A roundup of the latest court decisions touching on derivative claims, valuer’s scope of duty in the context of bridging loans, duty of a prudent insured, the indemnity principle under the solicitors minimum terms policy, retrospective application of the Building Safety Act and breach of a director’s statutory duty.
Court of Appeal re-affirmed derivative claims is a risky business for applicants
ClientEarth v Shell Plc [15.11.23]
In July 2023, the High Court refused permission for ClientEarth (minority shareholder) to continue a derivative action against 11 Shell directors who ClientEarth alleged had breached the duties owed to the company under the Companies Act 2006. The Judge also decided on an adverse costs order against ClientEarth’s application. For the facts of this case, see our previous article.
Following the High Court’s re-affirmation of its dismissal, and where permission to appeal to the Court of Appeal was also refused, ClientEarth applied directly to the Court of Appeal. Permission was again refused.
The Court of Appeal maintained that:
- There was evidence of some basis on which the directors could reasonably have come to the conclusion that the actions they took had been in Shell’s interest. Further, expert evidence would have been needed on the facts of this particular case – to which ClientEarth did not present any such evidence.
- A court will not grant mandatory injunctive relief if constant supervision is required or where imposing such compliance would have serious impact on the success of the company.
- The Judge was satisfied the appellant had not adduced sufficient evidence to counter the inference of collateral motive, i.e. to advance its policy agenda rather than to enhance or protect the value of its very small shareholding.
- The Judge had cogent reasons for the order made. The amount of costs was a matter for assessment/agreement, as he did not attempt to quantify the costs, nor order a payment on account. Further, the court was disinclined to interfere with discretionary decisions as to costs.
Consequently, the Court of Appeal has strengthened the notion that such derivative claims carry significant financial risks for applicants. The derivative claim structure, previously a viable means of challenging organisations on their ESG policies, will now carry risks of an adverse costs order if incorrectly executed. This may be a significant disincentive for parties seeking to rely on these types of claims.
Author: Haric Papa and Matt Deaville
Court provides clarification on valuers’ scope of duty in the context of bridging
Hope Capital Ltd v Alexander Reece Thompson LLP [27.09.23]
The defendant valuers (ART) were instructed by the claimant (Hope) to provide a valuation (the Valuation) on a Grade II listed hall in Surrey (Cedar House). ART valued Cedar House at £4 million.
In 2018, Hope lent £2.4 million (the Loan) to St Anselm Heritage Properties Limited, owned by an individual, Evalengos Pieri (the Borrower) which was secured against Cedar House. The Borrower had a long term lease over the property, with the National Trust being the freehold owner.
The Borrower defaulted on the Loan in 2018. The Borrower then, without the approval of the National Trust, carried out building works to Cedar House, which resulted in the service of a second Section 146(1) notice (the Notice) shortly after LPA Receivers took possession of Cedar House. This, as well as, the COVID-19 pandemic resulted in Cedar House being sold for £1.4 million in 2020.
Hope alleged the Valuation was negligent and but for the Valuation, Hope would not have advanced the Loan. Given the crucial nature of the Valuation, Hope held ART liable for the entirety of Hope’s losses, pleaded at £3.9 million.
ART admitted breach but argued that the majority of the losses fell outside of its scope of duty. Instead, Hope’s losses were caused by the Borrower’s actions which resulted in the Notice and the impact of COVID-19.
Constable J agreed and held that Hope’s losses fell outside of ART’s scope of duty. Therefore, there was no actionable loss.
Constable J rejected the argument that the Valuation was the only “green light” upon which the advancement of the Loan turned and instead, stated that a lender’s own role must be considered. The judgment was critical of Hope for ignoring evidence of the Borrower’s dishonesty and the lack of an exit strategy, devised by Hope.
Constable J also held that at the time Hope took possession, the value of Cedar House exceeded that of the Loan. Due to the inconsistency and unreliability of evidence, Hope also failed to establish entitlement to contractual interest of loss of profits damages. The claim was therefore dismissed.
