Professions and Financial Lines Brief: latest decisions July 2022

A roundup of the latest court decisions raising issues for the scope of the Quincecare duty; Section 90A of the Financial Services and Markets Act 2000, costs, disclosure applications and S13A (Insurance Act 2015) claims.

Court finds in bank’s favour in the latest application of the Quincecare duty

Federal Republic of Nigeria v JPMorgan Chase Bank NA [14.06.22]

This latest decision on the scope of the Quincecare duty will come as welcome news to financial institutions (FIs) processing client payments, as the court rules in favour of the defendant bank, JP Morgan Chase (JPMC), finding that it did not breach its Quincecare duty.

The claim arose out of several historic disputes between the Federal Republic of Nigeria (FRN), Malabu Oil & Gas Ltd (Malabu) and a subsidiary of the oil company Shell. These disputes were eventually settled in exchange for US$1.1 billion to be paid to Malabu from FRN’s depository account held with JPMC.

In 2011 and 2013, in accordance with the settlement agreement, JPMC made payments out of the depository account to Malabu on the instructions of authorised officers of the FRN.

Following a change in government, the FRN alleged that the agreement had been procured by corruption and in making those payments, JPMC had breached its Quincecare duty. FRN claimed that JPMC was on notice of Malabu’s ‘murky’ past and that the payments were being made to facilitate a fraud on FRN.

It was held that the Quincecare duty is narrow and confined and it is only applicable whenever a banker is on inquiry that the instruction in question is an attempt to misappropriate funds. In this instance, FRN had failed to show that the bank was ‘on inquiry’ in relation to the 2011 payment instruction. General concerns around a transaction such as association with past corruption, were not sufficient to trigger the duty.

In addition, although there was notice in relation to the 2013 payment, JPMC hadn’t committed any gross negligence in executing the payment, as required under the banking contract which had excluded the ordinary negligence standard applicable to the Quincecare duty.

This judgment confirms FIs must be on notice that the specific payment instruction may be vitiated by fraud in order to trigger the duty. Knowledge of wider historic corruption or financial crime are not sufficient and are more relevant to anti-money laundering procedures. It also highlights the protection afforded to banks by exclusion clauses in banking contracts, which serve to raise the standard required to be met for triggering the Quincecare duty.

Contacts: Sheena Purohit, Jenny Boldon

Long-awaited clarity provided on the application of Section 90A FSMA

ACL Netherlands BV, Hewlett-Packard the Hague BV, Autonomy Systems Limited and others v Lynch and Hussain [17.05.22]

This case marks the first time that a claim under Section 90A of the Financial Services and Markets Act 2000 (FSMA) has gone to a full trial. Under Section 90A, an issuer is liable if a person discharging managerial responsibilities (PDMR) knew of, or was reckless to any untrue or misleading statement in any publication an issuer makes to the market, or the omission of any material required to be included in any such publication.

The claimants, a group of Hewlett-Packard (HP) entities, brought claims against the defendants, the former CEO and CFO of Autonomy, arising from the acquisition of the entire issued share capital of a listed software company, Autonomy. HP alleged that it had been misled as to the true value of Autonomy by the financial information published by Autonomy, as well as the defendants’ dishonest representations.

HP claimed approximately US$4.5 billion under Section 90A and Schedule 10A FSMA for the alleged misleading statements with regards to the description of Autonomy as a pure software company and misleading practices to accelerate revenue and boost high margin software sales. It also issued claims for misrepresentation and for breaches of directors’ fiduciary and contractual duties.

At the time the claims were issued, HP was the sole owner of Autonomy. As Section 90A/Schedule 10A claims can only be brought against the issuer, Autonomy would therefore be solely liable for the loss. To overcome this issue, Autonomy admitted liability under Section 90A for the misstatements/omissions, and in turn brought proceedings against the defendants to recover its losses. The court accepted the use of the liability of Autonomy under Section 90A/Schedule 10A as a stepping stone to a claim against the defendants, stating that there is “no conceptual impediment” to the use of such a structure.

Hildyard J found that the relevant claims under FSMA, as well as those under the Misrepresentation Act 1967 and for breaches of directors’ duties, were successful. The judge found that the defendants were aware of the dishonest representation of financial information and directed and encouraged the use of the improper practices.

