Compromise and capacity: protecting the vulnerable is paramount
Dunhill v Burgin
12 March 2014
In the recent case of Dunhill v Burgin (2014) the Supreme Court had to consider the unusual scenario of a case that had settled where the claimant lacked capacity but the defendant was unaware of this. This is a case which has twisted, turned and even leapfrogged its way to the Supreme Court. In a judgment which emphasises that the policy underlying the Civil Procedural Rules is the protection of vulnerable parties, the Supreme Court held that the claimant did not have the capacity to conduct her claim and the settlement was invalid. In this legal update Paul Banks and Philip D’Netto review the judgment and consider its implications.
In June 1999 the claimant suffered a head injury when she was struck by the defendant’s motorcycle on a dual carriageway. On the eve of limitation she issued a claim for damages. At that time she claimed she was still suffering from a number of cognitive, emotional and psychological symptoms. With the defendant denying liability, a trial to determine the issue was listed for 7 January 2003. The claimant attended trial with a mental health advocate which, with hindsight, perhaps should have set alarm bells ringing. When one of her witnesses failed to show, negotiations took place leading to a compromise in the sum of £12,500 which was concluded with a consent order.
This clearly represented a gross undervaluation of the claim which the claimant now puts at £2 million on a full liability basis and the defendant puts at £800,000.
In 2006 the claimant engaged a new legal team and, through her litigation friend, issued professional negligence proceedings against her former advisers. In February 2009 the litigation friend reopened the original proceedings to seek a declaration that the claimant did not have capacity at the time of the purported settlement of the matter and that the consent order should be set aside.
The parties agreed there should be a trial on the issue of whether or not the compromise had required the approval of the court. This depended on two issues:
Whether the claimant was a “patient” within the (then) meaning of CPR 21, the term having since been replaced by “protected party”.
The consequences if she were a protected party and specifically, whether the compromise needed court approval pursuant to CPR 21.10?
Did the claimant have the capacity to litigate?
The accepted approach to the test of capacity is now set out in the Mental Capacity Act 2005 which was modelled closely on the common law and in particular the Court of Appeal decision in Masterman-Lister v Jewell (2002):capacity is to be judged in relation to the activity or issue in question and not globally. The parties agreed therefore that for the claimant to have capacity, this had to be judged by reference to decisions likely to be required of her in the course of the proceedings. The key question in this case was: what is meant by the ‘proceedings’ which the party must have the capacity to conduct?
Here, the parties disagreed over whether the test should be applied to the proceedings which she had actually brought or whether it should be to those that should have been advanced.
At first instance Silber J adopted the former approach and held that the claimant retained capacity to compromise the matter in January 2003. The Court of Appeal disagreed, finding the judge should not have confined himself to the actual decisions required of the claimant on 7 January 2003 but should have considered her capacity to conduct the proceedings as they should have been framed.
The Supreme Court’s starting point was that the wording of CPR 21 suggested “a focus on proceedings in general rather than on ‘the proceedings’ as framed”. However, Lady Hale acknowledged that some statements in the authorities might suggest a different approach. In Masterman-Lister Kennedy LJ quoted the test described by Boreham J in the unreported case of White v Fell (1987),
“To have capacity she requires… the insight and understanding of the fact that she has a problem in respect of which she needs advice... Secondly, having identified the problem, it will be necessary for her to seek… an adviser and to instruct him with sufficient clarity to enable him to understand the problem and advise… Finally she needs sufficient mental capacity to understand and make decisions based upon, or otherwise give effect to such decisions”
Silber J, had favoured the remarks of Chadwick LJ in Masterman-Lister who also defined the test as “whether a party to legal proceedings is capable of understanding, with the assistance of such proper explanation from legal advisers, experts and other disciplines, as the case may require, the issues on which is consent or decision is likely to be necessary during the course of those proceedings”.
The Supreme Court interpreted this as meaning that, having identified a problem and gone to a solicitor, all that is required is the capacity to understand and make decisions based on the advice given by that solicitor.
If that interpretation was right, the claimant’s capacity would depend on whether she was capable of understanding the advice given, regardless of whether that advice was good or bad. Yet if she had received no advice at all or brought a claim as a litigant in person, then she would lack the capacity to make the decisions which her claim required of her. This clearly cannot be correct as it is a far narrower interpretation of the test and something entirely different from the insight and understanding needed to conduct complex litigation.
