I wasted time That wasn’t mine

Anis Waiz a professional professional partner of Mohindra Maini LLP Solicitors in Manchester has kindly written a guest article for us on the following case.

Continuing with my Blogs on Law and music http://aniswaiz1.wordpress.com/  and as ever keeping a watching brief on the fast moving waters of a developing jurisdiction.  This is a very important decision for lawyers and an excellent précis of a difficult arena. Limitation and the limited exceptions found within the Limitation Act 1980. Instructive, easy to digest but not so obvious.

The case required a consideration of section 21(1) (b) of the 1980 Act which provides

No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action–

(a )in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b )to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use

In essence the Claimants were administrators of the estates of Annie and Aubrey Page, husband and wife,. They were also the principal beneficiaries under their wills. An important asset of the estate was the former family home at 262 Kidmore Road, Caversham, Reading, Berkshire (“the Property”).

The First Defendant is a firm of solicitors .The Second Defendant was a legal executive employed by the First Defendant. In early 1998, the Defendants were instructed to advise and act for the Claimants in the administration of their parents’ estates and later in 1998, the Second Defendant was instructed by the Claimants in relation to the sale of the Property and a neighbouring property owned by the Pages.

Materially at that time and unknown to the Claimants, the Second Defendant carried on business as a property developer or consultant through Exnine Developments and Exnine Developments Limited.

On 17 February 1999, Exnine entered into an agreement with a  prospective purchaser of the Property, Sahana Enterprises Limited (“Sahana”), by which  which Exnine would be paid either (i) £6,000 or £10,000 “joint venture profit” and £5,000 “introduction fee” in respect of each dwelling unit built on the site. . This arrangement was not disclosed to the Claimants at the time.

The Second Defendant recommended to the Claimants that they sell the Property and the neighbouring land to Sahana, and on 12 March 1999, the sale to Sahana of the Property completed for £190,000. The Second Defendant drafted the contract of sale for the Property and on the Claimants’ behalf, signed and exchanged contracts for the sale.

After the sale of the Property, the Claimants discovered that the true value of the Property was in the region of £350,000 . On  25 November 2000, the Claimants wrote to the Office for the Supervision of Solicitors (“OSS”) about the Defendant’s conduct.

Almost two years later, the OSS put these complaints to the Defendants in a letter dated 7 November 2002. In response, on 5 December 2002, the Second Defendant sent a letter to the Claimants enclosing a cheque for £6,000, explaining that this payment was in respect of “overage” due to the Claimants from Sahana pursuant to an agreement made by the Second Defendant, allegedly on the Claimants’ behalf. Enclosed with this letter were copies of certain correspondence between Sahana and the Second Defendant but not, the letter of 17 February 1999.

The letter from the Second Defendant of 5 December 2002 made clear his connection with Exnine and that a payment had been made by Sahana to Exnine, and, specifically, in a manuscript postscript to the letter, the Second Defendant referred to a fee structure agreed between Exnine and Sahana from which, it was said by the Defendants, it could be inferred that Exnine had received a fee pursuant to that agreement.

On 30 January 2003, The  OSS sent the Claimants the letter of 17 February 1999 between Sahana and Exnine, and the Claimants responded on 18 February  to the OSS commenting on that letter and other matters of complaint with regard to the Defendants’ conduct. The receipt by the Claimants on 30 January 2003 of this letter of 17 February 1999 was important for the purpose of Limitation (see below).

Correspondence ensued without resolving the issues and for various reasons proceedings were issued much later by the claimants.

The claimants sought various remedies against the defendants

1          an account and payment of profits made by the Defendants as a result of their retainer in early 1998;

2          compensation for breach of fiduciary duty and for dishonestly assisting a breach of trust, together with damages and interest.

As expected the defendants raised the issue of limitation. In answer and to defeat the claim being time barred the claimant argued that the Defendants held any secret profit on (constructive) trust for the Claimants and thus there was no limitation given section 21 (1)(b) of the 1980 Act . Further the Defendants deliberately concealed some of the facts necessary to the Claimants’ rights of action until 17 February 2009 .There was also an issue as to when the claim was actually issued.

