Ipsofactoj.com: International Cases [2002] Part 1 Case 15 [CAEW]




- vs -





26 JULY 2001


Lord Justice Mummery


  1. This case powerfully demonstrates the importance of the paramount duty of a solicitor to observe fiduciary obligations in his personal dealings with a client and even with a former client. A solicitor proposing either to buy property from, or to sell property to, a client is under a duty to cause the client to obtain independent advice. That duty may endure beyond the termination of the retainer, which initially formed the professional relationship of solicitor and client: see Snell's Principles of Equity (13th Ed) para 11-83. The source of the duty is not the retainer itself, but all the circumstances (including the retainer) creating a relationship of trust and confidence, from which flow obligations of loyalty and transparency. As long as that confidential relationship exists the solicitor must not place himself in a position where his duty to act in the interests of the confiding party and his personal interest in acting for his own benefit may conflict. Breach of that duty may result in the setting aside of the transaction or, if that is no longer possible, in the award of equitable compensation for resulting loss.

  2. Unfortunately, these basic principles neither featured in the pleadings nor in the arguments in the court below. They only surfaced in the course of the hearing of this appeal.


  3. As foreshadowed by the opening words of HHJ Roger Cooke's detailed and careful judgment, the facts are redolent of some famous judgments of Lord Denning MR:

    Whatever is the result on the merits this is a tragic case of a bad business decision. When the story started the Claimants Mr & Mrs Longstaff had 50,000 to invest in a small hotel business. When it ended their 50,000 was gone and they had no employment and were and are destitute. All this happened nearly ten years ago.

  4. Mr Longstaff was an executive officer in the Department of Employment. In 1982 he and his wife bought a guest house in Blackpool. Mr Longstaff retired from the Civil Service in 1984 to concentrate on the guest house. The Longstaffs decided that they would rather run a place in the country. So they sold up in Blackpool in 1987 and went to live temporarily in Kirby Stephen. They started to look for a place. They had about 58,000 available. They found a Moorland pub called the Moorcock Inn at Egglestone, Co Durham. It was on the market for 150,000. They proposed to inject 50,000 and to borrow 100,000.

  5. Mr Longstaff, who conducted the negotiations on his wife's behalf as well as for himself, needed a solicitor. So he instructed a local firm in Kirby Stephen in January 1988. They were called Hewitson & Harker. He had never had anything to do with them before. He just went to them off the street. The partners were two brothers, Peter and Michael Birtles. Mr Longstaff dealt with Mr Michael Birtles.

  6. The Longstaffs did not know that the Birtles were also partners, along with Mr Middleton (a local builder) and Mr Allen (an associate of Mr Middleton), in a hotel business at the Castle Hotel at Brough. It was bought by them in August 1986 in a run down condition. There was a loan of 76,000 from the Midland Bank to finance improvements to the premises. The hotel opened for business in July 1987. Mr & Mrs Williams became resident landlords in October 1987 and gave notice to expire in 1988. According to the accounts for the trading year August 1986 to August 1987 the business had been trading at a large loss.

  7. The Moorcock negotiations were not fruitful. The business accounts were unsatisfactory and showed that the representations about turnover were wrong. At a meeting on 24 February 1988 Mr Longstaff told Mr Michael Birtles that he had decided not to proceed with the purchase of the Moorcock. The negotiations were ended by a letter sent by the solicitor the next day and the papers were returned.

  8. At the same meeting Mr Michael Birtles told Mr Longstaff about the Castle Hotel. He suggested that he might like to buy into the Castle Hotel partnership. He indicated that the business was worth 250,000 and referred Mr Longstaff to a local valuer in Penrith, who said that the figure was about right. Next day Mr Longstaff visited the hotel with Mr Michael Birtles. There were four further meetings in February and March 1988. Mr Michael Birtles drafted a partnership deed. He did not insist that Mr Longstaff should obtain independent advice. The deed was signed on 22 April 1988. It was agreed that the Longstaffs would introduce 40,000 into the partnership for a half share in it, manage the business, live on the premises , draw a combined weekly gross salary of 250 and receive half of the profits. The partnership was to be for six months terminable by six months notice.

