Where a defendant settles a claim with the claimant and then seeks to recover his losses from a third party, the third party may attempt to challenge the settlement on the basis that it was unreasonable. What approach, therefore, would the courts take in assessing whether a settlement was reasonable? This was one of the main issues upon which the Court of Appeal provided valuable guidance in the recent case of Supershield Limited v Siemens Building Technologies FE Limited  EWCA Civ 7. In Supershield, X, the contractor, constructed new offices at the order of the developer. X sub-contracted various electrical and mechanical works to Y, including the supply and installation of sprinklers. Y then subcontracted the supply and installation of the sprinklers to Siemens. Siemens subcontracted the installation of the sprinklers systems to Supershield. Shortly after the offices were constructed, the water sprinkler system storage tank overflowed and caused extensive flooding which resulted in damage and loss. A mediation was held, attended by all parties to the dispute. Siemens settled the claims with the parties up the contractual chain, but was unable to reach a settlement with Supershield and, therefore, pursued its part 20 claim against Supershield to trial. At first instance, the judge found that the cause of the flooding was defective works carried out by Supershield. On the issue of damages, Supershield disputed Siemens’ contention that the sum for which Siemens had settled the claims was reasonable. Supershield argued that the settlement did not reflect the strengths of the defences which were available to Siemens against the claims which had been brought against it. The judge at first instance, however, found that the overall settlement was, in fact, reasonable and gave judgment for Siemens for the amount of the settlement (plus interest). Supershield appealed on three grounds: (1) the judge had misconstrued the subcontract; (2) the judge was wrong to find that Supershield had installed a ball valve, a mechanism which was found to have caused the sprinkler to fail; and (3) the judge was wrong to find that the settlements which Siemens concluded with the other parties to the dispute were reasonable. Lord Justice Toulson, giving the judgment of the court, had no difficulty in dismissing the first two issues. He carefully considered all of the relevant contractual documents between the parties and, construing the meanings given in those documents, found that the judge had correctly interpreted the subcontract between the parties and that Supershield had, in fact, installed the ball valve. Toulson LJ then went on to consider issue (3): was the settlement reasonable? His lordship proceeded by firstly acknowledging that parties to a dispute will, understandably, have different perceptions of what would be a fair settlement figure without either being unreasonable. The object of mediation or negotiations was to close the gap to a point which each party found to be acceptable, and this will be an important factor which a judge, who is considering whether a settlement is reasonable, will take into account. Another factor which would influence a judge’s conclusion as to whether a settlement was reasonable would be that a judge is likely to have a less complete understanding of the relative strengths of the settling parties than they had themselves, and this was particularly so in complex litigation. Toulson LJ argued that a judge would essentially have to ask himself whether the settlement was “within the range of what was reasonable”. If a judge does find that the settlement was reasonable then “…an appellate court will not interfere with his decision unless persuaded that he erred in principle or (which is intrinsically unlikely) that his decision was incapable of justification on any reasonable view”. Supershield raised arguments of remoteness of damage in contract to support its argument that the settlement was not reasonable. Supershield contended that the cause of the flooding was due to blockage in the storage tank or that the cause of the flooding was too remote a consequence for Siemens to have been liable to the main subcontractor on a proper application of the rule of Headley v Baxendale (1854) 9 Ex 341. Supershield maintained that imputing knowledge of the existence of the drains (which the judge at first instance had done) was incorrect. Rather, it was the fact that the tank room was designed and constructed with drains, and the usual and natural course of any water which overflowed from the sprinkler tank would have been to run away via the drains into a sewer. The fact that the drains were blocked meant that this prevented the water from draining away, which would have been the case if the drains had not been blocked. Turning to the issue of the degree of likelihood required for the damage not to be regarded as too remote, Toulson LJ reinforced the application of Hadley: ‘Hadley v Baxendale remains a standard rule but it has been rationalised on the basis that it reflects the expectation to be imputed to the parties in the ordinary case, ie that a contract breaker should ordinarily be liable to the other party for damage resulting from his breach if, but only if, at the time of making the contract a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach.’ Further, Toulson LJ, following the House of Lords case of Transfield Shipping Inc v Mercator Shipping Inc  UKHL 48, stated: ‘If, on the proper analysis of the contract against its commercial background, the loss was within the scope of the duty, it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances.’ Finding that the cause of the flood was due to the defective works carried out by Supershield, Toulson LJ concluded that Siemens had only to show it was reasonable to settle the claims against it and this had been done. Supershield helpfully illustrates the approach the courts are likely to take when asked to consider whether a settlement is reasonable. It is clear that a court is under no obligation to carry out a detailed assessment of the merits of the case when assessing reasonableness. If the lower courts conclude that a settlement was reasonable then, as Toulson LJ made clear, the higher courts will not usually interfere. Therefore, Part 20 defendants would be wise to tread carefully when seeking to challenge a settlement on the grounds of reasonableness and this will especially be the case when settlements are reached in complex disputes. Masood Ahmed is a senior lecturer in law at Birmingham City University
Share valuation – Unlawful distribution of capital Progress Property Co Ltd v Moorgarth Group Ltd: Sup Ct (Lords Phillips (President), Walker, Mance, Collins, Clarke): 8 December 2010 Matthew Collings QC, Gabrielle Higgins (instructed by Seddons) for the appellant; John McGhee QC, Richard Fowler (instructed by Eversheds) for the respondent. The appellant company (P) appealed against a decision ((2009) EWCA Civ 629, (2009) Bus LR 1535) that there had not been an unlawful distribution of capital when the whole issued share capital of its subsidiary company (Y) was sold to the respondent company (M). All three companies were indirectly controlled by the same holding company. The sale price was calculated on the basis of Y’s open market value, subtracting liabilities for creditors and a further sum in respect of an indemnity believed to have been given by P for a repairing liability. It transpired that P had no such indemnity liability to be released from and that there was no justification for the reduction in Y’s value. P alleged that the transaction had been at a gross undervalue, relying on what the Court of Appeal referred to as ‘the common law rule’ devised for the protection of creditors, that a distribution of a company’s assets other than in accordance with specific statutory procedures constituted a return of capital which was unlawful and ultra vires. The Court of Appeal upheld the High Court’s decision that the transaction had been genuine and not ultra vires despite being at an undervalue. P contended that an objective approach was required and that any such transaction which resulted in a transfer of value not covered by distributable profits, regardless of its purpose, constituted an unlawful return of capital. Held: Whether a transaction infringed the common law rule against unlawful distributions was a matter of substance, not form. The label attached to the transaction by the parties was not decisive, Ridge Securities Ltd v Inland Revenue Commissioners  1 WLR 479 ChD, Aveling Barford Ltd v Perion Ltd  5 BCC 677 ChD, and Halt Garage (1964) Ltd, Re  3 All ER 1016 ChD applied (see paragraph 16 of judgment). The essential issue therefore was how the sale of Y was to be characterised. A relentlessly objective rule would be oppressive and unworkable and would cast doubt on any transaction between a company and a shareholder, even if negotiated at arm’s length and in good faith, where the company proved with hindsight to have got significantly the worst of the transaction (paragraph 24). If it was a stark choice between a subjective and an objective approach, the least unsatisfactory option would be the latter but the court’s real task was to inquire into the true purpose and substance of the impugned transaction. That approach called for an investigation of all the relevant facts, which could include the state of mind of the persons orchestrating the transaction. That state of mind could be totally irrelevant. A distribution described as a dividend but actually paid out of capital would be unlawful, however technical the error and well-meaning the intention. However, the participants’ subjective intentions would sometimes be relevant, and a distribution disguised as an arm’s length commercial transaction was the paradigm example. If a company sold to a shareholder at a low value assets which were difficult to value precisely but were potentially very valuable, the transaction might call for close scrutiny. The company’s financial position and the motives and intentions of its directors would be highly relevant. If the conclusion was that it was a genuine arm’s length transaction, then it would stand even if it appeared with hindsight to have been a bad bargain. If it was an improper attempt to extract value by the pretence of an arm’s length sale, it would be held unlawful. It would depend on a realistic assessment of all the relevant facts, not simply an isolated retrospective valuation exercise, Clydebank Football Club Ltd v Steedman (2002) SLT 109 OH applied. In the present case, there had been concurrent findings that the sale of Y was a genuine commercial sale (paragraphs 27-29, 31-33). Appeal dismissed.
