Dunhill -v- Burgin  (2014) UKSC 18

Imagine settling a claim and closing your file, only to find that many years later the settlement was invalid and must be reopened, as the claimant (unbeknownst to you) did not have capacity to agree to it. The Supreme Court’s judgment in Dunhill -v- Burgin means that this could be a very expensive reality. Alan Dury discusses.

Background

On 7 January 2003, Ms Dunhill’s claim was settled at the doors of the court for £12,500. The court sealed a consent order and the insurers put away their file. But, in February 2009, Ms Dunhill issued proceedings again, this time claiming over £2 million. Insurers responded that the claim had been settled and was therefore closed, but Ms Dunhill argued that it had not been validly settled, as she did not have capacity. The settlement should therefore have been approved by the court under CPR 21.10 which states that settlement of any claim made by or on behalf of a child or protected party is not valid ‘without the approval of the court.’ Merely sealing a consent order does not amount to court approval for these purposes.

Was the settlement valid?

No-one disputed that the insurers did not know, indeed could not reasonably have known, that Ms Dunhill had lacked capacity in 2003, so where did this leave matters? A contract entered into by a person that does not have capacity is still valid and cannot be avoided, if the other party did not know, or could not reasonably have known, about that lack of capacity. Insurers therefore argued that this rule must apply equally to the settlement of claims as it does to contractual agreements.

Yet the rules are clear: if a party to a settlement is a child or protected person, the settlement is not valid without court approval. There is no exception to this rule even if, for example, one party does not know that the other lacks capacity.

This being the case, the Supreme Court ruled that the settlement was invalid. The consent order was set aside and the case sent back down for trial. Insurers would have to re-open their file.

Competing arguments

The court had no problem in viewing the situation here as different from the rule in contract, nor did it object to the need to protect vulnerable individuals not only from themselves, but also from their lawyers.

The court was likewise not impressed by arguments that Ms Dunhill would have a claim against her solicitors and that the settlement did not therefore need to be re-opened. Ostensibly, this (and the need for finality) had no bearing on the interpretation of the clearly worded rule. A professional negligence claim would also have had disadvantages for Ms Dunhill. She would probably have to settle at an undervalue and could not obtain periodic payments. Likewise, a litigant in person would have no such claim, but was equally deserving of protection. There could not be a different rule about capacity depending on whether or not a litigant had lawyers.

Also considered was the question of what lack of capacity means. A claimant might understand the narrow compromise being accepted but may not, as here, have capacity to understand the claim they might have had, if properly advised. The court decided that the latter capacity was relevant. A claimant should not have less protection where given bad advice which they could understand, than if good advice was given but not understood.

Implications

Insurers will be concerned that this judgment means that a seemingly dead claim may come back to life much later, like some monster in a bad horror film. It is far-reaching too. The decision does not just apply to claims where a claimant is rendered a protected party by the accident in question. It will also apply to a compromise with a claimant who already lacked capacity. As such, insurers may never be certain that a claimant known only at arm’s length, should not be considered a protected party with consequent impact on any settlement.

That said, whether this decision will translate into a significant problem remains open to question. Only claims at an undervalue are caught. If a settlement was reasonable it can, and is likely to, be approved in retrospect. In most cases, insurers will have a good idea whether there is a risk that the claimant should be protected. Although  insurers here were not accused of knowing this, there were some pointers as Ms Dunhill’s claim did inform them that she suffered a head injury with loss of the senses of smell and taste, forgetfulness, headaches, personality change, low moods, suicidal ideation and self-mutilation. She also attended the trial with a mental health advocate.

On balance, then, some cases may be lurking that will unexpectedly revive, but there are unlikely to be many. The warning signs are often there and (hopefully) few claimants will receive such monumentally bad advice from their lawyers as the claimant here. The real question for insurers is whether to prompt investigations into capacity where they have suspicions, but where the claimant’s solicitor is seemingly oblivious.  Not to do so could render a settlement invalid - but to do so could destroy the prospects of a good settlement and result in a vastly inflated claim. It may be that most insurers would prefer to reach a low settlement (perhaps with a precautionary continuing reserve in those cases where there are signs the claimant may be a protected party) and keep their fingers crossed. The sleeping dog may continue to lie. A few may wake, but that is surely preferable to waking them all.