UK: Footnotes – April 2011

Last Updated: 20 April 2011
Article by Kate Ayres

Norwich Pharmacal order sought against lawyers

In United Company Rusal PLC and others v HSBC Bank PLC and others (2011) the court considered whether to make a Norwich Pharmacal order against the firm Debevoise & Plimpton LLP for disclosure of documents. The applicants (Rusal) were part of a large corporation in Russia who were in dispute with an investor (Interros) over the control and management of Norilsk Nickel. Proceedings had been commenced by Rusal in a number of jurisdictions and disclosure was sought in support of proceedings in Russia and Nevis, to evidence an agreement between the relevant parties and the documents obtained by the firm under the Money Laundering Regulations.

A Norwich Pharmacal order requires a respondent, who is involved or mixed up in a wrongdoing, whether innocently or not, and is unlikely to be a party to the potential proceedings, to disclose documents or information to the applicant. To obtain a Norwich Pharmacal order the "mere witness" rule must not be infringed and the order must be necessary in the interests of justice.

The law firm resisted the application on the basis that they were lawyers instructed by Interros, including in relation to the Nevis proceedings. Although Rusal accepted that they were not entitled to privileged documents, the firm argued that it could not disclose information that would not be in its client's best interests to disclose, following Hilton v Barker Booth and Eastwood (2005).

The court considered the case law applying to banks and held that in considering whether a law firm has become involved in wrongdoing it is necessary to consider whether lawyers in the jurisdiction have become involved rather than some other office. The court found that Rusal had a good arguable case, for the purposes of the application, of wrongdoing by the defendants on one ground namely that a block of shareholders had been formed to counter Rusal's activities. There was limited evidence of involvement by the firm, only a series of forms of contract sent to shareholders in Norilsk as part of the offer memorandum on which the address of the firm was given for correspondence. The firm submitted that lawyers should always be regarded as mere witnesses and not involved in any type of wrongdoing on policy grounds. The court accepted that if a lawyer is given a document by a client to advise then he will be a mere witness, but if the lawyer drafts the document then he could be regarded as involved in the wrongdoing (unknown to the lawyer) if the document forms a part of it. The judge found that there was a good arguable case that the London office of the firm was innocently involved in the alleged wrongdoing. However, the court rejected the application on the basis that the disclosure was not necessary as other routes were available to obtain the documents.

Although not necessary the court went on to find that the degree of specificity of the document request was insufficient. The court also considered whether it would have exercised its discretion to grant the order. The court noted that while lawyers are not immune from being compelled to give evidence or produce non-privileged documents, the court will scrutinise such an order closely due to the risk of injustice to the client and the lawyer, particularly where the relationship is in relation to litigation. The court found that the facts of reported cases suggest that an appropriate case for an order against an innocent lawyer will be likely to be one where fraud is alleged against the client.

Court states that a general obligation to obtain medical evidence on elderly clients would be insulting

In Thorpe v Fellowes Solicitors LLP (2011) the court considered a solicitor's duties towards an elderly client who suffered from dementia. The firm had been instructed to sell a property for Mrs Hill, and to remit the proceeds to Mrs Hill's daughter. The expert medical evidence showed that Mrs Hill had been suffering from dementia at the time of the instruction, although that did not mean that she lacked actual capacity to instruct the defendant on the sale of the property or the ability to exercise her free will. The court confirmed that a solicitor is only required to make inquiries as to a person's capacity to contract if there are circumstances such as to raise doubt in the mind of a reasonably competent practitioner. The court stated that there is plainly no duty on solicitors in general to obtain medical evidence on every occasion that they are instructed by an elderly client just in case they lack capacity, and such a requirement would be insulting and unnecessary. The evidence including contemporaneous attendance notes showed that the solicitor in question had been well aware of her duties to Mrs Hill, and the solicitor had acted properly by asking Mrs Hill to attend a face-to-face meeting at the firm's offices so that she could satisfy herself that Mrs Hill wanted to sell the property and understood the implications of the transaction. Accordingly there had been no duty on the defendant to seek medical evidence on Mrs Hill's mental health. Once again, the case makes clear how important attendance notes can be in the defence of a professional negligence claim.

Privilege in the context of lender claims

In Mortgage Express v Sawali (2010), the High Court considered the question of whether a borrower's rights of privilege were overridden by a declaration in the mortgage application providing that: "I/We declare and agree that ... (17.1) I/We irrevocably authorise my/our conveyancer to send their entire file relating to the whole transaction (not just the loan) to you at your request." The lender was seeking copies of conveyancing files of a predecessor firm of the defendant, where, in the usual way, there had been a joint retainer with the lender and the borrower. The defendant accepted that the lender was entitled to documents created in the course of the lender's retainer, but argued that it was unable to provide documents in which the borrower had rights of privilege. The defendant also made submissions to the Court that the declaration might not extend to privileged material because:

  • it did not expressly refer to privilege;
  • the public policy in favour of protecting privilege is so strong that courts do not readily assume it has been overridden;
  • it may have been intended to refer to non-privileged documentation relating to the purchase of the property;
  • it may have been intended to operate only during the course of the transaction in question;
  • the declaration might be regarded as so unusual or onerous that further steps should be taken to bring it to the attention of the borrower in order for it to be incorporated into a binding contract; and
  • the borrowers might have been dealing as consumers and the declaration may be unfair under the Unfair Terms in Consumer Contracts Regulations 1999.

