Bulletin - Winter 2013 Commercial Chancery Chan Bulletin Winter 13.… · was hosted by Walsall legend Noddy Holder, with teams from the legal & business community competing. Nicola

Commercial & Chancery - Specialising in the following areas:

Commercial &Chancery

AGRICULTURE & RURAL AFFAIRS • ALTERNATIVE DISPUTE RESOLUTION • BANKING, FINANCE & CREDIT AND FINANCIAL SERVICES

COMMERCIAL LITIGATION • COMPANY & PARTNERSHIP • CONSTRUCTION & ENGINEERING • COSTS & LITIGATION FUNDING

ESTATES, TRUSTS & TAX • INSOLVENCY • INSURANCE • INTELLECTUAL PROPERTY & INFORMATION TECHNOLOGY

INTERNATIONAL ARBITRATION & TRADE • MEDIATION • PROFESSIONAL NEGLIGENCE • PROPERTY

Quite a lot, actually. Paul Marshall considers the recentHigh Court (QBD) decision in Shah v. HSBC.

Bulletin - Winter 2013

WELCOMENEW PREMISESAND A NEW ARRIVAL

Richard Jones QC Head of Group

PRIVATE TRUSTSand the COURT OF PROTECTIONby Claire van Overdijk

What’s Wrong with Money Laundering?

Enforcing

by Kevin Barrett

ADR Agreements

Commercial & Chancery Bulletin - Winter 2013 2

New East Midlands officeNo5 Chambers are pleased to announce the opening of our newoffices in the East Midlands at 5 Museum Square in Leicester. Thenew offices will not only see us consolidate the level of instructionswe receive from the East Midlands but also increase business,turnover and the reputations of our tenants and No5.

We like to think that we continue tobalance the traditional with the best thatcan be obtained from new technology.Over my practising years, the changes tothe latter have been spectacular andrevolutionary. But the core value of theservices we provide, and the workproduct which you, our clients, rightlyexpect, have remained startlingly (butunsurprisingly) constant. We strive toavoid complacency, knowing that weoperate in a highly competitive market.But we like to think that we continue toprovide a high level of service at a faircost.

Two recent developments for No5 havebeen the acquisition of new and largerpremises in London and premises inLeicester, both of which are now fullyoperational.

The group has been joined by PaulMarshall, formerly of 4-5 Gray’s InnSquare, to whom we wish a heartywelcome.

I wish you all a happy, healthy andsuccessful 2013.

Richard Jones QC Head of Group

WINTER2013In this issueEnforcing ADRAgreementsKevin BarrettPAGE 4

What’s wrong with Money Laundering?Paul MarshallPAGE 6

Private Trusts andthe Court ofProtectionClaire van OverdijkPAGE 10

Legal AdvicePrivilege is confinedto advice given bylawyersNicola PrestonPAGE 14

If you would like to receive furthercopies of this bulletin, pleaseemail [email protected] bulletin is also available inpdf format on our website atwww.No5.com

As an ongoing endeavour toprovide our clients with the bestpossible service, we welcome yourfeedback and comments on thispublication. Please [email protected]

New premises and a newmember; we continue tomove forward in 2013.

WELCOMECommercial &Chancery

It is truly remarkable how swiftly the seasons (or what in2012 have passed for the seasons) have come around,and here is the beginning of another year. An edgy startto January has shown how the high street retailers arefar from immune to changes in consumer trends and inparticular to the onward march of the internet. A failureto move with the times can have very seriousconsequences.

3 Commercial & Chancery Bulletin - Winter 2013

Paul Marshall joined Chambers from 4-5 Grays in August 2012. He brings a wealthof experience with him and is proving to bean excellent addition to the team.

NewArrival

On November 8th, No5 beat off stiffcompetition to win the 2012 MarieCurie Birmingham Brain Game.

The annual Midlands’ showcase quizwas hosted by Walsall legend NoddyHolder, with teams from the legal &business community competing. NicolaPreston captained No5 Chambers.Assisted by clerks and barristers fromthe group, No5 secured victory in asudden death eliminator againstSquires Sanders.

The evening was rounded off by thenews that the quiz and auction hadraised a staggering £145,000.

The move comes as No5 expandsits Commercial Group and recruitsnew clerking staff to manageexisting and prospective clientdemand and instructions.Numerous clients attended theofficial launch party in November.

No5 Chambers new London officewill be based at GreenwoodHouse, 4-7 Salisbury Court,London EC4Y 8AA, the home of thefirst edition of the Sunday Timesnewspaper.

No5 WINNERS

No5 Chambers will continue tosupport Marie Curie by holding the3rd Ralph Lewis QC MemorialBoxing Cup at Villa Park on Friday5th July 2013.

Boxing fans or wannabe contendersinterested in the Ralph Lewis QCMemorial Cup 2013 should contact No5Chambers’ Marketing team [email protected] or 0845 210 5555who can provide you with full details onhow to book a table or participate.

In October No5 Chambers in Birmingham played host to twentydelegates from the Chinese Central Government for a three dayconference/event organised by The Birmingham Law SocietyInternational Committee.

The Ralph LewisMemorial Cup 2013

Sports LawTo continue on the sporting note,Rupert Beloff alongside MichaelBeloff QC, Tim Kerr QC and MarieDemetriou QC have authored thesecond edition of Sports Law,published by Hart Publishing.

This edition, with a foreword by LordCoe, updates the original 1999 versionand provides a coherent framework forunderstanding the principles of sportslaw as well as a deep analysis of its keyfeatures. Full information can be foundat:http://www.hartpub.co.uk/books/details.asp?isbn=9781841133676

The Law andPractice ofInternationalTradeCarole Murray and David Hollowaypublished the 12th edition ofSchmitthoff: The Law and Practice ofInternational Trade. Schmitthoff hasbeen a leading work of reference onthe law of international trade for over50 years and the latest edition is acomplete and up to date guide acrossthe various complex areas ofinternational trade.

