Professions and Financial Lines Brief: latest decisions September 2020
We consider the latest significant court decisions impacting claims arising from professional liability and financial lines policies and products. Issues covered include: the widened application of the SAAMCO principle to auditors, the scope of a consultant’s duty to a third party and use of the Part 8 procedure, reflective loss and the impact on claims against directors and officers, the court’s approach to access to justice in light of the claimant’s unreasonable and oppressive behaviour, exploring whether a professional owes a duty to a third party it was unaware of at time of contract, establishing the date of damage in accordance with s. 2 of the Limitation Act 1980 and the use of pre-action disclosure as a fishing expedition.
SAAMCO in the spotlight
AssetCo Plc v Grant Thornton UK LLP [28.08.20]
AssetCo Plc instructed Grant Thornton to audit its financial statements for the years ending 31 March 2009 and 2010. The management of AssetCo Plc fraudulently presented the business as solvent in that period. Grant Thornton admitted extensive breaches of duty in relation to its failure to uncover the fraud. The result of the negligence on the part of the auditors was that the assets of AssetCo Plc were overstated by £120 million. In the first instance AssetCo Plc successfully claimed that, ‘but for’ the negligence of the auditors, the insolvent state of the company would have been discovered in 2009 or 2010, wasted expenditure avoided, and refinancing undertaken. Grant Thornton paid damages of £22.36 million following a reduction for contributory negligence from AssetCo Plc.
The appeal by Grant Thornton had three elements. Namely, the application of SAAMCO, damages for loss of chance, and credit for benefits received by AssetCo Plc. The key discussion centred around the first point of appeal, whereby the appeal judgement highlights that the SAAMCO principle does not only apply where professional information or advice is provided in the context of a specific transaction, but can also apply in the context of an audit report to a company and its shareholders. This is the case even though the purpose of an audit is not to inform a decision regarding a particular transaction.
If accountants fail to take account of the decision in this case, one can expect further claims for negligence arising against the profession.
Contacts: Fleur Rochester, Daniel Kellard
Related item: SAAMCo in the spotlight
Application of a contractual liability to a third party in tort and use of the Part 8 Procedure
RSK Environment Ltd v Hexagon Housing Association Ltd [30.07.20]
RSK was appointed by Skillcrown Homes Ltd (Skillcrown) to act as geotechnical consultant in respect of a site development. RSK’s fee proposal enclosed its terms and conditions containing a number of limitations of liability which were accepted by Skillcrown. RSK’s geo-environmental report, issued in April 2014 included and identified a third party, Hexagon Housing Association Ltd, as its joint client (along with Skillcrown). In May 2016 there was a ground collapse at the site, considered to be the result of an underground void. Hexagon subsequently intimated a tortious claim against RSK, alleging that, in purchasing the site, it had relied upon the report which failed to identify the risk of voids in the ground.
RSK issued a Part 8 claim seeking a declaration that the tortious claim could be subject to the contractual limitations of liability in the contract between Skillcrown and RSK, thus limiting any claim by Hexagon against RSK to £1m. Hexagon argued it was an inappropriate use of the Part 8 procedure. The Court held it could not determine the issues in a vacuum and without considering the existence of any contract between the parties, the terms and conditions of any such contract and the proper construction of such terms. Accordingly, it was unable to make the requisite determination by way of Part 8 proceedings and RSK’s claim for relief was not granted.
This case will have implications in the construction industry, serving to highlight the importance of ensuring contractual terms are carefully considered prior to entering into an appointment.
Contacts: Nikki Baynes, Christopher Butler, Holly Waldren
Related item: Application of a contractual liability to a third party in tort and use of the part 8 Procedure
Reflective loss and the impact on claims against directors and officers
Sevilleja v Marex Finance [15.07.20]
Mr Sevilleja (Sevilleja) owned and controlled two companies registered in the British Virgin Islands. Marex Finance Limited (Marex), a creditor of the companies, brought proceedings against the companies in England for significant sums due under a contract. Marex obtained judgment to the value of USD5.5m plus costs of £1.65million. Following the draft judgment, Sevilleja arranged for funds held by the BVI companies to be transferred into his personal control. Hence, the companies were unable to satisfy the debt and costs awarded in favour of Marex. Sevilleja later placed the companies into insolvent voluntary liquidation. Marex sought damages in tort from Sevilleja who. relied on the principle of reflective loss to defend the claim.
The Court of Appeal found in favour of Servilleja, but granted permission to Marex to appeal to the Supreme Court. The Justices were unanimous that the rule against reflective loss should not apply in this case. They also made clear that the principle of reflective loss is limited to shareholder claims and does not extend to claims made by other third parties, including creditors. However, the effect of the judgment in Sevilleja will undoubtedly be felt by companies, their directors and officers. Shareholders will seek to explore other routes to recover their loss, perhaps through a derivative or unfair prejudice claim. Creditors, due to COVID-19, will look to directors/officers for recovery as a result of alleged wrongdoing. Therefore, directors and officers should ensure they comply with their obligations proactively, and can evidence compliance.
Contacts: Jenny Boldon, Hannah Williams, Daniel Kellard
Related item: Investment fund administrators: liability for “gross negligence”
Proceedings stayed by head of the TCC due to unreasonable and oppressive behaviour by the claimant
Kew Holdings Ltd v Donald Insall Associates Ltd [14.07.20]
This was a dispute concerning unpaid fees payable to the defendant for their architectural services for refurbishment of a property owned by the claimant.