In the circumstances, the Supreme Court upheld the decision of the Court of Appeal and on that basis found that the claimant did not have capacity to conduct the claim.
Did a finding of incapacity automatically mean the settlement and court order were of no effect?
CPR 21.10(1) requires any settlement by or on behalf of a protected party to be approved by the court for it to be valid:
“Where a claim is made – (a) by or on behalf of a child or protected party (b) against a child or … protected party, no settlement, compromise or payment and no acceptance of money paid into court shall be valid, so far as it relates to the claim, by, on behalf of or against the child or protected party, without the approval of the court.”
The defendant advanced two arguments as to why the rule did not have that effect here.
The first was that the rule only applied where a litigation friend was appointed, since it was only then that they would be on notice that she lacked capacity. In rejecting this argument the Supreme Court referred to the House of Lords’ judgment in Dietz v Lennig Chemicals Ltd (1967) where it was held that the “compromise rule” embodied in the predecessor to CPR 21.10 applied to the settlement of a claim made on behalf of a child before any proceedings were begun. Following that decision, the Court of Appeal in Drinkall v Whitwood (2003) held that the words “the claim” in CPR 21.10 meant the cause of action rather than any specific proceedings, a point reinforced by CPR 21.10(2) which sets out the procedure for settlements achieved before proceedings have commenced.
Although both Dietz and Drinkall related to the compromise of a child’s claim, in Bailey v Warren (2006) the Court of Appeal held there was no reason to distinguish between claims involving children and those of adult claimants who lack capacity.
The second, more fundamental argument was whether the Court of Appeal decision in Imperial Loan Company v Stone (1892) conflicted with CPR 21.10 rendering it ultra vires. In Masterman-Lister Chadwick LJ, when discussing the predecessor to CPR 21.10(1) and 21.11 said that if those rules were intended to apply in a situation where it appeared to a defendant and the court that a claimant was asserting that he was not under a disability, then it would be open to question whether the rule making body had the power to change the substantive law set out in Imperial Loan. This was not discussed further in Masterman-Lister as the claimant did not lack capacity.
In Imperial Loan the Court of Appeal held that that a contract made by a person who lacked the capacity to make it was not void, but could be avoided by that person provided that the other party to the contract knew (or ought to have known) of his incapacity.
The defendant argued that this applies equally to a compromise as it does to other contracts. On the basis that neither the Rules of the Supreme Court nor the Civil Procedure Rules can change the substantive law unless expressly permitted to do so by statute, (Grosvenor Hotel, London (No.2) (1964)) the defendant asserted that the Civil Procedure Rules Committee has no power to alter the common law and as such the Supreme Court should declare CPR 21.10 ultra vires.
The Supreme Court rejected this and in so doing, but without expanding further on this point, appears to have accepted the claimant’s arguments first advanced before Bean J that the “compromise rule” embodied in RSC Ord 80 (the predecessor to CPR 21.10) is in fact a matter of “practice and procedure” rather than a general rule of contract. In the circumstances it was not “overturning “ the decision of Imperial Loan, which nevertheless remains good law, but is best considered as providing a discrete self-contained code in much the same way as Part 36 does for “offer” and “acceptance” (see Gibbon v Manchester City Council (2010)).
In the circumstances, the CPRC is therefore entitled, as was its predecessor, to promulgate a rule of practice or procedure which conflicts with Imperial Loan. The Supreme Court gained support from Lord Pearson’s dicta in Dietz when he accepted the “compromise rule” was a valid exercise of the rule making power conferred by the Judicature Act 1925. Despite their criticism of his lack of reasoning, the Supreme Court nevertheless considered they were bound by Dietz. In doing so they accepted the claimant’s further point that the Civil Procedure Rules 1997 expressly provide that matters contained in former rules can be carried over in to the CPR, and therefore this could be read as conferring express power to alter the substantive law to the extent this was modified previously, and regardless of whether such a power had actually existed.
Weighing policy considerations
The defendant had throughout the appeal emphasised the need for finality in litigation and the difficulty experienced in reopening cases long after they were perceived as having been settled. In the end this argument was unable to compete with the underlying policy of the CPR that protected parties require and deserve protection, not only from themselves but also from their legal advisers.
The saga continues since Ms Dunhill’s damages have yet to be determined.
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