NEW LONDON OFFICE

An international welcome Nearly 150 people attended the group’sChristmas party at Opus restaurant inBirmingham. Massive thanks must goto everyone who attended such anentertaining evening and kick off thefestivities in fine fashion.

Continuing success at No5 Chambers resulted in the Londonoffice relocating from Shoe Lane to new stand alone premisesalmost twice as large at Greenwood House, Salisbury Court.

Festive fun


The use of pre-agreed ADR proceduresbegs the question: how, if at all, is anagreed ADR procedure to be enforced?

The powers of the court - in particular byway of case management, declaratoryrelief and costs - provide the answer.

Case managementThe court has jurisdiction under CPR Part1.1 to encourage the use of ADR whereappropriate and to facilitate the use ofsuch procedures. The court also has widepowers of case management under CPRPart 3 including a power to stay the wholeor part of any proceedings either generallyor until a specified date or event.

These wide powers of case managementwere commented upon by Colman J. inCable & Wireless Plc v. IBM [2002] 2 AllER (Comm) 1041 where one of the partiesapplied for a stay of proceedings broughtin contravention of an agreed ADRprocedure. The procedure in questionstipulated that any dispute should beresolved through negotiation but, ifunsuccessful, an attempt in good faithshould be made to resolve the dispute

through ADR by adopting a procedure asrecommended by the Centre for DisputeResolution (CEDR). Negotiations failed toresolve the dispute so C&W commencedproceedings instead of referring it toCEDR. IBM then applied for a stay of theproceedings so that the dispute could bereferred to CEDR in accordance with theagreed procedure.

Colman J. concluded that the obligation toengage in ADR was sufficiently certain tobe enforceable. Further, he consideredthat the court should not, as a matter ofpolicy, accentuate uncertainty andtherefore enforceability in the field ofdispute resolution references. Finally, heconcluded that the court had a discretionto stay, adjourn or adopt some other casemanagement remedy and should exerciseits power based on equitable principles.Applying this approach, Colman J. foundthat there were strong case managementconsiderations for an adjournment toallow the reference to ADR to proceed.

Despite the conclusion that the courtshould not as a matter of policyaccentuate uncertainty and enforceability

there have nevertheless been instancessince where the courts have concludedthat the ADR process was insufficientlycertain to be enforceable. In SulamericaCia Nacional De Seguros SA v. EnesaEngenharia SA [2013] 1 WLR 102 theCourt of Appeal upheld a refusal to stay byCook J. which distinguished Cable &Wireless in relation to a mediationagreement which did not contain a clearlydefined mediation process nor refer to theprocedures of a specific mediationprovider.

Subsequently, in Tang Chung Wah v.Grant Thornton [2012] EWHC 3198 (Ch)Hildyard J. followed the Sulamericadecision and concluded that the courtshould only seek to enforce compliancewith an ADR procedure where the relevantprovision, without the need for furtheragreement, provided: (a) a sufficientlycertain and unequivocal commitment tocommence a process; (b) a means ofdiscerning the steps each party wasrequired to take to start the process; (c)sufficient clarity and definition to enablethe court to make an objectivedetermination of the minimum

by Kevin Barrett

The high cost of traditional dispute resolution is widely regarded as prohibitive. One consequence is the modern tendency to engage in alternative dispute resolutionprocedures either on an ad hoc basis or as a result of pre-agreed contractual terms.

Enforcing ADR Agreements

participatory requirements for each party;and (d) an indication of how the processwould be exhausted or properlyterminable without breach.

It does not inevitably follow from a findingthat a valid and enforceable ADRprocedure exists that the court will grantrelief. In this respect in Nepean Highwayv. Leigh Mardon [2009] VSC 226, theVictorian Supreme Court adopted anuanced approach when it upheld a stay ofproceedings commenced in the absenceof prior compliance with an agreed ADRprocedure. In this case the courtconcluded that only strong countervailingcircumstances would justify ignoring theagreed ADR procedure. Futility andunwillingness are unlikely to fall into thiscategory. In this respect, in Downer EDIMining Pty Ltd v. Wambo Coal Pty Ltd[2012] QSC 290, the Queensland SupremeCourt upheld the stay in an action whichhad been commenced in contravention ofan ADR procedure and, in so doing,rejected arguments that the procedurewas futile. Further, in Shirayama v.Danovo Ltd [2004] BLR 207 (Ch) the courtfound that the power under CPR Part 1.1may be exercised even though one of theparties may be unwilling to embark on anADR process.

Declaratory reliefIt may be open to the court to declaresteps taken in contravention of an ADRprocedure to be invalid but that dependson the proper construction of the ADRprocedure, as demonstrated by EricssonAB v. EADS Defence and Security SystemsLtd [2010] BLR 131 (TCC). In this case theADR provision of a contract allowed for theparties to mediate or adjudicate if adispute arose. When a qualifying disputearose, one of the parties gave notice tomediate in accordance with the ADRprocedure but then subsequently gavenotice to adjudicate in relation to the samedispute before the mediation hadcommenced. The other party then appliedto the court for a declaration that theadjudication was invalid as the first partyhad elected to mediate the dispute.Akenhead J. refused to grant the proposeddeclaration because the ADR provision didnot require an election to use one or theother of the prescribed ADR proceduresbut instead left it open to the parties tochoose either, or to use both, as theywished.

Costs There is a clear line of authoritiesconfirming that the court has power tomake adverse costs orders in the event ofa failure to mediate or negotiate. Theleading authority is Halsey v. MiltonKeynes General NHS Trust [2004] 1WLR 3002 which confirms that anunreasonable failure to mediate mayresult in adverse costs consequences.The Halsey case was concerned with arefusal to engage in an ad hocarrangement after proceedings hadcommenced rather than non-compliancewith a pre-agreed ADR procedure. TheCourt of Appeal approved the impositionof adverse costs consequences due to theunreasonable failure to mediate.Analogously, a refusal to undertake apre-agreed ADR procedure smacks evenmore of unreasonableness. Given that in

Brookfield v. Mott MacDonald [2010]EWHC 659 (TCC) the court indicated thatthe willingness to participate in ADRwould be an important element indeliberations on costs it seems safe toposit that the court is likely to regard afailure to engage in a contractually pre-agreed procedure to be a factor to takeinto account when dealing with costs.