Solicitors will already be familiar with the term LeO to describe the Legal Ombudsman, which opened last October. But this could so easily have been a far more amusing acronym, as the ombudsman himself reveals in his blog. Adam Sampson says the complaints body considered various options before settling on LeO, including LOO (Legal Ombudsman’s Office); LOS (Legal Ombudsman Service); and Obiter’s personal favourite, LegO, until ‘trademark issues and wiser heads intervened’. Shame. Sampson admits ‘the semiotics of LeO are not without risk’, but adds: ‘Overall, I don’t mind us being seen as slightly scary’.
by Lucy Scott-Moncrieff, a solicitor member of the QC Selection Panel The results of the latest QC appointments competition have just been announced, and, once again, only a tiny number of the successful applicants are solicitors. The old system was widely seen as being unfair to some well-qualified applicants, including solicitors, but is the new system any better? The QC appointments system, both now and in the past, is intended to identify excellence in higher court advocacy, which excludes the vast majority of solicitors, who do not advocate in the higher courts. Whatever the rights and wrongs of this state of affairs, the scheme should be judged against its stated objectives. The main reason why so few solicitors become QCs is that so few apply. This year there were five applicants, of whom two were successful. As there are now nearly 5,500 solicitors with higher rights, this seems to be a puzzlingly low number of applicants, until you take account of the background. The first solicitors to obtain rights of audience in the higher courts did so in 1994. Barristers obtain higher rights on completing their first six months of pupillage, and it would be an exceptionally talented barrister who would be appointed QC within 15 years of that date. Also, it is likely that they will have been engaged in advocacy, day in and day out, for most of that time. Most solicitors with higher court rights use those rights to advocate for the clients of their firm, and will also be undertaking other work for their clients, including lower court advocacy. It will therefore take them much longer to gain the same higher court experience as their fellow advocates at the bar, and, as with so many things, consistent excellence is achieved through constant practice. The very nature of a solicitor’s practice can also create obstacles: the QC appointments process requires applicants to display evidence of excellence in cases of substance, complexity, or particular difficulty or sensitivity. In some areas of law, for instance judicial review or commercial arbitration, such cases may only require one or two days in court. However, in many other areas, such as crime, family, or planning enquiries, cases that allow advocates to display excellence to a QC standard are more likely to take weeks or months, and many solicitors simply cannot be out of the office for that length of time, or, at least, not often. The QC appointments process takes account of different types of practice, so that those whose cases seldom get to court, such as tax practitioners, are not disadvantaged compared with those who are frequently in court. However, as the appointment is for excellence in advocacy, if the case does get to court, the applicant has to have contributed to the advocacy. Of course there are solicitor advocates who undertake long and complicated cases in court, as well as those whose excellence can be demonstrated in shorter cases, and that is why there is a small but steady stream of solicitors appointed as QCs. Is the number of applicants going to increase? This seems likely. First, simply through the passage of time, more and more of those with higher rights will gain the necessary experience to produce evidence of consistent excellence in substantial and complex cases. Second, there is anecdotal evidence that some law students who want to specialise in advocacy are choosing to become solicitors rather than barristers, obtaining their higher rights very soon after qualification, and it seems reasonable to assume that they will be working in a similar way to barristers and so will achieve the same standards within the same timeframes. Third, changes in legal aid mean it is likely that more criminal defence solicitor advocates will be spending more time in court, as firms reduce their reliance on the bar. Fourth, an increasing focus on ADR will give solicitors greater advocacy opportunities that will fit in with their other work. Parity of numbers will take a while, but parity of esteem is already in place; the fact that solicitor and barrister applicants go through exactly the same process ensures that there can be no suggestion that a solicitor QC is less able than a barrister QC.
