Professions and Financial Lines Brief: latest decisions December 2021
In this briefing, we consider the latest court decisions relating to abuse of process, duties of accountants as introducers, pre-action disclosure, policy interpretation, late notification, reflective loss principle and inducement.
Extrapolated claims are an option
Building Design Partnership Ltd v Standard Life Assurance Ltd [02.12.21]
The Court of Appeal has ruled that a professional negligence claim can be pleaded on an extrapolated basis at the outset. The appeal involved an application to strike out this form of claim or grant reverse summary judgement. Proportionality was a relevant consideration in determining whether there had been an abuse of process (CPR r 3.4(2)).
The allegations were against 167 variations. As a result, Standard Life sought to plead the claim on an extrapolated basis across the remaining 3,437 variations. This was without “investigating or pleading a detailed case” in relation to each allegation.
In the High Court, Kerr J acknowledged that there were aspects that were impermissible, which would ultimately fail at trial. However, it was not appropriate to strike out the whole claim. It was concluded that there was “no abuse of process, incoherence of improper purpose”.
The Court of Appeal followed the two stage test in order to determine whether the claimant’s conduct amounted to an abuse of process, and to exercise discretion as to whether to strike out the claim. It was decided that the extrapolated claim was proportionate in order to address the 3,437 variations and was in accordance with the overriding objective.
The court can strike out a claim if (a) the statement of case discloses no reasonable grounds for bringing or defending the claim or (b) the statement of case is an abuse of the court’s process (CPR 3.4(2)).
Furthermore, the court must determine whether there is a prospect of success for the claim and for the defendant to successfully defend the claim (CPR 24). The judge held that Building Design Partnership knew the case they had to meet and the pleading was not “vague or incoherent”. Therefore, there was no abuse of process.
This case seeks to provide clarification in relation to what basis an extrapolated claim can be brought.
Author: Jessica Moss, Trainee Solicitor
Related item: Kennedys strike out £58m conspiracy claim
Consideration of accountants’ duty when acting as introducers
Knights v Townsend Harrison Ltd [24.09.21]
The claimant suffered losses incurred on three tax schemes and an FX investment scheme introduced by the defendant. The claimant alleged that this was due to the defendant’s failure to conduct adequate due diligence.
The defendant argued that although it was engaged as the claimant’s accountants, it merely introduced them to the tax schemes and FX investment and that their terms of business and limitation of liability letters were clear. Consequently, the defendant denied any duty of care in respect of the introductions or any obligations to carry out due diligence in respect of the investment.
The High Court dismissed the claims and found that the claimant had failed to establish the existence of the duty of care alleged in relation to the tax schemes claim.
In reaching this decision, the court was not persuaded that the defendant had assumed responsibility (see Hedley Byrne & Co Ltd v Heller & Partners Ltd) and the following facts were given consideration:
- The defendant’s engagement letter and the standard terms of business, which made it clear that they would not recommend a particular investment or type of investment.
- The regulatory framework under section 19 of the Financial Services and Markets Act 2000 (FSMA).
- The relevant limitation of liability letters explained in clear terms that the defendant could not advise as to the success or otherwise of any tax planning strategy, and the risks involved, and required the claimant to confirm that it was relying solely on other advice in connection therewith. It was likely that the claimant read these
- A claimant email to the defendant acknowledging that the defendant had no duty to provide advice. Further, the judge found no specific advice had been provided.
- The claimant received advice from another party (scheme providers) and there was insufficient evidence to conclude that the defendant was on notice that the claimant was not relying on the advice of the scheme providers.
- When it was clear that the tax schemes were not working, the claimant did not promptly challenge the advice given.
The judge also held that the claimant was unable to demonstrate the defendant had assumed responsibility to carry out the due diligence.
This case provides guidance regarding the duties of accountants when acting as introducers in relation to tax schemes and highlights the importance of having clearly defined terms of business. It also acts as a reminder to ensure signed limitation of liability letters are received from clients where appropriate.