  9. To begin with the hotel appeared to be doing well. The Longstaffs did not exercise the right to terminate and a bonus arrangement was negotiated. By the winter of 1989/90 trade at the Castle Hotel had dropped off. All was not well. A decision was made to sell the hotel for 450,000, but nobody wanted to buy it. Salary was stopped. Trade did not improve. The hotel was in real trouble. Mrs Longstaff suffered ill health. The Longstaffs moved out of the hotel into Oakley Cottage, 2 New Street, West Auckland. Mr Michael Birtles had acted as their solicitor on the purchase of it. Mr Longstaff continued to run the business for a little longer. He went to see another firm of solicitors. They advised him to dissolve the partnership. It is common ground that this was done with effect from 9 December 1990, although partnership affairs have still not been wound up and this would now be difficult to do satisfactorily. Since then the Longstaffs have neither had business nor employment. Mrs Longstaff became gravely ill and has recently died.


  10. The writ was issued on 23 December 1992.The Longstaffs claimed damages for professional negligence, misrepresentation and breach of the fiduciary duty of good faith arising between partners. The two latter claims, which were rejected by the judge, have not been pursued on appeal. It is, however, necessary to refer to the pleadings in order to understand the issues at the trial and the circumstances in which counsel for the Longstaffs came to make an application for leave to re-re-amend the Statement of Claim in the closing stages of the appeal to this court.

  11. In the re-amended Statement of Claim it was alleged that in January 1988 the Longstaffs entered into an oral contract of retainer with the firm of Hewitson & Harker

    to provide general advice over the purchase of a Hotel business and specific advice over the purchase of a business at the Moorcock Inn...

  12. Under the particulars of negligence it was alleged that the solicitors had failed to advise them to seek independent advice; or to insist on the inclusion of financial guarantees in the partnership agreement; or to advise them that the losses suffered by the business prior to their negotiations to become partners were such as to make it a high risk venture given their limited resources and the income they required; or to make any or any adequate enquiry as to the limits of their financial resources or the profits they required from their investment in the partnership; or to advise them that they should not enter into a partnership which could result in them being bankrupted as a result of their partners' actions; or to warn them to be sceptical of the trustworthiness of their proposed partners.

  13. They also alleged that, if the firm of solicitors had not acted negligently, they would not have entered into the partnership agreement and that, as a result of the negligence, they had suffered loss of all sums invested and the loss of opportunity to generate income.

  14. In their defence the solicitors denied that there was a general retainer. They pleaded that the relationship of solicitor and client ceased following the decision of the Longstaffs not to proceed with the proposed purchase of the Moorcock Inn. It was only thereafter that they asked the Longstaffs if they were interested in joining the Castle Hotel partnership. It was admitted that Mr Longstaff was shown writing indicating that the Castle Hotel was running at a loss prior to the partnership and, indeed, since it was bought at auction in 1986.The allegations of misrepresentation and negligence were denied. It was pleaded that the Longstaffs were informed that they were at liberty to seek independent advice and were advised to seek it. It was denied that the Longstaffs entered into the partnership agreement by reason of the alleged negligence or in reliance on any representation. It was even alleged that any loss or damage that the Longstaffs might prove was caused wholly or in part by reason of their own negligence in failing to seek independent advice and relying on their own expertise, in failing to avail themselves of the opportunity to leave the partnership earlier than they did and in failing to keep themselves abreast of the financial situation of the partnership. There was a counterclaim in respect of other matters ,including the liabilities in the partnership.


  15. On 9 May 2000 HHJ Roger Cooke gave judgment dismissing the action. For the purposes of this appeal it is only necessary to outline the main points and to focus on his crucial findings of fact relating to the defendants' breach of duty as solicitors.