The defendants were successful upon summary judgment and thus the claims were statute barred. The claimants Appealed.

The Limitation point at first sight seemed obvious. Not so. HHJ Prevezzer QC noted the following issues

1          Was the money received by the Defendants from Sahana in 1999 trust property or the       proceeds of trust property, and therefore pursuant to s 21 (1)(b),of the Limitation Act           1980,  no limitation period applied? (The trust Issue)

2          If there was deliberate concealment of material facts by the Defendants, and in the event that the Limitation Act applied, when did time start running against the Claimants? The Defendants case, was that the Claimants had sufficient knowledge by no later than 6 February 2003 or at all events by 17 February 2003. (The time issue)

3          When was the Claim Form issued or when was it to be treated as having been issued- the 4th or 5th December 2008 or 17 February 2009?

The claimant relying on existing authority submitted the Defendants owed the Claimants certain fiduciary duties to act in good faith; not to make a profit out of the trust; not to place themselves in a position where their duty and interest may conflict; and not to act for their own benefit or the benefit of a third person without the informed consent of the Claimants (Bristol &West Bromwich Building Society v Mothew [1998] Ch 1 at 18).

Materially The Defendants’ secret profit from the arrangement with Sahana was or should have been part of the Property, in respect of which the Defendants’ owed these fiduciary duties. To put it another way, it was“a cut” of the price of the Property, which was part of the Estates, and the Defendant therefore held this on constructive trust for the Claimants.

The matter came before the court before the Court of Appeal gave its decision in two other important cases Sinclair v Versailles,  and  Cadogan Petroleum.

In Sinclair Investments, the Claimant asserted a proprietary interest in sums Mr Cushnie, a director of the Claimant, had received from selling shares in a company referred to as VGP, on the basis that the apparent value of VGP had been artificially inflated by the misuse of monies entrusted to the Claimant, in breach of Mr Cushnie’s fiduciary duties.

It was alleged that the proceeds of sale of the shares represented an unauthorised gain made by Mr Cushnie in the course of his fiduciary relationship with the Claimant, and through the use of the Claimant’s money.

Mr Justice Lewison and the Court of Appeal both rejected this claim, concluding that an asset or money which a fiduciary has acquired in breach of his duties to the beneficiary will not necessarily be held on trust for the beneficiary of the fiduciary’s duties, and that a beneficiary cannot claim a proprietary interest “unless the asset or money is or has been beneficially the property of the beneficiary or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary.

Lord Neuberger stated:

In Cadogan Petrolium, Newey J considered the application of Lord Neuberger’s Judgment with regard to a bribe or secret commission, and concluded that he was obliged to proceed on the footing that a beneficiary will have no proprietary interest unless, as in Sinclair v Versailles, it can be said that the bribe or secret commission “is or had been beneficially the property of the beneficiary or the fiduciary acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary”.

Further, as a result of the Court of Appeal’s judgment, Newey J held that was not open to him to follow AG of Hong Kong v Reid in preference to Lister & Co v Stubbs (1890) LR 45 Ch D 1, a case where the Court of Appeal held that bribes that an employee had taken from suppliers to his employers were not held on trust for the employers, but were monies acquired in such a way that the employers were entitled to get an order for the payment of those monies to them, as a debt due from the employee to them in consequence of the corrupt bargain which the employee had entered into.

In this present  case HHJ Prevezer QC held  that the Claimants’ claim was not a claim to recover trust property or the proceeds of trust property within Section 21(1) (b) of the 1980 Act and thus there was a limitation period. The reason is set out at paragraph 25 of her judgment and can be summarised:

1          The secret profit that the Second Defendant received from Sahana, by, in effect, securing the sale of the Property by the Claimants to Sahana, could not be regarded, in legal theory or otherwise, as having been the property of the Claimants throughout.

2          The trust obligation in the present case arises as a direct consequence of the unlawful transaction, namely the taking of a bribe, which transaction is rightly impeached by the Claimants.

3          The secret profit obtained by the Second Defendant is not and has never been beneficially the property of the Claimants, and the Defendants did not acquire the secret profit by “taking advantage of an opportunity or right.