Author: George Emery, Trainee Solicitor
A reminder that pre-action disclosure is not an exercise to fish for material
Willow Sports Ltd v SportsLocker24.com Ltd and another [23.09.21]
This case relates to an application for pre-action disclosure pursuant to CPR31.16. The crux of the case concerns a license agreement between the applicant and the respondent. The applicant alleged that an agreement had been entered on the basis that onward sales or licensing of the applicant’s broadcasting rights would be made under contract with the US Federal Bureau of Prisons (FBP). The applicant alleged the respondent had represented that they were providing the broadcasts to FBP and profits were not being accounted to the them. The applicant sought an order that the respondent disclose a long and wide reaching list of documents as it was considering bringing three categories of claim:
- A claim for damages or debt.
- Damages for a failure to exercise reasonable care and diligence in the collection of gross revenue from the FBP.
- Damages for (fraudulent) misrepresentation and/or conspiracy.
The application was refused. Although the Deputy Master was satisfied that the court had jurisdiction to make such a pre-action disclosure order, it declined to do so, because, amongst other things:
- There was a real likelihood of the applicant being dissatisfied with any pre-action disclosure provided which risked satellite litigation.
- The court was sceptical of the “extremely wide” nature of the application and was concerned about the potential “roving inquisition”.
- The court considered that the applicant was unsure which course of action to pursue, and was effectively “fishing” for information to help determine the correct strategy.
This case is a helpful reminder to applicants that pre-action disclosure is not a tool for “fishing” and that applicants should avoid making applications for disclosure which are too wide and lack specificity.
High Court considers the construction of insolvency questions in insurance proposals
Ristorante Limited T/A Bar Massimo v Zurich Insurance Plc [21.09.21]
Ristorante Limited (Ristorante) entered into a policy of insurance with Zurich Insurance Plc (Zurich). The proposal form included the following question:
"No owner, director, business partner or family member involved with the business:
(iii) has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation…"
At inception and on renewal, Ristorante responded, indicating that the statement was correct.
In January 2018, Ristorante sought to be indemnified by Zurich following damage caused by a fire. Zurich purported to avoid the policy on the basis that Ristorante failed to make fair presentation of the risk. Zurich had become aware that the Ristorante directors had previously been directors of insolvent companies.
The court found in favour of Ristorante, concluding that Ristorante had interpreted it correctly in answering only about insolvency events of individuals involved with Ristorante. Further, it was held that in asking this question in the way it had, Zurich had waived its entitlement to be told about any other insolvency events not specified.
The court also held that Zurich should have been aware of case law developments concerning the construction of insolvency questions to potential insureds.
This outcome is a stark reminder that insurers should pay close attention to the wording of proposal forms, as well as policy wordings, and should be well acquainted with developments in relevant case law.
Author: Aylish Power, Trainee Solicitor
An insured’s failure to notify pursuant to a condition precedent in a public liability policy
Arch Insurance (the Insurer) v Philip McCullough [14.09.21]
Mr McCullough, the owner of a motorbike track, held a public liability policy (the Policy) with the Insurer. In October 2019, a young girl suffered life changing injuries on the track. While Mr McCullough was aware of the incident, he asserted that he did not believe a claim would materialise.
He therefore notified the Insurer 11 months after the incident. The Insurer brought a Part 8 claim for a declaration of non-liability on the basis of non-compliance with the notification provisions of the Policy, which were expressly stated to be a condition precedent to the Insurer’s liability under the Policy.
The court found in favour of the Insurer on two fronts:
- Mr McCullough had failed to notify a circumstance which might give rise to a claim as soon as reasonably practicable.
- The notification clause was a workable condition precedent, so the Insurer was entitled to a declaration that it was not liable to meet the claim.
Cockerill J held that the notification clause was a condition precedent because: (i) there was clear conditionality between the notification requirement and liability (ii) it was workable and clear and (iii) it had a clear commercial purpose allowing the insurer to investigate the potential claim.
This case is a reminder to insureds that they should notify circumstances and/or claims promptly, and in accordance with policy terms and conditions.
Furthermore, it provides a confirmation that insurers may rely on a breach of condition precedent to insurers’ liability to provide a complete policy defence, and without having to additionally prove “prejudice”. This is notwithstanding the changes implemented by section 11 of the Insurance Act 2015 which provided that insurers cannot rely on breaches of policy terms that could not have increased the risk of the loss, which actually occurred, to defeat claims.