  16. The retainer was for a specific piece of business, the purchase of the Moorcock, which came to an end in the course of the meeting on 24 February 1988. By the time the discussion turned to the Castle Hotel all that was left of the retainer was the duty to write a letter to the vendors of the Moorcock and return the papers. Subject to that formal matter, the retainer was terminated and Mr Michael Birtles had no continuing obligations under it.

  17. The discussion of the Castle Hotel partnership was a fresh and independent piece of business introduced by Mr Michael Birtles in circumstances that were not those of a solicitor/client relationship in which he owed duties. The fact that he acted for the Longstaffs at other times and in other transactions (e.g. the purchase of a house) was not relevant to whether he acted as solicitor in respect of the Castle Hotel partnership.

  18. The solicitors were under no liability to the Longstaffs in contract, because the Moorcock Inn retainer did not extend to the Castle Hotel transaction, even though he found that the Longstaffs thought that it did and believed that Mr Michael Birtles was acting as solicitor in respect of it.

  19. There was no assumption of responsibility so as to lead to a duty of care in tort. The fact that Mr Longstaff continued to believe that Mr Michael Birtles was his solicitor and that the latter did nothing to disabuse him of that belief was not enough to found a "non-retainer" duty of care in tort in respect of the partnership transaction. The relationship between them had changed to that of vendor and purchaser. The judge added this, in explanation of his comment that "it was scarcely surprising that Mr Michael Birtles found such an attack being made,"-

    It was foolish in the extreme to deal personally with somebody who had just ceased to be a client without putting all the usual safeguards in place, most especially an insistence (as the solicitors' own practice requires) on the former client being advised by others ,coupled with a refusal to deal unless they are. This is the essence of good practice and one would have thought consistent anyway with a prudent solicitor's sense of self preservation.

  20. There was no presumption of undue influence, such as where there was a gift by a client to his solicitor.

  21. Although it was not strictly necessary for the judge to decide whether or not there was negligence, as he held that there was no duty of care in contract or tort, he prudently did so in case the matter should go any further. He found that, had it been their duty to advise, there was negligence on their part: there was a failure to perform what the judge described as "a professional duty...as opposed to a legal duty of care..." of insisting, not merely advising, the Longstaffs to seek independent advice; there was a failure to advise them that they must have as much information as possible on the financial position, so that they could form a proper view of what they were buying into and that they knew the risks and could evaluate them and reach a proper decision; and that what the Longstaffs were told went nowhere far enough.

  22. As to damages, the judge said that ,if his finding on liability was reversed, the damages would have to be assessed. He accordingly made findings of fact and principle in order to avoid the necessity for a new trial. But he did not assess figures. He found that, had the Longstaffs been advised to get a full financial picture, they would have followed that advice and, in the light of the information which they would have been given, they would "on balance have withdrawn." In additional reasons given by the judge on 27 September 2000 (in accordance with an undertaking to do so if the Court of Appeal granted permission to appeal) he found that "the Longstaffs would more likely than not have withdrawn." There are other detailed findings and conclusions which are not relevant at this stage.

  23. The Longstaffs sought the permission of this court to appeal on the negligence issue only. Permission was granted by Robert Walker LJ on 24 August 2000.

  24. The grounds of appeal were that the judge erred in law in concluding that no duty of care was owed by the solicitors to the Longstaffs and that, on the basis of the judge's findings of fact and the evidence adduced at trial, the proper conclusion was that the solicitors had assumed a responsibility to act for the Longstaffs in the Castle transaction as their solicitors.

  25. There is no respondents' notice.


  26. On behalf of the Longstaffs, Mr Pipe submitted that the duty of care owed by the solicitors to their clients in respect of the Moorcock Inn transaction did not terminate. It continued. Mr Michael Birtles was a professional person who held himself out to Mr Longstaff as having expertise. Mr Longstaff reasonably relied on him as his professional adviser to give him assistance in respect of a substantially similar transaction such as the Moorcock Inn and as to which he was likely to require the assistance of lawyers.

