal representative of Mr Mascord, had been asked to obtain separate advice. Having been alerted to the possibility of fraud, it took the Society some 5½ months to make the necessary investigations and to issue the proceedings based on fraud on 2nd December 2002.

[114]The third step in the judge’s reasoning appears to me to have been one which might be primarily be characterised as inference. It was that, bearing in mind the evidence and arguments (including the fact that 5½ months in 2002 represented sufficient time for the Society, from the time it first considered the question of fraud, to start an action based on fraud) and applying the test required by s32(1) as explained by Millett LJ, and further developed by the judge in his first step, the judge was not satisfied that with reasonable diligence the Society could not have reasonably discovered the fraud by 2nd December 1996, ie more than six years before 2nd December 2002, when the second action was brought.

[115]On this appeal, Mr Dutton, on behalf of the Society, attacks the first and third steps in the judge’s reasoning, but, realistically, he raises no challenge to the second step.

[116]So far as the first step is concerned, I consider that the judge was right in his conclusion that it is inherent in s32(1) of the 1980 Act, particularly after considering the way in which Millett LJ expressed himself in Paragon, that there must be an assumption that the claimant desires to discover whether or not there has been a fraud. Not making any such assumption would rob the effect of the word “could”, as emphasised by Millett LJ, of much of its significance. Further, the concept of “reasonable diligence” carries with it, as the judge said, the notion of a desire to know, and, indeed, to investigate.

[117]I accept that one must be very careful about implying words into a statutory provision, and it can be said that the judge’s first step involves doing just that. However, it appears to me that the judge was not seeking to imply words, or a new concept, into the statutory provision. He was explaining what was involved in the process of deciding whether a claimant, could, with reasonable diligence, have discovered the fraud which it now seeks to plead.

[118]I turn, then, to the judge’s third step. The essence of his reasoning was that, bearing in mind the time that the Society actually took, between the date on which the possibility of alleging fraud surfaced in the mind of the Society and its advisors, and the date on which the proceedings in fraud were actually begun, namely 2nd December 2002, the Society had failed to persuade him that it could not, with reasonable diligence, have discovered the fraud within the same period, measured from the date of intervention in the practice of Payne & Co. In that connection, it is important to bear in mind that, with effect from the date of intervention, 20th May 1996, the Society had access to all the papers and records of Mr Payne’s practice, because, as it was entitled to do under Schedule 1 to the 1974 Act, the Society took possession of all those papers and records.

[119]Two points were raised before the judge and are raised before us by Mr Dutton as to why any reliance upon what happened in 2002, as a guide to what could have happened in 1996, was not justified. They were that: i) the Society was under much greater pressure in 2002, because, to its surprise, even consternation, the defendants were taking a point under the Limitation Act 1980; and ii) obtaining Mr Mascord’s own internal records was essential for the Society to be able to maintain a claim in fraud, and in 1996, unlike in 2002, there would have been no right for production of those records in advance of proceedings.

[120]The judge did not specifically rule on the first point, but said that he was prepared to assume that it had some force. As to the second point, the judge accepted, in light of the evidence summarised in the draft pleading enclosed with Wrights’ letter of 23rd September 2002, a submission on behalf of Sephtons “that disclosure of Mr Mascord’s working papers was not a necessary ingredient in discovery of the fraud with reasonable diligence”. On the other hand, the judge did not accept a further submission on behalf of Sephtons “that it was unnecessary even to ask for disclosure of Mr Mascord’s working papers before pleading fraud”. It is suggested by Mr Dutton that there is some inconsistency between these two observations. I do not agree. What the judge was saying was that, even bearing in mind that, in 1996, the CPR did not apply, and that there was therefore no right to pre-action disclosure, there would have been enough to establish a prima facie, and therefore a pleadable, claim in fraud, in light of the other facts available, by drawing an adverse inference from a refusal by the solicitors acting for Sephtons to produce the documents sought.

