There is no obvious reason why the Court of Appeal's carefully reasoned judgment in Tughans would not apply to solicitors' PII policies
We consider the recent decision of the Court of Appeal in Royal & Sun Alliance Insurance Limited v
Tughans( AFirm) EWCA Civ 999. In particular, we evaluate RSA's argument that the effect of the declaration of cover in this case was to treat Tughans' PII policy as granting first party cover for unpaid fees.
A partner of the law firm Tughans contacted English law firm BRUK to facilitate the sale of a bank's property loan book. The arrangement was that BRUK would receive £15 million plus VAT from Cerberus, the purchaser, if the transaction was successful, with 50% of this being shared with Tughans. In their letter of engagement with BRUK, Tughans represented and warranted that they would not make any payments, directly or indirectly, to any government official.
Following completion of the transaction, BRUK paid Tughans £7.5 million plus VAT. It emerged later that the partner at Tughans had transferred part of Tughans' success fee into an account for his own benefit and that he had intended to transfer part of it to a third party, in breach of the warranties and representations.
Tughans notified a circumstance to its professional indemnity insurer, RSA. BRUK then issued proceedings against Tughans in March 2014, alleging fraudulent and/or negligent misrepresentations, misstatement and/or deceit and seeking the return of Tughans' success fee.
Tughans' professional indemnity policy ("the Policy")
Based in Belfast, Tughans were required by the Law Society of Northern Ireland to maintain insurance to a similar extent to that required of SRA-regulated solicitors in England and Wales. The relevant insuring clause read,
"The insurers will indemnify the Insured in respect of claims or alleged claims made against the Insured in respect of any civil liability (including liability for claimant's costs and expenses) incurred in connection with the Practice..."
By way of comparison, the SRA Minimum Terms and Conditions ("the MTC") require professional indemnity insurance to cover,
" ...each insured against civil liability to the extent that it arises from private legal practice in connection with the insured firm's practice..."
Both schemes permit for specified exceptions to cover, including in respect of dishonesty.
The Court of Appeal's decision in Tughans was the third round of the parties' dispute.
Following RSA's declinature of cover, an arbitration resulted in a declaration that RSA was liable to indemnify Tughans in respect of any claim to repay its share of the success fee.
RSA challenged the award on three fronts: jurisdiction, serious irregularity and the substantive point of law. In the Commercial Court, it lost on jurisdiction and the law. For a more detailed account of Foxton J's decision, see our previous article.
The issue of law for which RSA were granted permission to appeal was their contention,
"...that policies of professional indemnity are not intended to, and do not in fact, provide cover that would entitle an assured to be indemnified for the loss of a sum to which they were never entitled, there being no 'loss' and thus no 'insured loss' at all."
The Court of Appeal's judgment
The Court of Appeal hearing proceeded on the assumption that there had been a misrepresentation. Notably, there was no appeal from Foxton J's conclusion, that Tughans' legal entitlement to the fee accrued upon the giving of the relevant representations and successful completion of the deal and was not conditional upon the truth of the representations.
The main thrust of RSA's argument before the Court of Appeal was that Tughans was not entitled to the success fee "in substance" as it was procured by misrepresentation and Tughans had no right to retain it. Therefore, as summarised by Lord Justice Popplewell [paragraph 40],
"...Tughans had not suffered a loss in the amount of the fee, and cover for that element of a damages claim would violate the indemnity principle."
In upholding the Commercial Court's judgment, the Court of Appeal adopted the reasoning of Foxton J [paragraphs 38 to 43], including the emphasis that he placed on the fact that BRUK had not tried to rescind the retainer, thus leaving the parties' contractual rights alive. The crux of the Court of Appeal's decision was that, as Tughans were contractually entitled to the fee, which had been paid, an award of damages in the amount of the fee payable would constitute a loss for the purposes of a PII policy.
The Court of Appeal then went on to consider the parties' arguments in more detail and cite four reasons why it rejected RSA's reliance on the indemnity principle i.e. the principle that a policy of indemnity insurance is intended to indemnify an assured in respect of its actual loss but not more than its actual loss:
- Firstly, "..a solicitor who has earned a fee, so as to be contractually entitled to it, does indeed suffer a loss if deprived of it by reason of a liability claim." [paragraph 61].
- RSA's argument ran contrary to the public interest purpose of solicitors' compulsory PII, in offering a degree of protection to clients [paragraph 69].
- The implications of RSA's argument were "..... inconsistent with the commercial and regulatory function of compulsory PII cover, which is to protect partners and employees from their own negligent mistakes and those of their fellow partners and employees, and from the fraud of those others..." [paragraph 70].
- RSA's argument ignored the composite nature of the Policy "..and the fact that the claims are made under it by individual assureds." [paragraph 71].
Whilst the Court of Appeal emphasized the importance of policy issues in considering solicitors' PII policies, it is our view that consideration of just points one and four might well have led to the same result – a point which has implications for non-compulsory, composite professional indemnity policies, depending upon their wording.
How can this judgment be aligned with the fact that indemnity for unpaid fees do not form part of solicitors' compulsory PII in Northern Ireland or England and Wales and, for SRA-regulated solicitors, are a permitted exclusion under the usual 'trading debts' exception? And were RSA right in arguing thatthe effect of the declaration of cover in this case was to treat the Policy as granting first party cover for unpaid fees?
Tughans is not a carte blanche for the recovery of a firm's costs from insurers Paragraphs 80-83 draw a clear distinction between the facts in Tughans and the paradigm scenario where a solicitor sues for unpaid fees and is met with a damages claim, leading to an equitable set-off. . Whilst at first glance, the position may seem anomalous, the Court of Appeal offered two key reasons for the distinction between the situation in Tughans and an equitable set-off scenario:
- Firstly, under a composite policy, individual partners are not in the same position irrespective of whether a fee has been received, "...they are worse off by reason of the fee having been paid because they each become liable for the whole of the fee element of the damages liability whilst each having a beneficial interest, at best, in only a proportion of the gross fee received by the firm." [paragraph 81].
- The second reason focused upon the fact that Tughans' policy was a form of liability insurance. If Tughans' fee had been unpaid, there would be no ascertained civil liability for it and it would not fall within the Policy's insuring clause. As the fee had been paid, there was a liability and a loss to which the Policy would respond [paragraph 82].
The upshot being that the decision does not apply to that scenario.
In the context of unpaid fees, Lord Justice Popplewell also observed that the public protection imperative, of shielding clients from solicitor insolvency, "..simply does not arise..".
The decision also makes clear that the policy responded because Tughans had a right to payment of its fees, which right subsisted notwithstanding the alleged misrepresentation..
There is no obvious reason why the Court of Appeal's carefully reasoned judgment in Tughans would not apply to solicitors' PII policies, incorporating the MTC, in England and Wales. Therefore, it remains the case that solicitors wishing to bring a counterclaim for outstanding fees, in response to a professional negligence claim, will still need to be told that the costs of pursuing that counterclaim are not covered by their policy and that they will need to pay privately for that element.
Upon close examination, the judgment in Tughans is neither as anomalous nor as wide-reaching as it first appears. As those regularly dealing with solicitors' PII claims will be aware, clients seeking recovery of fees earned by the solicitor and already paid is not the norm.
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.