Finance litigation briefing July 2014: report and review on the latest cases and issues

29 July 2014

Our finance litigation experts bring you the latest on the cases and issues affecting the lending industry.

Contribution proceedings confirms solicitors' duty to lender

In contribution proceedings under the Civil Liability (Contribution) Act 1978 between a valuer and a firm of solicitors, the court confirmed that the disparity between a valuation and the purchase price paid six months before should have been disclosed to the lender by the solicitors. Their failure to do so was a breach of their duty to the lender.

In E.Surv Ltd v Goldsmith Williams Solicitors, E.Surv valued a property at £725,000 having been told by the purchaser it had been bought within the last 12 months for £600,000 and using comparable properties. The borrower's re-mortgage application indicated the purchase price was £450,000.

The defendant was instructed by the borrower and lender on the basis of the Council of Mortgage Lenders Handbook (the Handbook). This provided that solicitors were to take reasonable steps to verify that there were no discrepancies between the description of the property as valued and the title and other documents which a reasonably competent conveyancer should obtain. They were required to notify the lender if there were any such discrepancies.

The solicitors were sent a copy of the valuation. The defendant obtained documents from the Land Registry showing the property had been purchased within the previous six months for £390,000 but did not report this to the lender. E.Surv settled the lender's claim against it for overvaluation of the property in the sum of £200,000 and then sought a contribution towards that sum from the defendant. The defendant argued their reporting obligations only extended to matters relevant to title and did not include a duty to report the discrepancy between the purchase price and the valuation.

The High Court held that the Handbook did not exclude the general obligation to exercise reasonable skill and care, which included the obligation to report information which might have a material bearing on the valuation of the security or some other ingredient of the lending decision (the Bowerman duty). The disparity between the valuation and the purchase price was so significant that it ought to have been disclosed to the lender.

Had it been disclosed, the lender may have asked E.Surv if this information affected its valuation. E.Surv would then have valued the property at no more than £500,000 and the lender would have offered no more than 85% of that value, which would have been insufficient for the borrower's stated purposes. The transaction would not have proceeded.

Although E.Surv had overvalued the property, the valuation could have been corrected had the defendant fulfilled its obligations in bringing the discrepancy to the lender's notice. They were in breach of duty in failing to do so. Both were responsible for the lender's losses and responsibility was to be allocated equally. The defendant was ordered to contribute £100,000 towards the damages paid by E.Surv.

Things to consider

This case indicates that the Bowerman duty may require a conveyancer to report on things which some may consider as within the surveyor's role, and that there is a degree of overlap between the responsibilities of solicitors and surveyors.

Whether the duty arises in a particular case will depend on the source of the information in question. If the source is not one which the solicitor is required to obtain or consider under his express obligations to the lender, there is force in the argument that he cannot be obliged to consider whether or not it has a material bearing on the valuation so as to give rise to the duty.

Achieving "win" under a conditional fee agreement

In the case of Ultimate Products Ltd and another v Woolley and another, the court had to determine whether the definition of "win" in a conditional fee agreement (CFA) had been achieved and whether the success fee was therefore payable by the funded party and so recoverable from the losing party.

The definitions used in the CFA were fairly standard in form. The "claim" was defined as for passing-off and trademark infringement. "Wins the claim" was defined as meaning where Woolley's claim was finally decided in their favour whether as a result of the court ordering Ultimate Products Ltd (U) to pay damages or U agreeing to do so. "Loses" was defined as meaning where the court dismissed the claim without awarding any damages in their favour or where Woolley discontinued the claim with no agreement for payment of damages in their favour.

The trademark issues were stayed pending the outcome of invalidation proceedings in the Office of Harmonisation in the Internal Market, but Woolley was successful at trial on the passing-off issues and obtained an account of profits.

U submitted that payment was only due under the CFA when Woolley won its claim and, as the claim included both the passing-off and trademark infringement, and as the latter remained unresolved, the claim had not yet been won.

The High Court held that sufficient regard had to be given to the CFA's definitions of winning and losing the claim. Success was defined entirely by reference to the remedy obtained as opposed to the cause of action upon which the remedy was based. Success was simply the result of the court ordering (or the opponent agreeing to pay) damages. Success did not mean that the court must order damages in relation to each and every cause of action included in the definition of "claim". "Losing" was similarly defined. There was no gap between these two definitions which might create uncertainty where Woolley achieved partial success. Any order (or agreement) for damages would have meant success had been achieved.

Further, as the "claim" was defined as being against one "and/or" other of the appellants, success against either or both would have entitled Woolley's solicitors to claim the success fee. There was no legal or commercial difficulty with such a construction. What eventually happened to the trademark claim made no difference to the order for damages already made as Woolley had already been successful.