Ezekiel v Orakpo  3 All ER 659 considered; Thompson v Elmbridge Borough Council  LS Gaz R 2456 considered; Smith (a bankrupt) v Braintree District Council  3 All ER 897 considered; Razzaq v Pala  BPIR 726 considered; Greenwich London Borough Council v Regan  EGCS 15 considered; Harlow District Council v Hall  All ER (D) 393 (Feb) considered. (2) It was settled law that s 285(3)(b) of the Act was implicitly limited to legal proceedings against the bankrupt ‘in respect of that debt’; it was qualified in the same way as s 285(3)(a) of the Act. Accordingly, proceedings for an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of rent arrears, in which no claim was made for arrears provable in the tenant’s bankruptcy, were not subject to the automatic stay in s 285(3)(b) of the Act. Neither was an order for possession of property subject to a tenancy, including an assured tenancy, on the ground of arrears of rent, which was the subject of the tenant’s DRO, a ‘remedy in respect of the debt’ within the meaning of s 251G(2)(a) of the Act, whether the order was an outright or conditional suspended order for possession. Proceedings for possession of property subject to an assured tenancy on the ground of rent arrears, which were provable in the tenant’s bankruptcy or were the subject of the tenant’s DRO, should not normally be stayed under s 285(1) or (2) or s 251G(3) of the Act. On the hearing of such proceedings, no order could be made for payment of arrears, nor should a suspended order for possession be made conditional on payment of such arrears. Consequently, although the judge had made no error in S’s case, the judge in G’s case had erred in making the order conditional on the payment of arrears (see , ,  of the judgment). The order in G’s case would be varied deleting the order for payment of the rent arrears, and confining the weekly instalments to costs (see  of the judgment). Sharples and another v Places for People Homes Ltd: Court of Appeal, Civil Division (Lords Justice Mummery, Etherton, Mr Justice Wilson): 15 July 2011 The two claims involved common issues about the effect of a person’s insolvency on the right of a landlord to obtain an order for possession of a dwelling let on an assured tenancy, on the ground of rent arrears. In the first claim, the defendant, S, fell into arrears on her rent, and was adjudged bankrupt in May 2009. Her landlord issued proceedings seeking possession. S submitted that as the rent arrears were provable in her bankruptcy, the court was prevented from making an order for possession against her by virtue of s 285(3) of the Insolvency Act 1986 (the Act). That section precluded any creditor of the bankrupt from taking action against the bankrupt in respect of that debt. The judge refused to make an order for payment of the rent arrears since they were a debt provable in the bankruptcy, but held that s 285(3) of the Act did not preclude the making of an order for possession. In the second claim, the defendant, G, fell into arrears on his rent, and a debt relief order (DRO) was made. When a DRO was made, s 251G of the Act imposed a moratorium which prevented a creditor from taking action in respect of the debt without the permission of the court. G contended that the proceedings for possession, instituted by his landlord, should be stayed in view of the DRO. The judge rejected that argument, and made an order for possession, directing that the order was not to be enforced so long as G paid his landlord £5 per week in respect of rent arrears and costs. Both S and G appealed, and their appeals were heard together. The issue in the first case was whether the making of a possession order in respect of a dwelling let on an assured tenancy was precluded, following the making of a bankruptcy order against the tenant, by s 285(3)(a) of the Act. S submitted first that s 285 of the 1986 Act was intended to protect the interests of one unsecured creditor against another, and granting the order for possession would give one creditor an improper advantage. Secondly, S submitted that the legislative policy was to enable a tenant under an assured tenancy or a secure tenancy to remain in their home. Such tenancies were excluded from the bankrupt’s estate, but, by virtue of s 285(b) were nevertheless property to which s 285 applied. G adopted S’s submissions, and further contended that s 251G(2) of the Act prohibited the making of the order, and further that on any footing, the order should not have been made conditional on payment of arrears; it should have been made conditional only on payment of current rent. S’s appeal would be dismissed. G’s appeal would be allowed in part. (1) The grant of a tenancy, including an assured tenancy, created a property interest in the tenant which was an incumbrance on the landlord’s title. An order for possession was a remedy which restored to the landlord full proprietary rights, including rights of occupation and letting. The failure to pay rent was a breach of a contractual obligation. Neither forfeiture, nor a court order for possession, nor recovery of possession by the landlord, nor an order for bankruptcy, eliminated the personal indebtedness constituted by the rent arrears. It followed, as a matter of general principle, that an order for possession of property, whether let under an ordinary contractual tenancy or a secure or assured tenancy, was not a remedy ‘in respect of’ the debt represented by the rent arrears which gave the landlord an entitlement to the order for possession (see  of the judgment). Recovery of possession – Tenant’s insolvency Edward Bartley Jones QC (instructed by Whiteheads) for the first claimant. Jonathan Manning and Victoria Osler (instructed by Owen White) for the second claimant. Jan Luba QC and Ben McCormack (instructed by Glaisyers) for S. Kerry Bretherton (instructed by Turpin and Miller) for G.
