UK: Negligence in Regulatory Investigations

Last Updated: 11 July 2002
Article by James George
Will circumstances ever arise where a regulated person is able to succeed in a negligence claim against a regulator? This issue was recently considered in the case of Miller v Law Society (The Times, 3 June 2002), in the context of an allegedly negligent investigation of a solicitor’s practice.

The decision in Miller v Law Society

Mr Miller was a solicitor in sole practice. In August 1996, the Law Society appointed an investigating accountant to inspect Mr Miller’s accounts. The accountant reported that the books did not comply with the Solicitors Accounts Rules.

In October 1997, the Law Society intervened in Mr Miller’s practice, with the result that his funds were vested in the Society and his practising certificate suspended. Under the Solicitors Act 1974, Mr Miller had 8 days in which to give the Society 48 hours’ notice and then issue an application in the High Court to challenge the intervention. He failed to do so.

The Solicitors Disciplinary Tribunal subsequently found that Mr Miller had failed to keep proper accounts and had used client funds for the wrong purposes. He was suspended from practice and ordered to pay the costs of the investigation.

Mr Miller did not dispute the disciplinary findings, but when the Law Society sought to enforce the costs order he raised a counterclaim for damages. He alleged that the investigating accountant had been negligent in conducting his investigation and preparing his report, which led the Society to intervene in Mr Miller’s practice and prevent him from carrying on his business. The main issue for the judge was whether the investigating accountant could owe Mr Miller any duty to take care in conducting his investigation and preparing his report.

The judge noted that two consequences might follow from an adverse report by an investigating accountant: the Law Society could intervene in the solicitor’s practice, in which case the solicitor could challenge the decision in the High Court; and the Society could bring proceedings in the Solicitors Disciplinary Tribunal, which the solicitor could defend. Thus the accountant’s investigation was part of “a unitary and indivisible statutory process” which provided the solicitor with adequate remedies. The judge therefore held that a private law action could not be used to challenge either the Law Society’s decision to intervene or the process leading to that decision. The scheme of investigations and interventions under the Solicitors Act gave rise to issues in public law only, and private law claims in negligence should not be allowed to “intrude into this exclusively public law field”.

Although the outcome in this case appears correct, the judge was not referred to a number of important cases in which the courts have considered similar situations. Those decisions suggest that this case could have been analysed rather differently.

Public or private law?

In dismissing Mr Miller’s claim, the judge relied on a version of the principle of “procedural exclusivity”. As originally formulated in O’Reilly v Mackman [1983] 2 AC 237, this meant that a person who alleged violations of public law requirements was normally required to apply for judicial review. Bringing an ordinary civil action in order to obtain the same remedies while avoiding the procedural safeguards of judicial review would amount to an abuse of process. By analogy, the judge in Miller held that the statutory application to the High Court was the only procedure available to the claimant.

However, in recent years the exclusivity principle has been relaxed in favour of a more flexible approach. The current position is that a party will only be required to proceed by way of judicial review if the case is exclusively concerned with public law rights (Roy v Kensington & Chelsea FPC [1992] 1 AC 624) or if it would be an abuse of process to bring an ordinary action, e.g. where there has been delay and the claimant is simply seeking to avoid the short time limit for judicial review (Clark v University of Lincolnshire and Humberside [2000] 1 WLR 1988).

Furthermore, the Courts have long accepted that O’Reilly does not preclude a party from bringing a negligence claim where questions as to the validity of actions taken by public authorities arise only incidentally. In Davy v Spelthorne BC [1984] AC 262, the House of Lords refused to strike out a negligence claim relating to advice given by a local planning authority which resulted in the claimant failing to appeal against an enforcement notice. The House of Lords held that the claim did not involve any public law issue, as the validity of the notice was not being challenged; and that the negligence action was not an abuse of process, because the claimant was unlikely to recover damages in any other way and judicial review was probably not available. (See also Lonrho v Tebbit [1991] 4 All ER 973.)

Similarly, Mr Miller was not challenging the legality of the Law Society’s intervention, judicial review was unlikely to be available, and it was unlikely that damages would be awarded under the Solicitors Act procedure. Nevertheless, the judge appears to have been persuaded that a private law action was precluded by judicial remarks in O’Reilly and Buckley v Law Society [1983] 1 WLR 985 (a case decided shortly after O’Reilly concerning the intervention provisions of the Solicitors Act). Although Mr Miller’s claim could perhaps have been regarded as an indirect attack on the decision to intervene in his practice, it is questionable whether the judge was right to dismiss his claim on this basis.

Could a duty of care ever arise?

Because the judge regarded Mr Miller’s statutory right to apply to the High Court as ruling out any private right of action, he did not go on to consider the relevant principles of the law of negligence in any detail. However, several recent cases have raised the question of whether it is fair, just and reasonable to impose a duty of care on a regulatory body which acts in the public interest, in circumstances where the claimant has a right to appeal against the regulator’s decisions.

In Harris v Evans [1998] 1 WLR 1285, an inspector from the Health and Safety Executive gave incorrect advice to local authorities, which led them to issue notices prohibiting the claimant from operating his business. The claimant had a statutory right to appeal against those notices, but instead he sued for the losses caused to his business. The Court of Appeal held that the HSE did not owe a duty of care to the claimant. Imposing a duty of care would be detrimental to the proper discharge by the HSE of its responsibility for protecting public safety, and the legislation provided adequate protection for regulated businesses through the appeal procedures for challenging notices.

In Harris, bringing an appeal would have suspended the effect of the prohibition notice. In other situations, an enforcement decision remains in force until the appeal has been determined, so that the decision may continue to cause loss until it is overturned. This was the position in Bowden v Lancashire County Council [2001] BLGR 409. A local authority applied to the Magistrates’ Court, without notice to the claimant, for an order cancelling her registration as a child minder. The claimant successfully exercised her statutory right to apply to the High Court to set the order aside. She then claimed for the losses caused to her by the decision to use the without notice procedure.

The judge held that a local authority owed no duty of care to a registered child minder. First, the statutory scheme was intended to protect children and imposing a duty of care might lead the local authority to delay taking action in circumstances where children might be exposed to harm. Secondly, it was the Magistrates, not the local authority, who took the decision as to whether a cancellation order should be made without notice. The fact that they had a “full opportunity to test the evidence” and “full discretion as to what to do in the circumstances” provided sufficient protection for the child minder.

Harris and Bowden show that a regulator will not normally owe a duty of care to a regulated person where there is an effective right to appeal against the relevant enforcement order, or if the regulator merely applies for the order to another body which has the opportunity to review the evidence and reach its own decision. The judge in Miller was therefore right to hold that the investigating accountant did not owe the solicitor a duty of care. Nevertheless, it is surprising that neither Harris nor Bowden appears to have been cited in Miller.

It is possible that a duty of care could arise if a regulator made demands without issuing a formal notice. In such a situation, any statutory right to appeal against a notice would be irrelevant and there might be no other remedy (see Welton v North Cornwall District Council [1997] 1 WLR 570; Dart v Isle of Wight Council [2002] NPC 22). However, the fact that statutory regulators are charged with promoting the public interest rather than the interests of regulated firms, and the concerns about the effects of imposing liability which were expressed in Harris and Bowden, would mean that such a claim would still face very considerable difficulties.

Conclusion

The result in Miller v Law Society was certainly the correct one, and it is difficult to imagine circumstances in which the Law Society or its investigating accountants would owe a duty of care to a solicitor in whose practice the Society intervened. However, the reasoning in Miller does not appear to have taken into account a number of important recent developments in the law relating to judicial review and negligence.

© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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