Professions and Financial Lines Brief: latest decisions May 2022

In this briefing, we consider the latest court decisions raising issues for the Quincecare duty, contribution claims against counsel, non-disclosure of material facts, COVID-19 business interruption losses and aggregation of claims.

Revisiting the Quincecare duty

Philipp v Barclays Bank Plc [14.03.22]

This decision concerns the ‘Quincecare duty’ (Barclays Bank v Quincecare [1992]) and whether it should be extended to cover authorised push payment (APP) fraud (a fraudulent payment that has been directly authorised by the customer).

The Quincecare duty obligates banks to make inquiries and refrain from executing an order, where it has reasonable grounds to believe that the order may be an attempt to misappropriate the customer’s funds.

The claimant was a victim of an APP having been fraudulently induced into authorising a payment of £700,000 from her Barclays account to bank accounts in the United Arab Emirates.

She subsequently brought a claim against Barclays alleging that it had breached its duty of care to protect her from the consequences of the fraudulent payments. Relying on the Quincecare duty, she argued that Barclays should have had policies and procedures in place to detect and prevent APP fraud.

Barclays applied to strike out the claim arguing that the duty was restricted to cases where the payment instruction was made by an agent of a customer. At first instance, the High Court found in Barclays’ favour but the claimant appealed the decision.

The Court of Appeal set aside the summary judgment, finding that the Quincecare duty is not limited to instructions given by an agent but may also apply to any situation where the bank is ‘on inquiry’ that executing the payment instruction would result in the misappropriation of the customer’s funds.

It therefore follows that the duty may arise where the customer is unwittingly complicit in their own defraudment by authorising the fraudulent transfer themselves.

This decision proposes a wider application of the Quincecare duty irrespective of who makes the payment instruction, potentially exposing financial institutions to increased claims by victims of APP or similar frauds. It should act as a prompt for financial institutions to ensure that they have robust procedures in place and to take steps to detect and prevent fraudulent payments, even where instructions are received directly from the customer.

Greater clarity on the scope of the duty will be determined following full examination of the facts at trial.

Authors: Sheena Purohit and Jeremy Riley

Related items:

• The buck stops here: the limits of bankers’ Quincecare duty for push payment fraud
• Bankers beware: the Quincecare duty to query suspicious client requests

No duty owed to investors by a barrister advising tax scheme avoidance promotors

McClean & Others v Thornhill [08.03.22]

The investors in a series of film finance tax schemes sued the barrister, Mr Thornhill QC, who had prepared opinions for the promoter of the schemes. These were then shared with all prospective investors. The schemes eventually failed and HMRC pursued the investors for the tax they had underpaid. The claimant investors asserted that the barrister assumed a third-party duty to them. The court disagreed, finding that the barrister owed no such duty, and that even if he had, the views expressed in the opinions were not unreasonable.

The court however accepted that the claimants were justified in believing there was an assumption of responsibility, because the barrister, in an information memoranda, consented, clearly and in writing, to his opinions being shared with prospective investors. However, on proper analysis there was no assumption of responsibility. The investors were recommended to take (and all warranted they had taken) their own advice. Furthermore, they could only have gained access to the schemes through an independent financial adviser (IFA), and it was reasonable to expect that the IFAs would have either given or obtained the necessary advice. Therefore, it was found that the barrister did not owe a duty of care.

This is a striking judgment for the judge’s tax analysis undertaken for the purposes of determining breach issues. Zacaroli J rejected the claimants’ contention that the barrister’s advice must have been negligent given the claimants felt obliged to settle with HMRC in 2017. Instead, the judge re-immersed himself in 2002 – 2004 common law jurisprudence/authorities (and HMRC’s approach to film finance tax schemes) as this was the context in which these schemes were conceived and in which the barrister provided his advice.

It is trite to state that this must be the approach that the court should take in assessing the reasonableness of advice given nearly 20 years earlier, but it is reassuring for defendant professionals to see that task faithfully carried out in practice.

This decision will be of interest to professional liability insurers and legal practitioners - particularly those involved in tax-related professional negligence claims.

