Pure Economic Loss

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DRAFT: NOT FOR CITATION WITHOUT THE PERMISSION OF THE AUTHOR.

PURE ECONOMIC LOSS: THE PROBLEM OF TIMING
Robert Walker

Occasionally the English Court of Appeal has cited to it a decision of the Supreme Court (or, until recently, the House of Lords) which it finds almost completely incomprehensible. It has a tactful way of signalling this. It does so by taking the unusual course of itself granting permission to appeal, rather than leaving it to the higher court to decide. The clear message is “Try again, and try harder this time.”

For present purposes the decision that the Court of Appeal found so much difficulty with was that of the House of Lords in 2006 in the case of Law Society v Sephton & Co.1 The case in which the Court of Appeal said “Try again” was Axa Insurance Ltd v Akther & Darby2. Both were claims for pure economic loss caused by breach of professional duty. The defendants in the first case were a firm of accountants, and in the second case several firms of solicitors. In each case the essential issue, on appeal, was whether the defendants had a good limitation defence. That depended on when the cause of action arose, and that in turn depended – since the cause of action relied on was negligence – on when the plaintiff sustained damage.

These two recent English decisions provide a way into the problems that I want to discuss. I shall be referring mainly to Australian authority, including some Queensland authority, that Dominic O’Sullivan has very kindly drawn to my attention. I hardly need say that my observations on 1

[2006] 2 AC 543

the Australian cases are offered with due deference and an awareness of what may happen where angels fear to tread.

The Sephton case was concerned with the part that accountants play in the regulation of the solicitors’ profession by the Law Society. Rules made under statutory powers require every solicitor in sole practice to obtain an annual accountants’ report certifying that the accountants have examined the solicitor’s books and are satisfied that the solicitor has complied with the Solicitors’ Accounts Rules. Mr Payne, a solicitor in sole practice, had between 1990 and 1996 misappropriated a total of about £750,000 from his client account. Every year a partner in Sephtons had given the regulatory certificate. Mr Payne staved off discovery of his misdeeds for some time but in May 1996 the Law Society intervened. Mr Payne was struck off the roll, convicted and sentenced to imprisonment.

The Law Society has a statutory compensation fund to meet claims by clients whose money has been misappropriated. Payments from the fund are discretionary, but in practice genuine claimants, unless very much to blame for their own losses, have their claims met in full – in this case, up to a total of over £1.2m, including interest. The Law Society indicated that it had a claim against Sephtons, but matters moved slowly as the issue of duty of care was being litigated in other proceedings, in which the Law Society was eventually successful.3 It started proceedings against Sephtons on 16 May 2002. A preliminary issue was heard as to whether the cause of action accrued before 16 May 1996. The judge held

2
3

[2010] 1 WLR 1662
Law Society v KPMG Peat Marwick [2000] 1 WLR 1921

2

that the claim was statute-barred. The Court of Appeal allowed the Law Society’s appeal by a majority.4

The House of Lords unanimously dismissed the further appeal. The principle of the decision is that the Society suffered no loss, but merely a risk of loss, until it resolved to meet the claims on its compensation fund. Both appeal courts referred at length to the important decision of the High Court of Australia in Wardley Australia Ltd v State of Western Australia5, decided in 1992. I shall come back to that case in more detail but it is worth noting at once a passage in the plurality judgment,6 quoted in both English appeal courts, which goes to the heart of the problem: “If,...
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