[121]An honest accountant (or his personal representative or former partners), who is told by a respectable firm of solicitors, acting for the Law Society and advised by counsel, that there appears to be a real possibility of a claim in fraud against him, and who is asked in this connection to produce his working papers, can reasonably be expected to produce such papers. Of course, there could be some good reason why he would not produce his working papers, but, if there were a reason other than a need or desire to hide his dishonesty, one would expect him to say so. The fact that there was no legal obligation, and no right to apply to the court, to require him to produce those papers does not alter the fact that, particularly where, as here, there would have been other factors to support a claim in fraud, adverse inferences could, even should, be drawn from his refusal to produce his working papers without good reason. There is no suggestion in the present case that there could have been a good reason for Sephtons to refuse disclosure, and, indeed, the judge was entitled to rely on the fact that, when Barlows were asked for the working papers (albeit six years later), they came up with no good reason for refusing to provide them, and, ultimately, did indeed provide them.

[122]In fact, as the judge pointed out, there were grounds for thinking that, if anything, the 5½ months which it took the Society in 2002 between first considering the possibility of fraud and actually pleading it, could well have been longer than the period which would have been reasonably required for that purpose in 1996. He put it this way:

“[T]he litigation culture in 1996 would probably have provoked a persistent refusal by or on behalf of the defendants to produce Mr Mascord’s working papers, sufficient to satisfy the proper professional concerns of the Society’s advisors in 1996 with regard to a plea of fraud. By contrast, in 2002, considerable delay in the due diligence investigation was occasioned to the Society by the fact that the defendants initially refused but then consented to production of those working papers and in the subsequent expert examination of the papers once received.”

At first sight, the word “considerable” may seem a little extreme, but, in the context of a period of 5½ months, it appears to me to be an appropriate adjective. To my mind, that factor more than cancels out any force in Mr Dutton’s point about the perceived need for speed in 2002 because of concerns over the limitation issue.

[123]Mr Dutton also contends that there was no information available to the Society prior to June 2002, which should have alerted it to the possibility that Mr Mascord may have been fraudulent. In my view, that way of putting the argument could be dangerous, because it slightly mischaracterises the question which has to be considered, and therefore may result in a wrong answer. The correct question to be considered, bearing in mind the information available to the Society once it intervened in Mr Payne’s practice, is whether, with due diligence, it could have discovered the fraud within 5½ months (although, to be more accurate, it was for the Society to satisfy the judge that, on the balance of probabilities, it could not reasonably have done so).

[124]In that connection, as Mr Michael Pooles QC, who appears with Mr Derek Holwill for the defendants, says, and as the judge accepted, significant evidence was available to the Society before or immediately upon the intervention. In summary, Mr Pooles relies on the following in this connection: i) the internal papers of Mr Payne had been made available to Mr James; ii) the Society knew of the existence of a deficiency of over £750,000 in the practice of a non-specialist sole practitioner out of London; iii) Mr James had reported that there were serious and large discrepancies going back several years; iv) the Society had immediately required an explanation from Mr Mascord after receiving Mr James’s report; v) Mr Mascord had committed suicide on the same day; vi) the Society’s advisers were able to produce a draft pleading of fraud, albeit for the purpose of submission of Sephtons’ solicitors on the basis of material which it had once the intervention occurred; vii) the Society could have asked for Mr Mascord’s working papers at any time; viii) Mr Ilett’s conclusion in November 2002 that Mr Mascord must have been dishonest when he prepared the Reports, was based substantially upon facts disclosed by the documents within the control of, or accessible to, the Society, including Mr Payne’s client ledger, the office ledger, time and accounting records, sales reserve, work in progress, fees earned and drawings records.

[125]These factors reinforce the conclusion reached by the judge on this issue. Accordingly, I am of the view that, to put it at its lowest, the judge was entitled to find, as he did, that “the Society have failed to prove that they could not with reasonable diligence have discovered the fraud by 1st December 1996”. Indeed, on the agreed facts and the findings he made, I suspect that no other conclusion was open to him.