I note with interest that the Solicitors Regulation Authority is to canvass personal injury firms to ask how they will cope when the government bans referral fees. I would suggest that they cope by ceasing to chase the gravy train and actually exercise business and professional judgement. I do not recall any regulator or professional body consulting me or my partners when we were forced (along with hundreds of other firms) to bail out the banks and insurance companies over the fiasco involving The Accident Group (TAG) a few years ago. Readers will recall that that debacle centred around what were later found to be illegal referral fees, namely payments made to an associate company of TAG for services relating to personal injury claims. The whole TAG scheme depended on the support of several large banks and insurance companies which were, one might have thought, capable of exercising a bit of business sense but who instead blamed solicitors for their losses and sued accordingly. Luckily for my firm, I exercised some sense (when I realised that all was not as it seemed) by plugging the flow of TAG work into our office. Referral fees are inherently wrong; this is borne out not only by the above episode but by the general experience of mankind over the centuries. Such fees compromise the integrity and independence of the recipient and have no place in our legal system (a principle which not so long ago was taken as axiomatic by every good lawyer). Continually saying a thing is harmless does not make it so; if you do not agree, try it with the next shark you meet. Stephen Thorn, Drivers, York
HSBC has established a conveyancing panel of solicitors and licensed conveyancers to provide legal services to its residential mortgage customers. Solicitor member firms must have the Law Society’s Conveyancing Quality Scheme (CQS) accreditation. The panel, managed by Countrywide, will launch on Monday across the UK. Of the 43 members, 39 are solicitor firms and four licensed conveyancing companies. The panel is not closed and others can apply to join. HSBC has 5% of the UK’s mortgage market. It introduced the new panel in response to the Financial Service Authority’s recommendations for tackling mortgage fraud. Customers will continue to be free to use their own solicitor or conveyancer to act for them, but HSBC will use a panel firm for its own legal requirements. Where a customer chooses a non-panel firm, the new process will separate the two pieces of legal work, and the customer will pay for both. Where customers appoint a panel firm to act for them, work will be carried out for a fixed fee. They will be able to monitor the sale online and check to ensure the solicitor is carrying out the work in a timely manner. Head of mortgages at HSBC Peter Dockar said: ‘Our new panel arrangement will spare customers the time and hassle of searching for a firm to do the important conveyancing work on their new property. Customers who choose to use a firm on the panel can benefit from agreed conveyancing costs as well as valuable guarantees should the seller pull out. We also believe this will provide additional protection for our customers and HSBC.’ The Law Society welcomed the requirement that law firms on the panel have the CQS quality mark, but raised concerns over the small size of the panel. Chief executive Desmond Hudson said: ‘HSBC’s decision to appoint only CQS accredited firms to its panel is further evidence that the scheme is firmly establishing itself as an essential standard for lenders. Nevertheless, we are concerned that fewer than 43 firms will serve home-buyers who use HSBC for their mortgage in England and Wales. Does this provide sufficient consumer choice?’ Such a small number could restrict the choice available to consumers who prefer to use a local service, he said. ‘The disabled, those living in rural areas or even those wishing to simply use their family solicitor will either have little choice but to opt for the same solicitor as HSBC, one of their panel firms or pay twice over for their own solicitor as well as HSBC’s legal fees,’ said Hudson. He added: ‘It is disappointing that HSBC failed to consult the Society. I suspect they have made the calculation that the majority of their customers will opt to use the bank’s solicitor.’ He also raised the possibility of the bank being tempted to sell valuable places on the panel, thus putting up costs for house buyers. ‘This is not in the long-term interests of consumers. HSBC should reconsider.’
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Stay at the forefront of thought leadership with news and analysis from award-winning journalists. Enjoy company features, CEO interviews, architectural reviews, technical project know-how and the latest innovations.Limited access to building.co.ukBreaking industry news as it happensBreaking, daily and weekly e-newsletters Subscribe now for unlimited access Subscribe to Building today and you will benefit from:Unlimited access to all stories including expert analysis and comment from industry leadersOur league tables, cost models and economics dataOur online archive of over 10,000 articlesBuilding magazine digital editionsBuilding magazine print editionsPrinted/digital supplementsSubscribe now for unlimited access.View our subscription options and join our community To continue enjoying Building.co.uk, sign up for free guest accessExisting subscriber? LOGIN Get your free guest access SIGN UP TODAY