Professions and Financial Lines Brief: latest decisions March 2021
In this briefing, we consider the latest significant court decisions impacting claims arising from professional liability and financial lines policies and products. Issues covered include: the treatment of reliance and affirmation in strike out applications, limitation and the true date of loss, fundamental defects that render the appointment of administrators void, clarifying further the “Quincecare” duty, when a professional’s duty extends to the provision of both advice and information, when a court should exercise its discretion in requiring a claimant to provide security for costs, defining an abuse of process in strike out applications and determining the burden to discharge when securing an order for public examination of a company director.
LOBO loans: revisiting the test for reliance
Leeds City Council & Ors v Barclays Bank Plc & Anor and London Borough of Newham v Barclays Bank Plc & Anor [22.02.21]
This judgment concerns the defendant’s applications seeking to strike out two claims brought by Leeds City Council and others, and the London Borough of Newham. The claims relate to Lender-Option, Borrower-Option (LOBO) loans obtained for terms between 60 and 70 years. Under the terms of the loans, Barclays could change the interest rate payable. However, where the interest rate was changed, the borrower had the option to repay the loan early to avoid the higher interest rate. The loans referred to the London Interbank Offered Rate (LIBOR) to set the interest rate and/or for calculating the breakage costs.
In 2012 it was discovered that a number of banks involved on the survey panel for the purpose of calculating LIBOR were manipulating the benchmarks for the rate. The claimants were therefore seeking the rescission of the loans on the basis that Barclays had misrepresented that LIBOR rates were set honestly and properly, and that the bank was not (and had no intention of) engaging in any improper conduct involving the LIBOR panel.
The court considered two main issues at the hearing:
- The claimants could not show that that they relied on the representations which they allege Barclays had made (the reliance issue).
- Even if the claimants succeed in proving misrepresentation, they affirmed the relevant contracts by continuing to make interest payments (the affirmation issue).
On the reliance issue, the court held that in order to bring a misrepresentation claim, it is necessary to establish awareness of a representation which included giving ‘active’ or ‘contemporaneous conscious thought’ to the representations made. The claimants had accepted that the contemporaneous conscious thought test could not be met, and did not plead any conscious operation on anyone’s mind. The court therefore held that the claimants’ case had no real prospect of success and the application for strike out was successful.
As such, the affirmation issue did not arise. However, the court formed the view that had it arisen, they would not have granted the strike out application. The court considered it probable that it was not sufficiently clear the claimants had the requisite knowledge of the relevant facts and their legal right to rescind in place prior to 2018.
Contacts: Matt Deaville and Sarah Hitchcock
Taking a leap - when to depart from the default position regarding limitation
Gosden and another v Halliwell Landau and another [29.01.21]
The Commercial Court addressed the question of when the date for assessment of damages in cases of negligence should be determined, following a finding of professional negligence in the implementation of a tax mitigation scheme. This case shows that when appropriate, the courts will depart from the default position.
The claimant’s mother owned a property which she wanted the claimant to inherit on her passing. In 2003, the defendants were instructed to implement a scheme, known as an “Estate Protection Scheme”, which is designed to reduce liability to inheritance tax. Under the scheme, the property was placed in trust and the claimant’s mother remained the registered owner. The claimant’s mother would enjoy the property during her life and it would pass to the claimant on her death. Until then, she could not, in law, dispose of the property without the consent of her fellow trustees. In October 2010, without the consent or even the knowledge of the claimant, the claimant’s mother sold the property and thus breached the trust. She died in March 2013 and only in 2015 did the claimant discover the sale.
The defendant, who created the scheme, had been negligent in failing to restrict the claimant’s mother’s ability to sell the property without the consent of the other trustees under the scheme. Negligence was proven on the part of the defendant and it was accepted that the loss was the value of the property. However, given the recent and significant rise in property prices, there was debate about at which time the value of the property should be taken.