The third issue: are Sephtons estopped from relying on the 1980 Act?

[126]The Society’s case on this issue is that Sephtons’ solicitors, Barlows, represented to the Society’s solicitors, Wrights, that they would not take a limitation point, and the Society relied upon this by not issuing proceedings until May 2002.

[127]In this connection, it appears to me that, in the absence of what was said in Barlows’ letter of 18th May 2001, the estoppel argument would have no foundation at all. It is true that, from June 1999, Barlows requested the Society to await the outcome of the KPMG case, but that was a simple proposal for delay which the Society and its advisors were entitled to accept or refuse. I do not see how it can be said to carry with it an implied statement that no limitation point would be taken, or, to put it another way, to include an implied offer that no limitation point would be taken. This is particularly so in light of the judge’s finding that there was no question of any arguable sharp practice on the part of Barlows, in the sense of proposing delay with a view to trapping Wrights, and therefore the Society, into rendering a claim which might be partly time-barred into a claim which was wholly time-barred. In general, it seems to me that a solicitor acting for a proposed defendant, when suggesting to an intending claimant’s solicitor that the issue of proceedings be delayed for a genuine reason, is entitled to assume that the intending claimant and its solicitors are able to look after themselves so far as Limitation Act implications are concerned. As already indicated, I do not rule out the possibility of a different conclusion if it could be shown that the proposed defendant’s solicitors have been guilty of sharp practice, but there is no question of that here.

[128]The letter of 18th May 2001 does, to my mind, give one pause for thought, but in the end I agree with the judge: it is not expressed in clear enough terms to give rise to an estoppel. The terms of the letter cannot fairly be said to amount to a clear indication that liability is accepted, although the letter does amount to an indication from Barlows that liability for negligence is likely to be accepted on behalf of Sephtons. What is important are the conditional way in which the concession is expressed (“… they would be prepared to concede liability …”), the fact that it is made clear that liability is not actually being conceded (“… before our clients would be prepared to make such a concession …”), and, to a lesser extent, the requirement for a quantification of damages, the proposal of a meeting and the fact that the letter was expressly “without prejudice”.

[129]The judge was plainly right to express the view that the letter of 18th May 2001 “did amount to a reasonably clear representation that the defendants and their advisers did not then have in mind the advancing of a limitation defence to all or any part of the claim”. However, it seems to me that there are two problems, which may in practice be connected, with the contention that the letter amounted to a positive representation to that effect. First, as already mentioned, the letter was expressed in tentative terms, making it clear that there is no concession on liability, merely an expression of expectation of such a concession. Hence, it would not be right to characterise the letter as containing a positive representation whether put in terms of irrevocable intention or assurance, that no limitation point would be taken. Secondly, until the House of Lords gave judgment in Cave on 25th April 2002, the law would have been understood to have been such that there was no limitation defence, because of the provisions of s32(1)(b) as interpreted by the Court of Appeal in Brocklesbury -v- Armitage & Guest (note)

[2002] 1 WLR 598

, a case decided in 2000, and overruled by Cave. Accordingly, it is scarcely surprising that, as at May 2001, Barlows were not raising any limitation point in correspondence.

[130]Even if the letter of 18th May 2001 could otherwise give rise to an estoppel, it seems to me that the Society might well be in some difficulty in raising an estoppel. I do not see how the estoppel could have the effect of reviving a cause of action which was already time-barred. Consequently, the only claims which could possibly be pursued by the Society against Sephtons, if there were an estoppel arising out the letter of 18th May 2001, would be in relation to the last of the Reports, namely that produced in late 1995. Even that might have its problems. Wrights failed to reply substantively to the letter of 18th May 2001 for nearly six months, and so the Society could be said to be the author of its own misfortunes, particularly as Wrights’ reply resulted, within some two months, in Barlows denying that they had conceded liability. Secondly, as the judge said, the Society might have had difficulties in establishing reliance as Mr Miller was firmly of the view that there would be no Limitation Act problems in relation to any claim against Sephtons until the sixth anniversary of the intervention in the practice of Payne & Co, so that proceedings could be safely issued at any time before May 2002.

