Professions and Financial Lines Brief: latest decisions July 2023

This article was co-authored by Aoife Dunne, Bushra Jalil and Patricia Cornejo Teixido, Trainee Solicitors, London and Amy Childs, Solicitor Apprentice, Taunton.

A roundup of the latest court decisions touching on the following issues: permission to pursue a derivative action against the directors of a company, the assumption of a duty of care to third parties, the relationship between causation and loss, solicitors’ dishonesty and the doctrine of proximate cause.

ClientEarth’s shareholder action on climate change targets fails

ClientEarth v Shell plc & Ors [12.05.23]

The High Court has refused permission for ClientEarth (minority shareholder) to continue a derivative action against 11 of Shell's directors who ClientEarth allege breached their legal duties owed to the company under the Companies Act 2006.

ClientEarth claimed that Shell's directors had breached these duties by failing to:

• Establish a measurable and realistic plan for Shell to achieve net-zero targets in line with the Paris Agreement.
• Provide a reasonable basis in their 'climate risk management strategy' to achieve Shell's net­zero target aligned with the Paris Agreement.
• Develop a plan for timely compliance with the Dutch Court's order in Milledefensie v Shell [2021].

They maintained that Shell should:

• Give appropriate consideration to climate risk based on a reasonable consensus of scientific opinion.
• Take reasonable steps to comply with applicable legal obligations.
• Adopt strategies reasonably likely to achieve Shell's climate risk mitigation targets.
• Implement reasonable measures to mitigate risks to Shell's long-term financial profitability and resilience in the transition to net zero.
• Ensure that both existing and future directors have control over the strategies employed to manage climate risk.

The Court rejected ClientEarth's application for permission to pursue a derivative action pursuant to s261 of the Companies Act. The court found that ClientEarth had not demonstrated a prima facie case that (a) Shell's directors had breached their duty of care to the company or (b) the mandatory injunctions sought, specifying actions to be taken by the directors, would serve a useful purpose.

The judgment highlights it is for the company's directors to determine how best to promote the success of a company for the benefit of its members as a whole. A court will not generally question company decision-making unless there is evidence that the directors could not reasonably have concluded that their decision was in the best interests of the company. Undoubtedly, this is a significant ruling for the D&O insurance market - one which will bring much relief and comfort to directors who face the challenge of now balancing climate action with other business priorities. In particular, it shows the court will be slow to allow shareholders with small or insignificant shareholdings to use the derivative claim procedure to challenge strategic or long-term decisions made in good faith in relation to addressing climate risks.

The court has since granted ClientEarth’s request for the court to reconsider its decision at an oral hearing. It remains to be seen whether ClientEarth will succeed in an oral hearing, particularly given how confidently the judge reached his conclusions and the many different bases relied upon.

Authors: Aoife Dunne and Jennifer Boldon

The Court of Appeal rules avoidance scheme promotors’ advisor did not owe duty to third party investors

McClean v Thornhill [28.04.23]

This case is a reminder of professionals’ assumption of a duty of care to third parties.

The appeal arises out of three failed film finance tax schemes (the Schemes). Andrew Thornhill KC (the Defendant) provided advice to Scotts Atlantic Management Limited (the Promoters), regarding the tax implications.

The defendant consented to a copy of his opinion being made available to prospective investors in the Schemes. However, the Promoters issued an Information Memorandum (IM) which advised David McClean and Others (the Appellants) to consult their own tax advisors, and stated that no investor had been allowed to subscribe to the Schemes without confirming they had obtained their own tax advice (the IM Advice).

Subsequently in 2016, HMRC decided that the Schemes were not available, and raised tax assessments which the Appellants settled. The Appellants brought a claim against the defendant for alleged negligent advice in respect of the Schemes. 

At first instance, Zacaroli J, dismissed the claims, for various reasons, including that the defendant did not owe a duty of care to the Appellants in respect of advice given in connection with the schemes; the IM Advice (above) was critical. The Appellants appealed.

Simler LJ, dismissed the appeal and agreed with Zacaroli J that it was unreasonable for the Appellants to rely on the defendant’s advice without independent enquiry, and, that it was not reasonably foreseeable by the defendant that they would do so.

Simler LJ commented that the Schemes were not directed at vulnerable people of modest means, but high net worth individuals who had, and were required to make use of, their own professional advisors.

In these circumstances, the requirements for an assumed duty of care to a third party were not satisfied.

However, the decision serves as a reminder to professionals that the requirements for an assumed duty are heavily fact specific and to tread with caution when providing advice that they are aware will be made available to third parties - especially when it is without any express disclaimer of responsibility, and knowing that the third party would ‘take comfort’ from that advice.

Authors: Amy Childs and Jennifer Boldon

Negligent drafting: loss needed in addition to a breach of duty for there to be a successful professional negligence claim

Cutlers Holdings Ltd (formerly Sheffield United Ltd) v Shepherd and Wedderburn LLP [04.04.23]

Sheffield United Ltd (SUL) and its parent company brought professional negligence claims against Shepherd and Wedderburn LLP, a firm of solicitors (the firm) instructed to negotiate and draft an investment and shareholders agreement (ISA). This was in relation to the purchasing of shares in Sheffield United Football Club (the Club) by a company, UTB.

SUL owned the Club, and the ownership of the Club was separated from the ownership of the stadium by the creation of Blades, a new subsidiary of SUL. SUL’s shares in the Club were transferred to Blades while SUL retained the stadium. UTB agreed to purchase 50% of the shareholding of Blades. The stadium was to be resold to the Club under the new ownership.