This case has provided long-awaited clarity on the application of Section 90A FSMA. The judgment confirmed that Autonomy, as the issuer, could only be held liable for those misrepresentation that the defendants, as PDMRs, knew to be untrue. The case also confirmed that there will be a factual presumption that an objectively material representation did induce the claimant to acquire the securities.

The defendants have indicated their intention to seek permission to appeal the decision.

Contacts: Calyx Tucker, Jenny Boldon

High Court finds breach of duty in landmark ENRC v Dechert ruling

Eurasian Natural Resources Corporation Limited v Dechert LLP & Ors [16.05.22]

Eurasian Natural Resources Corporation (ENRC) is a UK-listed mining company that was being investigated by the Serious Fraud Office (SFO) over allegations of potential bribery, fraud and corruption. ENRC retained Mr Gerrard, a former partner at Dechert LLP, to oversee an audit and examination into one of its subsidiaries that had been the focus of the SFO investigation.

ENRC argued that during this time, Mr Gerrard negligently provided wrong and unnecessary advice in order to expand the scope of his investigation. In response, ENRC made several claims concerning the SFO investigation, which related to Mr Gerrard and his involvement within the investigation and his advice given at the time.

These claims, which have been ongoing for a decade, have now been subject to a recent ruling where Mr Justice Waksman found that Mr Gerrard had given “negligent and for the most part reckless” advice to ENRC regarding their potential criminal liability and the risks of raids stemming from the SFO investigation. It was also found that Mr Gerrard, on at least three separate occasions, had been in breach of his duty to ENRC by leaking ENRC’s confidential information and documents to the press with a view to generating further work and fees for himself.

The court further found in favour of ENRC and concluded that Mr Gerrard was negligent in failing to protect ENRC’s privilege and failing to determine the scope of the SFO’s investigation and concerns. The decision also makes clear the importance of preparing a written record of advice to clients, as it was held that Mr Gerrard was negligent in failing to do so.

The decision will be of interest to professional liability insurers as, on the back of this ruling, Dechert LLP now face what is likely to be a sizeable costs order, with it being said that they have already incurred approximately £40 million in defence costs. While it is likely that Dechert LLP will have suitable primary and excess layer cover for costs, there is a question as to whether a dishonesty exclusion would apply given the circumstances.

There is, however, more to be seen, as the issues of causation and costs have yet to be dealt with by the court and we are most likely going to see an appeal from Dechert LLP on the ruling.

Contacts: Laura Baxter, Jenny Boldon

A harsh reminder for claimants withdrawing allegations that they cannot withdraw without consequences

Karis Developments v Howard KennedyLLP [03.05.22]

Howard Kennedy was sued by Karis Developments Limited and Karis Southern Housing Projects Limited (the claimants), over a scheme to develop multiple sites owned by Lewes District Council (the local authority) in East Sussex. In 2015, the claimants entered into contracts with the local authority and Southern Housing Group which included an agreement for the sale of some of the development sites from the local authority to the housing association. In December 2015, the agreement was terminated which the claimants allege was a result of Howard Kennedy’s negligent drafting, accusing the firm of giving ‘false reassurance’ about the deal.

The claim was disputed in full by Howard Kennedy, who were represented by Kennedys and made its way to trial. During the trial, the claimants sought to withdraw.

The parties agreed the following terms: withdrawal of all allegations against Howard Kennedy, its current and former partners and staff, an undertaking not to repeat them, and a statement in open court acknowledging that Howard Kennedy was not liable in negligence. Further, the claimants agreed to contribute £850,000 toward Howard Kennedy's legal fees.

This outcome is a reminder to prospective claimants that claims against solicitors will be expertly run to their conclusion and will not always be ‘paid off’ by solicitor’s insurers. Claimants must remember that where claims may be withdrawn, the consequential cost orders will be enforced against claimants and their associated entities.  They cannot expect to walk away without consequence.

Contacts: Jessica Randall, Jenny Boldon

The ‘need to plead’: reminding parties of their duty to fully particularise their case

Evolve Housing and Support v Bouygues (U.K.) Ltd & Ors [13.04.22]  

This case confirmed that, particularly in the context of the wave of fire safety claims currently before the courts, it is essential the court receives accurate and comprehensive particulars of negligence against construction professionals. The court will not order parties to provide further disclosure if the case is not properly pleaded.

