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A roundup of the latest court decisions touching on the following issues:
The interpretation of knowledge when determining directors’ accessory liability, loss of a chance, further interpretation of warranty & indemnity insurance and limitation.
Supreme Court introduces new knowledge requirement for directors ’ accessory liability
Lifestyle Equities v Ahmed & Another [15 May 2024]
The UK Supreme Court has confirmed that a director will only be liable as an accessory to a wrongful act committed by their company if they had actual knowledge of that wrongdoing.
The High Court and the Court of Appeal held that Hornby Street (the Company) and two of its directors were jointly liable to Lifestyle Equities (Lifestyle) for trade mark infringement. The directors were also ordered to account to Lifestyle for the profits that both they and the Company had made.
The Supreme Court unanimously allowed the appeal of both directors, not finding them liable as accessories for the Company’s infringement of Lifestyle’s trademarks or liable to account for profits. Two main issues were considered:
- Is accessory liability dependant on the director’s knowledge of a company’s wrongdoing and
- If the directors were liable, should they be ordered to account for the profits made by themselves and/or the Company?
On Issue (1), the Supreme Court found that in order to be liable as an accessory to a wrongful act for a tort, a defendant must have knowledge of the essential facts which make the act wrongful, even if the tort is one of strict liability. This is because it would be unjust to hold it liable for procuring a wrong where it acted in good faith. That knowledge also includes turning a blind eye to the facts. In this case, neither director had the requisite knowledge of the Company’s trademark infringement, to make them liable as accessories to the infringement.
On Issue (2), the Supreme Court concluded that the directors could only have been liable to account for profits they had themselves received and not profits made by the Company. Otherwise, this would amount to a penalty, which was not the purpose of the remedy.
This decision is good news for directors as they may now protect themselves from a finding of accessory liability, where they have no actual knowledge of the wrongful act committed by their company. However, directors should review their practices to mitigate the risk of them being criticised for “turning a blind eye” to the facts of a tort.
Authors: Martin McKenna, Rekha Cooke
Loss of chance in broker’s professional negligence claims
Norman Hay Plc (in Members’ Voluntary Liquidation) v Marsh Limited [08.05.24]
This recent Commercial Court judgment concerns Marsh Limited’s (Marsh) attempt to strike out/obtain summary judgment in a professional negligence claim.
In November 2018, Mr Kelsall, an employee of a subsidiary company of Norman Hay Plc (the Insured) was killed in a road traffic accident while driving a car in the U.S.A. without insurance. Serious injuries were sustained by another driver, Ms Sage.
Ms Sage issued proceedings against the Insured on the basis that Mr Kelsall was driving during the course of his employment. A settlement agreement was reached, under which Ms Sage received damages of $5,500,000.
The Insured issued proceedings against Marsh for breach of contract and/or negligence when advising, placing and renewing their worldwide insurance cover. This was based upon a failure to consider the use of hire cars by employees when travelling.
Picken J held that it was not appropriate to strike out the Insured’s claim or to order summary judgment against it.
The Judge held that the usual position under a liability policy is that the Insured has to establish third party liability in order to recover from insurers. However, the position is not the same in an insurance broking claim. The Judge held that there was scope for broader enquiry in broking claims as to what would have happened, but for the negligence, in the event that the Insured presented a claim to their insurers. This required an assessment of the chance that the insurers would have met the claim.
Picken J further distinguished between liability on the balance of probabilities and a loss of chance. Where a claimant can prove that, on a balance of probabilities, they would have recovered under the insurance policy but for the broker’s negligence, then the claimant will recover in full.
If this cannot be established but the court concludes that the claimant has nonetheless been deprived of the chance to recover had insurance been in place, then there will still be a recovery. However, recovery will not be in full and will be arrived at on a loss of chance (and so percentage) basis.
This case confirms the extended scope for enquiry which can be applied when considering liability in a broker’s negligence claim and, in particular, the importance of assessing what would have happened in the event that a claim was presented to the insurer.
This judgment has been appealed and is scheduled to be heard by the Court of Appeal in January 2025.
Authors: Lara Francioni, Fleur Rochester
A final cure for the interpretation of warranty and indemnity insurance
Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd [02.05.24]
This decision involved an apparent conflict between the cover available under an Anti-Bribery and Anti-Corruption (“ABC”) warranty and what was excluded by an ABC exclusion clause.