The possible adverse costs consequencesof a failure to comply with a pre-agreedADR procedure are starkly illustrated bythe decision of Ramsay J. in CharlesChurch Developments Ltd v. StentFoundations Ltd [2007] EWHC 855 (TCC)which concerned a failure to follow theTCC pre-action protocol. The action wasstayed for mediation at an advancedstage. Ramsey J. was then asked toconsider the costs consequences of thefailure to follow the protocol. Ramsay J.concluded that (1) there was no excusefor non-compliance with the protocol andthat there were reasonable prospects thatthe dispute would have been settledduring the protocol process had it been

undertaken; and (2) the defendant oughtnot to be put in the disadvantageousposition of mediating against thebackdrop of the much higher costsincurred as a result of the legalproceedings in circumstances where theprotocol meeting would likely have servedthe same function as the proposedmediation and might well have resultedin settlement of the dispute at a timewhen a much lower level of costs wouldhave been incurred. As a result of theseconclusions Ramsay J. ordered that theclaimant should in any event bear 50% ofthe costs incurred by each party up to thedate of the stay on the basis that thisproportion represented the costs thatwould likely have been avoided if the casehad settled during the protocol process.

In principle there is nothing to precludethe court adopting a similar approach tothat adopted in the Charles Churchdecision if it is asked to deal with thecosts consequences of a failure to complywith a pre-agreed ADR procedure ratherthan the protocol.

ConclusionThe courts have eagerly embraced ADRand have sought to facilitate its use bothunder the rules of court and its protocols.The subsequent case law indicates apractical, but pragmatic, willingness tosupport the rules and agreements toengage in ADR. The potential for thecourt impose adverse costsconsequences of the kind indicated in theCharles Church decision is likely tooperate as a powerful incentive to engagein any ADR procedure as may have beenagreed to in advance.

The result, as can be seen, is that infuture only the incautious will disregardan ADR agreement and proceed straightto the courts or to arbitration. Theauthorities indicate that they will do so attheir peril.


Kevin Barrett

Colman J. considered thatthe court should not, as amatter of policy, accentuateuncertainty and thereforeenforceability in the field ofdispute resolutionreferences.


Quite a lot, actually. Thisnote considers, the recentHigh Court (QBD) decisionin Shah v. HSBC [2012]EWHC 1283 in whichSupperstone J. clarified theeffect of making a ‘consent’Suspicious Activity Report(SAR) to the advantage andbenefit of banks andsolicitors but thedisadvantage of theircustomers and clients.Whether the result isentirely satisfactory remainsopen to question.

A gap in PoCA filledby an implied term A central problem facing solicitors andthose applying the AML legislativeregime under Part 7 of the Proceeds ofCrime Act 2002 (PoCA) has its origin inthe mists of time and theimplementation of the First EU MoneyLaundering Directive under the CriminalJustice Act 1988 as amended by the CJA1993. The core problem is that whenwhat is now called a suspicious activityreport is made in connection with atransaction or arrangement suspectedto fall within s. 328 (i.e. an ‘authoriseddisclosure’) it becomes illegal to furtherperform the transaction where itconcerns (defined) criminal property.(Technically frustration of the contract bysupervening statutory illegality.) Theitalicised words are key. The transactionwill become lawful to perform only aftera law enforcement agency (commonlythe Serious Organised Crime Agency(SOCA) - until replaced by the NationalCrime Agency) gives consent to proceed.The structure is commonly referred to

as the ‘consent regime’. Though toughand politically attractive, it is doubtfulthat this was a very good idea. Suspicionis the trigger for a SAR regardless ofwhether it turns out to be correct.Suspected transactions that are not inreality illegal (i.e. not involving moneylaundering) are treated as if they were.No other jurisdiction has implementedthe EU Directives in a manner similar tothe consent regime.

In practice, the period before consent isgiven is quite short and in theoverwhelming majority of cases consentis given within a few days. In themeantime if the transaction concernscriminal property the contract is illegalwith the consequence that the partiesare relieved of performance obligations.There is generally no remedy for non-performance of a contract that hasbecome frustrated by illegality. Scantconsideration was given to this ineptlydrafted structure when originallyintroduced in 1993, nor to itsimplications for bona fide transactions(the Law Commission had noinvolvement being a matter of European

by Paul Marshall

What’s Wrong with Money Laundering?


law and international treaties).Remarkably it attracted little comment,perhaps because the statutory AMLregime until February 2003 and theintroduction of PoCA applied, in effect,only to suspected serious indictableoffences. For international transactions,life was simplified for banks and thosethen subject to the 1993 ML Regulationsbecause there was a carve-out (reg. 2(4))that meant the suspected offence had tobe an offence both in English law andunder the criminal law of the placewhere it occurred if this was outside theUK. This represented a significantsoftening of the potential effects of theconsent regime because moneylaundering is overwhelmingly atransnational phenomenon.

