Professions and Financial Lines Brief: latest decisions May 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: further clarification of the obligations of SIPP providers, duties of receivers, fiduciary duties of professional advisers, the duty of rationality and innocent non-disclosure clauses, the courts’ current approach to remote hearings, vicarious liability and the personal actions of a rogue employee, loss of opportunity claims, analysis of the principle of illegality and breach of the SRA (Solicitor Regulation Authority) rules revisited.
SIPP Providers, Due-Diligence and Contractual Primacy
Adams v Options Sipp UK LLP (formerly Carey Pensions UK LLP) [18.05.20]
Mr Adams was introduced to the Defendant (Carey) by CLP (an unregulated introducer) and subsequently transferred an existing pension fund into a SIPP (self-invested pension plan), administered by Carey. Mr Adams instructed Carey to purchase a number of rental units (non-standard investments) using funds in the SIPP. Carey carried out the transaction, on an execution-only basis. The investment failed to perform and Mr Adams sought to rescind his contract and claimed damages from Carey relating to the sale and establishment of the SIPP. The case concerns the extent to which SIPP providers are obliged to vet client investments.
Mr Adams alleged Carey (i) failed to act fairly, honestly and in accordance with the best interests of its client under Conduct of Business (COBS) Rule 2.1.1 of the FCA (Financial Conduct Authority)’s Handbook in allowing Mr Adams to enter the SIPP without advice (ii) was responsible for any advice (known or otherwise) given by CLP and therefore in breach of s.27 Financial Services and Markets Act (FSMA) 2000 and (iii) was in a joint venture with CLP.
The court rejected each claim and concluded that:
- The scope of any duty imposed on a SIPP provider by COBS Rule 2.1.1 must be considered through the lens of the individual contractual agreement. The contract between Mr Adams and Carey made it clear that Carey was acting on an execution only basis. The court therefore decided that Mr Adams must take responsibility for his investment decisions.
- The SIPP was not entered into as a result of CLP’s actions and therefore CLP did not ‘arrange’ the investment or provide ‘advice’ in relation to a regulated activity.
- There was no evidence of a joint venture between CLP and Carey. CLP was only involved in recommending Mr Adams to Carey, which was severable from Carey’s role in administering the SIPP.
The decision brings helpful clarity around the obligations of SIPP providers to vet client investments and for financial institutions facilitating ‘execution-only’ transactions.
- SIPP providers, due diligence and contractual primacy
- FCA expands probe into health of beleaguered pensions transfer market
The law on receiverships perseveres
Centenary Homes Ltd v (1) Victoria Liddell (2) Jon Gershinson [06.05.20]
The claimant, Centenary Homes Limited (CHL) is a property development company. The defendants are fixed charge receivers (the Receivers). The claim arose out of the receivership of two properties alleging sale at an undervalue, the unnecessary sale of a flat, failure to maintain the properties and their common parts whilst under the Receivers’ management and failure to obtain indemnity insurance for the lack of planning permission for a change of use of one of the properties. It is a useful case to reiterate established case law on the duties of receivers and reinforcing that receivers should act reasonably in deciding how to exercise its vested powers to secure a debt to the bank. They should focus on effecting sales at the best price reasonably obtainable and not incur time or expense in bettering the property.
Duties owed by receivers is well established in case law – including:
- A duty to act in good faith and for proper purposes, namely for the purpose of preserving, exploiting and realising the assets comprised in the security.
- A duty to take reasonable care to obtain the best price reasonably obtainable.
- A secondary duty to exercise care to avoid preventable loss.
There is no duty on receivers to only sell so much of the charged property as is required to repay the mortgagee – this would conflict with the principle that a receiver is obliged to give priority to the interests of the mortgagee. Receivers enjoy a degree of latitude as to the timing of a sale and the method of sale to be employed.