  27. The judge had found as a fact that Mr Longstaff believed that Mr Michael Birtles continued to act as his solicitor and that Mr Michael Birtles did nothing to disabuse him of that belief. He had drafted the partnership agreement. He acted as his solicitor in later transactions. In all the circumstances there was an assumption of responsibility by Mr Michael Birtles to render professional services, such as advice, to Mr Longstaff in respect of the decision to enter into the Castle Hotel partnership, in particular to obtain independent advice and further information.

  28. In the light of observations from the Bench in the course of his submissions and those of Mr Christopher Gibson QC on behalf of the solicitors, Mr Pipe made an application during his reply for permission to re-re-amend the Statement of Claim to add a claim of breach of a fiduciary duty owed to his clients. He relied on the facts already pleaded in support of the claim for breach of a duty of care. The application was opposed by Mr Gibson for the entirely understandable reason that the application was made extremely late in the proceedings: the events in question had occurred 13 years ago; the proceedings had started over 8 years ago; the case had been pleaded and argued at trial on the basis of breach of the duty of care; it had been decided on that basis; and the appeal had been prepared and argued on the same basis right down the closing stages of the hearing.

  29. Mr Gibson, who has argued this appeal with conspicuous and commendable fairness befitting the highest traditions of advocacy, accepted that, even if the allegations of breach of fiduciary duty had been made before the trial, it was unlikely that it would have been necessary to adduce more evidence than was in fact adduced in his clients' defence.

  30. The court allowed the amendment. In the circumstances it was not prejudicial to the defendants to allow it and the amendment was necessary to achieve justice between the parties.


  31. In my judgment the appeal should be allowed and the matter remitted for the assessment of the compensation which the Longstaffs are entitled to recover for the loss they have suffered. In view of the detailed findings of HHJ Cooke in his judgment and his additional reasons and of the long passage of time, I express the hope that the parties will be able to reach agreement on the appropriate figure without the further delays inevitably involved in the process of judicial assessment.

  32. My reasons for allowing the appeal can be briefly stated. Indeed, I think that they must already be evident from earlier passages in this judgment.

  33. The judge erred in holding that there was no duty owed by the solicitors He is not to be criticised for reaching that conclusion, having regard the particular way in which the case was pleaded and argued before him. The initial emphasis in the pleadings was on the retainer issue i.e. was it a general retainer in respect of a hotel business or was it a particular retainer in respect of the Moorcock Inn? The judge correctly rejected the submission that there was a general retainer. He was then presented, as was this court, with a submission that irrespective of the contractual retainer, this was a case of assumption of responsibility by a solicitor, giving rise to a duty of care to a non-client of the solicitor. That was also rightly rejected by the judge on the basis that the evidence simply did not support a finding of an assumption of responsibility. Mr Michael Birtles had not under taken to advise or act as solicitor for the Longstaffs in respect of a new business opportunity: he had cast himself in a new role, that of someone with something to sell and willing to deal with a former client already known to him as a prospective purchaser.

  34. Mr Pipe was very anxious to maintain the assumption of responsibility line on the appeal, because he believed that it was of advantage to his clients on remedy. So he cited Lord Goff in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 180C-G and 181E-F on liability for negligent omissions in the context of a non- contractual relationship arising from a person assuming or having undertaken a responsibility towards another in relation to the performance of services, such as where a person has entrusted a solicitor with the conduct of his affairs, in general or in particular. He also cited Lord Browne-Wilkinson in White v Jones [1995] 2 AC 207 at 274 in respect of a duty of care arising from a special relationship between the parties, such as where there is a fiduciary relationship or a voluntary assumption to involve himself in the affairs of another.