The brakes came off with PoCA (whichunder Part 7 was largely a consolidatingstatute even though it made moneylaundering a nominate offence for thefirst time). Bizarrely under PoCA anyoffence can be ‘predicate’ for moneylaundering and conduct that occurredoutside the jurisdiction is referable solelyto the criminal law of the UnitedKingdom as to whether it wouldconstitute an offence (so-called ‘singlecriminality’). This gave rise to the nowclichéd, if colourful, prospect of thehapless Spanish Toreador investing hisincome in the UK property market, wherethe funds would undoubtedly fall withinthe definition of ‘criminal property’. Butsingle criminality was in fact the sametest as under the CJA 1993 but becauseof the carve-out under the 1993 MLRegulations and the (derivative)laundering offences prior to 2003 onlyapplying to ‘predicate’ (and thereforenecessarily serious) indictable offences,it caused little loss of sleep. After thecarve-out was removed from 2003,justifiably, there was loud protest when itwas recognised that overseas conductthat would be a technical offence, forexample under FSMA 2000 or theCompanies Acts, were it to occur here,engaged AML provisions and risk ofdraconian penalties. (An instant andnovel extra-territorial criminaljurisdiction for the Companies Court.)Extensive urgent amendments wererequired, in particular to the reportingobligation under s. 330 so as to nowrender it close to unintelligible save to adetermined statutory Alpinist.

A sequence of decisions (notablySquirrell Ltd v. Natwest [2005] EWHC664, Laddie J, and UMBS Online v. SOCA[2008] 1 All ER 465, CA) expressed, inmore or less measured terms, seriousjudicial disquiet that reports of suspicionunder PoCA gave rise to risk of injusticeto those incorrectly suspected of moneylaundering who suffered harm as aresult by their businesses beingsterilised pending consent being given.The court observed that Parliament hadprovided no relief for harm caused to aninnocent person subject to a SAR andthat the utility of judicial review waslimited.

At the heart of the problem is the lighttrigger for making a SAR, namely‘suspicion’, and the foreseeable harmthat a report may cause to an innocentparty (quite apart from the separateissue of an innocent party becoming(often unknowingly) a DPA data subjecton the SARs (ELMER) database, onlybelatedly recognised as an issue in thewake of the ECHR decision in Marper).At one point (after K Ltd v. NationalWestminster Bank [2007] 1 WLR 311(CA)) it appeared that the mere fact ofsuspicion provided carte blanche forthose making reports, without recourse,even where loss was sustained as aresult of suspicion later shown to havebeen incorrect.

The conundrum for banks and othermakers of SARs (and the customers) isthat it is not an offence to proceed with atransaction suspected of representing abenefit from criminal conduct when itdoes not in fact represent such a benefit.It is not the suspicion that taints theproperty and makes the transactionillegal (and thus frustrates a contract)but, rather, the original actual predicateoffence from which the tainted ‘criminal’

property is derived. This legal propositionis a fault line that runs through thepresent ML arrangements and the ratherdrastic consequences, for all concerned,of the existence of ‘suspicion’.

Eventually the issue of the availability ofdamages to an innocent subject of anSAR came to a head in the Court ofAppeal’s decision in HSBC v. Shah [2010]EWCA Civ 31. Mr Shah claimed damagesrunning to millions against HSBC forallegedly negligently making a SARwhich, he said, caused him losses oninvestments held up (albeit briefly) by thereports and consequential difficultiescaused him in South Africa. The bank

applied to strike-out Mr Shah’s claim orfor reverse summary judgment on thebasis that, once suspicion wasentertained, that was enough to defeat aclaim for damages. The bank, it wascontended, was merely doing what thelegislation required and if Mr Shah hadsuffered loss as a consequence that wasno responsibility of the bank. In adoptingthat position the bank understandablyrelied upon the robust observations ofLongmore LJ in K Ltd v. Natwest as tothe pointlessness of cross examining aperson on their suspicion. The Court ofAppeal (Longmore LJ again giving theonly reasoned judgment) in a decisionthat seemed to represent a sea changefrom K Ltd v. Natwest (reflecting disquietin UMBS?) rejected the bank’sapplication. By a decision that causedwidespread concern to banks, the courtheld that it was a strong thing to shut aperson out from a substantial claim atthe interlocutory stage and that fairnessand justice required that a person whomade an SAR should be required toprove the fact of their suspicion at trial (acourse that K Ltd v. Natwest appeared todiscount). So far so liberal - andprincipled.

continued…

This represented a significantsoftening of the potential effects ofthe consent regime because moneylaundering is overwhelmingly atransnational phenomenon


Banks became understandably alarmedat the prospect of, on the one handbeing exposed to criminal penalties (amaximum 13 years’ imprisonment onconviction on indictment) for not makingan SAR when they ought to have doneso, and exposure to claims for damagesby aggrieved clients as a consequence ofthe bank’s suspicion that turned out tobe incorrect. The outcome appeared anunappetising calculus of risk ofprosecution balanced against a civilclaim for damages.

The problem in ShahAfter a bit of further interlocutoryskirmishing (including in the Court ofAppeal) the trial took place beforeSupperstone J. who gave judgment inMay 2012. The judgment, that came aslittle surprise, amounts to a vindicationof the bank’s original position. The judgeaccepted the bank’s contention that itwas conscientiously seeking to apply thereporting requirements under the PoCA.An interesting feature of the judgment isthat the grounds for suspicion werefairly tenuous and what was suspectedwas quickly established not to be thecase. The legal issue that is of interest isthe way the judge addressed the

conundrum that, however much atransaction is suspected of beingtainted, it is not unlawful to proceed witha contract suspected of facilitating theacquisition, retention etc. of criminalproperty, if the transaction is in fact

untainted: R v. Geary [2011] 1 Cr App R 8[2010] EWCA Crim 1925. The point isfundamental and was applied again bythe CA in Abida Amir & Urfan Akhtar[2011] EWCA Crim 146. It is aremarkable omission that there is nostatutory defence provided under thelegislation for a reporter who makes an

SAR where a transaction is untaintedand accordingly, on the face of it, inbreach of contract declines to proceed inthe absence of consent (c.f. the positionon ‘protected disclosures’ under s. 330).Mr Shah’s case was that since thetransaction was not in fact tainted andunlawful (as was soon established) thebank acted unlawfully and in breach ofcontract in not complying with themandate.