Receivers are entitled to sell the property in the condition it was in when appointed without effecting any increase in value or improvement to the property. It was not a breach of a receiver’s duty to fail to carry out extensive and intrusive investigations or to carry out the expensive process of rectifying a problem and it was reasonable for them to concentrate on selling the flat in its current condition or to concentrate on selling the other less problematic flats.
Despite having been pleaded as a sale at an undervalue as opposed to the proper “loss of chance”, small damages were awarded for the mistaken transfer of a janitor’s storeroom to the purchaser of one flat by the Receivers to reflect that the claimant had been deprived of something of value as a result of the conveyancing error.
Related item: The law on receiverships perseveres
Breach of fiduciary duties between individuals and professional advisers clarified
Carmela De Sena & Anor v Joseph Notaro & Ors [01.05.20]
This recent High Court decision regarding breach of fiduciary duty and negligence provides clarity as to when fiduciary obligations will be established between individuals and professional advisers. Following the demerger of a family-run company, the claimant advanced a claim against the first defendant (managing director of S Notaro Holdings), the accountants and solicitors for undue influence alleging that she had sold her shares at an undervalue.
The court dismissed the claims against the accountants and solicitors and made clear that a fiduciary relationship does not automatically arise where one party has relied on and trusted another in a professional context. On the facts, the accountants were acting for the company and the claimant was advised to seek independent professional advice. The court therefore rejected the assertion that a duty of care was owed simply because a long-standing relationship existed between the accountants and the claimant.
This is a pleasing development for professionals and their insurers, who can take comfort that the court will review the particular facts and appropriate tests when considering if fiduciary obligations exist in a professional context.
Innocent non-disclosure clauses now subject to the duty of rationality
UK Acorn Finance Ltd v Markel (UK) Ltd [21.04.20]
The claimant was a bridging finance lender and brought proceedings against surveyors (CLS) alleging that CLS had negligently overvalued 11 properties in 2010-2012. In 2016 and 2017 the claimant obtained default judgments against the insolvent CLS and subsequently made a claim against CLS’s professional indemnity insurers, Markel (UK) Ltd.
The policies were subject to an innocent non-disclosure (IND) clause which provided that, in the event of non-disclosure or misrepresentation of information, Markel would waive its right to avoid, provided that CLS (the claimant) was able to establish to Markel’s satisfaction “that such non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive”. On renewal in 2013 and 2014, CLS confirmed in "risk profiles" prepared by Markel, that its commercial valuation work had been undertaken for institutions that were either UK clearing banks or building societies and that CLS had not undertaken commercial valuation work for sub-prime lenders. CLS had, in fact, undertaken valuation work for the claimant, among others. Markel purported to avoid the policies in February 2016 on the basis that CLS could not satisfy it that there had not been deliberate and dishonest misrepresentation and non-disclosure.
The High Court held that the IND clause entitled it to assess Markel’s decision to avoid the policy on Braganza irrationality grounds (whether Markel exercised its discretion “in an arbitrary, capricious or irrational manner”), but not to perform its own assessment of whether CLS was fraudulent. It held that Markel’s approach to assessing fraud was “permeated by failings” and so did not give Markel a right to avoid under the clause. Markel failed to satisfy the court that it acted rationally when reaching the decision to avoid.
This is the first English reported decision confirming that the duty of rationality qualifies innocent non-disclosure clauses requiring the insurer to exercise its discretion rationally.
Contacts: Conrad Chidzey and Henry Saunders
The court’s approach to remote hearings during the COVID-19 pandemic
Muncipo De Mariana & Others v BHP Group PLC (formerly BHP Billiton) [20.04.20]
This case concerned an application for an extension of time for service of expert evidence by the defendants, which, if granted, would have required adjournment of a seven day hearing listed for 08 June 2020. Having considered the overriding objective pursuant to CPR 1.1, the Coronavirus Act 2020, the Lord Chief Justice’s guidance, the Remote Hearing Protocol (Protocol) and paragraph 4 of Practice Direction 51ZA (PD51ZA), alongside relevant case law, the court established two sets of principles that should be considered when determining:
- Whether the hearing should be adjourned
- Whether an extension of time should be granted.