[131]Accordingly, I consider that the judge was right in his conclusion that the Society’s estoppel argument should be rejected.

Conclusion

[132]In these circumstances, I am of the view that the judge reached the right conclusion on all three issues, and I would therefore dismiss the Society’s appeal.

[133]In his judgment, Neuberger LJ has set out the preliminary issues before the judge, which are the subject of this appeal, and the factual and legal background in which they arise. I agree with his conclusions and his reasons in relation to the second and third issues, namely as to when the cause of action in fraud arose, and as to whether Sephtons are estopped from relying on any limitation point. However, I have reached a different conclusion on the first issue, namely the date upon which the Law Society’s cause of action in negligence accrued.

[134]It is rightly common ground that the Society had a cause of action in negligence against Sephtons in relation to Mr Mascord’s preparation of each of the Reports in respect of Mr Payne’s practice, which were provided to the Society annually between the end of 1989 and the beginning of 1996. I consider, however, differing from the conclusion reached by the Deputy Judge, that the Society’s cause of action in relation to each Report accrued on the date on which the Society resolved for the first time to pay from the Fund compensation to a client whose monies were misappropriated after the Report in question was provided to the Society. In other words, in the light of the unusual facts of this case, I am of the view that the cause of action did not accrue on the first occasion of misappropriation, but on the occasion of the first decision to compensate in respect of a misappropriation after the Report in question.

[135]The question when what Lord Nicholls called “measurable, relevant loss” (at 1631D in Nykredit Mortgage Bank plc -v- Edward Erdman Group Ltd (No 2)

[1997] 1 WLR 1627

) occurs is often difficult to assess in professional negligence cases (and, indeed, in other types of case as well). The number of reported cases on this topic, only some of which have been referred to in Neuberger LJ’s judgment, serve to illustrate that point. Furthermore, as the analysis of the law and the authorities in the speech of Lord Nicholls in Nykredit indicate, although the question must be determined in accordance with principles established by the authorities, the answer in any particular case must, at least to some extent, be fact-sensitive.

[136]On the facts of the present case, I am of the view that no relevant measurable loss was suffered by the Law Society until it first determined to meet a claim made against the Compensation Fund by a client whose monies had been misappropriated by Mr Payne (except that this summary of our conclusion may have to be subject to a qualification if it could be shown that the Law Society had wrongly rejected such a claim, or had unreasonably delayed in considering such claim. It may be that, in such a case, damage should be treated as having been suffered from the date on which the Society should have accepted that the Fund would meet the claim. However, it is unnecessary to decide whether or not such a refinement is appropriate, because there can be no suggestion that the outcome of this appeal would be any different whether this refinement is right or wrong.)

[137]My reason for reaching this conclusion, and for disagreeing with the judge, is that his analysis fails to distinguish between loss (which, when suffered, does result in the cause of action accruing) and a mere risk of loss (which of itself does not result in the cause of action accruing: it merely gives rise to a risk of a cause of action accruing in due course).

[138]Although, as I have indicated, it can be dangerous to refer to the facts of other cases when deciding when actual damage was suffered and the cause of action accrued in a particular case, the analysis of Lord Nicholls in Nykredit provides a good illustration of the difference between actual loss and risk of loss. If a valuer negligently over-values a property, as a result of which a bank lends more money than it would otherwise have done on the security of the property, there may be no more than a risk of loss at the time the loan is actually made (and for some time thereafter). That is because the value of the security, together with the value of the borrower’s covenant to repay, may exceed the amount of the loan. However, when and if the combined value of the secured property and the borrower’s covenant fall below the value of the loan, the risk of loss is, as it were, transmuted into an actual loss, and the cause of action accrues (see at

[1997] 1 WLR 1631

H- 1632C).