The default position is that damages should be determined at the date the wrongful act occurs or, if in tort, the date at which the loss caused by the breach of duty occurs. At the date of sale in 2010, the property was valued at circa £785,000. It was this sum and date that the defendant argued should be used to determine damages. However, the claimant disagreed arguing that the court should depart from the default positon in order to adequately compensate the claimant. Judge Pelling QC agreed with the claimant that, in this instance, it was appropriate to depart from the default positon but only to adopt the date that the deceased passed away as the correct date for assessment, this being 2013. This was the date when the loss effectively crystallised.
This decision is interesting in illustrating that, when appropriate, the courts will determine limitation and the date of loss differently. The negligent act occurred in 2003. However, this was not the date used for limitation purposes, nor was it the date on which the claimant discovered the error. The appropriate date was when the loss crystallised, in this case, the date of the deceased’s passing.
Contacts: Matt Deaville and Patrick W George
When is a procedural defect a fundamental defect?
Re NMUL Realisations Limited (in Administration) [20.01.21]
This matter arose from a potential defect in the procedure for appointing administrators out of court. The company involved had been unable to repay the amount demanded by a secured lender. The secured lender was a qualifying floating charge holder, so was able to appoint an administrator without the need for a court order. As a result of the company’s inability to repay, the lender filed a Notice of Appointment of Administrators.
At the time of filing the notice and upon review of the Companies House register, there appeared to be no other unsatisfied qualifying floating charge holders. So, the notice was not served on any other party. It was later discovered that an additional qualifying floating charge holder had a remaining unsatisfied debt, despite this being incorrectly recorded as satisfied on the Companies House register. The court noted that the holder of the prior qualifying floating charge did not lose the benefit of the security, despite it being incorrectly marked as satisfied.
The court considered whether such a failure was a fundamental defect which rendered the appointment void ab initio (to be treated as invalid from the outset), or whether it caused no substantial injustice, was not fundamental, and could be remedied. The court relied on several existing authorities on the matter and ultimately held that the appointment of administrators was not void ab initio. The failure to give notice of its intention to appoint administrators was merely a formal defect that was capable of remedy by court order and no substantial injustice had been caused. The appointment was therefore valid, notwithstanding the irregularity in the procedure.
Contacts: Matt Deaville and Sarah Hitchcock
The buck stops here: the limits of bankers’ Quincecare duty for push payment fraud
Fiona Lorraine Philipp v Barclays Bank UK PLC [18.01.21]
In Fiona Lorraine Philipp v Barclays Bank UK PLC (Philipp) a couple, who were the victims of a “push payment” fraud, were unable to recover damages from their bank for failing to prevent the payment of substantial sums to the fraudster, the court finding that the so-called “Quincecare” duty had not been engaged.
Authorised push payment fraud (APP) is a fast-growing and targeted form of fraud analogous to “phishing”. APP fraudsters (usually impersonating a banker, conveyancer or public authority employee) use scare tactics to trick their victim(s) into transferring to them large, one-off sums of money.
In Philipp, the claimant and her husband were misled by fraudsters posing as investigators with the Financial Conduct Authority who convinced them that an official investigation was being conducted in relation to their bank’s affairs. They were persuaded to transfer £700,000 of their savings to “safe accounts” controlled by the fraudsters, which funds were never recovered. The Philipps’ executed the transfers and attended a branch of the bank to confirm their instructions. They did this despite receiving warnings from the police and close friends that they were being deceived.
Mrs Philipp, the account holder, brought an action against Barclays claiming the bank owed her a Quincecare duty to stop these monies from being misappropriated. Prior to Philipp, in Singularis (In Official Liquidation) v Daiwa Capital Markets Europe Ltd, the Supreme Court had expanded the scope of banks’ duty of care under Quincecare to include appropriate policies and procedures for verifying client payments which, on the facts of that case, the Supreme Court found to have been breached.
In Philipp, however, the court found that that in the circumstances of the push payment fraud perpetrated on the Philipps’, there was no expectation that Barclays would take further, positive steps to probe the validity of the payment instructions advanced by its customer. Specifically, the judge emphasised that Barclays should not be burdened with the obligation of (1) putting additional procedures in place to detect and circumvent prospective push payment fraud and (2) refusing to act on client instructions which are prima facie legitimate.