Factors set out in the tests included the importance of the continued administration of justice, the steps taken by the parties to comply with court deadlines, the extent to which disputes can be fairly resolved by remote hearings and whether such hearings can be achieved consistent with justice, including the extent to which live evidence and cross-examination are necessary.
Having considered all of the available guidance/case law in the context of the defendants circumstances, the court concluded that the circumstances were compelling and that, even with the proper use of technology and extra efforts by the defendants, the expert evidence would take significantly longer to prepare and produce than was provided for in the timetable initially set down. The court therefore granted an extension of time of five to six weeks and adjourned the hearing, which was re-listed for 20 July 2020. This case provides a useful insight into the approach courts will take when considering extensions of time and the possibility of remote hearings in the wake of the coronavirus pandemic. It also provides a useful steer on the steps parties should be taking before seeking extensions of time and/or the vacation of hearing dates.
Contacts: Emily Burrett and Fleur Rochester
- Remote hearings in the lockdown and future of the legal profession to come
- COVID-19: potential claims against construction professionals and its impact on ongoing and future disputes
Supreme Court confirms that corporates and their D&O insurers cannot be held responsible for the actions of a rogue employee
WM Morrison Supermarkets plc v Various Claimants [01.04.20]
In July 2013, a senior auditor in Morrisons’ internal audit team, Mr Skelton, was subject to disciplinary proceedings for misconduct and was given a verbal warning. Thereafter, he uploaded a file containing the payroll data of 98,998 Morrisons’ employees to a public website and sent copies to newspapers. Mr Skelton was subsequently sentenced to eight years imprisonment for offences under the Computer Misuse Act 1990 and the Data Protection Act 1998.
The employees whose data had been leaked, claimed damages from Morrisons. The judge found that Morrisons was vicariously liable for Mr Skelton’s wrongful conduct. The Court of Appeal upheld that decision, but granted permission to appeal to the Supreme Court.
On 1 April 2020, the Supreme Court unanimously reversed the decision and held that Morrisons was not vicariously liable for an extensive data breach intentionally caused by a disgruntled employee. The Supreme Court held that, just because Mr Skelton obtained the data in the course of his employment, did not mean that Morrisons should be held vicariously liable for him doing so. In other words, opportunity is not an automatic vicarious liability.
Mr Skelton had not been engaged in furthering his employer's business when committing the wrongdoing, but had instead been pursuing a personal vendetta. The Court also held that vicarious lability was not excluded by the Data Protection Act 1998.
This decision confirms that employers will not be responsible for an employee who acts outside his/her scope of duties for personal reasons.
- Morrisons in the Supreme Court: data breach implications for D&Os
- Vicarious liability: the Supreme Court redresses the balance
Loss of opportunity claims against solicitors further clarified
Taray Investments Ltd & Bellevue Homes Limited v Gateley Heritage LLP [27.03.20]
Property developers who claimed damages of over £600,000 from their solicitors arising out of a failed property transaction have lost their case in the High Court. In 2012, the claimants entered into a joint venture to purchase and develop a site in Rotherhithe (the development), London, and instructed the defendant to advise on the commercial property purchase. Whilst preparing the report on title, the defendant failed to notice that there was a discrepancy between the Highway Authority Search Plan and HM Land Registry Index Map Plan. It failed to identify a part of the site that encroached on a footway. Accordingly, in order for the development to proceed, a stopping up order would be required to extinguish any rights of use of that footway. This discrepancy went unnoticed for approximately eight months until the solicitors for Titlestone Property Finance Limited, which had agreed to provide finance for the project, noted the discrepancy and brought it to the attention of the defendant. When this discrepancy was highlighted to the claimants and the vendor, the transaction quickly fell apart. The claimants subsequently brought a claim against the defendant. They alleged that, as a result of the defendant’s negligence, they had lost the opportunity to purchase and develop the Rotherhithe site.
