Lawyers Covered - February 2023

Welcome to the latest edition of our Lawyers Liability & Regulatory Update, in which we look back over the last month at key developments affecting lawyers and the professional risks they face.

A matter of interpretation – the Supreme Court look at contractual interpretation once more

In their recent Judgment in Sara & Hossein Asset Holdings Ltd (a company incorporated in the British Virgin Islands) v Blacks Outdoor Retails Ltd [2023] UKSC 2 the Supreme Court adopted a commercially balanced interpretation of a lease; rejecting the overly textual approach of the Court of Appeal in favour of reading the relevant clause in the context of lease as a whole.

The Court applied the well-established principles of contractual interpretation laid down in Wood v Capita, placing weight on both the natural meaning of words used and the context in which they were used to find a balanced interpretation of the relevant clause.

It is a clear reminder for solicitors: they must be alive to both the words used and also to the wider context of the particular clause within the contract as a whole. The court will be prepared to override the narrow, literal meaning of words in contracts in favour of placing the words in their appropriate context, where doing so will give effect to the full extent of the contract.

Read our full article here.

SLAPPs round up

The last few weeks have been busy ones in terms of the SRA's pronouncements on SLAPPs (Strategic Lawsuits Against Public Participation).  The SRA's Chief Executive, Paul Philip, appeared in front of a House of Lords committee to discuss SLAPPs, which is discussed in RPC's blog here.  The Committee was critical of the SRA's fining powers, described by Mr Philip as like pitting "a peashooter against a tank."  Since then, the SRA has also published its thematic review on SLAPPs, which broadly concluded, based on a review of 25 firms, that more needed to be done by firms to guard against the risk of SLAPPs.

SRA and SDT publish joint statement on referrals to the SDT:

In the January edition of this blog, and previously, we have highlighted the SRA's increasing powers.  This includes the increase in the SRA's fining powers from £2,000 to £25,000, which is expected to allow the SRA to take action in more cases without the need to refer them to the SDT.

The SRA and SDT say that, as a result, they have developed a "shared expectation" of the types of cases which should be referred to the SDT, as explained in a joint statement issued on 30 January 2023.  The SRA says that each case will be considered on its own facts and circumstances in accordance with its referral test.  The likely sanction is not the only consideration for the SRA; the nature of the offence and motivating factors will also be relevant.  The SRA expects to apply its new fining powers to all cases where a fine of £2,000 to £25,000 would be appropriate.  

The SDT, on its part, recognises that it is for the SRA alone to determine which matters should be referred to the SDT, and that its duty is to consider significant public protection and wider professional reputational issues.  As a result, the SDT envisages that it will continue to hear the most serious cases of professional misconduct, including those which would attract a fine of more than £25,000, or where suspension or strike off would be appropriate.  Such cases include those involving workplace culture – which remains the focus of regulatory oversight – and those where there are allegations of misappropriation or serious misuse of client monies. 

It is intended that this approach should allow the SRA to deal with cases more swiftly and at a reduced cost, whilst reducing the SDT's caseload and allowing it to focus upon the most serious cases.  However, questions have been raised about the appropriateness of the SRA and SDT issuing a "joint statement" in circumstances where they have a duty to maintain their independence.

Inadvertent Disclosure – Risks to Lawyers

The recent High Court decision in Flowcrete UK Ltd v Vebro Polymers UK Ltd [2023] EWHC 22 (Comm), clarifies when Courts can exercise discretion to prevent the use of inadvertently disclosed documents that remain privileged.

The Facts

On 14 June 2022, the parties exchanged extended disclosure.  The defendants' extended disclosure included two PDF documents which were both compilations of other documents.  Over two months later, on 17 August 2022, the defendants' solicitors notified the other side that the compilation documents were subject to legal advice privilege and professional privilege.  The claimants disputed this view on the basis that (1) the documents were not obviously privileged and (2) it was not obvious that the documents had been disclosed by mistake.  In response, the defendants sought injunctive relief by way of an application to prevent the claimants from relying on the documents.  A hearing followed.

The Relevant Principles

At the hearing, the Court relied on the principles set out in Al Fayed v Commissioner of the Police of the Metropolis [2002] EWCA Civ 780. Al Fayed confirmed that a solicitor is generally entitled to assume privilege has been waived regarding any documents that are disclosed to them during civil proceedings.  As a result, once privileged documents are disclosed by a solicitor, it is normally too late for the disclosing party to reassert privilege over said documents.  However, the Court determined it could still grant the injunction sought by the defendants, if it could be convinced that either the allegedly privileged documents were procured by fraud or disclosed because of an obvious mistake.  Issues of fraud were not relevant in this case, and as such the Court considered whether the defendants' disclosure amounted to an obvious mistake.

A mistake is said to be obvious where:

• The solicitor receiving the disclosed documents accepts that a mistake has been made before using the documents; or
• It is obvious to a reasonable solicitor that a mistake has been made in disclosing the documents.