In response, the bank contended for theexistence of an obvious or necessarycontractual term to be implied in thecontract of mandate to the effect thatthe bank was entitled to refuse toexecute payment instructions in theabsence of appropriate consent fromSOCA where it suspected the transactionin question constituted moneylaundering. Supperstone J concluded:

“ …I am led to the conclusion that theterm for which the Defendant contendsis to be implied by reason of thestatutory provisions. In my judgmentthe “precise and workable balance ofconflicting interests” in PoCA [………]requires the implication of this term inthe contract between a banker and hiscustomer.”

Banks becameunderstandably alarmedat the prospect of, on theone hand being exposedto criminal penalties fornot making an SAR whenthey ought to have doneso and exposure to claimsfor damages by aggrievedclients.

The conundrum for banks and other makers of SARs (and the customers)is that it is not an offence to proceed with a transaction suspected ofrepresenting a benefit from criminal conduct when it does not in factrepresent such a benefit.


It was common ground that there wasno precedent for implying a term to thiseffect. Supperstone J's analysis of theimplied term rests upon the supposedbalancing of interests that PoCArepresents. That is a statement derivedfrom Longmore LJ’s judgment in K Ltdv. Natwest, but upon examination of thelegislative history the statement may notbear the freight that it is required tocarry (though an issue well beyond thescope of this note).

The outcome is of comfort to banks andsolicitors conscientiously seeking toapply the AML legislation. Until suchtime as the Court of Appeal considersthe issue, it can be said that, where acontractual relationship exists, includinga solicitor’s retainer, there will be a termimplied (as a matter of fact) to the effectthat the person making a SAR is relievedof further performance obligationspending consent being given for thetransaction to proceed by lawenforcement authorities. (The precisescope of the term, however, arguablyremains uncertain.)

But the downside for customers andclients is that anyone who suffers lossdamage or expense as a result of aconsent SAR having been made thatturns out to be incorrect (i.e. thetransaction legitimate) is unlikely to haveany remedy for suspension of the

transaction so long as the reporter canestablish that suspicion (howevermodest) was in fact entertained at thetime when the report was made. It isprecisely that absence of relief for whatmay be potentially catastrophic harmthat the CA expressed concern about inUMBS Online. It is a little surprising thata term with that effect is to be impliedas a matter of fact.

As to the policy to which PoCA giveseffect and the supposed ‘balancing ofinterests’ that it is said to represent(which is the central element of thelearned Judge’s decision on this point), itmay be noted that of 247,601 SARsmade in 2010-2011 only 13,662 wereconsent SARs. Interventions as a resultof refused consents generated a mere£30.5 million recovered by lawenforcement authorities (given consentsgenerated a further £5 million). This isagainst estimates that organized crimein the UK is worth around £40 billion perannum. Whether the recovery is worththe disruptive suspensive effect onlegitimate, though suspected,transactions, and the costs of operatingthe system measured against the policyobjectives, remains open for debate. The‘consent regime’ as a whole is arguablyonly justified to the extent that theinterference with contracts (intervention)is successful against stated policyobjectives. On the face of it, it isdisproportionate, given the costs ofimplementation.

While the decision in Shah resolves therisk of a claim for damages for breach ofcontract, for solicitors the problem withlegal privilege in making a ‘consent’ SARremains real and unresolved. While animplied term will protect against abreach of contract it will not protectagainst a breach of confidence. Thisproblem, however, is beyond the scopeof this note.

Paul Marshall

The trial Judge had approachedcosts in a Beddoes Applicationas if they were costs in normallitigation. On an appeal by thetrustees, the Court of Appealconfirmed that, absentimproper conduct, the trusteeswere entitled to their costs outof the trust fund (on anindemnity basis).

The Judge had overlooked thespecial nature of Beddoeproceedings. Further, there wasnothing in the criticism that apre-action protocol letter hadnot been sent as there was norelevant pre-action protocol thatrelated to Beddoe’sapplications. Accordingly, therewas nothing in the criticismsthat had been found by theJudge and the trustees had notacted improperly. Thus theywere entitled to their costs outof the fund/estate on anindemnity basis (as provided inCPR 48.4).

Davies v.Watkins[2012] EWCA Civ1570 (Thorpe, Lloyd & Black LJJ)

Treatment ofcosts of aBeddoesapplication

Paul Marshall is author of the Chancery BarAssociation Guidance on Money Laundering,a contributor to A Practitioner’s Guide to UKMoney Laundering Law and Regulation and amember of the editorial team forButterworths Corporate Law Service.www.No5.com

An interesting featureof the judgment is thatthe grounds forsuspicion were fairlytenuous and what wassuspected was quicklyestablished not to bethe case.

by Claire van Overdijk

In the absence of an EPA or LPA, the Court haspower to appoint a deputy to manage the propertyand affairs of an individual who lacks mentalcapacity (s16, Mental Capacity Act 2005 (MCA2005)). It also has power to authorise the setting upof a trust to hold the individual's property(s.18(1)(h), MCA 2005). When deciding whichstructure to use the Court must consider what is inthe best interests of the mentally incapacitatedindividual (s.16(3), MCA 2005). However, nothing onthe face of the MCA 2005 prevents the setting up ofa trust as an alternative to deputyship.


PRIVATETRUSTS COURT OF PROTECTION

and the

The Court of Protection has jurisdiction over theproperty, financial affairs and personal welfare ofpeople who lack mental capacity to make decisionsfor themselves. Among its various roles the Courtis responsible for determining disputes as to theregistration of enduring powers of attorney (“EPA”),and Lasting Powers of Attorney (“LPA”), appointingnew trustees, authorising certain gifts and makingstatutory wills.

by Claire van Overdijk


Prior to the MCA 2005, while the settingup of a trust for individuals withoutcapacity was an exception to the normof receivership, successful applicationsfor the implementation of a private trustwere not uncommon and recognised themain benefits of a private trust over theappointment of a receiver being theflexibility afforded and lower costsinvolved. Further, trusts are oftencreated for claimants in personal injurycases to protect an award from beingtreated as capital when assessingentitlement to means-tested benefits.The test prior to the MCA 2005 requiredthe court to consider whether theproposed course was reasonable in allthe circumstances. However, since theMCA 2005, the Court now must focus onthe best interests of the incapacitatedindividual when deciding how theindividual’s property is to beheld/managed.