[139]Reverting to the facts of the present case, no loss was suffered by the Law Society, as trustee of the Compensation Fund, at the time that it received one of Mr Mascord’s annual reports on the practice of Payne & Co, and even when Mr Payne misappropriated monies from his client accounts, no loss was actually suffered by the Society. When it received each report, and, as result, permitted Mr Payne to continue in practice, the Society, in its capacity as trustee of the Compensation Fund, suffered a risk of loss, and that risk of loss was substantially increased when Mr Payne thereafter first misappropriated client monies, and on each subsequent misappropriation. However, although, on each such occasion, the Society suffered an increasing risk of loss, I do not accept that it could fairly be said that the Society suffered actionable loss. The mere fact that one could say that, in terms of its net worth, the Society, as trustee of the Compensation Fund, was worse off than it would have been if, for instance, it had not received the unqualified report from Mr Mascord, or if the subsequent misappropriations of client funds had not occurred, is not enough to result in the conclusion that the Society had suffered actionable damage by that time.

[140]The mere fact that a claimant is potentially worse off as a result of the defendant’s negligence cannot be enough to justify the conclusion that a claimant has suffered actionable damage. If it were otherwise, the decision in Nykredit would have been different, because it can fairly be said that, from the very moment it made the loan, the lender was worse off than it should have been, because his loan was less well covered (in the form of the value of the secured property and the borrower’s covenant) than it would have been if the defendant valuer had provided a non-negligent valuation of the property.

[141]Indeed, carried to its logical conclusion, one could say that a person who receives negligent advice is worse off from the moment he receives the advice, because by then he is at risk of making a decision, based on the advice, which would ultimately result in his being worse off.

[142]So far as the other authorities are concerned, it appears to us that, with one possible exception, they do not conflict with the proposition that a cause of action in negligence (at least where it involves economic loss) does not accrue merely when a risk of loss arises. Cases such as Forster -v- Outred

[1982] 1 WLR 86

, Polley -v- Warner Goodman & Street [2003] PNLR 40, Knapp -v- Ecclesiastical Insurance Group Plc [1998] PNLR 172 and Bell -v- Peter Browne & Co

[1990] 2 QB 495

were all cases where the defendant was advising or acting for the claimant in connection with a transaction where the claimant was to do something which involved him acquiring a right or asset, and where, as a result of the defendant’s alleged negligence, the value of that right or asset was diminished. In those cases, the date upon which the right or asset became reduced in value (or lost its value) was the date upon which the claimant’s cause of action accrued, because it was on that date that he suffered measurable loss. Except that in most or all of those cases it can be said that, in one sense, the loss was contingent, in the sense that it was dependent on something which might occur in the future (such as the combination of damage by fire and the insurer voiding the policy in Knapp). However, the essential point is that actual loss was suffered much earlier than the occurrence of the contingency, the loss in question being a diminution in the value of the right or asset in relation to the acquisition of which the defendant was acting or advising.

[143]In the passage in Forster at page 94, cited by Lord Nicholls in Nykredit at 1630C-F, it was said that “actual damage” included “liabilities which may arise on a contingency”, but I do not consider that that is inconsistent with the view I have reached. The essential point in Forster, and the other cases to which I have just referred, was that, in the course of the relevant transaction in which the defendant has advised or acted, the claimant had acquired an asset, and the diminution or extinction of the value of the asset was the damage which resulted in the cause of action accruing. The reference to a contingency was to explain that the present loss or damage was attributable to a contingency which might occur in the future (the fire and the insurers voiding the policy in Knapp, as mentioned above).

[144]By contrast, the circumstances in which Sephtons provided the annual report on Payne & Co did not involve the Society acquiring an asset or a right; indeed, it involved the Society doing nothing. Accordingly, unlike the claimants in the cases discussed above, the Society did nothing other than to continue to suffer an ongoing risk of a loss in its capacity as trustee of the Compensation Fund. There was no question of any right or asset of the Law Society being diminished, merely an increase in its risk of loss. In my view, on its own, that is not enough to start time accruing under s2 of the Limitation Act 1980.