This decision is timely given we are currently seeing multiple late notification issues due to the disruption caused by the COVID-19 pandemic.
Author: Maeve Morrisey, Trainee Solicitor
The Privy Council further refines the principle of “reflective loss” following the landmark Supreme Court decision in Sevilleja v Marex Finance (Marex)
Primeo Fund (in official liquidation) v Bank of Bermuda (Cayman) Ltd & another [09.08.21]
Primeo (a Cayman Island company) was an investment fund and the respondents are professional service providers. The first respondent (R1) and the second respondent (R2) were appointed as Primeo’s administrator and custodian respectively. Primeo placed a proportion of its funds with Bernard L Madoff Investment Securities LLC (BLMIS) for investment. In 2007, Primeo’s direct investments in BLMIS were transferred to Herald Fund SPC (a feeder fund) as consideration for new shares in Herald (the Herald transfer). In 2008, BLMIS collapsed when Mr Madoff’s Ponzi scheme was discovered. Primeo suffered heavy losses and was placed into voluntary liquidation on 23 January 2009.
Primeo claimed losses suffered by making direct and indirect investments with BLMIS. Primeo submitted that, had R1 and R2 performed their duties properly, the problems with the investments would have become apparent. It would then have withdrawn its investments with BLMIS.
After the Grand Court dismissed Primeo’s claims in 2017, Primeo appealed to the Privy Council. The key issue was whether Primeo could claim against R1 and R2 for losses suffered through direct investments with BLMIS before the Herald transfer.
The Privy Council allowed the appeal and held that Primeo could claim in respect of the direct investments it made in BLMIS and for losses up to the time of the Herald transfer in 2007. The Privy Council also held that the Court of Appeal was wrong to hold that the common wrongdoer requirement was satisfied in relation to R1 and R2, respectively.
This Privy Council decision confirms that whether a claim may be advanced using the principle of reflective loss depends upon the claimant’s status at the time of the loss, rather than the time any claim is advanced. The case demonstrates that the principle has a narrow application as a defence to shareholder claims and will apply only when a claim concerns a wrong committed against both the company and the shareholder by the same wrongdoer.
Author: Edward Hitchen, Trainee Solicitor
High Court rules on policyholder misrepresentation in a consumer insurance policy
Jones v Zurich Insurance [18.05.21]
The claimant was insured under a policy with Zurich (the Policy). The claimant’s brokers presented the risk in 2018, where in response to the question “Any … claims in the last 5 years” the claimant answered “No” under the No Claims Declaration (NCD). Zurich agreed to provide cover and issued a Statement of Fact, recording the NCD which the claimant was told to correct if inaccurate (which he did not). The NCD was, however, inaccurate, as the claimant had in 2016 recovered £15,000 for the loss of a diamond.
In 2019, the claimant claimed to have lost a watch whilst skiing, which had an agreed value of £190,000 under the Policy. Zurich rejected the claim and sought to avoid the Policy, arguing that: (i) the claimant’s failure to declare the 2016 claim was a misrepresentation in breach of his duty to take reasonable care not to make a misrepresentation before entering into the policy under the Consumer Insurance (Disclosure and Representations) Act 2012 (the 2012 Act); (ii) the misrepresentation was a “qualifying misrepresentation” (which induced Zurich to enter the Policy); and (iii) if they had known of the misrepresentation Zurich would not have entered the Policy, entitling them to avoid.
The court held that the claimant’s failure to disclose the previous claim amounted to a “qualifying misrepresentation” as underwriters were able to provide contemporaneous evidence that they would not have entered the Policy had they known of the 2016 claim. Whilst Zurich were able to avoid the Policy, as they had not pleaded “deliberate or reckless misrepresentation”, Zurich’s remedy was confined to that for careless misrepresentation: namely, they could avoid the policy but had to reimburse the premium. Had it been a fraudulent misrepresentation, then they could have kept the premium.
This case provides guidance to insurers on how to evidence inducement in an avoidance case, and confirms that insurers must specifically plead deliberate or reckless misrepresentation.
Author: Suleen Latif, Trainee Solicitor