Fraud

Summary judgment - Breach of duty and trust - Solicitor

Seaton and others v Seddon and others: Chancery Division (Mr Justice Roth): 23 March 2012

Section 21 of the Limitation Act 1980 provides, so far as material: '(1) 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… (3) Subject to the preceding provisions of this section, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this act, shall not be brought after the expiration of six years from the date on which the right of action accrued…'

Section 28 of the act, so far as material, provides: '(1) Subject to the following provisions of this section, if on the date when any right of action accrued for which a period of limitation is prescribed by this act, the person to whom it accrued was under a disability, the action may be brought at any time before the expiration of six years from the date when he ceased to be under a disability or died (whichever first occurred) notwithstanding that the period of limitation has expired... (3) When a right of action which has accrued to a person under a disability accrues, on the death of that person while still under a disability, to another person under a disability, no further extension of time shall be allowed by reason of the disability of the second person.'

Section 38 of the act, so far as material, provides: '… (2) For the purposes of this act a person shall be treated as under a disability while he is an infant, or of unsound mind. (3) For the purposes of subsection (2) above a person is of unsound mind if he is a person who by reason of mental disorder within the meaning of the Mental Health Act 1983, is incapable of managing or administering his property and affairs.'

The instant claim was brought by or on behalf of the former members of a band, Musical Youth (MY). The first four claimants were members of MY. The fourth claimant was mentally ill and brought the action by his litigation friend. The first to the fifth defendants (together WS), were the partners or suspected partners of a firm of solicitors. MY had been made up of five boy members and had had success in the early 1980s with a reggae song called 'Pass the Dutchie' (Dutchie).

That song was an adaptation of another song 'Pass the Kouchie' (Kutchie), which had been recorded by another reggae group, MD. Kutchie appeared to have incorporated music from another song: 'Full up'. During 1984, disputes developed as between members of MY as to the song-writing credits, and in respect of the way in which royalties should be shared, concerning Dutchie. The instant case concerned an agreement concerning Dutchie, Kutchie and 'Full up' made in September 1984 (the Sparta Florida Agreement), in relation to which, WS had provided legal services on behalf of MY. WS had allegedly also represented Pieter BV and Pieter UK (the Two Pieters), which had been granted exclusive rights to Kutchie, with a view to establishing that Dutchie would be credited solely to them.

The instant claim against WS was for breach of duty and trust in that, whilst acting as solicitors to the MY members, they had acted for the Two Pieters in relation to the negotiation and conclusion of the Sparta Florida Agreement and the distribution of monies thereunder. The complaint against WS was, inter alia, that they had had a fundamental conflict of interest in acting for the Two Pieters in respect of the Sparta Florida Agreement, whilst acting as the solicitor to MY. Further, that they had been in breach of their obligations as a fiduciary to MY in failing to advise the band of their entitlement to copyright in Dutchie.

It was alleged, inter alia, that such breaches had been committed fraudulently. The trust alleged on the facts was in respect of monies received by WS by reason of the Sparta Florida Agreement. Whilst that Agreement was in made in 1984, the claim was not issued until February 2010. WS applied for the claim against them to be struck out as an abuse of process.

WS submitted that the claim ought to be struck out because the factual allegations as pleaded did not support a plea of fraud or dishonesty. Issues arose as to: (i) what was required in pleading an allegation of fraud, in particular, whether such an allegation had to be particularised by setting out its factual foundation; (ii) the correct approach to summary judgment or striking out; (iii) in respect of the fourth claimant, the correct interpretation of section 28(1) of the  Limitation Act 1980 (the 1980 act) in respect of mental incapacity, and whether the question of disability was to be determined under the law as it stood at the relevant time, namely The Mental Health Act 1983 (the 1983 act), or under the Mental Capacity Act 2005 (the 2005 act), which introduced new provisions regarding the question of mental capacity; and (iv) whether the claims for breach of trust or fiduciary duty were time barred. In respect of (iii) the claimants submitted, inter alia, that section 21 of the 1980 act applied and that so long as the fourth claimant was continually under 'a disability', time did not begin to run, even if a second overlapping disability (mental illness) was of a different nature to the first disability (namely minority).

WS submitted that time began to run on the fourth claimant attaining his majority regardless of whether he could establish that he was under the second disability at that date. In respect of issue (i), consideration was given to Civil Procedure Rule 1.2(b), CPR 1.1(1), (2)(e), CPR 16.4(1)(a), Civil Procedure Rules Practice Direction 16 (PD 16), to the Rules of the Supreme Court (RSC), and to the Chancery Guide.

The court ruled: (1) It was settled law that, as a general rule, the more serious the allegation of misconduct, the greater the need for particulars to be given which explained the basis of the allegation. The allegation of fraud, dishonesty or bad faith had to be supported by particulars. The other party was entitled to notice of the particulars on which the allegation was based. If they were not capable of supporting the allegation, the allegation itself might be struck out. But it was not a proper ground for striking out the allegation that the particulars might be found, after trial, to amount not to fraud, dishonesty or bad faith but to negligence. The Chancery Guide was not to be regarded as a substitute for the CPR and, in the case of any inconsistency, the CPR had to prevail.

The CPR had not introduced such a significant change in fraud cases by removing or reducing the obligation found in the RSC as to what had to be pleaded where fraud was alleged. The CPR and the associated practice directions were to be interpreted in accordance with the overriding objective in CPR 1.2(b) to deal with a case justly, which included, so far as practicable, ensuring that a case was dealt with fairly (CPR 1.1(1), (2)(e)). PD 16 imposed an obligation to 'specifically set out... any allegation of fraud'. Read together with CPR 16.4(1)(a), PD 16 was to be interpreted as meaning more than a simple statement that fraud was alleged but also the specific basis of the allegation, namely the facts relied upon (see [45]-[47] of the judgment). Three Rivers District Council v Bank of England [2000] 3 All ER 1 considered.