As discussed in our previous Latest Decisions piece, Project Angel Bidco Ltd (the Insured) agreed in November 2019, via a Share Purchase Agreement (SPA), to purchase King Construction. The SPA included numerous warranties and the Insured took out a Buyer Side Warranty and Indemnity (W&I) insurance policy (the Policy).
The Insured subsequently alleged that certain ABC warranties had been breached, that the shares in King Construction were worthless, and made a claim for indemnity under the policy. Insurers sought to rely on the ABC exclusion to decline cover.
The Insured argued that there was a contradiction between the extent of cover provided by the ABC warranties in the cover spreadsheet, and the ABC liability exclusion, which amounted to a clear drafting error. It sought to rectify the contractual definition of "ABC Liability" so that it had the following effect:
Instead of excluding “any loss arising out of “any liability or actual or alleged non-compliance”, the policy would be rectified to exclude loss arising out of “any liability for actual or alleged non-compliance”.
The court heard evidence from underwriters and concluded that the policy had been heavily negotiated by insurers and the broker. Further, that the underwriters had a coherent and rational reason for wanting to avoid liability for loss arising out of an ABC liability. The court held that there was no obvious drafting mistake in the policy and no obvious correction. The ABC exclusion was left as it was. Its effect was that it excluded the loss and the Insured’s appeal was dismissed.
This decision illustrates that when interpreting insurance policies:
- The location of the clause can be relevant but is not determinative
- Where the language of a clause is unambiguous (like in the ABC exclusion), the court will apply it and
- There remains a high evidential hurdle for rectifying mistakes of drafting.
Authors: Abbie Law, Nicola Pangbourne
Related items:
- Obvious mistake? English Court of Appeal clarifies position on alleged drafting “errors” in warranty and indemnity insurance policies
- Professions and Financial Lines Brief: latest decisions March 2024
Standard of care and limitation revisited
Riad Tawfiq Al-Sadik v Clyde & Co LLP & Ors [12.04.24]
In this recent case, the Commercial Court dismissed a professional negligence claim valued at £88 million. The claim was brought by Mr Al-Sadik (the Claimant) against his solicitor and Counsel (the Defendants) with issues around limitation and negligent advice.
The Claimant’s case arose from earlier unsuccessful legal proceedings in the Cayman Islands in 2009 and before the Privy Council in 2018. He contended that he suffered large losses in investments due to substandard legal advice and representation, resulting in significant financial losses. The central issues were whether the case was time-barred, whether the legal team had breached their duty of care and whether such breaches had caused the Claimant’s losses.
Deputy Judge Sean O’Sullivan KC delivered a detailed judgment that dismissed the Claimant’s claims. The court found that the legal advice and actions taken by the solicitors and counsel were within the range of reasonable professional judgment. It was emphasised that the Defendants had acted by the standards expected of competent legal professionals under the circumstances.
The judgment highlighted several key points:
- Standard of care
The decisions of the Defendants were deemed reasonable given the complex and evolving nature of the underlying legal disputes
- Causation
The Court concluded that even if there had been any breach of duty, the Claimant failed to establish that such breaches had caused his alleged losses
- Limitation Act 1980
The Court considered Section 14A Limitation Act 1980, relating to the date of knowledge of the Claimant and determined that the Claimant had knowledge of the material facts pursuant to a claim against his legal team back in December 2011, when his application to amend the claim failed. The Judge rejected the Claimant’s argument that he only acquired the knowledge of material facts when he obtained independent legal advice in 2019
- Continuing duty
The Claimant also argued that the Defendants owed a continuing duty of care as part of their retainer. The Court concluded that there is no continuing duty to advise a client as to whether it has been negligent in the performance of its own retainer.
This judgment serves as a significant affirmation of the standards required to establish professional negligence against legal practitioners. It also reinforces and clarifies the principles of limitation. Further, the continuing retainer that solicitors and barristers have does not, generally, mean there is a continuing duty to the client.
Authors: Grebin Cherian, Fleur Rochester
Read other items in Professions and Financial Lines Brief - July 2024
Insurance and reinsurance
Construction and engineering
United Kingdom