  35. Of course, I do not doubt the correctness of the statements of principle in those cases. What I do question, however ,is whether it is either necessary or appropriate to invoke them in this case to establish a duty of care and a breach of such a duty. This case can and, in my judgment, should be decided on the simple ground

    • that there was a relationship of trust and confidence between the Longstaffs and the solicitors;

    • that that relationship did not cease on the termination of the retainer in respect of the intended purchase of the Moorcock Inn;

    • that during the course of that relationship a personal business opportunity presented itself to the solicitors;

    • that the solicitors took advantage of that opportunity to propose that the Longstaffs buy into the partnership of the Castle Hotel at Brough;

    • that in the context of the relationship the proposal gave rise to a situation in which the duty of the solicitors might conflict with their interest; and

    • that they acted in breach of fiduciary duty, in continuing to deal with the Longstaffs in a situation of a conflict of duty and interest, without insisting that they obtain independent advice.

  36. It is clear from the other findings of the judge that the Longstaffs have suffered substantial loss as a result of the breach of duty in that ,if the solicitors had not acted in breach of duty, the Longstaffs would have taken independent advice and on balance would have withdrawn from the proposal of the Castle Hotel partnership. As explained in, for example, Swindle v Harrison [1997] 4 All ER 705 substantial equitable compensation to make good the loss in fact suffered by reason of breach of fiduciary duty may be recovered, so as to put the claimants in as good a position as that in which they were before the breach occurred.

  37. I would accordingly allow the appeal and hold that the Longstaffs are entitled to equitable compensation for loss suffered as a result of breach of fiduciary duty. The case should be remitted to assess the amount of that compensation, if it is not possible to agree quantum in the light of the findings of the judge relevant to assessment.

    Lord Justice Laws

  38. I agree that it was right to permit late amendment to the claimants' pleading, for the reasons given by Mummery LJ.

  39. As regards the substance of the case, I agree that the appeal should be allowed and the case remitted for the assessment of compensation. I am firmly of the view that the basis on which the claimants are entitled to succeed is and is only that on the proved or admitted facts the respondent solicitors are shown to have been in breach of a duty of trust and confidence imposed on them by equity, as Mummery LJ has explained. The suggestion that they might owe an additional duty, arising at common law in tort, is to my mind the fifth wheel of the coach: confusing and unnecessary.

    Sir Anthony Evans

  40. I also agree that the appeal should be allowed for the reasons given by Mummery LJ.

  41. Mr and Mrs Longstaff are entitled to recover compensation for the losses that they have suffered by reason of the Respondents' breach of the relationship of trust and confidence which existed between when the Castle Hotel proposal was made.

  42. Their counsel submitted to the Judge and again before us that Mr Michael Birtles at the relevant time owed them a common law duty of care. This could not take the form of implied retainer in relation to that project, as distinct from the Moorcock negotiations, because he could not properly act on their behalf in view of his own personal interest.

  43. Nevertheless, it was submitted, all the ingredients were present for the imposition of a duty of care in accordance with the Hedley Byrne principle. The Judge found that, if the duty of care existed, Mr Birtles was negligent and caused the Longstaffs to suffer loss.

  44. However, there is no case for imposing the duty when they are entitled to recover equitable compensation for their losses, to the extent that it is appropriate for them to do so. Counsel acknowledged that he had believed that they would only receive adequate compensation if they could recover damages at common law.

  45. I doubt whether that is correct, but even if it was, it would not be good reason for imposing a common law duty of care. If the equitable compensation is less than their loss (which seems improbable, if equitable principles apply), then that is because the law (including the rules of equity) restricts it to that amount. This does not justify providing an alternative legal basis for their claim.


Henderson v. Merrett Syndicates Ltd [1995] 2 AC 145; White v. Jones [1995] 2 AC 207; Swindle v. Harrison [1997] 4 All ER 705

Authors and other references

Snell's Principles of Equity (13th Ed)


Mr Gregory Pipe for the Appellant (instructed by Suttons Solicitors, Bishop Auckland)

Mr Christopher Gibson QC and Mr Ulick Staunton for the Respondent (instructed by Crutes, Carlisle, Cumbria)

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