The court heard from four witnesses and six experts in this case and found that, despite events having occurred seven years ago, the defendant’s witness was “careful and measured”, satisfying the court that the evidence given was truthful. On the contrary, witnesses for the claimants were found to be unsatisfactory. The court acknowledged that the defendant had admitted a breach of duty but dismissed the claimants’ claim. The court found that even if the discrepancy had been identified at an earlier stage, the claimants would not have spent the money required to obtain a stopping up order, particularly when the outcome of such a procedure was uncertain and there was no longer finance for the project in place from Titlestone or any other party. The court therefore dismissed the claim on the grounds that the claimants could not prove that they would have taken the steps required to acquire and develop the site.
This case will bring comfort to solicitors facing loss of opportunity claims, demonstrating that the court will carefully weigh all factual and circumstantial evidence before concluding whether a loss of opportunity has occurred. It also serves as a useful reminder of the importance of credible witness evidence.
Court of Appeal’s robust approach to the principle of illegality welcomed
Day v Womble Bond Dickinson (UK) LLP (WBD) [26.03.20]
In 2010, Mr Day was fined £450,000 and ordered to pay £457,317 by way of prosecution costs after pleading guilty to charges for unlawfully cutting down 43 protected trees. Following an unsuccessful appeal to the Court of Appeal (Criminal Division), Mr Day advanced a claim for professional negligence against his former solicitors on the basis that his solicitors had failed to advise (i) on the appropriate forum for the dispute and (ii) that the underlying criminal proceedings were an abuse of process.
The High Court struck out the civil proceedings on the basis that they were barred by the doctrine of illegality and were inconsistent with the decision of the criminal courts. On appeal, the Court of Appeal endorsed the High Court decision and confirmed that it would be contrary to public policy for a civil court to award damages for a disadvantage imposed on a claimant by the criminal courts.
This decision brings comfort to solicitors and their professional indemnity insurers as it demonstrates the court’s robust approach to the doctrine of illegality and the additional hurdle a claimant faces when looking to benefit from a criminal act. However, unusually, the Court of Appeal held that the principle of illegality did not prevent Mr Day from recovering additional legal fees incurred as a result of the choice of venue. Therefore, Mr Day was able to recover his costs from his former solicitors.
Solicitor’s duty to report potential and actual breach of conduct promptly
SRA (Solicitors Regulation Authority) v Claire Louise Matthews [25.03.20]
Junior solicitor, Claire Matthews, has been struck off the Roll following a Solicitors Disciplinary Tribunal (SDT) hearing arising out of an incident in which she left a case containing sensitive client documents on a train. Matthews was accused of making a number of untrue statements to colleagues regarding the whereabouts of the case and of failing to report the loss for several days after the incident occurred. This was contrary to Capsticks’ information security policy, which required incidents to be reported as soon as they are identified. Matthews denied acting without integrity or dishonestly, stating that she was overcome by uncontrollable fear, anxiety and panic following the incident. After a four day SDT hearing, judgment was handed down on 27 March 2020. Matthews was found to have acted dishonestly by trying to conceal the loss of the case to colleagues in giving them untrue information and was struck off the Roll for serious misconduct.
Matthews has since filed an appeal at the High Court, alleging that the SDT erred in law by finding that her case did not fall under ‘exceptional circumstances’ as a result of a failure by the SDT to investigate and weigh up the impact of the incident on her mental health. Following the decision, the SRA announced it would not impose a penalty on Capsticks for their failure to report Matthew’s conduct to them. The SRA instead wrote to Capsticks to remind the firm of its obligations to report any facts or matters that could amount to a serious breach of the SRA rules by any member of staff.
Many commentators have criticised the SDT’s decision as unduly harsh and insensitive to submissions made as to the mental health of Ms Matthews. The appeal will potentially consider both breach and sanction. In the meantime, we suggest firms remind staff of their data breach reporting obligations, not least in a “working from home” environment where data breaches may be more common.
Contacts: Emily Burrett and Paul Castellani