Things to consider

It is always worth a paying party considering the definition of "win" to determine that the obligation to pay the success fee has arisen. Even if it has, the paying party can still contend that costs incurred were disproportionate in amount or unreasonably incurred on any assessment, or should not be recoverable against it in relation to unsuccessful parts of the claim.

With the removal of recoverability of success fees in most areas of litigation post 1 April 2013, this will become less of an issue in the future.

Court refuses costs cap on counsel's fees

We first reported upon the case of Tidal Energy Ltd v Bank of Scotland PLC in October 2013. Briefly, the claimant's claim related to the payment of a sum out of its account via CHAPS, which it had authorised but which unfortunately arrived in the wrong account, was removed and could not be returned.

The issue was whether the bank had followed normal banking procedure by using the sort code and account number and not the name of the account holder. At first instance the court found that the bank had and the claim against it to recover the monies paid away failed. The claimant appealed.

The bank notified the claimant that it intended to use both leading and junior counsel on the appeal. The claimant sought a costs capping order, to cap the costs of using leading counsel so that those costs could not be sought at all against it, should it fail on the appeal.

The court refused to make such an order. The Civil Procedure Rules (CPR) 3.19 allows the court to exercise its discretion to make a costs capping order if:

  1. it is in the interests of justice to do so;
  2. there is a substantial risk that without such an order costs will be disproportionately incurred; and
  3. (the court) is not satisfied that the risk in subparagraph (b) can be adequately controlled by:
    1. case management directions or orders; and
    2. detailed assessment of costs.

The court considered that its discretion could only be exercised if a, b and c, above were satisfied. As to c, the court held that if the use of leading counsel on the appeal proved to be a luxury and unnecessary for the proper hearing of the instant appeal, the court would be able to strip that element out of the recoverable costs, assuming an order was made against the claimant.

This can be done on either a summary or detailed assessment. If the costs judge considered that the bank had a separate purpose in employing leading counsel, such as to protect the integrity of its standard form as against other customers, then he may well discount the cost of using leading counsel accordingly.

The court further considered that if detailed assessment was not an adequate control to neutralise or satisfactorily manage the risk, cost-capping satellite litigation would ensue and that could not have been the intention of the drafters of CPR 3.19.

Things to consider

Parties are entitled to protect themselves by the use of leading counsel if it is considered appropriate. However, the court's policy is to control costs and ensure that cases are dealt with justly and at proportionate cost. The court here considered that this could be more than adequately done through case management during the case or costs assessment after the event - which is the usual position.

Fair warning leads to costs recovery

Where the subject of a statutory demand notified the issuer of the demand that he would continue to incur costs on his application to set it aside until he received written notice of its withdrawal, those costs were recoverable where no such notice was received.

This was confirmed by the High Court in Kingsley v Orban. Kingsley issued a statutory demand in relation to unpaid fees. Orban's solicitor gave Kingsley a deadline for withdrawing the demand, failing which Orban would apply to set it aside. The last day for making the application to set aside was 5 July and on 4 July Kingsley confirmed, via phone, that he was willing to withdraw the demand.

Orban's solicitors emailed Kingsley advising they would continue to work on the application until confirmation in writing was received and that email confirmation would suffice. Kingsley sent the confirmation but by DX rather than email. By the time it was received, the application to set aside had been issued and Orban's witness statement taken.

Orban made a 'take it or leave it' offer to accept £500 as the costs for preparing the application, plus the costs of the court hearing. Kingsley required a breakdown of the costs. Orban replied that it was a grade A fee earner who had undertaken the work but that it was not cost-effective to engage in further correspondence on costs.

The judge hearing the application held that Orban's solicitors had acted prudently given the deadline, that Kingsley should have emailed the confirmation and that the costs were reasonable.

Kingsley appealed, alleging Orban's solicitor should have telephoned him advising they were about to make the application and as they had only filed the costs budget at the hearing itself he had been prejudiced as he had not been able to make full representations on the costs claimed.

The High Court struck out the appeal. It had not been necessary for Orban's solicitor to give a further warning after the earlier email. The court found it unsurprising Orban was unwilling to engage in correspondence on costs, given its offer and that the costs were reasonable. Orban's failure to provide the costs schedule earlier was not an aggravating factor and Kingsley had been able to make some observations on the level of costs on the day. It was not unreasonable for a grade A fee earner to have undertaken the work, given the seriousness of the potential case for making Orban bankrupt.

Things to consider

This is not a surprising decision. Orban had to be able to protect himself given the seriousness of the demand and potential bankruptcy order that may have followed.

It was within Kingsley's ability to have complied in a speedier manner to avoid further costs being incurred. Those dealing with deadlines in litigation should always bear in mind the deemed service provisions contained in the CPR, especially where the deadline is imminent.


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