Contacts: Mark Chudleigh and William Finnerty
An unusual approach to an unusual surveyors negligence case
Hart v Large [15.01.21]
The Court of Appeal (CA) has reiterated that surveyors who fail to advise potential homebuyers on the importance of seeking further investigations will be negligent. Additionally, and more significantly, the CA has suggested professionals can provide both ‘advice’ and ‘information’; effectively going against historic case law in this area which has sought to draw a distinction between cases of merely providing information, and those providing advice. However, it is important to note that the decision was very much based on the unusual facts of the case, and it is likely that only time will tell whether/how this approach will be followed in subsequent cases.
The claimants appointed the defendant, a surveyor, to conduct an assessment on a property they were considering purchasing. The defendant, following his assessment, recommended a Homebuyer report which highlighted various drainage and piping issues. Following the claimants’ purchase of the property, it became apparent that there were severe damp and water ingress issues, resulting in extensive and costly remedial works.
The claimants brought an action in the High Court against the defendant, on the basis that he was negligent in failing to (a) recommend a comprehensive building survey and professional consultant’s certificate from architects and (b) highlight the damp and water ingress in the Homebuyer report. The High Court ruled that the defendant was negligent and awarded damages to the claimants, concluding that had the claimants known of the damp and water ingress prior to the purchase they would not have purchased the property at all. The High Court also concluded that had architects been asked to provide a professional consultant’s certificate, they would have refused, and the claimants would not have completed the property transaction. The defendant appealed.
The appeal was dismissed. The CA was bound by the High Court’s finding that there was enough to give rise to a trail of suspicion which ought to have led him to give different advice from that provided. In addition, the CA analysed ‘information’ and ‘advice’ cases, and came to the view that the two are not mutually exclusive, with Coulson LJ commenting: “What matters is a consideration of the duty overall, so that the court can assess whether or not the professional had a duty to protect his or her client against the particular losses claimed.” The case was much closer to an ‘advice’ case than an ‘information’ case and, according to the Court of Appeal, the SAAMCO and Hughes-Holland approach is a tool by which a Court can assess loss; it does not have to be followed in every case.
The Ingenious Litigation – security for costs and litigation funders
Rowe & Ors v Ingenious Media Holdings plc & Ors [15.01.21]
The Court of Appeal (CA) has provided guidance on when a court should exercise its discretion to require a voluntary cross-undertaking in damages as a condition of requiring a claimant or their commercial litigation funder to provide security for costs. To recap, the costs of obtaining litigation finance cannot ordinarily be recovered from a defendant (National Westminster Bank v Kotonou ) because they are not “costs of or incidental to” the proceedings for the purposes of Section 51(1) Senior Courts Act 1981 (the SCA).
In its judgment, the CA declined to require the defendants to volunteer an undertaking to meet any such costs as a condition of security being provided. In reaching that decision, the CA was influenced by the “unsatisfactory practical effects” of routinely requiring a defendant to volunteer an undertaking, including the risks of a substantial increase in satellite litigation, an increase in the scope and costs of security applications and deterring defendants from seeking security for their litigation costs.
The CA noted that commercial litigation funders are not motivated by considerations of access to justice but instead aspire to make a return on their investment. If such funders have adequate capital, they will be able to demonstrate an ability to meet any adverse costs orders and therefore should rarely if ever be ordered to provide security for those costs. Conversely, commercial funders who are required to provide security (because their capital is inadequate to meet an adverse award of costs) should not be allowed to impose upon a defendant the consequences of their inadequate capitalisation.
Whilst the CA was satisfied that courts have a discretion to order a defendant to volunteer a cross-undertaking as a condition of security, they should not do so save in “rare and exceptional” circumstances, particularly where the cross-undertaking is required to be given for the benefit of a commercial litigation funder.