The Court held that the defendant should provide the entire files to the lender. The declaration was unambiguous, irrevocable and binding on both the borrower and the lender. The Court held that it was obliged to take into account the background facts and commercial commonsense when construing the declaration. The clause had to be read in the context of a mortgage transaction where the solicitor is assisting both parties and there needs to be frank disclosure. The Court held that the clause was necessary to the transaction, and accepted submissions that lenders can have no way of knowing whether retained solicitors have complied with their contractual or tortious duties unless they can see the whole of the file. The Court came to this conclusion despite the fact that paragraph 8(c) of the SRA's guidance to rule 4 of the current Code of Conduct state that a solicitor cannot provide the whole of a conveyancing file to a lender without the borrower's consent.

This decision may make it easier for lenders to bring claims against solicitors, as they will have access to further information from the file where such a declaration exists. On the other hand, in some circumstances it might make it easier for the solicitor to mount a defence to the claim as they will also be able to refer to the whole of the file without any constraints on privilege. In each case where the point is in issue an important factor is to consider the exact wording of the declaration in issue, whether it is effective to waive privilege, and what it does and does not entitle the lender to see.

Is behaviour objectively dishonest, where people might disagree on the question?

The Court of Appeal considered in Starglade Properties v Nash (2010) whether the defendant director (Nash) had dishonestly assisted in a breach of trust by the company (Larkstore) of which he was sole member and director. It was accepted that Nash had assisted in a breach of trust, the question remaining whether Nash's actions had been dishonest.

Under the terms of an agreement entered into by Nash and Larkstore, Larkstore agreed to pay Starglade half of the net monies received from litigation brought against a third party and to hold all monies on trust for division. The proceedings were settled on 26 January 2007 and Larkstore received approximately £300,000, 50 per cent of which was held on trust for Starglade under the agreement.

At this point Larkstore was insolvent. However, instead of accounting to Starglade and taking steps to put Larkstore into administration between 31 January and 27 March 2007, Mr Nash distributed the whole amount amongst creditors including himself. Four of the six payees were connected with Nash.

The Court of Appeal reviewed the authorities, Royal Brunei Airlines v Tan (1995), Twinsectra v Yardley (2002), Barlow Clowes v Eurotrust Ltd (2006) and Abu Rahman v Abacha (2007) and concluded that the correct test for dishonesty was that laid down in Twinsectra, as interpreted in Barlow Clowes, namely that an enquiry into a defendant's views as regards what the normal standards of honesty are is not part of the test. The court must look at what a defendant knew about the transactions or other matters in question: the subjective element of the test. However, it is sufficient for a defendant's conduct to be dishonest judged by the ordinary standards of honest people: the objective element of the test.

At first instance the judge had concluded that the relevant standard was what all normal people would regard as dishonest and that where some people would regard the conduct as dishonest and others would not, the conduct was not dishonest. The judge concluded that, even though he had deliberately preferred other creditors, Nash had not acted dishonestly because the question of whether some directors may prefer some creditors over others is not one most people knew the answer to as a matter of law, nor was it one on which there would be a general view as to whether such actions were dishonest. Nash did not consider that his own actions were dishonest. The judge said the question of whether the actions were dishonest might depend on the nature of the advice received.

The Court of Appeal disagreed. It held that the relevant standard is the ordinary standard of honest behaviour and the fact that some might regard the standard as set too high is irrelevant. None of the leading authorities established that the standard was flexible and was to be determined by anyone other than by the court on an objective basis. Nash's clear purpose had been to frustrate Starglade. This was achieved by leaving them to pursue an insolvent company without assets. Nash could not be protected on the basis that he had sought limited advice from his solicitor. The Court concluded that the deliberate removal of assets of an insolvent company specifically for the purpose of defeating the just claim of a creditor should not and does not accord with honest standards of commercial behaviour.

Court suggests Solicitors Disciplinary Tribunal publish Indicative Sanctions Guidance

In Hazelhurst and others v Solicitors Regulation Authority (2011) the Court allowed an appeal against a Solicitors Disciplinary Tribunal decision imposing a fine of £4,000 each on partners who had failed to adequately supervise an employee who had taken money from the firm's client accounts.

The matter was self-reported to the SRA after the fraud was discovered and the partners had ensured that the clients were compensated in full. The partners had submitted that it should be taken into account that the breaches of the Solicitors' Accounts Rules were strict liability, they had taken steps to ensure the problem would not happen again and to return clients' confidence in them, but the SDT had not addressed the submission and fined them a global sum. The Administrative Court, overturning the SDT's decision, found that a reprimand only was appropriate in this case. The Court noted that, unlike other regulatory bodies, the SDT has published no Indicative Sanctions Guidance and that such guidance would be a valuable reference tool.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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