Authors: Shaira Begum and Jeremy Riley

Court of Appeal upholds first avoidance decision due to breach of duty of fair presentation

Berkshire Assets (West London) Ltd v AXA Insurance UK Plc [07.03.22]

This case was the first to consider issues of materiality and inducement under the Insurance Act 2015. However this was not a valid reason for giving permission to appeal and the Court of Appeal upheld the judgment at first instance.

The insured, Berkshire Assets (West London) Ltd (BAWL), a Special Purpose Vehicle, had taken out a contractors’ all risks (CAR) policy with AXA in joint names with the contractor for a property development project in West London.

A few months prior to renewal on 9 August 2019, four criminal charges were filed against the director of the Insured, Mr Sherwood, by the Attorney General of Malaysia, arising out of the 1MDB fraud, in which billions of dollars went missing from a state fund. These charges were unrelated to his activities at BAWL and such proceedings were discontinued on 9 October 2020.

On 1 January 2020, there was an escape of water through a sprinkler pipe at the property and BAWL claimed under the policy. AXA denied liability on the grounds that had it been made aware of the charges against Mr Sherwood, it would not have renewed the policy in November 2019.

The court concluded that the circumstances were material within the meaning of the Act and ought to have been disclosed. AXA would not have accepted the risk if the charges against Mr Sherwood had been disclosed, in accordance with the underwriting policy. The fact that AXA subsequently declined cover supported this conclusion.

This decision makes clear that facts raising doubt as to the risk are sufficient to be material and should be disclosed to an insurer before a contract of insurance is entered into.

Authors: Calyx Tucker, Maria Montero Bedon, William Brown and Anthony Mann

Related item: Court of Appeal upholds first avoidance judgment for breach of duty of fair presentation under the 2015 Act

High Court rules in favour of policyholders for COVID-19 business interruption losses

Corbin & King Limited & Ors v AXA insurance UK PLC [25.02.22]

Corbin & King Limited and subsidiaries (Corbin & King) owned and operated a number of restaurants across London.

In February 2020, Corbin & King accepted an insurance policy with AXA Insurance (AXA) that included a non-damage denial of access (NDDA) clause in the following terms:

“We will cover you for any loss insured by this second resulting from interruption or interference with the business where access to your premises is restricted or hindered for more than the franchise period shown in your schedule arising directly from the actions taken by the police or any other statutory body in response to a danger or disturbance at your premises or within a 1 mile radius of your premises”.

Corbin & King sought to be indemnified by AXA for business interruption (BI) losses arising from restrictions on access to premises under government COVID-19 regulations. AXA denied cover.

Corbin & King argued they were entitled to indemnity if they could demonstrate that the presence or risk of COVID-19 within a one-mile radius of each of their premises, combined with that elsewhere in the UK, were an effective cause of the regulations that led to restriction of access. AXA contended that the clause provided only localised cover and the presence or risk of COVID-19 in the UK as a whole was irrelevant.

The court found in favour of Corbin & King and held that the NDDA clause provided effective cover.

In coming to its decision, the court determined that the differences in arguments and clause wording meant it was free to depart from the decision of the Divisional Court in the FCA test case. The court instead adopted the Supreme Court’s broader approach to causation, concluding that COVID-19 was capable of being a “danger” within one-mile of the insured premises which, coupled with other uninsured, but not excluded, dangers outside of the one-mile radius, led to the regulations which caused the closure of the premises.

The court also concluded that the policy was a composite policy with a separate limit of £250,000 in respect of each of the insured premises.

This case serves as an important authority in relation to COVID-19 BI claims, potentially giving rise to a significant increase to insurer’s exposure in these types of cases.

Authors: Ellie Sowden and Katherine Proctor

Related item: Corbin & King decision departs from FCA test case rationale on Prevention of Access Clauses

High Court ruling on when a contribution claim can be brought after bona fide settlement to an underlying claim

Percy v Merriman White [20. 01.22]

Here, it was decided that a barrister was liable to pay a 40% contribution in respect of his negligent advice. The case provided confirmation of the basis on which a party can bring a contribution claim. Where there is a bona fide settlement, the party seeking contribution only needs to ascertain that the underlying claimant had a reasonable cause of action against it on the basis of the assumed facts. 

