Professions and Financial Lines Brief: latest decisions October 2022
A roundup of the latest court decisions and regulations raising issues of piercing the corporate veil, service of a claim form, the FCA consumer duty, directors’ fiduciary duties and a solicitor’s duty of care outside of a formal retainer.
Court remains reluctant to pierce the corporate veil
Barclay-Watt v Alpha Panareti Public Ltd (APP) [19.08.22]
Directors will take comfort from this recent judgment, handed down by the Court of Appeal, which examined when a director will be liable for having assisted in a wrongdoing committed by a company. The Court of Appeal (the Court) confirmed that instances in which liability would be found would be limited and fact-specific, to avoid driving a “coach and horses through the concept of a limited liability company”.
The dispute was about the marketing by APP, of a Cypriot mortgage product, denominated in Swiss Francs, to unsophisticated investors resident in the UK. The product was marketed as an ‘armchair investment’, but due to the substantial fall in value of the British and Cypriot currencies against the Swiss Franc, the cost of the mortgages spiralled, and the UK investors became heavily indebted.
On appeal, the Court held that APP had negligently failed to warn the investors of the foreign currency risks that they were assuming by borrowing in Swiss Francs.
However, the Court also held that the director, Mr Ioannou, was not personally liable for assisting the company in committing the wrongdoing.
In order to have established this, the claimants needed to show that Mr Ioannou gave substantial assistance to the company, and that this assistance was pursuant to a common design.
Lord Justice Males found that, at a stretch, one could argue that there was a common design between Mr Ioannou and APP to market the Cypriot mortgages in a certain way, and omit to warn the investors of the currency risks. However, if this was sufficient to establish personal liability, it would be too broad, as it would then be “difficult to see why any director or senior manager who is heavily involved in a company's marketing of an unsuitable investment should not incur personal liability”.
As the claim failed to pass this hurdle, the court did not go on to consider a potential defence available to Mr Ioannou, which arose if the conduct in question amounted to no more than carrying out his constitutional role in the company. However, obiter, the judge said that the constitutional role defence was intended to be of narrow application, and it would be an ‘unacceptable anomaly’ if a senior manager would incur personal liability in this instance, but a director would not.
This case is a helpful articulation of the relevant principles to be considered when determining if a director should be found personally liable for assisting in a wrongdoing committed by a company. It is an equally helpful reminder of the fact that individuals are entitled to limit their liability by incorporating a limited company to carry on their business, and that the courts will protect this right.
Authors: Bethan Price, Fleur Rochester
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A clear reminder to adhere to court deadlines – court throws out £1.3 million professional negligence claim over service failure
Lonsdale & Ors v Wedlake Bell LLP & Ors [19.08.22]
This case is a clear reminder of the potentially disastrous consequences of not adhering to court deadlines.
The matter concerned negligent advice given to James Lonsdale regarding a trust, which he claimed was just ‘totally wrong’. Mr Lonsdale instructed London firm Archer, Evrard & Sigurdsson (AES) to commence professional negligence proceedings against Wedlake Bell, Cumberland Ellis and their indemnity insurer, QBE. AES emailed the claim form to the defendants’ solicitors, RPC, in July 2021 stating that this “was not formal service”. AES made it clear it was not expecting a response and instead proposed steps towards mediation.
The parties then agreed to extend the time for service. On 1 November 2021, RPC told AES that the mediation would have to take place in January 2022 and suggested extending the service deadline again. On 7 November 2021, AES asked for a further extension. However, RPC refused.
AES did not serve the claim form until January 2022 and applied for a declaration that a valid extension of time had been agreed or, alternatively, that it should be treated as being served in time. The claimants said the court did not have jurisdiction to hear the claim. They argued that the defendants were estopped from relying on expiry of the July 2021 claim form, but Deputy Judge Kimbell ruled that “the claimants cannot point to any relevant representation or assurance which is capable of founding the estoppel”.
He also rejected the argument that an email in November 2021 from RPC amounted to an acceptance that there was no need to agree a new date for service of the July claim form, holding it was “quite the opposite, RPC expressly referred to “a further order” to extend time, clearly RPC expected AES to send a further consent order for their agreement”.
Deputy Judge Kimbell dismissed the claimants’ argument that the court should order that emailing the July 2021 claim form to RPC constituted ‘good service’, saying that AES “took a conscious decision to send the July claim form to RPC and asked them not to treat this as service”.
A further argument that an order should be made to dispense with service of the July 2021 claim form was also rejected, with Deputy Judge Kimbell saying “the claimants made a strategic decision to issue (but not serve) the July claim form in July 2021. They agreed one extension to the period for service but then failed to serve the July claim form within that period and failed to agree another extension… this is not a case which can conceivably amount to exceptional circumstances to justify dispensing with service altogether”.
This case is a clear reminder of the importance of adhering to court deadlines, properly agreeing extensions of time and that any agreement to extend must be in writing. In this instance, the claimant failed to serve the claim by an already extended deadline. Given that a further extension was not obtained and there was nothing to suggest that there were any special circumstances, the High Court dismissed the claimant’s application and in doing so, effectively struck out the original claim.
The FCA’s new Principle 12: the consumer duty has arrived
FCA Policy Statement 22/9 [27.07.22]
The new Principle 12, which from 31 July 2023 will apply to all new products and services, and all existing products and services that remain on sale or open for renewal, states that “a firm must act to deliver good outcomes for retail customers” (Consumer Duty). From 31 July 2024, the Consumer Duty will then come into full effect by applying to all closed products and services.
