Professions and Financial Lines Brief: latest decisions December 2020
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: misselling by banks and a bank’s duty of care, the impact of the illegality principle upon conveyancing solicitors, aggregation as applied in SRA minimum terms and conditions, the relationship between security for costs and strike out applications and the impact of prejudice where a defence is filed late.
The court continues to refuse to imply a duty of care in the context of misselling
Fine Care Homes Limited v National Westminster Bank Plc and another [27.11.20]
Proceedings were issued by Fine Care Homes Limited (Fine Care) against National Westminster Bank Plc (NatWest) for negligence and misrepresentation relating to a missold interest rate hedging product (known as a structured collar) for a notional amount of £4 million over a five year period. In 2014, following intervention from the FCA (then FSA), NatWest conducted a review of Fine Care’s collar and offered a refund of £384,258.50 calculated on the basis that a “vanilla” collar would have been chosen over a structured collar. Fine Care refused to accept this conclusion and continued to seek redress for the direct loss suffered as a consequence of the alleged misconduct.
At trial, the following key issues of claim were considered:
- Negligent advice:
NatWest had advised Fine Care as to the suitability of the collar for its business and this resulted in a duty of care arising on the part of NatWest. Fine Care argued that NatWest breached this duty of care in that it failed to:
(a) Inform the claimant that the collar would impede its capacity to borrow across the lending market, and
(b) Clarify that the novation of the collar might not be straightforward, and may therefore require the provision of some external security.
- Negligent misstatement/misrepresentation:
The information provided by NatWest with regards to the collar contained negligent misstatements or misrepresentations in the same two respects referred to in (1) (a) and (b) above.
- Contractual duty:
NatWest was subject to an implied contractual duty under s.13 of the Supply of Goods and Services Act 1982 to exercise reasonable skill and care when giving advice and making recommendations in the same two respects at (1) (a) and (b) above.
In relation to issue (1), it was decided that NatWest was entitled to rely on its contractual terms, which confirmed the relationship between the parties. These terms did not give rise to a duty of care to advise Fine Care as to the suitability of the collar. In fact, it explicitly provided that such a duty will not arise between the parties. It was noted that even if there had been a duty of care, the court would have nevertheless decided that NatWest did not breach this duty. Given that issues (2) and (3) were advanced on the same breaches as issue (1), these claims also failed on the same basis.
This case firmly declines to imply a duty of care in the context of misselling and closely follows the decision in JP Morgan Chase Bank and others v Springwell , the leading case in the area.
Does fraud pay?
Stoffel v Grondona [30.10.20]
The claimant participated in a mortgage fraud, “lending” her credit rating to Mr Mitchell, who bought a flat for £30,000 then sold it to her for £90,000 in a non-arm’s length transaction. She borrowed £76,500 from a lender without giving the relevant history, but her solicitor, negligently, failed to register her title or register the charge in favour of the lender. Mitchell therefore retained legal title and borrowed money on it himself to her detriment. The claimant sued the solicitor asserting breach of duty in failing to register her title.
The principle on illegality applied, namely, that a person should not profit from their own wrongdoing. Further, the court should not condone conduct which is harmful to the integrity of the legal system. When dealing with the latter, three principles apply:
- What is the purpose of the “prohibition”?
Here, to discourage mortgage fraud.
- If the claim is denied, would there be any other societal harm?
Here, had the solicitors performed their duties diligently, transaction irregularities would likely have been identified and the fraud thwarted. Also, the sale contract was not a “sham”. It would be “incoherent” to allow the claimant’s equitable rights against Mitchell to be enforced but to bar her claim against negligent solicitors.
There was an absence of “centrality” of the illegality to the breach of duty.
The claim was allowed, the purpose being “not to profit but to obtain funds to reduce or discharge (the claimant’s) liability under the (lender’s) charge.”
Certain claims which insurers would instinctively think should be rejected will now proceed. However, profiting from one’s own wrong remains a “relevant consideration”. Thus allowing fraudsters to “profit” from the innocent mistakes of duped professionals is, we expect, something most judges would strive to avoid.
Contacts: Paul Castellani and Louise Cheney Lowe
Related item: Stoffel v Grondona – does fraud pay?
Aggregation of client account thefts: a challenging first instance decision for primary layer insurers
Baines v Dixon Coles and Gill (A Firm) and others [28.10.20]
This judgment concerns the theft of client funds by Mrs Box, a former partner of the defendant firm of solicitors.