4          The secret profit was not, counsel for the Claimants  contended, “a cut of the Property”.  The secret profit was a bribe obtained by the Second Defendant by doing a wrong; it was not obtained by depriving the Claimants of an opportunity, for example, to obtain an increased price from Sahana for the Property.

The matter was said to be  put beyond doubt by the decision of the Court of Appeal in Sinclair v Versailles, as applied in Cadogan Petroleum to secret profit/bribe allegations. In Cadogan Petroleum, as in the present case, there was a proprietary claim made on the basis of an allegation of a breach of fiduciary duty in accepting a bribe/secret commission by a party subject to a fiduciary duty (company directors in Cadogan Petroleum, and solicitors in the present case).

Applying Sinclair v Versailles (which, was not a secret profit/bribe case), Newey J concluded that a beneficiary will have no proprietary interest in a bribe or secret commission unless it can be said that it is or has been beneficially the property of the beneficiary or the fiduciary acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary (Paragraph 27).

Counsel for the Defendants accepted that for the purposes of the summary judgment application, it was to be assumed that there was a deliberate concealment of material facts by the Defendants, albeit that was strongly denied by them.

The issue that arises was whether, as the Defendants contend, and as found by the court below, the Claimants had sufficient knowledge by no later than 6 February 2003, alternatively at the latest by 17 February 2003. If they did, then their claims against the Defendants were statute barred.

Section 32(1) of the Limitation Act 1980 provides that:

The purpose of Section 32 is to ensure that the Limitation Act does not operate to bar a Claimant whose ignorance of the relevant facts is due to the improper actions of the Defendant (see Cave v Robinson Jarvis & Rolf [2003] 1 AC 384). 

As regards the common laws claims, the court held that the breach of retainer/negligence claim was known to the Claimants by or after 25 November 2000 and that both the claim and the breach of fiduciary duty claim were  both statute barred.

The Claimants’ letter to the OSS of 25 November 2000 showed that the Claimants knew sufficient facts to start time running in respect of these claims. At least the gist of the claim for damages for causing the Property to be sold at an undervalue appears to have been known to the Claimants by this date.

As regards the equitable claims, the question was when did the Claimants know enough to make out a case, from which time the six year period would run. It was argued for the defendants there were two primary dates when relevant knowledge should be attributed to the Claimants; (i) 6 December 2002, after receipt of the letter from Exnine or (ii) 6 February 2003 or shortly thereafter (and certainly by 17 February 2003), after the Claimants received the letter from the Law Society which enclosed Sahana’s letter of 17 February 1999 .

The  letter of 5 December 2002, received by the Claimants from the Second Defendant on 6 December 2002, made plain not only that the Second Defendant was connected to Exnine, but also the connection between Exnine and Sahana. It refers to a payment having been made by Sahana to Exnine and in the manuscript note, there is also reference to a fee structure between Exnine and Sahana, independent to the Claimants overage element.

It was held that by  the Law Society letter dated 30 January 2003, which enclosed Sahana’s letter of the 17 February 1999, the Claimants had all the material facts necessary, even if not all the evidence, to formulate a claim in respect of both the common law and the equitable claims.

Accordingly, by 6 February 2003 at the latest, the Claimants would have had within their knowledge the facts relevant to alleging a prima facie case and/or to properly plead their case.  Thus the Claimants case was statue barred.

The court went on to consider the date proceedings were issued which requires a detailed consideration of the court rules not entirely relevant to the purpose of this blog. The reader is referred to the Judgment for further consideration.

This is a very important decision and one which clearly requires a careful reading. In essence The secret profit obtained by the Second Defendant was not beneficially the property of the Claimants. The courts appear to be drawing a fine distinction in property and rights or for completeness wrongs!

For any lawyer the moral is clear. If upon discovering facts which could lead to a claim ensure proceedings are issued as soon as possible and within any limitation period. The courts are reluctant to allow the catch all fraud /concealment argument in every case. Clearly fact sensitive.

No turning back

No looking around

I wasn’t searching

See what I found