Popplewell: Insurers’ arguments contrary to public policy behind PII
A claim seeking the return of a £7.5m success fee earned by a law firm for its role in a giant transaction is covered by its professional indemnity insurance (PII), the Court of Appeal has ruled.
Lord Justice Popplewell described as “unreal” the insurers’ argument that Northern Ireland firm Tughans suffered no loss if it lost its fees because of the claim, which is made on the grounds that the retainer was procured by misrepresentation.
The Court of Appeal heard that in the wake of the 2008 financial crash, the Republic of Ireland government set up the National Asset Management Agency (NAMA), which decided to sell its Northern Irish property loan book.
NAMA accepted an offer from US investment firm Cerberus in April 2014 to buy the loan book for €1.6bn, the buyer having been found by Ian Coulter, then managing partner of Tughans, and Tuvi Keinan, a London-based partner at US firm Brown Rudnick (BR) he was working with.
BR agreed to give Tughans half of the £15m success fee it was due from Cerebus. When it learnt this, NAMA sought confirmation that no part of the fee would be paid to any current or former members of the Northern Ireland Advisory Committee, which had advised it on transactions involving banks in Northern Ireland.
Mr Coulter confirmed that was the case even though in fact he had worked closely with Frank Cushnahan, who had been on the committee between 2010 and 2013. It is claimed that Mr Coulter intended to share the fee with him.
Up to this point none of the other partners at Tughans was aware of Mr Coulter’s work or of the success fee. He initially hid how much had been received but eventually resigned from Tughans in January 2015.
Tughans paid the VAT and income tax due on the money and around £4m remains in its office account, subject to undertakings given to the Law Society of Northern Ireland and National Crime Agency, and, Tughans says, possible confiscation by the latter.
Mr Coulter and Mr Cushnahan are facing criminal charges but the trial has not yet taken place.
BR sued Tughans in November 2017, seeking damages for fraudulent misrepresentation. Its claims, including later claims made on behalf of Cerberus as an assignee, have since been stayed pending the criminal proceedings. BR’s claim losses include the £7.5m fee.
Tughans denied the claim, arguing that “if there had been any improper conduct by Mr Coulter, it had involved an attempt by him to deprive Tughans of a lawfully earned fee by diverting it from the firm after receipt”.
The firm’s lead insurer, RSA, declined cover for claims relating to the matter on a number of grounds. It said the policy was a contract of indemnity which would only respond to a loss, and that any liability in respect of the fee was not a loss because Tughans had received and retained it.
Tughans commenced an arbitration, which found in its favour on a key coverage issue and saw no reason to strip out the success fee from this.
The insurers were given leave to appeal to argue that, if BR established liability against Tughans, it would mean that it never became entitled to the fee, and so could suffer no loss in having to return the money. To grant cover would violate the indemnity principle, they said.
Mr Justice Foxton dismissed the appeal, holding that if a solicitor has done what was necessary as a matter of contract to accrue a right to a fee, an award of damages in the amount of the fee payable would ordinarily constitute a loss for the purposes of a PII policy.
He also held that Tughans had contractually earned the fee and, when paid, was a sum which belonged to it in law and equity.
On second appeal, Popplewell LJ upheld this decision. He said that “at the heart” of the insurers’ arguments lay the indemnity principle, that the law firm should only be covered “in respect of its actual loss, but not more than its actual loss”.
The judge said this did not help the insurers here because a solicitor who has earned a fee “does indeed suffer a loss” if he is deprived of it by a claim.
“If the services are unremunerated, that cost represents a real loss. It may be very large. Suppose that the fee is earned by many fee-earners working with unimpeachable skill and care for many years on a complex piece of litigation or transaction.
“The logic of the insurer’s argument is that the firm suffers no loss if the fees have to be foregone, by reason of a liability claim, because the retainer is procured by misrepresentation. The idea that in those circumstances the solicitor suffers no loss in being deprived of all its earned fees seems to me unreal.”
Popplewell LJ said the insurers’ arguments also ran “contrary to the public interest purpose of compulsory PII cover” in enabling clients to recover damages from law firms and were “inconsistent with the commercial and regulatory function of compulsory PII cover”, to protect partners and employees from their own negligent mistakes and those of their colleagues.
Lady Justices Andrews and Falk agreed.
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