This is a fundamentally differentapproach and until recently there was apaucity of post MCA 2005 jurisprudenceon the factors to be taken into accountwhen preferring one route over theother and determining the generalapproach to be taken with regard to themanagement of damages awards forpersonal injury or clinical negligence forincapacitated adults, which represents agrowing body of individuals who comeunder the jurisdiction of the Court.These incapacitated individuals usuallydo not fit the description of the majorityof cases handled by the court: theelderly mentally infirm who have eithertaken the step of establishing anenduring or lasting power of attorney inwhich they have appointed an attorneyor attorneys to manage their financialaffairs should they become incapable ofdoing so or, if the absence of an EPA orLPA, the appointment of a deputy ontheir behalf to do so. Recipients ofdamages awards tend to be younger

and many are in receipt of substantialawards to administer, which requires avery different role compared to themanagement of day to day financessuch as paying bills by a deputy.

Recent cases have filled in this gap, inparticular the decision of Her HonourJudge Hazel Marshall QC in the case ofRe HM [2012] COPLR 187. In this casethe applicant mother applied for areconsideration of an order that it wasnot appropriate for the Court toauthorise the creation of a trust of theassets of her daughter, HM, who wasseven years old and had been born withcerebral palsy because of injuriessustained during her birth. Proceedingshad been brought against the relevant

NHS trust and HM was to receive alump sum, which was significantly lessthan the level at which her financialneeds had been calculated. In order tosave some of the costs involved in adeputyship, it was proposed to set up apersonal injury trust to administer thedamages award. The proposed trusteeswere the mother and HM’s solicitor. Theapplication was refused by DistrictJudge Gordon Ashton at first instancewho decided that it would not be inHM’s best interests to authorise thetrust. The case was heard by HHJMarshall QC on an application forreconsideration under rule 89 Court ofProtection Rules 2007.

HHJ Marshall QC highlighted a non-exhaustive list of factors to beconsidered in deciding whether toauthorise the creation of a trust, theweight of each factor being individual toany particular case. The main factorswere identified as follows:

• the limits of a deputyship as against atrust such as in a situation where itwas not in the best interests of theincapacitated individual for the rulesof distribution on intestacy to apply ifthe individual died before attainingmajority, or where the individual wasan adult who might regain capacity,but who might then be vulnerable tofinancial abuse;

• the least restrictive option for theincapacitated individual;

• the degree of supervision applied toeach regime acknowledging thatthere would be less supervision anddiminished protection if theincapacitated adult’s funds wereplaced in a personal injury trust andthe extent of the proposed trustee’sexperience in such matters;

• the degree of protection afforded byeach regime, in particular themandatory supervision of deputies bythe Office of the Public Guardian andcontinued court involvement in theappointment of a deputy;

• the comparative cost and expense;

• administrative efficiency; and

• the investment powers of trusteescompared to deputies.

Although the mother’s application wasallowed on its particular facts1, in hergeneral assessment of the two regimesHHJ Marshall QC came down heavily infavour of deputyship as generally beingin the best interests of an incapacitated

HHJ Marshall QC concludedthat in the absence of a factorof magnetic importance adeputyship was likely to bepreferred over a trustarrangement in all but themost singular circumstances.

Recipients of damages awards tend to be younger and manyare in receipt of substantial awards to administer, which

requires a very different role compared to the managementof day to day finances such as paying bills by a deputy.

1 The judge identified three factors without which she would not have been prepared to authorise the creation of the relevant settlement. These were a) the administration of a trust, based on the evidence in this case, would be cheaper than a deputyship; b) HM’s mother was “a competent, forceful,well-educated and responsible person” and her presence as a trustee would provide a means of monitoring legal costs; and c) the proposedprofessional trustee had agreed that his firm’s costs would be limited to the guideline rates that would be allowed on detailed assessment.

continued…


adult. The main areas of concern werethe absence of statutory oversightunder the MCA 2005 by the use of atrust and the increased cost andexpense in respect of the chargeslevied by a professional trustee. HHJMarshall QC concluded that in theabsence of a factor of magneticimportance a deputyship was likely tobe preferred over a trust arrangementin all but the most singularcircumstances.

While this case was decided on itsparticular facts and should not beregarded as a return to the morewelcoming approach for suchapplications under pre-MCA 2005incapacity law, it does provided helpfulparameters for those advising on themerits of an application to set up atrust in place of deputyship. A partyproposing a trust will be required toprovide detailed evidence to enable thecourt to carry out a balance sheetapproach of the benefits anddisbenefits of a trust compared to adeputyship and to show that the formerwill be more cost effective withoutprejudicing the trust assets.Furthermore, the court will expect tosee evidence of the proposed laytrustees’ competence as well as theprofessional trustee’s charges andcommitment to a charging policy.

Another case that has shed light onthis area is Re JDS [2012] COPLR383, a decision of Senior Judge Lush.The application related to a young man,J, who had received substantialdamages for clinical negligence. Theapplication was made by his deputy forauthority to transfer £325,000 into aflexible power of appointment trustwhereby a settled gift would be made

primarily in favour of J’s parents. Thepurpose of the gift was to reduce theamount of inheritance tax that wouldotherwise be payable upon J’s death.

J was an only child and he lived withhis parents in a house bought from thedamages award and held for J in thenames of the deputy and the parentsas trustees. Although earlier medical

reports considered that J was onlylikely to survive into his late twenties orearly thirties, subsequent reportsindicated that his life expectancy waslikely to be into his late forties or earlyfifties with the continuation ofappropriate care. The deputy arguedthat the proposed arrangement was inJ's best interests; it did not affect hisfinancial security but it allowed him tomake provision for his parents andmitigate inheritance tax and that wouldgive effect to the wishes and feelingsthat he would have had, if he hadcapacity.