[145]I believe that this conclusion is substantially in accordance with the judgment of the majority of the High Court of Australia in Wardley Australia Limited -v- State of Western Australia

(1992) 175 CLR 514

, 109 ALR 247, the centrally relevant passages of which have been set out in the judgment of Neuberger LJ. Although observations in the judgments of Hobhouse and Buxton LJJ about that case in Knapp can be said to cut both ways, I note that, at 192C, Buxton LJ ended his brief summary of the High Court of Australia’s decision in these terms:

“Since P's guarantee only ‘generat[ed] an executory and contingent liability upon the part of [P], [P] suffered no loss until that contingency was fulfilled and time did not begin to run until that event.”

Immediately thereafter, he went on to say in relation to that observation and a number of others:

“None of these propositions seem to me, any more than they seemed to the High Court of Australia, to be inconsistent with the current English law.”

[146]Further, although I would again acknowledge the limitations, even the danger, of relying upon a case concerned with when time begins to run against a claim in contract, I derive a little support from the careful reasoning of Neill J in The Caroline P

[1985] 1 WLR 553

. He held that time normally begins to run against a claim on a general indemnity only from the moment when the liability of the indemnified is accepted by him or determined against him by the court. This was ultimately based, as I read the judgment, on the proposition that, in the absence of a provision to the contrary, an indemnity cannot be called on by the indemnified unless and until the indemnified has paid the money in respect of which he claims the indemnity - see at 568E.

[147]The one case which may be said to be inconsistent with my conclusion is the decision of the Court of Appeal in Gordon -v- J B Wheatley & Co [2000] Lloyds LR PN 605. However, it is clear from the way in which Kennedy LJ analysed the law and the basis on which he reached his conclusion, that he was not seeking to lay down any new principles, merely to apply the existing principles to the facts of that case. The factual context in which the decision was reached was rather different from that in this case, and I am wholly unpersuaded by the contention that the reasoning and decision in Gordon would justify my reaching a decision different from that which I have arrived at.

[148]I readily acknowledge that there are cases in which actual damage occurs but is undiscovered and undiscoverable by the victim until after the expiration of the limitation period. Thus, in relation to physical damage, Pirelli General Cable Works Ltd -v- Oscar Faber and Partners

[1983] 2 AC 1

illustrates how the victim may be left without a meaningful remedy unless and until statute modifies the limitation period, as it did, for example, in sections 11, 12, 14A and 14B of the 1980 Act. However, whilst the common law continues to tolerate the uncompensated victim in some such circumstances, there are sound policy reasons for ensuring that it does so no more than the application of principle demands. In Nykredit at 1633D Lord Nicholls said that “within the bounds of sense and reasonableness, the policy of the law should be to advance, rather than retard, the accrual of a cause of action” In my judgment, the conclusion reached by the Deputy Judge and by Neuberger LJ exceeds “the bounds of sense and reasonableness”. Neither the authorities nor sense and reasonableness require that the accrual of the cause of action in negligence occurred at the time when, unknown to the Law Society, Mr. Payne first misappropriated a client’s money following a negligent report by Mr. Mascord. If I am right and time did not start to run at that point, the logical point of the accrual of the cause of action is the first decision to compensate in respect of a misappropriation after the report in question.

[149]In these circumstances, I would allow the appeal so far as it relates to the claim in negligence, but I would dismiss the appeal insofar as it relates to the claim in fraud.

[150]Like Maurice Kay LJ, and in disagreement with Neuberger LJ, I differ from the judge’s admirable judgment on one point only, that is, the date when the cause of action accrued. Against the background of Neuberger LJ’s comprehensive review of the facts and the law, I can express my reasons shortly.