Multiple claims were brought against the partners of the defendant firm and its professional indemnity insurers by separate clients for the misappropriation of client funds (totalling over £4 million) by Mrs Box. The firm was intervened in January 2016.
The defendant partners were covered by PI insurance which complied with the SRA Minimum Terms and Conditions (MTC) and had a policy limit of £2 million. The defendants’ professional indemnity insurers asserted that the claims should aggregate on the basis that they arose out of “one act or omission” or “one series of related acts or omission”.
The High Court held that each theft constituted a separate breach of the SRA Accounts Rules and could not therefore amount to “one act or omission”.
The High Court similarly held that the thefts could not constitute “one series of related acts or omissions”, notwithstanding the “wholesale teeming and lading” that had taken place. The court concluded that what had to be related for the purposes of aggregation was the thefts themselves rather than the perpetrator’s ongoing dishonesty or the process adopted; “Dishonesty is not an act, it is a state of mind. What caused [the] claimants’ losses were the individual thefts from them”. Accordingly, the claims could not be aggregated.
Whether claims aggregate will continue will depend upon the unique circumstances of the case and the wording of the policy. However, aggregation under the MTC will now be more difficult and this decision will be of concern to primary layer insurers.
Contacts: Paul Castellani, Nicholas Read and Holly Waldren
Persistence is key? Claimant continues to not pay judgment debts
Kew Holdings Ltd v Donald Insall Associates Ltd [28.10.20]
This was a dispute concerning unpaid fees payable to the defendant for their architectural services for refurbishment of a property (the Kings Observatory at Kew) owned by the claimant. This summary follows on from our previous case update.
Back in July, the claimant was permitted to continue with its professional negligence claim against the defendant, on the condition that it paid £600,00 into court as security for the defendant’s costs. The security was necessary due to the claimant’s persistent breaches of court orders, its status as a non-UK domiciled company and non-payment of judgment debts.
Once again, the claimant failed to pay. The claimant cited difficulties in raising capital and COVID-19 as factors for non-payment, but submitted that funds could become available in November 2020. The defendant applied for an Unless Order, that unless the security was provided, the claim should be struck out.
The defendant’s application was successful. Despite some effort having been made to raise the capital, it was too little too late. The claimant had had ample time and opportunity to meet the orders and debts. The Unless Order gave the claimant until 30 November 2020 to pay the security for costs, failing which the claimant’s claim would be struck out.
Bearing in mind that the initial Summary Judgment was obtained in February 2019, this case serves to show just how long it can take to strike out an unmeritorious claim. Also, that it is always worth considering an application for security for costs from a tactical point of view
- Proceedings stayed by Head of the TCC due to “unreasonable and oppressive behaviour” by the claimant
- The Ingenious Litigation – security for costs and litigation funders
Reaffirming the Principles in Denton
Penta Ultimate Holdings Ltd & Anor v Storrier [14.09.20]
The defendant (chartered accountant) had been the claimants’ CFO and a director for numerous years. The relationship between the parties disintegrated culminating in the defendant resigning in 2018. The claimants said they then discovered extensive errors in the 2017 accounts. They sent the defendant a letter of claim alleging professional negligence, and other issues of mismanagement. The defendant acknowledged the claim and indicated an intention to defend but did not file a defence. Subsequently, the claimants obtained judgment in default regarding liability only. The defendant applied to set aside the default judgment, and for further disclosure. The defendant took a further six months to draft a defence. The defendant submitted that he only had oversight of the companies' finance functions and was not involved in the detail of the accounts or audit processes.
The court considered just over two weeks to submit an application to set aside default judgment was acceptable given the complexity of the claim. The draft defence raised issues that went to the root of the claim in respect of liability and the defendant was found to satisfy the test under CPR 13.3(1)(a). The defendant's failure to serve a defence was serious and significant, and his failure to engage caused the proceedings to become protracted. However, the claim was one of complex professional negligence and still needed to be proved at trial. Therefore, it was held that the prejudice to the claimants regarding procedural delay and the loss of a validly obtained judgment was outweighed by the prejudice the defendant would suffer if not allowed to raise a liability defence. This decision serves as a useful reminder that if deadlines are missed, it is always worth making an application to get matters back on track. Interestingly, the granting of the application to set aside the default judgment was balanced by the imposition of a condition on the defendant to pay a sum into court in respect of an improbable element of his defence, with the intention of providing a measure of security and to encourage efficient case management.
Contacts: Matt Deaville, Daniel Kellard