(2) It was settled law that, in respect of an application for summary judgment or to strike out a claim, the court had to consider whether the claimant had a realistic, as opposed to a fanciful, prospect of success (see [50] of the judgment). On the facts of the instant case, the allegation of fraud as particularised had no realistic prospect of success. Were it otherwise, almost every solicitor who was alleged to have been seriously negligent as regards an interpretation of the law would be susceptible on that basis alone to an arguable claim for fraud. Nor was it permissible for the claimants to seek to pursue the claim to trial in the hope that some further evidence might turn up on disclosure or on cross-examination of the first defendant, which might establish that he was lying. That was entirely speculative. The instant case was not one where there were reasonable grounds to suppose that fuller investigation would yield evidence that would significantly alter the position. The instant proceedings were an attempt to turn a claim for professional negligence into a claim for fraud or dishonest breach of trust in order to overcome the obvious problems of limitation, and the court regarded the claim as wholly without merit (see [60], [124] of the judgment).

WS were entitled to summary judgment on the [fraud] claim against them as it stood (see [124] of the judgment). Swain v Hillman [2001] 1 All ER 91 applied; Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] All ER (D) 130 (Apr) considered; ED & F Man Liquid Products Ltd v Patel [2003] All ER (D) 75 (Apr) considered; Bolton Pharmaceutical Co 100 Ltd v Doncaster Pharmaceuticals Group Ltd [2006] All ER (D) 389 (May) considered.

(3) In respect of mental incapacity, the applicable test was that determined by the law when the cause of action accrued (see [96] of the judgment). Applying that interpretation to the instant case, the relevant test for the purpose of section 28(1) of the 1980 act was the version of section 38 of the act prior to the amendment that introduced reference to mental incapacity under the 2005 act. The primary test under section 38 of the 1980 act, as it applied in 1984 when the cause of action accrued, was whether the fourth claimant was by reason of mental disorder within the meaning of the 1983 act 'incapable of managing or administering his property and affairs' (see [96]-[98] of the judgment). On the facts of the case, the fourth claimant had not shown a sufficiently arguable case that he met the statutory criteria for disability by reason of unsound mind on his 18th birthday (see [106] of the judgment). Masterman-Lister v Brutton & Co; Masterman-Lister v Jewell [2003] 3 All ER 162 considered.

(4) It was settled law that a distinction had to be drawn between two different uses of the term 'constructive trust' when applying the statute of limitations. The first covered those cases where the defendant, though not expressly appointed as trustee, had assumed the duties of a trustee by a lawful transaction which was independent of and preceded the breach of trust and was not impeached by the plaintiff. The second covered those cases where the trust obligation arose as a direct consequence of the unlawful transaction which was impeached by the plaintiff. In the first class of case, the constructive trustee really was a trustee. He did not receive the trust property in his own right, but by a transaction by which both parties intended to create a trust from the outset, which was not impugned by the plaintiff. The second class of case was different. It arose when the defendant was implicated in a fraud. The use of the term 'trust' in the second class of case should not lead the plaintiff's claim to fall within section 21(1) and escape any period of limitation (see [67], [68] of the judgment).

Given the conclusion that the pleaded claim of fraud had no chance of success, the instant allegation fell to be considered on the basis of a negligent or innocent breach of trust or fiduciary duty. The cause of action alleged against WS had accrued in about 1984. The period of six years from the time the members of MY had attained their majority had expired long before the issue of the claim form in 2010. Accordingly, the fact that they were under a disability by reason of their infancy when the causes of action had accrued had not overcome any limitation defence. It was clear that it was not a case of a class 1 trust. The fact that WS were the solicitors to the band could not in itself make them trustees over the assets of the members of MY, including any copyright in Dutchie. The trust alleged on the facts was in respect of monies received by WS by reason of the Sparta Florida Agreement, which was the agreement which the claimants sought to impugn.

Accordingly, it was a class 2 trust and the trust claim fell within section 21(3) of the 1980 act and the limitation period of six years applied. The claim for breach of fiduciary duty, although mixed up with the breach of trust claim in the pleadings, was conceptually distinct in that WS could be said to have owed a fiduciary duty to the members of MY by reason of being their solicitors, with the attendant obligation of loyalty. But all the allegations against WS brought under that head amounted to a breach of their duties as solicitors and therefore mirrored the allegations that would lie for breach of contract or negligence (see [62], [75], [76] of the judgment). Accordingly, following the authorities, the six-year limitation period applied to the claim for breach of fiduciary duty against WS, by analogy, pursuant to section 36 of the 1980 act (see [76] of the judgment).

Cia de Seguros Imperio (a body corporate) v Heath (REBX) Ltd (formerly CE Heath & Co (North America) Ltd ) [2000] 2 All ER (Comm) 787 followed; DEG-Deutsche Investitions und Entwicklungsgesellschaft mbH v Koshy; Gwembe Valley Development Co Ltd v Koshy [2003] All ER (D) 465 (Jul) followed; Paragon Finance plc v Thakerar & Co, Paragon Finance plc v Thimbleby & Co (a firm) [1999] 1 All ER 400 considered.

John Brisby QC, Tim Ludbrook and Michael Smith (instructed by Edwain Coe LLP) for the claimants; Joanna Smith QC (instructed by Clyde & Co LLP) for the first to fifth defendants.

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