In 2018, Mr Percy instructed Merriman White (the Solicitors) and barrister David Mayall to act on his behalf. Mr Mayall was instructed to provide advice and court representation in respect of a commercial dispute regarding a joint venture (JV). 

In mediation, Mr Percy was offered £500,000 to settle the claim. This offer was rejected and, based on the advice of both Mr Mayall and the Solicitors, Mr Percy sought to bring a derivative claim against Mr Trevor, the underlying claimant. Permission for this claim was refused by the judge for failing to meet the relevant threshold test. The judge recommended the JV be wound up. 

Mr Percy then brought a negligence claim against the Solicitors and Mr Mayall, the basis of which was that with non-negligent advice and representation, Mr Percy would have secured a more favourable result. The claim against the Solicitors was settled before trial and Mr Percy agreed not to pursue Mr Mayall.

Pursuant to section 1(4) of the Civil Liability (Contribution) Act 1978, the court held that the Solicitors were entitled to claim a contribution from Mr Mayall. This was because Mr Percy’s claim disclosed a reasonable cause of action against the Solicitors, despite it being resolved by a bona fide settlement.

“In arriving at a bona fide settlement C [Mr Percy] and D1 [the Solicitors] will respectively have assessed the relative strength or weakness of their respective cases in the litigation and have brought into account the commercial considerations bearing upon it. If the settlement involves a payment by D1 to C, then a claim by D1 for contribution to it by D2 will be one to which section 1(4) applies”.

Judge Briggs found that responsibility for the loss and damage suffered by the client fell more upon the solicitors. However, he ordered that Mr Mayall contribute 40% towards the settlement reached with Mr Percy.

This decision is of interest to professional liability insurers as their insured clients may be liable to a contribution claim despite their being a settlement in the matter. The key take away from this case is to maintain vigilance on matters, even if a settlement has been made, as a bona fide settlement will not nullify a contribution claim. 

Authors: Jessica Randall and Jeremy Riley

An ‘aggregate win’ for RSA: clarification on “original cause” wording in aggregation clauses

Spire Healthcare Limited v Royal & Sun Alliance Insurance Limited [11.01.22]

Spire Healthcare Limited (Spire), an operator of private hospitals, held a liability insurance policy with Royal & Sun Alliance Insurance Ltd (RSA). The policy was subject to a limit of indemnity of £10 million for "each and every claim" with an aggregate limit of £20 million. The wording in the policy applied to aggregate claims “…consequent on or attributable to one source or original cause”.

Spire sought an indemnity from RSA following the settlement of claims brought against Spire due to the behaviour of a breast surgeon, Mr. Paterson, who carried out procedures at two of Spire’s hospitals. Spire argued that it was entitled to the £20 million limit of indemnity as there were two distinct categories of claims. These were:

1. Mr. Patterson’s negligent actions in performing “cleavage sparing mastectomies” which left breast tissue in cases where a full mastectomy should have been performed.
2. Mr. Paterson’s deliberate actions in performing surgery on patients who had been falsely told they had a cancerous/pre-cancerous condition. RSA’s position was that all of the claims were attributable to one source and therefore the £10 million limit of indemnity applied.

Litigation arose between Spire and RSA, and at first instance the judge rejected RSA’s argument that the claims should aggregate. The judge found that Mr. Paterson had different motivations in relation to the two sets of claims and that these claims had distinct originating causes.

The Court of Appeal overturned the first instance decision, noting that the wording “one source or original cause” was widely drawn and that all the claims were attributable to one source, being Mr. Paterson dishonestly operating on patients without informed consent. In coming to this decision, the Court of Appeal reaffirmed principles of aggregation including that the “original cause” does not need to be the sole cause of the liability but there should be some causal connection between the originating cause and loss. The court also commented that “source” and “original cause” were interchangeable. 

This case provides important guidance on the interpretation of aggregation wording and serves as a reminder to Insurers to consider which types of claims could be brought against their Insured to determine which aggregation wording is suitable. 

Authors: Remi Brookes, David Robinson and Simon Gibson

Related item: Spire v RSA: an ‘aggregate win’ for RSA

Read other items in Professions and Financial Lines Brief - May 2022