Clearly this is a fact specific decision but there is no doubt that it also addresses a number of issues which the rapid expansion of short term lending has presented to valuers and insurers. Even where negligence is admitted, this may not go far enough in proving actionable loss.
Author: Michael J. Smith and Kate Courtman
Related item: Bridging finance and valuers’ scope of duty clarified
The Building Safety Act in the Court of Appeal
URS Corporation Ltd (URS) v BDW Trading Ltd (BDW) [27.09.23]
BDW are developers responsible for constructing various apartments around the UK, some of which have been designed by “URS”. Following the Grenfell Tower disaster in 2017, BDW conducted investigations into its developments. BDW discovered the structural design of two developments had been negligently performed by URS, causing health and safety risks. Remedial work was undertaken by BDW at significant cost. BDW sought to recover their costs and commenced proceedings against URS in negligence. BDW succeeded at first instance.
URS appealed the first instance decision, as well as the Court’s decision to allow BDW to amend its pleadings. URS’s appeal failed on all grounds. The key takeaways from the decision are as follows:
- A developer does not have to have a proprietary interest in the property to have a claim for its costs of remediating a defective building, so long as they had a proprietary interest at the time the cause of action arose.
- In cases involving physical damage the cause of action will arise upon the physical damage occurring, whilst claims in relation to defects not involving physical damage (i.e. pure economic loss – as was the case here) it will generally accrue, at the latest, upon practical completion when the works in question are handed over to the employer.
- With regard to the Defective Premises Act 1972 (DPA):
- The retrospective action of the 30 year extended limitation period provided for under the amendment introduced by the Building Safety Act 2022 extends to proceedings commenced prior to the amendment being introduced.
- The duties owed under the DPA apply to both developers and commercial entitles as well as individual purchasers.
- The rights provided for by the DPA are not conditioned on ownership and remain actionable after ownership has passed.
- A formal claim by a third party is not required before the right to claim contribution under the Civil Liability (Contribution) Act 1978.
Whilst this decision is positive for developers, it represents an inevitable cause of concern for insurers facing previously statute-barred claims which will now have additional time in which to be brought.
Authors: Isobel Budgen and Emily Harris
Is a success fee contractually owed to a firm of solicitors if ascertained by misrepresentations? If deprived of the fee, will this be an insured loss?
Royal and Sun Alliance Insurance Limited & Ors v Tughans (a firm) [31.08.23]
The main issues relating to the coverage dispute between Tughans (a firm of solicitors in Northern Ireland) and their insurer, RSA were considered previously before the Commercial Court on 14 October 2022. Our case review on this decision can be found here.
This decision was appealed by RSA, to the Court of Appeal and heard on 31 August 2023. RSA argued that as the fee (received by Tughans’ partner as a result of a transaction they advised on) was procured by misrepresentation, Tughans were not entitled to it and had no right to retain it. RSA further contended that if Tughans was obliged to return the fee, as part of a separate damages claim, it had not lost something to which it was entitled. RSA argued that to cover this loss, would be a violation of the ‘indemnity principle’ – that a policy of indemnity insurance would only indemnify an insured’s actual loss.
LJ Popplewell agreed with J Foxton’s findings in the Commercial Court judgment and rejected RSA’s arguments, stating that “a solicitor who has earned a fee, so as to be contractually entitled to it, does indeed suffer a loss if deprived of it by reason of a liability claim. This is because the fee has been earned, and consideration has been given by the solicitor providing the solicitorial services. The fee, if earned and due, represents the value of services provided.”
In considering matters of public policy, LJ Popplewell agreed with J Foxton that the purpose of the solicitors compulsory professional indemnity insurance scheme is to “secure that the solicitor is financially able to compensate the client for any liabilities found to be owed by the client.”
LJ Popplewell also stated that if successful, RSA’s position would leave other partners, who had no involvement in the underlying acts or omissions and who had not benefitted from the fee, exposed to a liability for which indemnity cover was unavailable.
There will now be very few circumstances in which professional liability insurance providers can legitimately decline an indemnity in respect of any claim against the insured professional for reimbursement of fees. Although an unwelcome development for these insurers, the judgment provides certainty in this area of law and enforces public policy considerations that were already long established in the context of professionals. There is potential that the judgment will be appealed to the Supreme Court. However, for now we will have to wait and see.
