Professions and Financial Lines Brief: latest decisions December 2022
A roundup of the latest court decisions and regulations touching on the following issues: the reflective loss principle, solicitor policy coverage, a director’s duty to uphold the interest of a creditor and implied retainers (or the absence thereof) between solicitors and clients.
Court of Appeal rules on whether reflective loss rule will bar claims of former shareholders of a dissolved company
Burnford & Ors v Automobile Association Developments Ltd [14.11.22]
The Court of Appeal (CA) has struck out a claim by a former shareholders of a dissolved company against an investor on the basis that all losses claimed were barred by the reflective loss principle.
The claimants were former shareholders in a company called Motoriety (UK) Ltd (Motoriety). The claimants and Motoriety entered into investment and licence agreements with Automobile Association Developments Ltd (AADL). In 2017, Motoriety went into administration and was purchased by another company in the Automobile Association plc (AA) group.
The claimants brought proceedings against AADL for fraudulent or negligent misrepresentation and/or for breach of contract alleging that they had entered into the investment and licence agreements in reliance on false representations made by AADL. The claimants further alleged that AADL breached implied terms of the investment agreement. In the alternative, the claimants contended that had it not been for AADL’s breach of contract, AADL would have exercised the call option and paid the consideration due.
The claimants sought damages for losses incurred as a result of the fraudulent/negligent misrepresentation and/or breach of contract. AADL denied the claim and brought an application to strike out the claim or for reverse summary judgement on the basis that all the losses claimed were barred by the reflective loss principle.
The High Court granted AADL’s application to strike out the claim on the basis that the alleged losses were entirely derived from the claimed losses of Motoriety and were not separate and distinct losses. The claims therefore satisfied all of the conditions needed (set out in Marex) for a claim to be barred by the reflective loss rule.
The claimants appealed the decision on the following grounds:
- The issue was not suitable for summary determination because it raised fact-sensitive questions and the relevant law is uncertain and developing.
- In any event, the claims were not barred by the reflective loss principle.
The Court of Appeal upheld the High Court's decision to strike out the misrepresentation and breach of contract claim on the basis that all of the claimed losses were barred by the reflective loss principle. Further, the Court of Appeal did not consider that the reflective loss issue was unsuitable for summary judgement as the existence and scope of the principle were recently confirmed by the Supreme Court in Marex. In light of the above conclusions, the claimants’ appeal was dismissed.
The outcome provides welcome clarification for insurers and insureds around the application and scope of the reflective loss principle in relation to misrepresentation and breach of contract claims.
Authors: Francesca Gormally, John Bruce
When will a solicitor’s professional indemnity policy respond to a loss which comprises the solicitor’s own fees?
Royal & Sun Alliance Ltd (RSA) v Tughans (a firm) [09.11.22]
This was the issue at the heart of a coverage dispute in which the High court upheld an award in favour of a Northern Irish law firm, Tughans.
Foxton J held that Tughans’ claim for damages against Brown Rudnick (BR) for fees which it was contractually entitled to was covered under the firm's professional indemnity insurance. He further held that it did not matter if the fees were obtained through the solicitor's fraudulent misrepresentation provided that the solicitor had done what was required under the contract to earn the fees. As such, this decision will not be welcomed by insurers.
Tughans were involved in a dispute with BR over the facilitation of the sale of a portfolio of bank loans. The two firms were engaged to facilitate the sale and to share the success fee payable on completion of the sale. It was alleged that, contrary to the warranties given by Tughans as a condition precedent to the contract, a managing partner at Tughans had always intended to divert part of their fees to a third party. Upon completion, Tughans received their share of the success fee; £7.5 million plus VAT. The transaction was subsequently investigated and a claim was brought against Tughans for misrepresentation. Damages sought included the success fee paid to Tughans, plus costs incurred by BR in dealing with various civil and criminal investigations.
Foxton J confirmed that where a solicitor had accrued a contractual right to a fee, an award for damages for the fee amount would create a loss for the purposes of a professional indemnity policy. However, absent any clear wording within the policy, the solicitor having to return a sum of money to which it was never legally entitled to, was not an indemnifiable loss under the policy.
Therefore, if the reimbursement of fees paid to solicitors under a retainer is claimed as damages, that liability would fall to be covered (subject to a the other terms of the professional indemnity policy), whereas if reimbursement of fees is sought by way of a restitutionary claim i.e. unjust enrichment, it would not be covered.
Foxton J found that the terms of its engagement provided Tughans with a contractual right to the success fee. Hence, the contract had not been rescinded. Tughans would therefore suffer a loss if it was required to pay an amount in damages referrable to that fee.