[151]The tort of negligence is not complete until actual damage is suffered. Risk of loss is not enough. Thus, for example, if someone negligently drives through a red light when I am crossing the road, I have no cause of action unless I am actually hurt. I cannot sue him merely for making my crossing more dangerous. Pinpointing the date of actual damage seems to have proved more difficult in cases involving negligent advice or lack of advice. According to the classic statement from Forster v Outred

[1982] 1 WLR 86

(as adopted in later cases up to the House of Lords), “actual damage” in such cases means any detriment, liability, or loss capable of monetary assessment, including a liability “which may arise on a contingency”.

[152]The argument in the present case has centred on the words “liability which may arise on a contingency”. Those words must not be treated as though they were in a statute. They are intended simply to describe one example of actual damage in the ordinary sense of that term. To my mind, they naturally connote a present legal obligation, from which liability or increased liability will follow on the happening of a future event. Although some of the cases may have stretched that natural meaning, I do not understand any of them to go as far as to say that the mere risk or increased possibility of damage is by itself enough. Something else is needed as a trigger. That trigger typically is a legal transaction to which the claimant is a party, such as the acquisition of a right, or the incurring of an obligation, which is potentially less secure or more hazardous, than it would have been if proper advice had been given. The inadequacy may be in the terms of the transaction itself, or in its circumstances, such as the failure to take some associated step which would have made it more secure. There is immediate detriment, in that the legal right or obligation is less valuable or more onerous than it otherwise would have been, even though its full consequences are contingent on future events.

[153]In Daniels v Thompson

[2004] EWCA Civ 307

(a decision to which I also was a party) Dyson LJ categorised these cases as examples of “inadequate transactions”: “There have been several cases where a negligent person (usually a solicitor) failed adequately to protect the client’s interests and/or procured less valuable rights for the client than should have been procured and/or did not secure for the client that to which he or she was entitled. In each of these cases the court has held that the client suffered loss when what I shall for convenience call “the inadequate transaction” was concluded, and not at the later date when the risk against which the solicitor had failed to provide protection eventuated.” (para 18) He included in this category Forster v Outred

[1982] 1 WLR 86

, Melton v Walker & Stanger [1981] 125 SJ 861, Baker v Ollard & Bentley [1982] 126 SJ 593, D W Moore and Co Ltd v Ferrier

[1988] 1 WLR 267

, Bell v Peter Browne & Co

[1990] 2 QB 495

, Knapp v Ecclesiastical Insurance Group Plc [1998] PNLR 172.

[154]He commented: “In each of these cases, the client was held to have suffered damage as soon as he was committed to the inadequate transaction. The transactions were inadequate because there was inherent in each of them the risk that a contingency would occur which would cause actual loss to the claimant. The fact that it was uncertain whether the contingency would actually occur went to the quantification of damage, and not to the question of loss itself. Thus, in Forster it was uncertain whether the plaintiff would ever be liable to pay her son’s creditors, but this did not prevent her from suffering actual damage as soon as she was committed to the inadequate transaction and her property was encumbered with a charge as security for a loan made to her son by a third party. Her property became worth less than it would otherwise have been if it had not been made the subject of a charge as the result of the solicitor’s negligence.” (para 24)

[155]I agree that Gordon v J B Wheatley [2000] Ll LR PN 605 appears to take this reasoning a stage further, although there is no indication that the court thought that it was extending the law as established by Forster v Outred. It concerned a private mortgage scheme operated by the claimant, which, because of his solicitors’ failure to advise him to register under the Financial Services Act, left him open to the risk of action by the SIB to require him to underwrite losses. It was held that a cause of action in negligence against the solicitors arose on each occasion when a client made an investment into the scheme.

[156]Arguably, it can be said that each such transaction with a client was “inadequate” in the sense that it opened the claimant to risk of action by the SIB. With respect, however, I see this decision as taking the concept to the limit, or perhaps beyond. The risk of action by the SIB was described by Kennedy LJ as “a liability, albeit a contingent liability, a fetter on his assets…” ( p 612). However, it was not a liability arising directly from the investment transaction. The enforcement powers of the SIB were quite independent of the rights and liabilities arising under the scheme. The link was at the most indirect, in that the investment in the mortgage scheme provided simply the occasion for the SIB to act. I accept, of course, that the decision must be treated as binding as far as it goes, but I see no reason to pursue its logic further than required by its own unusual facts.