The claimant, a charity and provider of social housing, engaged the first defendant, a large contractor, to design and build a new YMCA Hostel at a site in Croydon, London between 2011 and 2012. The claim concerned alleged defects in the copper and terracotta cladding to the external walls of the property, which the claimant considered required a full-scale replacement. Contractual and tortious claims were brought against the first defendant, the employer’s agent and the project architect, alleging that each fell below the standard of reasonable skill and care required.

During the course of the litigation, the project architect served several Requests for Further Information on the claimant, seeking further particularisation of the claimant’s case in negligence. The project architect claimed that the claimant’s pleaded case was vague, unfocused, repetitive and directed largely towards the first defendant.

The claimant responded that it could not provide such information until it received disclosure of documents comprising the designs of the property. The architect then issued an application requiring the claimant to provide properly particularised responses to its requests.

Mr Justice Coulson granted the application in full, holding that the architect was entitled to know how the claimant formed its case based on what already had been disclosed. In reaching this decision, Coulson J referenced his own judgment in Pantelli Associates Ltd v Corporate City Developments No2 Ltd [2010], and noted that “the pleading needs to set out clearly what it is that the defendant failed to do that it should have done, and/or what the defendant did that it should not have done, what would have happened but for those acts or omissions, and the loss that eventuated”.

This case provides valuable confirmation of the pleading standards to be applied in professional negligence claims, and that the court does not view disclosure as a precondition of a party being capable of setting out their case. Absent sufficient information for a claimant to plead its case properly, it will be worthwhile considering pre-action disclosure applications. From a defendant perspective, it is a worthwhile reminder that claimants cannot rely on disclosure as a universal panacea to an unfocused claim.

Contacts: Phoebe Penman, Jenny Boldon

Clarification on insurable interest and a first decision on S13A of the Insurance Act 2015

Quadra Commodities S.A. v XL Insurance Company SE & Ors [04.03.22]

This case was the first to consider S13A of the Insurance Act 2015 (the Act), which states that “it is an implied term of every contract of insurance that if the insured makes a claim under the contract, the insurer must pay any sums due… within a reasonable time”.

The insured, Quadra Commodities S.A, entered into a series of contracts with Agroinvestment group to purchase cargoes of grain. The insured paid the contract price on presentation by the sellers of various warehouse receipts issued by Ukrainian warehouses. The warehouses were engaging in fraud, whereby multiple warehouse receipts for the same goods were issued to different buyers. Consequently, the warehouses were unable to execute the physical deliveries due to insufficient amounts of grain.

The insured issued proceedings against the Insurers for the loss of goods, and for damages -alleging a breach of S13A of the Act.

Insurers denied the insured’s claim for lost cargoes on the basis that there was no loss of physical property, only financial loss (which was not covered under the policy). Insurers further argued that the insured could not demonstrate an insurable interest in the property.

The court found that the insured did have an insurable interest in the property as the goods were present in the warehouse at the time the receipts were issued. The insured paid for the goods and held an economic interest in them. The insured’s loss was caused by misappropriation, which was an insured peril under the policy.

The claim for damages was dismissed as it was found the insurers had not breached S13A of the Act. The court considered two distinct questions:

  1.  What constituted a reasonable time for payment of a claim (the burden was on the insured to prove payment was made after a reasonable time had elapsed).
  2.  Whether there were reasonable grounds to dispute the claim (the burden was on the Insurer to prove reasonableness in this instance).

The court concluded that a reasonable time was not more than a year from the notice of loss, assuming that any investigations by the Insurer did not indicate reasonable grounds for disputing the claim. The factors considered by the judge included the complexity and size of the claim and the unavailability of evidence. The judge further found that there were reasonable grounds to dispute the claim, and just because those grounds were incorrect, did not mean they were unreasonable.

This case provides useful guidance on the interpretation of an insurable interest in property as well as factors that the court may consider when determining the reasonable time for insurers to investigate and pay a claim. It will also be a welcome comfort to Insurers that the grounds for disputing a claim do not need to be correct to be reasonable for the purposes of defeating a S13A claim.

Contacts: Remi Brookes, Jenny Boldon

Related item: Late payment of claims: being wrong but not unreasonable

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