Strike out applications as an abuse of process are rarely successful
Allsop v Banner Jones Ltd and another [08.01.21]
The Court of Appeal (CA) has partially allowed an appeal of a decision striking out allegations in a claim for professional negligence and/or breach of contract against solicitors and a barrister.
Mr Allsop (the claimant) pursued a professional negligence claim against his solicitor and barrister (the defendants) following an unfavourable judgment in a matrimonial financial remedies hearing. Allegations made by the claimant included failure to prepare the evidence in advance of the hearing, failure to advise on strategy, failures of advocacy, and also a failure to advise the claimant to appeal. Both defendants denied liability and applied to strike out a number of the allegations stating that they were an abuse of process as they were collateral attacks on the earlier judgment. The defendants applications were successful in the first instance, and the claimant then applied to the CA.
The CA ruled that the judge had made an error in applying the test in Phosphate Sewage Co Ltd v Molleson , which permitted re-litigation where there was new evidence which fundamentally changed the complexity of a case. In the lead judgment, Mr Justice Smith noted that the jurisdiction for abuse of process should not be restricted by formal categories. Whilst accepting that re-hearing issues from an earlier civil case may be an abuse of process, emphasis was placed on the word “may” by the CA, and therefore the individual circumstances of the case would need to be considered.
Going forwards, professional negligence litigators will need to remember that instances of the court striking out proceedings as an abuse of process are rare and exceptional. This case has established that it is not an abuse of process for a claimant to bring proceedings concerning the professional negligence of their advisor in litigation whereby the underlying proceedings were criticised, and where the parties to the second set of proceedings were not the same as in the earlier matrimonial proceedings. Re-litigation of an earlier civil decision is therefore not abusive as a matter of fact, and must be considered on its merits. Therefore, whilst strike out applications are a useful tool for defendant professional negligence solicitors in order to save costs, applicants will need to consider whether the allegations disclose a reasonably arguable case.
Contacts: Matt Deaville and Daniel Kellard
No easy task to secure an order for public examination of a de facto director of a company
The Official Receiver v Deuss and Others [17.12.20]
This case concerned the question of whether the court should order a public examination of Mr Deuss, an alleged de facto director of Transworld Payment Solutions UK Limited (the Company). The application was made by the Official Receiver (the OR) at the request of a creditor.
Mr Deuss was a 78-year-old resident of Bermuda, the Chief Executive Officer and Director of a bank, and the ultimate beneficial owner of the Company of which it was alleged he was a de facto director. The OR was the liquidator of one of the Company's creditors and also the liquidator of the Company. As liquidator of the Company, the OR issued a claim against Mr Deuss, alleging that the bank and Mr Deuss had used the Company to participate in missing trader fraud and seeking damages for the same. As liquidator of the creditor, the OR requested a public examination of Mr Deuss so that he could ask various questions. Questions centred around the Company’s trading accounts, banking arrangements and circumstances of dissolution, and the Company's vacation of its trading premises.
The burden of proof was on the OR to prove a public examination of Mr Deuss was necessary. Only then would the burden shift to Mr Deuss to demonstrate, that despite the need for public examination, it would be oppressive to make the order. The burden was not discharged in this case by the OR for the following reasons:
- Request by the OR to view accounting papers- the OR failed to justify why a public examination was necessary in the context of a liquidation, and it was noted that the production of documents did not justify a public examination.
- Banking arrangements and dissolution- there was no evidence that Mr Deuss was involved with the decision to dissolve the company.
Unless it was proven that Mr Deuss was a de facto director or shadow director of the Company, he was not an officer. In those circumstances, summoning him for a public examination under threat of imprisonment or arrest if he was not compliant, to answer questions about his conduct on oath and under compulsion, would be oppressive.
For those dealing with D&O liability, this case highlights the burden that an OR needs to discharge to secure an order for public examination of a de facto director of a Company. It also notes that where there is a real risk that such an examination would improve the position of the applicant in litigation, such an application may be denied.
Contacts: Matt Deaville and Daniel Kellard