Senior Judge Lush rejected theapplication and concluded that it wouldnot be in J’s best interests to authorisethe proposed gift at this stage of hislife. In J’s case, as in most cases where

an individual’s assets derive exclusivelyfrom a damages award for personalinjury/clinical negligence, a factor ofmagnetic importance whendetermining whether or not a lifetimegift is in his best interests is likely to bethe purpose for which thecompensation was awarded and theassumptions upon which it was based.In the judge’s view this extended to thefundamental principles that underlieclinical negligence litigation generally,in particular that of restitutio inintegrum: to place the claimant in thesame position as he would have beenhad he not suffered the wrong and notto interfere with the sum that had beencarefully calculated to support him tothe end of his life. As such, it is theCourt’s duty to ensure that as muchmoney as possible remains available tomeet the incapacitated adults’ ongoingneeds throughout his lifetime and noduty exists to mitigate inheritance taxfor others. The judge emphasised thatwhile the Court was generallysympathetic to family members whotake on a caring role and dedicate theirlives to injured relatives, it was not partof the Court’s function to anticipate,ring-fence or maximise any potentialinheritance for the benefit of thosefamily members as this is not thepurpose for which the award wasmade. The Court recognised that adistinction could be drawn, however, ondifferent facts where the incapacitatedadult had surplus funds from aseparate source, e.g. from aninheritance or a lottery win.

Under the pre-MCA 2005 rules theoutcome of this case may well havebeen different. However, under theMCA 2005 this case demonstrates thatin the absence of special

Under the MCA 2005 thiscase demonstrates that inthe absence of specialcircumstances, it is unlikelythat the Court of Protectionwill authorise a gift out offunds derived from an awardof damages for personalinjury/clinical negligence.

It is the Court’s duty to ensure that asmuch money as possible remainsavailable to meet the incapacitatedadults’ ongoing needs throughout hislifetime and no duty exists to mitigateinheritance tax for others.


The parties were long standingplatonic friends who had livedtogether in rented flats for a numberof years before purchasing a flattogether. The flat was registered inMr Sabastianelli’s sole name, butboth parties had contributed to itspurchase. The contributions to thepurchase were unequal, with MrGallarotti having contributed a cashpayment of £86,500, and MrSabastianelli having paid circa£27,000. The remainder was fundedby way of joint mortgage. There wasno express declaration of trust.

The Recorder at First Instance foundthat when they purchased theproperty they had intended it to beheld beneficially for them both inequal shares, but that this wassubject to an agreement; once itbecame clear that they could notmake equal cash contributions, thatMr Sabastianelli would pay a largerproportion of the mortgagerepayments. The Recorder found thatthis did not happen, in fact he hadmade no real contribution at all,although he had made somecontributions to other outgoings.However, the Recorder still held thatthe parties were beneficially entitledto the flat in equal shares.

The sole question on appeal waswhether the inferences drawn by therecorder were properly drawn fromthe evidence. Lady Justice Arden, inthe leading Judgment, commentedthat the appeal may be of wideinterest as “the factual paradigm isnot uncommon”.

The Recorder held that the principlesto be applied to a common intentionconstructive trust were the samewhether the parties were husbandand wife or business associates, but

that the court might draw differentinferences from similar conduct inlight of the different relationships.The Record held that in this case theclose relationship should be seenmore in the domestic thancommercial context. The Court ofAppeal upheld each of thosefindings.

However the Court of Appeal heldthat, given the agreement theRecorder had found between theparties had contained a condition thatMr Sabastionelli pay a larger share ofthe mortgage, and that this was notborne out by events, the agreementdid not apply to the events whichunfolded. The Recorder had put downthe lack of formalised accountingsystem to their strong friendship, butthe Court of Appeal held that thisonly affected their failure to chaseone another for payments, and didnot mean that either would or hadgiven up a chance of substantialequity in the flat.

It was held that the logicalconclusion from the Recorder’sfactual findings was that theagreement for 50/50 shares hadcome to an end. The only inferencethat could be drawn after that wasthat the parties intended theirbeneficial ownership to reflect theirfinancial contributions, as it waswholly implausible that one shouldintend to make such a substantialgift to the other. Accordingly a findingof 75/25 shares was substituted.

This case is a useful analysis of howinferences should be drawn in theincreasingly common situation offriends purchasing property together.It is also a reminder that thecommon intention of parties canalter during the course of a trust.

Gallarotti v. Sebastianielli [2012] EWCA Civ 865 (Arden, Tomlinson and Davis, LLJ)

Shares in beneficial ownership of propertypurchased and lived in by friends

circumstances, it is unlikely that theCourt of Protection will authorise a giftout of funds derived from an award ofdamages for personal injury/clinicalnegligence. While the proposals wouldclearly have benefitted J’s parents,aside from giving effect to the wishesand feelings J would have had ifcapacitous, it is difficult to see how Jwould have benefitted.

Following the introduction of the MCA2005 these cases demonstrate afundamental shift in emphasis inapplications for the management offinancial affairs of protected partiesthrough trusts, especially for those thatdo not fit the archetypical descriptionof a protected party under the Court’sjurisdiction. Aside from the central roleafforded to the best interests of theincapacitated individual under the MCA2005, there can be no room for doubtthat, absent special circumstances tobe assessed on the facts of each case,the Court will be reluctant to departfrom the protective regime afforded bythe MCA 2005 and the scrutiny andsupervision of those who manage thefinancial affairs of protected parties.

These casesdemonstrate afundamental shift inemphasis in applicationsfor the management offinancial affairs ofprotected partiesthrough trusts.