The Court also considered whether it would be unjust and inequitable to grant the relief sought by the defendant.  In doing so, it relied on the decision in Pickett v Balkind [2022] EWHC 2226 (TCC), which it said was consistent with the decision in Al Fayed and was therefore relevant to the defendants' application.  Pickett confirmed that the Court could refuse to grant injunctive relief where inadvertently disclosed documents evidenced wrongdoing on the part of the disclosing party.  Accordingly, for injunctive relief to be granted, it would need to be shown that it would have been unconscionable for the recipient of the disclosed documents to rely on said documents.  If no finding of unconscionability could be made, then the Court would not grant an injunction.

The Decision

On application of Al Fayed, the Court rejected the defendants' application.  This conclusion was largely factual; one of the disputed documents had been disclosed twice (once in its native form) – as such it appeared the defendants had intended to disclose that document.  Further, the Court noted that none of the documents in dispute were marked privileged or without prejudice.  The Court was therefore unable to conclude that an obvious mistake had been made by the disclosing party.  As to the question of whether it would be unjust and inequitable to grant relief, the Court penalised the defendants for failing to identify and assert privilege without delay after the documents had been disclosed.  Further, the Court accepted that two of the three categories of inadvertently disclosed documents disclosed evidence of sufficient wrongdoing by the relevant parties.  As such the Court was justified in refusing injunctive relief.

Comments

The immediate take away from this decision is that legal representatives must practice extreme caution when proceeding with disclosure.  Failure to do so can be costly, not least because it can be very difficult to persuade the Court that privilege remains intact when allegedly privileged documents have inadvertently been disclosed

SIFting through the new rules on post six-year negligence

The SRA has announced proposed new rules for maintaining the Solicitors Indemnity Fund (SIF), which provides cover where negligence comes to light more than six years after a law firm closes.

The SRA initially planned to close the fund, which would have risked former partners and their estates being found personally liable for losses arising from post six-year claims.

There was strong opposition to the original plans, particularly from sole practitioners and those practising in high-risk areas (such as wills and trusts) where late claims are more prevalent.  The Law Society also objected on the basis that the prospective closure of SIF (and the lack of alternative long-term run-off cover options) would put consumers at risk.

Following a further consultation, the SRA has decided to bring SIF provision within its own regulatory arrangements and plans to take control of the fund from 1 October 2023 (subject to approval from the Legal Services Board).

This means compensation will still be available to clients when a claim is made after the compulsory six-year run-off period for solicitors' professional indemnity policies.

The SRA's consultation highlights some potential issues with the proposed new rules:

• Does the SRA have the expertise and resources to run an insurance scheme, manage its capital and handle claims? The SRA has said that it will be engaging external experts to deliver the day-to-day operation of the scheme and that taking over the scheme will result in cost savings overall.
•  Will the profession be levied to obtain more funds for the scheme?  The SRA has said there are no immediate plans to do so but recognises that this may be necessary in the future.
• How will coverage disputes under the scheme be dealt with?  The draft rules said that a sole arbitrator would be chosen by the SRA.  This has now been changed so that the arbitrator will be chosen by an independent body.

Could the SRA's dual function as both indemnifier and regulator lead to unfair outcomes for solicitors?  The SRA says that valid claims will not be delayed by disciplinary considerations and information arising from claims will only be passed to the investigation team if it indicates a "serious regulatory breach".

Hong Kong: "Without Prejudice" not same as "Subject to Contract"

The High Court judgment in MSB International Ltd v Lok & Anor [2022] HKCFI 3751 (15 December 2022) illustrates that parties or their lawyers can reach a binding settlement based on their without prejudice correspondence, irrespective of whether a formal settlement agreement is agreed.

After several without prejudice exchanges between the parties' lawyers, the only outstanding item between the parties was the amount to be paid.  The defendants' lawyers wrote as much in a without prejudice letter to the plaintiff's lawyers.  A settlement amount was agreed shortly afterwards by way of further exchange.

The parties' lawyers proceeded to communicate regarding how settlement terms might be recorded in a formal settlement agreement. Until that point, all the written without prejudice communications had been marked "without prejudice" but not "subject to contract".  Subsequent written communications regarding a draft settlement agreement appear to have been marked both "without prejudice" and "subject to contract" – namely, subject to execution of a formal settlement agreement between the parties.

It transpired that the parties were unable to agree the terms of the draft settlement agreement. The plaintiff argued that the parties had nevertheless concluded a binding settlement based on the previous without prejudice correspondence which had culminated in the plaintiff's lawyers' acceptance of the amount to be paid.  The court agreed on the facts.

The case shows that, applying basic principles of contract law and settlement, it is possible for parties to agree to a binding settlement without having agreed to a formal settlement agreement.  A takeaway point is that "without prejudice" and "subject to contract" mean different things. Where a party intends that the agreed outcome of their without prejudice negotiations be "subject to contract" they should make this expressly clear at the outset of all their without prejudice communications.

Disclaimer: The information in this publication is for guidance purposes only and does not constitute legal advice. We attempt to ensure that the content is current as at the date of publication, but we do not guarantee that it remains up to date. You should seek legal or other professional advice before acting or relying on any of the content.