Foxton J rejected RSA’s argument that no indemnifiable loss could arise because Tughans had no legal right to a success fee obtained by the alleged fraudulent misrepresentation.
Foxton J believed that where the provision of a representation/warranty was a ‘pre-condition’ to the payment of a success fee, the contractual entitlement to receive that fee was not affected if it turned out that the representations made were untrue or the warranties were then breached. The contractual requirement was solely that the representation or warranty be provided and the paying party simply acquired a right to remedies in respect of the alleged misrepresentations and/or breaches.
No claim for an indemnity in respect of a solicitor’s own fees can attach to a professional indemnity policy where the essence of the claim is that the solicitor was never legally entitled to the fees. This remains the position regardless of any subsequent change of position and the way the underlying claim is put.
It seems, however, that in English law there are limits to the scope of activity which is considered an equivalent to stealing. The mere fact that the underlying claim involves an allegation that the solicitor’s contract of engagement was procured fraudulently, does not prevent it from being included within a claim for damages in relation to the fees paid, rather than a demand for repayment or restitution.
Authors: Aoife Dunne, John Bruce
When do directors duties extend to upholding the interests of a creditor?
BTI 2014 LLC v Sequana SA [05.10.22]
On 5 October 2022, the UK Supreme Court handed down a judgment that reviewed the duties of a company director to consider its creditors’ interests.
In this case, the directors had caused the company to pay a dividend to its only shareholder. The dividend was paid when the company was solvent but at real risk of insolvency at some date in the future due to long term contingent liabilities of an uncertain amount. The company went into insolvent administration ten years after the dividend was paid.
The claim was brought on the basis of the common law rule that when a company’s solvency is in doubt, the directors’ duties extend to upholding the interests of its creditors. This required the Court to consider the existence of this duty and when it may apply.
The Court confirmed that the duty to consider creditors’ interests does exist, but decided that merely 'a real risk' of a company’s insolvency is not enough to trigger it. The Court also confirmed that it is not open to the company’s creditors to claim against the directors directly for breaching this duty, as it falls to the company itself to pursue any such claim.
There remains significant uncertainty following this judgment. Although the Court decided that 'a real risk' of insolvency is insufficient to trigger the duty, it is not yet clear what likelihood of a company’s insolvency is the precise trigger point. Imminent or borderline insolvency may be the threshold.
The judgment will likely generate new claims against directors as the parameters of this special duty are worked out through the courts.
The relatively high threshold will deter some borderline claims, although D&O insurers should still brace for more claims alleging breach of the duty to consider creditors’ interests.
Authors: David Armstrong, Donald McDonald
Related item: Supreme Court confirms directors’ extended duty to protect creditors
Are you trying to imply something?
Sean McDonnell v DASS Legal Solutions (MK) Law Limited t/a DLS Law [29.04.22]
The High Court has provided a welcome recap of the case law and considerations to be applied when determining the existence (or non-existence) of an implied retainer between solicitor and client.
The claimant alleged that he gave express instructions to the defendant solicitors (DLS) and, as a result, he asserted there was a retainer and a duty of care owed to him by DLS, in relation to a land transaction.
DLS denied that the claimant was their client at the relevant time of the transaction. Instead, asserting they were instructed by Arc Holdings and Investments Limited (Arc). DLS argued, as a fallback, that even had the claimant been their client, at no time were express instructions given by him in relation to the land transaction.
The claimant sought £2.5 million in damages against DLS for the loss of opportunity to benefit from purchase of the land and that, as a result of this failure, the claimant missed out on proceeds of a later sale of the land and claimed those losses against DLS.
Forster J held that there was neither an express retainer nor implied retainer, applying the various principles, including, necessity and objective consideration.
When applying those principles, Forster J noted that:
- The claimant personally had a retainer or retainers with DLS regarding several previous land transactions, as well as other contemporaneous land transactions which were taking place at all material times.
- The claimant was experienced and practiced in procuring legal advice and services.
- Where the claimant had previously elected to retain DLS, a series of separate retainer letters were provided to and signed by the claimant.
- There was, however, no retainer letter in connection with the transaction giving rise to the claim.
Forster J concluded that there certainly had been previous and an ongoing relationship between the claimant and DLS. Here, however, the claimant intended not to enter into a retainer with DLS in connection with the land transaction. There was, similarly, no tortious duty of care owed to him by DLS, as the claimant alleged, and the claim failed.
The approach of the Court and principles applied are a timely reminder of the importance of the intentions of the parties at the time instructions are received, and setting out clearly and unambiguously said instructions in the retainer.
Authors: Michael J. Smith, David Robinson
Related item: Are you trying to imply something?
Read other items in Professions and Financial Lines Brief – December 2022