Dunhill v Burgin [2014] UKSC 18

Ms Dunhill suffered a severe head injury in a road accident and settled her personal injury claim for £12,500, a gross undervaluation. The Supreme Court held she lacked capacity to conduct the proceedings, set aside the consent order, and required court approval under CPR 21.10.

Facts

On 25 June 1999, Ms Dunhill was struck by Mr Burgin’s motorcycle whilst crossing a dual carriageway near Goldthorpe. She sustained a severe closed head injury and soft tissue injuries. In May 2002, shortly before the limitation period expired, she issued a claim in the Barnsley county court, seeking damages limited to £50,000, supported by two reports from an accident and emergency consultant.

On 7 January 2003, at a listed liability trial in Sheffield, and following the non-attendance of a key witness, the claim was compromised for £12,500 plus costs, embodied in a consent order signed by counsel and placed before the judge. Her present legal advisers value the claim at over £2,000,000 on full liability; the defendant values it at around £800,000. In February 2009, her litigation friend applied to set aside the consent order on the basis that Ms Dunhill had lacked capacity at the time of settlement.

Issues

Two issues arose:

(i) What is the test for deciding whether a person lacks the mental capacity to conduct legal proceedings, for the purposes of CPR Part 21? Specifically, is capacity to be judged by reference to the proceedings as actually framed by her lawyers, or by reference to the proceedings as they should have been framed given her underlying cause of action?

(ii) If a claimant lacked capacity but this was unrecognised, does CPR 21.10(1) render the settlement invalid without court approval, or does the common law rule in Imperial Loan Co Ltd v Stone [1892] 1 QB 599 apply, so that the compromise is valid unless the other party knew or ought to have known of the incapacity?

Arguments

Appellant (Defendant)

Mr Rowley QC argued that capacity should be judged by reference to the decisions actually required of Ms Dunhill in the proceedings as brought, principally whether to accept the settlement offer. He further contended that CPR 21.10(1) applied only where a litigation friend had been appointed, so that the defendant was on notice, and that any wider reading would be ultra vires the rule-making power, impermissibly overriding the substantive contract law in Imperial Loan and Hart v O’Connor [1985] AC 1000. He emphasised the need for finality in litigation and the availability of professional negligence claims against former legal advisers.

Respondent (Claimant)

Mr Melton QC argued that capacity was to be judged by reference to the claim which the claimant actually had, not the claim as (mis)formulated by her lawyers. He submitted that CPR 21.10(1) applied irrespective of appearances at the time and rendered the unapproved settlement invalid. He also relied on the disadvantages of professional negligence claims (discounts for chance and inability to obtain periodical payments) and highlighted that lack of insight is common in head injury cases.

Judgment

Lady Hale, with whom Lord Kerr, Lord Dyson, Lord Wilson and Lord Reed agreed, dismissed both appeals.

The test of capacity

The test derived from Masterman-Lister v Brutton & Co [2002] EWCA Civ 1889 — capacity to conduct the proceedings — was not challenged and was correct. The question was what was meant by “the proceedings”. Reading CPR Part 21 as a whole, including rules 21.2(1), 21.4(3) and 21.10 (which applies even to claims settled before proceedings begin), the Rules posit a person with a cause of action who must have capacity to bring and conduct proceedings in respect of that cause of action.

Lady Hale rejected the defendant’s construction, observing that it would produce the absurd result that a claimant’s capacity would depend on the quality of the advice she received: a claimant receiving good advice or no advice at all would lack capacity, but one receiving bad advice which reduced the decisions required of her would possess it. The correct test is the capacity to conduct the claim or cause of action which the claimant in fact has, rather than the claim as formulated by her lawyers. On that basis, it was common ground that Ms Dunhill lacked capacity.

Effect of incapacity and CPR 21.10(1)

The embodiment of the settlement in a consent order did not constitute the approval of the court required by CPR 21.10(1). The rule imposes an external check on the propriety of the settlement.

The defendant’s argument that the rule only applies where a litigation friend has been appointed was rejected: it required words to be written into the rule which were not there, and the rule expressly applies to claims settled before proceedings (and hence before any litigation friend could be appointed), as confirmed by Dietz v Lennig Chemicals Ltd [1969] 1 AC 170, Drinkall v Whitwood [2003] EWCA Civ 1547 and Bailey v Warren [2006] EWCA Civ 51.

The ultra vires argument was also rejected. In Dietz, Lord Pearson had held that the compromise rule was a valid exercise of the rule-making power, reasoning that the court needs full control over settlements to protect the interests of those under disability. The Supreme Court was bound by Dietz absent very good reason to depart. Paragraph 1 of Schedule 1 to the Civil Procedure Act 1997 could also be read as expressly conferring power to make rules on matters previously governed by the Rules of the Supreme Court.

Agency and Policy

The Court declined to rule on the alternative agency argument (that an agent lacks authority to bind a principal who lacks capacity), noting the authorities are in confusion. On policy, Lady Hale observed that policy arguments do not answer legal questions, but that the policy underlying Part 21 is clear: children and protected parties require protection not only from themselves but also from their legal advisers.

Implications

The decision confirms two important principles:

First, for the purposes of CPR Part 21, capacity to conduct proceedings is assessed against the claim or cause of action which the claimant actually has, not the claim as (potentially inadequately) formulated by her lawyers. This prevents the anomaly that inadequate legal advice could artificially confer capacity by simplifying the decisions required of the claimant.

Second, CPR 21.10(1) creates a substantive exception to the ordinary contract rule in Imperial Loan Co Ltd v Stone: a settlement of a claim by or against a protected party is invalid without court approval, even where the other party had no reason to suspect the incapacity. Insurers and defendants cannot rely on the appearance of capacity at the time of settlement.

The decision matters particularly to personal injury insurers, who face the possibility that settled claims may be reopened where the claimant is later shown to have lacked capacity — although, as Lady Hale acknowledged, the claimant’s original legal advisers may face professional negligence claims. It also matters to claimants with hidden cognitive impairments (such as those following head injuries) whose lack of insight may not have been apparent at the time of settlement.

The Court did not disturb the underlying capacity test from Masterman-Lister, nor did it consider whether the Mental Capacity Act 2005 has altered that test in any respect. The Court also expressly declined to resolve the agency point. The Court retained a discretion under CPR 21.3(4) retrospectively to validate steps taken without a litigation friend, but held it would not be just to validate the settlement itself in this case.

Verdict: Both appeals dismissed. The order of Bean J was upheld: Ms Dunhill lacked the capacity to commence and conduct proceedings arising out of her claim; she should have had a litigation friend from the outset; the settlement required court approval under CPR 21.10(1); the consent order was set aside and the case remitted for trial.

Source: Dunhill v Burgin [2014] UKSC 18