There was a dispute concerning the wording of the ISA and UTB brought proceedings against SUL to enforce the purchase contract. The judge found in favour of UTB.

Subsequently, in the case brought against the firm, the court held that the firm had breached its duties in the drafting of the ISA. This had enabled UTB to avoid purchase of the stadium, by avoiding the exercise of property options, drafted by the firm, which were intended to ensure that the stadium would remain united with the Club in the event of a sale of the remaining shares to UTB. The firm had also failed to warn SUL of the risk that UTB may use ‘Device 1’ - where it transferred 80% of its shareholding in Blades to a new group company - as an option to avoid purchasing the properties, and further failed to warn of the own-interest conflict once it became apparent that there was significant risk it had been negligent.

However, judgment was in favour of the firm as, crucially, the firm's negligence had not caused SUL any loss. It was found that the outcome of the litigation brought by UTB would have remained the same had SUL instructed different solicitors to act.

This case is a useful reminder of the need for there to be a loss caused by the breach of duty for a successful claim and the importance of very careful drafting to ensure that agreements reflect the intentions of the parties.

Authors: Bushra Jalil and Jennifer Boldon

To condone or not to condone – fraud is the question

Discovery Land Company LLC & ORS v Axis Specialty Europe Se [03.04.23]

This case considered what was meant by ‘condoning’ the action of another in the context of a fraud and dishonesty exclusion in a Solicitors Professional Indemnity Insurance policy.

The insured, Jirehouse, was a solicitors’ practice of two partners, Mr Prentice and Mr Jones. Jones is currently in prison for two multi-million pound thefts from the claimant, who was a client in 2018. The claimant obtained judgment against him, but as Jirehouse was insolvent, the claimant looked to Jirehouse’s professional indemnity insurers to satisfy judgment.

Cover was declined by Jirehouse’s insurers on the basis that, although Mr Prentice had not been involved with the two frauds, they believed that he had condoned them. The cover provided contained a Minimum Terms compliant exclusion clause in respect of fraud and dishonesty. This excluded cover for claims arising from fraudulent acts where it had been condoned by all directors of the company. Insurers argued that Mr Prentice had condoned the fraudulent acts of Mr Jones, and that the wording of the exclusion clause did not suggest that it is only if a person knows of a particular act that he is taken to have condoned it; it was enough to know and condone a pattern of behaviour of which Mr Prentice had turned a blind eye to.

Mr Justice Knowles accepted that the word ‘condone’ should be given its ordinary meaning, but it was important in this case to consider what is required to be condoned in order to trigger the exclusion. It was found that Mr Prentice had lied in evidence in a deliberate attempt to downplay his involvement, but did not have sufficient awareness that financial problems, of which he knew about, were such that Mr Jones might steal client funds. He further did not make enquiries and follow up when financial issues came to light as he lacked the necessary sense of professional responsibility.

The Court held that Mr Prentice’s standards fell well below those required in his profession, but these episodes were not enough to justify a conclusion that he appreciated  Mr Jones was engaging in the fraudulent misappropriation of client funds. Mr Prentice did not specifically approve of the particular dishonest acts in question. Insurers could not therefore rely on the exclusion to avoid cover and they were obliged to provide indemnity.

This decision provides insurers with important guidance on the meaning of ‘condone’ in the context of the dishonesty clause in the Minimum Terms compliant exclusion clause. It appears that unless there is clear evidence of actual knowledge of the specific fraudulent transaction itself, insurers will not be able to argue that a non-fraudulent partner condoned this.

Authors: Bushra Jalil, Jennifer Boldon

Related item: To condone, or not to condone – fraud is the question …

A win for Allianz as court finds WWII bomb damage is to be excluded from cover

Allianz Insurance Plc v The University of Exeter [22.03.23]

This case provides further helpful guidance on the doctrine of “proximate cause” and the court’s approach to establishing it, when there is more than one cause of the loss or damage at issue.

In 2021, an unexploded WWII bomb discovered during construction works at the University of Exeter, was destroyed in a controlled detonation by contractors, causing damage to University halls and surrounding buildings. The University made a claim for property damage and business interruption losses under an insurance policy with Allianz.

Allianz declined to provide cover arguing that the dropping of the bomb was either the sole proximate cause of the loss, or alternatively, a concurrent proximate cause of loss, together with the controlled detonation, such that the claim was excluded under the war exclusion clause in the policy. The University disagreed and pointed towards the proximate cause of the loss as being the deliberate human act of detonation.

The court reaffirmed a number of key principles to consider when establishing the proximate cause, including that:

• A “common sense” approach should be used to establish the proximate cause.
• There may be more than one proximate cause of a loss.
• The proximate cause will be the dominant, effective or efficient cause.
• The passage of time does not of itself provide an answer to the question of "proximity".

Applying these principles, the court found in favour of Allianz, determining that the dropping of the bomb 79 years ago was the sole proximate cause of the loss and an “act of war”, such that the war exclusion clause was triggered. The court compelled the parties to see beyond the detonation causing the loss: without the dropping of the bomb during WWII, the detonation and loss would have never occurred.

Alternatively, the dropping of the bomb was “a” concurrent proximate cause. Where there are concurrent proximate causes of loss, and one is insured and the other excluded, the exclusion will prevail.

This case illustrates that identifying the proximate cause of a loss requires a common sense approach. The proximate cause is not necessarily the cause proximate in time to the loss, but rather that which is the efficient cause of the loss, making the loss inevitable.

Authors: Patricia Cornejo Teixido and Jennifer Boldon

 

Related items:

• Directors' and officers' liability report 2023: trends and future risks
• To condone, or not to condone – fraud is the question …