Claire van Overdijk


By a majority of 5:2 the SupremeCourt has held that legal professionalprivilege is confined to advice givenby lawyers and not any such advicegiven by other professionals. Thecase concerned accountants givingadvice in a matter where HMRC hadissued a notice under section 20Taxes Management Act 1970requiring disclosure to be made ofcertain documents relating to a tax

avoidance scheme. P refused todisclose documents that containedlegal advice from their accountantson the grounds that the documentswere covered by legal adviceprivilege.

All of the Supreme Court noted thatthere was a strong argument inprinciple for allowing the appeal. Themajority, however, were of the viewthat it was a matter that had to beleft to Parliament and that it was notfor the courts to extend the scope ofthe privilege. There would also beissues as to who was covered by anyextension to the current scope of theprivilege – what is a ‘profession’?

Lord Sumption, dissenting (withwhom Lord Clarke agreed), held thatthe privilege was the client’s privilegeand it was in the public interest thataccess to legal advice could be madeon the basis of absolute confidence.Thus there was no principled reason

for distinguishing between lawyersand accountants (or others). Further,the common law could recognise thefact that much legal advice was givenby non-lawyers and so there was noneed to leave the matter toParliament.

The majority, whilst recognising theinevitable logic of Lord Sumption’sview, concluded that the issue shouldbe left to Parliament. Legal adviceprivilege (LAP) had been the subjectof a number of reports, which had not

Legal Advice Privilege is confinedto advice given by lawyersR (on the applicationof PRUDENTIAL PLC& ANOR) v. SPECIALCOMMISSIONER OFINCOME TAX &ANOR [2013] UKSC 1

by Nicola Preston

There would also beissues as to who wascovered by any extensionto the current scope ofthe privilege – what is a‘profession’?


In both cases the buildingsconcerned were originally designedand used as houses, but were usedfor commercial purposes, namelyoffices and a hotel, by the time thematter came before the courts.

S2 requires the court to ask twoquestions in defining a ‘house’;whether it was designed or adaptedfor living in, and, whether it isreasonably so called. The SupremeCourt held that these two definitionsare a ‘belt and braces’ approach,and are complementary andoverlapping, although both need tobe satisfied for the property to bedefined as a ‘house’. It further heldthat the questions should be asked

in the context of houses as places tolive in, rather than pieces ofarchitecture.

The Supreme Court went on to holdthat neither a building used whollyas a self-catering hotel, nor onewholly used for offices, could be ‘ahouse reasonably so called’ withinthe meaning of the section. The factthat a building might look like ahouse, and be referred to as ahouse for some purposes could notdisplace the fact that its use wascommercial.

[2012] UKSC 41 (Lords Phillips,Walker, Mance, Clarke, Wilson,Sumption and Carnwath).

Day and another v.Hosebay Limited,Howard de WaldenEstates Limited v.Lexgorge Limited

Definition of ‘houses’ in TheLeasehold Reform Act 1967

These conjoined appeals addressed the issue of thecourts below feeling constrained to find propertieswere ‘houses’ within the meaning of the 1967 Act.The consequences of those decisions were that thelessees were entitled to ‘enfranchise’, i.e. toacquire the freeholds from the lessors compulsorilyon the terms set down by the Act.

Nicola Preston

resulted in any substantive change inthe law. Further there are somestatutory exceptions (for example, inthe case of licensed conveyancers).Those legislative provisions plainlyassumed that LAP was restricted toadvice given by lawyers. By allowingthe appeal, the scope of LAP wouldbe extended considerably, as it wouldnot be restricted to such advice beinggiven by accountants. Any changewould leave to uncertainty and lack ofclarity, as, in each case, it would benecessary to examine whether theadvice/document in issue was “legaladvice”. Accordingly, it was found thatany extension involved a policydecision which, in all thecircumstances, was to be left forParliament and the appeal wasdismissed.

By allowing theappeal, the scope ofLAP would beextendedconsiderably, as itwould not berestricted to suchadvice being givenby accountants.

No5 Chambers provides services onan equal opportunity basis

This was an appeal on the grounds that the Judgehad improperly exercised her discretion in awardingsubstantial sums to the Claimant (Respondent) inher claim under the Inheritance (Provision forFamily and Dependants) Act 1975.

The Court of Appeal confirmed, as it has done so many times inthe past, that the ambit of the discretion under the Act is verywide and it is only in the most exceptional of cases that it mightbe said that the earlier decision was “plainly wrong” and thiswas not one of those cases.

Further, the Judge had properly taken into account theAppellants’ conduct, which included the fact that one of theAppellant’s had been charged with, and subsequently cleared ofan attempt to procure C’s murder. Other relevant conduct wasthat C had worked in the deceased’s funeral business but afterhis death, the other family members (the Appellants) haddismissed her for unsubstantiated misconduct and fraud.

Musa v. Holliday [2012] EWCA Civ 17632(Black & Kitchen LJJ)

Relevance of conduct inclaims under 1975 Act

A property had been purchased by the parties in1993 in their joint names. In 1997, C had left theproperty, with the two children of the relationship.Some years later, she applied for an order for sale.D was unsuccessful in a claim that he was the solebeneficial owner of the property and it was held thatthe property was owned in equal shares.

D was ordered to pay occupational rent of £350 per month. TheCourt of Appeal upheld his appeal that the figure should behalved, to reflect the fact that he was the beneficial owner ofhalf of the property.

Akhtar v. Hussain [2012] EWCA Civ 1268 (Sir NicholasWall, Lloyd & Sullivan LJJ)

Occupational Rent

Commercial & Chancery BulletinEditor - Nicola PrestonCase notes provided by Nicola Preston and Louise Corfield

This bulletin does not contain legal advice. Whilst everyeffort is made to ensure its accuracy, No5 Chambers, itsindividual members and the authors of the articles do notassume for, and cannot be held liable in respect of, thecorrectness of its contents or for any reliance placedupon them.

Commercial & ChanceryPractice DirectorTony McDaid

Senior Practice ManagerJames Parks

Tel: +44 (0) 845 210 5555 Fax: +44 (0) 0121 210 7312 Email: [email protected]

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