The FCA considers Principle 12 to impose a higher standard than Principles 6 and 7, so where Principle 12 applies, Principles 6 and 7 do not.
The new Consumer Duty applies to all firms that “have a material influence over, or determine, retail customer outcomes”. There are three main elements to the Consumer Duty: Principle 12; The Cross-Cutting Rules; and The Four Outcomes. Primarily there is Principle 12, which reflects the new high standard required of firms by the FCA and is supplanted by the Cross-Cutting rules, which give some flavour by applying the following requirements:
- Firms must act in good faith towards retail customers.
- Firms must avoid foreseeable harm to retail customers.
- Firms must enable and support retail customers to pursue their financial objectives.
More detailed expectations for firms are then further set out by the Four Outcomes, namely:
- Governance of products and services
- Price and value
- Consumer understanding
- Consumer support
The new duty is designed to protect consumers against being exploited by firms, especially considering the lack of specific knowledge that consumers often have to inform their decisions. Firms often do not design products so that they present fair value and prioritise their own profits overachieving favourable outcomes for consumers.
It is yet to be seen how effectively firms will respond to the Consumer Duty, but it certainly shows that the FCA is being proactive in protecting consumers, by requiring firms to be continually reflecting on their standards and practices. Whatever the reaction, the introduction appears to be timely, given the current cost of living crisis and uncertain economic outlook for the UK.
Legitimate expectation is key in showing fiduciary duties are owed outside the established categories of fiduciary relationships.
JT Kelly & Lansdowne Group Ltd v BE Baker and RJ Braid [19.07.22]
This case considers the existence of fiduciary duties in the absence of an established category of fiduciary relationship or an explicit undertaking to discharge such duties.
The case concerned the sale of part of a family business, with a seller (Mr Kelly) entering into a share purchase agreement for over £100 million. Corporate financiers supported a group of purchasers, headed up by two defendants (Mr Braid and Mr Baker). Both defendants had worked for the company for years, as a quantity surveyor and an accountant respectively.
After the share purchase was completed, the seller argued they could have sold the shares for £200 million. They issued proceedings, alleging that the defendants breached their fiduciary duties by failing to disclose their buy-side position and failing to achieve the best possible sale price.
The issue of breach of the defendants’ fiduciary duties required the court to consider whether fiduciary duties existed between the parties in the first place.
The parties accepted the starting position in Bristol & West Building Society v Mothew , that a fiduciary is “someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence”. However, the circumstances in the present case did not fall into any of the established categories for a fiduciary relationship and the defendants had entered no explicit undertaking to act for or on behalf of the seller.
The court found that, when deciding if a party owed fiduciary duties, the hallmark of cases where duties have been recognised is the existence of a legitimate expectation on the part of the beneficiary.
When applied to the facts of this case, it was accepted that, although the seller believed the defendants to be close friends, this was not the objective reality. They were “outside the circle of power and the circle of real trust” and there was no quasi-familial closeness to create a fiduciary relationship.
This decision demonstrates the high bar for establishing fiduciary duties, as the court held no fiduciary duties existed between the parties and the claim for breach of fiduciary duty failed.
Authors: David Armstrong, Fleur Rochester
Substantial clarification on solicitors’ obligations when responding to informal queries
Spire Property Development LLP & Anor v Withers LLP [19.07.22]
Lady Justice Carr and the Court of Appeal confirmed that, whilst assuming a duty of care to respond to claimants’ specific queries with reasonable skill and care outside a formal retainer, solicitors may assume no wider duty to provide information which has not been sought.
The claimants retained Withers LLP (Withers) to act on their acquisition for redevelopment of two high value Grade II listed properties (the properties) in London. Following purchase and after conclusion of Withers’ retainer, the claimants learned of the existence of three high voltage cables (the cables), owned by UK Power Networks (UKPN), running under both properties. The claimants then raised queries with Withers. In particular, they asked why the existence of the cables had not been disclosed and if it had, why Withers had not advised the cables’ impact on said acquisition. Whilst they had no obligation to do so, Withers replied, stating that the acquisition documents including deeds and report on title made no mention of the cables. Pertinently, there was no wayleave agreement to install the cables under or over the properties. The claimants did not seek further advice from Withers and the cables were not moved, rendering the development of the properties more modest in scope.
The court found at first instance that, notwithstanding the absence of a retainer, Withers had assumed a duty of care to advise the claimants correctly as to their rights against UKPN and the advice provided was incomplete. Further, Withers knew or ought to have known that the claimants would rely on their advice, and it was immaterial that Withers had not charged for its advice.
The Court of Appeal found the extent of Withers’ duty and assumed responsibility to be a matter of objective construction of the correspondence between Withers and the claimants. This must be considered in the context of the correspondence comprising exchanges between a solicitor and former client with an ongoing professional relationship. In short, Withers had not assumed a duty to advise on the wider questions of the claimants’ potential rights and remedies.
In that regard, Lady Justice Carr observed that, in correspondence between the parties, the claimants addressed only three discrete questions to Withers. Particularly relevant to the finding of no duty to advise was the claimants’ familiarity with the firm, its sophistication and use of property development specialists in multiple disciplines (on this retainer)
This judgment is encouraging for solicitors who wish to respond confidently and constructively to former, current and potential clients who may approach them seeking information absent a formal retainer. The decision also demonstrates that, when responding to one-off queries, solicitors should take care to clearly identify the extent and limits of their assumption of responsibility and clients should be conscious of the limitations of informal responses and the degree to which they may be relied upon.
Related item: Duty calls, or does it?