[157]The present case, in my view, is readily distinguishable from all those cases. The Fund was not party to the transactions between Mr Payne and his clients, and they did not, in themselves, impose any liability on the Fund, contingent or otherwise. The Fund was not party to any “inadequate transactions”. Any potential liability on the Fund arose from its statutory functions, which pre-existed, and were quite independent of, the alleged negligence. The misappropriations no doubt gave rise to an increased risk that the Fund would ultimately be called upon to pay, but, even on the widest view of the statement in Forster v Outred, they did not in themselves cause it any immediate loss.

[158]For these reasons, in addition to those given by Maurice Kay LJ, I would allow the appeal on the first ground.

ORDER

1 – Paragraphs 1-3 of the order of Michael Briggs QC dated 6 February 2004 (“the order”) be set aside 2 – It is declared that the Claimant’s causes of action in Claim No.HC020C01293 (“the Negligence Action”) and Claim No. HC020CO3605 (“the Fraud Action”) accrued when the Claimant first resolved to make payment out of the Compensation Fund to a former client of Mr Payne. 3 – The appeal is therefore allowed in so far as it relates to the expiry of the limitation period in the Negligence Action. 159. Negligence Action (1). Are the Claimant’s claims against the Defendants statute barred by reason of the provisions of the Limitation Act 1980? Answer: No in the case of the Negligence Action and Yes in the case of the Fraud Action (2). In particular, did the Claimant’s causes(s) of action against the Defendants accrue(a) On the date when each or any of the Reports referred to in paragraph 10 of the Particulars of Claim was relied upon by the Claimant as averred in paragraph 16 of the Particulars of Claim? Answer: No.

(b) When each such Report was relied upon by the Claimant to grant or renew Mr Payne’s practising certificate from time to time? Answer: No.

(c) Upon the various dates, subsequent to each of the Defendants’ Reports, upon which Mr Payne first misappropriate his clients’ money and /or caused money to be unlawfully removed from his client account, and/or failed properly to account to his clients in respect of money deposited with him? Answer: No.

(d) When the first payment was made out of the Compensation Fund to those whose funds were misappropriated by Mr Payne and/or to those who suffered loss as a result of Mr Payne’s dishonestly or false accounting? Answer: See paragraph 2 of this Order. The Claimant’s causes of action in respect of each of Mr Mascord’s reports accrued when the Claimant first resolved to make a payment out of the Compensation Fund to a former client of Mr Payne.

(e) When a claim was first made on the Compensation Fund to those whose funds were misappropriated by Mr Payne and/or to those who suffered loss as a result of Mr Payne’s dishonestly or false accounting? Answer: No.

(f) When the Claimant intervened in Mr Payne’s practice? Answer: No. (3) Are the Defendants are estopped and/or precluded from relying on the Limitation Act 1980 as a defence because the solicitors acting for the Defendants promised and/or represented to the Claimant that they would not rely on such a defence, as alleged in paragraph 4 of the Claimant’s Reply herein and the Further Information in respect thereof [“the Estoppel Issue”]? Answer: No. Fraud Action (1). Are the Claimant’s claims against the Defendants statue barred by reason of the provision of the Limitation Act 1980? Answer: No. (2). In particular, did the period of limitation in respect of the Claimant’s claims herein only began to run after 1 December 1996 because the Claimant did not discover, and could not with reasonable diligence have discovered that Mr Mascord’s representations were fraudulent until after that date? Answer: No. 5 – Accordingly there be judgment for the Defendant in the Fraud Action only. (1). the Defendants to pay the Claimant’s costs of the issue of accrual of the cause of action in negligence; and (2). the Claimant to pay the Defendants’ costs of the Estoppel Issue to be assessed on the standard basis in each case if not agreed. (Order does not form part of approved Judgment)

Cited in 42 later judgments

and 33 more of the most senior