The dispute was referred to adjudication and culminated in enforcement proceedings in the TCC whereby the defendant was granted summary judgement. The claimant once again did not pay. The Court went on to grant a charging order against the property. In a final attempt to realise the outstanding sums the defendant launched proceedings to gain an order of sale of the property. This order was opposed by Kew Holdings (“KH”) who instead presented a claim against the defendant for professional negligence and breach of contract in the sum of approximately £2 million. The claimant argued that the claim amounted to an equitable set-off. In response, the defendant issued an application for the claim to be struck out or stayed until the sums were paid by KH.
The central issues for the court were:
1. To stay the professional negligence claim against the defendant unless and until KH pays the sums awarded in the enforcement proceedings.
Held: KH and the Court accepted that proceedings should be stayed
2. To strike out the professional negligence claim unless and until KH pays the sums awarded in the enforcement proceedings.
Held: the claim should not be struck out, however KH would not be able to start further adjudication without paying the outstanding judgement debt
3. To make KH pay security for the defendant’s costs in the proceedings.
Held: As a result of the claimant’s previous disregard for the Court’s orders, security for costs was granted in the sum of £600,000, to be paid into Court within 14 days.
This highlights that despite the claimant’s previous “unreasonable” behaviour in respect of unpaid debt, it still remains imperative to strike the correct balance so that parties are made aware of their right to access justice.
Contacts: Caitlin Gallagher, Christopher Butler, Holly Waldren
- 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
- A defendant’s scraping around does not impress the TCC, or the Court of Appeal
Duty of care
Valley Brook Investments v Huam [10.07.20]
The defendant in this case was an architect. It had prepared drawings for its client M concerning the conversion of a property to residential use. M intended to sell the relevant property to A and/or a SPV company controlled by A (“the Company”). At the time the drawings were sent to A, the Company had not been incorporated. The Company purchased the property and both A and the Company brought a claim alleging that the drawings had been prepared negligently. The architect sought to dismiss the Company’s claim, in part, on the basis that there was no assumption of responsibility to an entity which did not exist at the time the drawings were prepared.
The court found that the Company was within the relevant class of persons in respect of which a duty had been assumed. An awareness of the fact that a SPV was to be used was found and as at the date of reliance (purchase of the property), the SPV existed. This is a difficult case for professionals generally as protections put in place in the retainer documentation such as limitations of liability or proportional liability clauses may not be effective when the claim is brought by a non-client.
Contacts: Paul Castellani, David Robinson, Daniel Kellard
- Solicitors Liability: latest decisions August 2020
- Application of a contractual liability to a third party in tort and use of the part 8 Procedure
Limitation issues continue with professional negligence time-barred claim
Holt v Holley & Steer Solicitors [07.07.20]
The Court of Appeal decision in this case provides key guidance on establishing the date of damage in accordance with s. 2 of the Limitation Act 1980.
The claim arose out of the negligent conduct of the claimant’s solicitors who had acted for her in divorce proceedings. The claimant’s main allegation was that her former solicitors had failed to obtain permission to rely on expert valuation evidence as part of the financial relief proceedings. As a result, it was alleged that the claimant’s assets were overvalued and she was awarded less in the division of the matrimonial property. The financial relief proceedings lasted from February 2011 to May 2012, with the last day of the hearing on 16 March 2012. The negligence claim was brought on 28 March 2018. The claimant issued proceedings more than six years after the final day of the financial relief hearing, but less than six years before the date of judgement. The claimant brought claims in both tort and contract, arguing that time would not run until after judgment was handed down as damage was not suffered until this point.
The defendant sought summary judgment on the basis that both causes of action were time-barred by reason of sections 2 and 5 of the Limitation Act 1980. The court at first instance held that only the contract claim was time-barred. The claimant then appealed to the Court of Appeal only in relation to the tort claim. The sole issue to decide was the date damage had been sustained. McCombe LJ held that the claim in tort was also time-barred because the claimant’s cause of action had accrued on the last day of the hearing. Therefore, the appeal was dismissed.
The judgment provides useful insights for solicitors and litigators as regards the importance of limitation. This guidance comes at a crucial time given that some financial remedies cases can run for years, which will only be compounded by the number of cases backlogged due to COVID-19. The key message is to bring a claim in as timely a manner as possible.
Contacts: Paul Castellani, David Robinson, Holly Waldren
Related item: Solicitors Liability: latest decisions August 2020
Pre-action disclosure can no longer be used as a ‘fishing expedition’ to further advance a claimant’s case
Carillion Plc (in liquidation) v KPMG LLP and KPMG Audit Plc [03.06.20]
The claim arose following the collapse of the Carillion Group, with the focus being that, as auditors, KPMG did not detect that the financial statements of Carillion failed to reflect the company’s true financial position. Carillion made an application for pre-action disclosure from KPMG, on the basis that KMPG had refused to provide any of its working papers voluntarily, that those papers will be core documents in the future action, and are essential to proper pre-action consideration. KPMG resisted the application on the grounds that standard disclosure does not extend to the documents sought, and disclosure of those documents will not seek to dispose fairly of the anticipated proceedings.
Mr Justice Jacobs dismissed Carillion’s application noting:
- Carillion could satisfactorily plead its case based on the documents already available.
- Pre-action disclosure is not “the norm”.
- The order sought was too onerous, requiring KPMG to review some 8,500 documents.
- This case would develop regardless of the information available at this stage.
The decision puts pressure on claimants to show that their request for disclosure is not a tactical fishing expedition, and is a useful authority when responding to such pre-action threats, particularly from a costs perspective.
Contacts: Hannah Williams, Daniel Kellard
- Pre-action disclosure can no longer be used as a ‘fishing expedition’ to further advance a claimant’s case
- Inside information disclosure during suspension of trading: Mayer Holdings v Securities and Futures Commission
Read other items in Professions and Financial Lines Brief - October 2020