Authors: Victoria Pryor and David Robinson
- When will a solicitor’s professional liability policy respond to a loss which comprises the solicitor’s own fees?
- Professions and Financial Lines Brief: latest decisions December 2022
Directors’ divestment and the route to claims: how a breakthrough claim may have opened avenues into holding executives accountable
McGaughey & Davies v Universities Superannuation Scheme (USS) Ltd and Directors [21.07.23]
The University Superannuation Scheme (USS) is the largest private pension scheme in England, with over half a million members. Two of those members, Professor Neil Davies and Dr Ewan McGaughey became displeased with USS LTD and sought to bring a claim against the Corporate Trustee Company by a derivative action on the following grounds:
- USS’s failure to divest from fossil fuels, despite the financial risk and resounding results of a members ethical survey.
- USS’s directors wasted beneficiaries’ money by putting their beliefs regarding fossil fuel investment ahead of the interests of the company.
The trigger for the claim was the USS suffering losses in the hundreds of millions in their investments (including those in fossil fuels) and the subsequent impact on benefit pension thresholds and accrual rates. In 2022, the High Court refused the claimants permission to bring the derivative action against the directors, because:
In 2023, the Court of Appeal upheld the High Court decision, primarily because the claim was brought via the wrong legal mechanism. This nuanced technical point saw Asplin LJ advise that the claimants were better off pursuing a ‘beneficiary derivative claim’.
Asplin LJ also dissented that where a trustee company (USS Ltd) is created solely to administer the trust in question, it is possible that the company's claims against the directors may be held on trust, opening up the possibility of a dog-leg claim. The benefit of these claims is that a beneficiary can pursue the directors personally, as the breach of trust arises from a breach of duty by directors.
Ultimately, this claim was an attempt to question USS’s investment decisions and it should have been brought as such against the company. The case is the first instance in which the Court of Appeal has considered a claim that directors have breached their statutory duties in failing to take steps towards divestment in fossil fuels. Despite being unsuccessful, the claim may pave the way for future derivative actions.
As such, directors and insurers should pay extra consideration to this possible new avenue of litigation and carefully maintain records of decision making processes, in particular, those pertaining to divestment in fossil fuels.
Author: Tom Fennelly and Matt Deaville
Clarification on the consequences of not gaining insurer consent for settlement agreements and the prudent uninsured
Technip Saudi Arabia Ltd v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [21.07.23]
While carrying out work under its contract with a third party, Technip’s chartered vessel caused damage to a platform on the project’s oil and gas field. Its insurer, Mediterranean and Gulf Cooperative Insurance and Reinsurance Company (Medgulf), initially declined coverage for the damage, advising Technip to act as a prudent uninsured. After settling its liability for the damages, Technip looked to claim indemnity for the US$25 million in settlement funds under the offshore construction insurance policy that Medgulf had underwritten. However, Medgulf again declined coverage, arguing inter alia that as Technip had failed to obtain its consent to reach the settlement, the funds were not within the policy’s definition of “Damages”.
The High Court held that the payment would fall within the categories of compensatory damages and compromise settlements included in the definition. The lack of insurer consent did not exclude it from the policy’s definitional requirements of “compensatory damages, monetary judgments, awards and/or compromise settlements entered with underwriters’ consent…”. Technip was found to have acted in accordance with Medgulf’s initial instructions, as an uninsured person and would have no reason to consult or seek insurer’s consent.
Despite being made in obiter, the Court’s comments concerning insurer consent and the insured’s responsibilities when instructed to act as a prudent insured will likely have an impact on future claims.
While the decision provides them with greater flexibility on these issues, policyholders should still seek to adhere to policy conditions to avoid any issues. When reaching a settlement, the insured will still need to show that it was liable to the third party and that it would have been liable for at least the amount agreed if that dispute had ben litigated. Conversely, insurers should fully consider the matter before denying coverage and instructing policyholders to act as a prudent uninsured.
Author: Graham Cooke and Matt Deaville