Flagging the limits on duty of care

This article first appeared in Insurance Day, February 2021

Insurers will welcome a recent decision in Uralkali v Rowley [2020] relating to the sale of a Formula One racing team that a professional’s duty of care did not protect a losing bidder.

The decision will help with rebutting claims by disappointed bidders, which may be aggrieved after losing out on the opportunity to purchase valuable assets. Professional indemnity and financial lines insurers in particular should monitor this development, which is forecast to reduce the number of liability claims to which they are exposed.

This claim was brought forward by a company, Uralkali, connected to Russian billionaire, Dmitry Mazepin, against the administrators of a Formula One team, Force India. It followed Uralkali’s loss in the bidding race to purchase the team’s assets.

It was held an administrators’ duty of care does not generally protect bidders, but instead administrators are required to “perform their functions single-mindedly in the interests of creditors”.

After Force India had fallen into administration, a number of competing parties wanted to take over the company as a going concern or alternatively to buy up its assets.

That resulted in a bidding race between Uralkali and a company, Racing Point, which was in turn controlled by a Canadian billionaire, Lawrence Stroll.

Racing Point’s bid was ultimately successful. Following that victory, Stroll became the chairman of what is now the Aston Martin Cognizant F1 Team. His son, Lance Stroll, together with Sebastian Vettel, are now the team’s drivers.

The lead administrator, Geoffrey Rowley of FRP Advisory, proceeded on the basis (as laid down by statute) that a bid to rescue the company as a going concern would be preferred and, if that was not possible, a fall-back offer to buy the company’s assets would be accepted instead.

Racing Point submitted a rescue bid, with a fall-back offer for the assets. Uralkali was unable to reach agreement with Force India’s existing shareholders, which was necessary to mount a rescue bid, and so only made an offer to buy the company’s assets.

After the administrators had selected Racing Point as the winning bidder, Stroll decided he would not proceed with the rescue after all. The administrators considered they were then bound to accept Racing Point’s fall-back offer to buy the company’s assets. This deal completed on 16 August 2018 at a price of £90 million.

Uralkali argued the bidding process had been unfair. In particular, Uralkali claimed the administrators had said they would select the winning bid solely on the basis of the highest offer for the company’s assets. As a result, Uralkali alleged it had lost the chance to purchase the company’s assets and so had lost in excess of £10 million.

Following trial, on 15 December 2020 Justice Miles dismissed all claims against the administrators. The judge held unless there are special circumstances, an administrator does not owe a duty to outside parties that may be adversely affected by their actions.

If the administrators in this case had owed a duty of care towards Uralkali they may also have owed duties to a much wider group of potential claimants. That would have unduly constrained their ability to act in the best interests of Force India’s creditors.

The other appointed administrator, Jason Baker of FRP Advisory, had limited actual involvement in the transaction. Significantly, the judge rejected Uralkali’s argument that one joint office-holder could automatically be held liable for the breach of the other. The claims against Baker were also dismissed on that basis.

Uralkali alleged the administrators had breached confidentiality by providing information about its bid to Stroll. The judge rejected that, as he found the administrators were entitled to mention other bidders were exploring the possibility of a rescue bid. That information did not have the necessary quality of confidence, so there had been no breach of confidentiality. On the other hand, the judge held one of Uralkali’s representatives had sought to obtain confidential information about Racing Point’s bid but decided any misconduct in that regard had not affected the outcome.

While Uralkali failed to establish any breach of duty or causation, the judge made one finding in its favour, which was that Uralkali would (if the judge’s other findings had been different) have suffered the loss of a real opportunity to buy Force India’s assets.

That continues the trend of the courts being ready to assess compensation on the basis of a percentage figure for the loss of a chance.

Uralkali has announced it intends to seek permission to appeal.

The decision reinforces the priority of the duties that are owed by administrators to creditors. The judge said: “Parliament and the courts have defined the class of parties who complain about administrators’ conduct… That class does not include potential bidders in a sales process.”

If Uralkali’s arguments had prevailed, it would have reignited the debate about the reach of administrators’ duties and could also have opened the floodgates for losing bidders to bring claims against other professionals who accept bids for valuable assets, such as estate agents, auctioneers, probate professionals and receivers. That is important in turn for those professionals’ advisers, such as lawyers, valuers and property consultants. The refusal to hold one joint office-holder automatically liable for a breach by the other will also put off similar claims in the future.

Insurers and insured professionals alike will be able to point to this decision limiting a professional’s duty of care towards outside parties. That reflects the tendency for the courts to restrict the reach of professionals’ duties of care beyond a closely defined circle, unless that professional has clearly taken on responsibility towards a particular outside person.

This litigation is also a reminder, both to professionals and their advisers, to ensure there is complete record-keeping of all decision-making, even in the face of such intense commercial and time pressures as when selling a Formula One team.

Read other items in Professions and Financial Lines Brief - March 2021