Ever thought a case you had closed six years earlier could be reawakened and leave you facing a reserve of £2 million? Here the court found that where a claimant was retrospectively considered to have lacked capacity to agree the settlement at the time, it could be overturned and the litigation re-opened leaving the defendant in precisely that position.Tony Wilson reviews the recent Supreme Court decision of Dunhill -v- Burgin.

Background

The claimant sustained severe head injuries in an accident. She issued proceedings and, on the advice of her legal representatives, settled the claim by consent for £12,500. The sum was paid and the matter closed.

Six years later, the claimant consulted a new firm of solicitors and a litigation friend was appointed on her behalf. She issued proceedings for professional negligence against her initial advisors, together with an application in the original claim for a declaration that she had lacked capacity at the time she agreed to settle and that court approval should have been sought. She contended that the settlement had been a gross undervaluation of the claim – and that damages were in fact worth £2 million. Further, as court approval had not been obtained, the original settlement should be rendered void.

The court considered two issues:

1. Did the claimant have capacity to litigate the original claim?

2. Was court approval required?

The law

The common law rule is that a contract made by a person who lacks capacity is valid unless the other party knew (or ought to have known) about the incapacity. However, CPR 21.10 provides a specific exception to this rule in the case of a vulnerable party and states that settlement of a claim concerning a child or protected party requires court approval.

The defendant argued that he did not know, and could not reasonably have known, that the claimant lacked capacity at the time of settlement. He said that the common law rule should apply equally to settlement of claims as it does to contractual agreements.

The decision

Test for capacity

The Court of Appeal held that the question of capacity refers to proceedings generally and is not restricted to the proceedings subject of the litigation. While it was found that the claimant had capacity to deal with the proceedings before the court at the time of the settlement, those proceedings had been incorrectly formulated. It was held that the claimant did not have the capacity to deal with the proceedings that should have been brought on her behalf and so, the claimant should not be bound by the settlement simply because her legal representatives had failed to advance the claim as they should have done… notwithstanding that the defendant had no way of knowing that the claimant lacked capacity when settling the claim.

Court approval

The court found that CPR 21.10 was a specific, and clearly intended, exception to the common law rule to protect vulnerable parties and it was not for the court to overrule. The Supreme Court approved the Court of Appeal’s decision in these terms and the settlement was therefore declared void.

The implications

The Supreme Court has made it clear that the protection of vulnerable parties is paramount to the spirit of the CPR. The fairness, for defendants, of allowing capacity to affect settlements retrospectively was considered, but the importance of protecting parties was found to outweigh any prejudice doing so may cause. The decision leaves defendants, and their insurers, without the certainty of finality in proceedings. Defendants and their insurers must therefore be sure of the capacity of their opponent at the time of settlement and approval of the court sought if required. This is paramount, particularly in any cases where there has been a head injury if defendants are to avoid similar exposure.