Professions and Financial Lines Brief: latest decisions September 2021
In this briefing, we consider the latest court decisions relating to aggregation of dishonesty claims, unregulated introducers, breach of confidentiality and misuse of private information, undertakings, director’s fiduciary duties, the rule against reflective loss and limitation.
Court of Appeal rules on aggregation of dishonesty claims against solicitors
Baines v Dixon Coles & Gill (DCG) [06.08.21]
The Court of Appeal (CA) has ruled that multiple claims arising from separate thefts by a dishonest partner in a solicitors practice did not aggregate and could not be treated as a single claim attracting one limit of indemnity.
Ms Box misappropriated over £4 million from client and office accounts and diverted incoming funds to her personal accounts. This started in February 2002, although most misappropriations took place between 2010 and 2015 (across 85 files). DCG closed in January 2016, after making a notification to its professional indemnity insurers, HDI Global SE (HDI). The HDI policy contained a £2m limit of indemnity for each and every claim. The victims of the thefts brought claims totalling more than double the limit of indemnity. Could HDI aggregate the claims and cap its exposure at £2 million?
It was held that the claims did not aggregate because the actions, taken over a number of years and without a sufficient unifying factor, could not be seen as one act (Limb 1) or as arising from one related series of acts (Limb 2).
The CA upheld the first instance decision, finding that:
- The claims did not arise out of a “series of related acts” because each arose from a separate theft from a separate client. Considering Lloyds TSB, the CA concluded that, where there is a series of acts ‘A’, ‘B’ and ‘C’, it is not enough that act A causes claim A, act B causes claim B etc. What is required is that each claim is caused by acts A, B and C collectively. Therefore, a single claim could not arise from distinct dishonest acts.
- The claims did not amount to one claim under the policy definition of ‘claim’ because the thefts had given rise both to the right of the innocent partners to claim the amount needed to remedy the shortfall in the client account, and to separate claims to indemnify them against liability to the claimants.
The outcome is a cause for concern for the solicitors’ primary market (but good news for excess layer insurers). Aggregation arguments often advanced by primary layer insurers will now be more difficult to sustain and multiple primary limits of indemnity may be repeatedly hit by such claims.
Contacts: David Robinson and Francesca Gormally
Clarification on the regulatory rules for unregulated introducers
Financial Conduct Authority (FCA) v Avacade Ltd (in liquidation) and others [05.08.21]
The Court of Appeal (CA) has provided clarification on the regulatory rules for unregulated introducers in relation to a regulatory petition brought by the FCA against two unregulated pension introducers, Avacade Limited (in liquidation) and Alexandra Associates (UK) Limited, and their associates. Avacade was found to have “funnelled” consumers into transferring existing pension funds to self-invested personal pensions (SIPPs) which invested in high risk investments.
The High Court found that this amounted to advising/arranging specified investments pursuant to Articles 25(2) and 53 Financial Services and Markets Act (Regulated Activities Order 2001) (RAO), without permission, and thus in breach of s.19 of the Financial Services and Markets Act 2000 (FSMA). The defendants appealed, arguing that, as unregulated introducers, they fell outside of the regulatory framework. They argued Article 25(2) of the RAO, which provides that a regulated activity includes “making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing or underwriting”, did not apply. The defendants also argued that Article 25(2) required “a direct and instrumental link” between the arrangement and potential investment activity.
In upholding the High Court’s decision, the CA clarified the differences between Article 25(1) and 25(2) of the RAO. The former applied to making arrangements for buying and selling of certain investments, whereas the latter applied more broadly where there were arrangements “with a view to” the investment occurring. Further, the ‘causation test’ in Article 26, which provides an express exception to Article 25(1) for “arrangements which do not or would not bring about the transaction”, did not apply to Article 25(2). The CA found that the arrangements between the defendants and consumers clearly had the dominant purpose of the consumers transferring their pensions into SIPPs and making subsequent investments through them.
This case serves as an important reminder that FSMA will apply to introducers, even if there is an attempt to distance themselves from advice provided.
High Court strikes out claims for breach of confidence, misuse of private information and negligence in data breach claim
Warren v DSG Retail Ltd [30.07.21]
Between 2017-2018, DSG Retail Ltd (DSG) was subjected to a complex cyber attack, which allowed the attacker to access the data of at least 14 million customers. The subsequent ICO investigation concluded that DSG had breached the seventh data protection principle and a Monetary Penalty Notice (MPN) was issued for £500,000 (which DSG is appealing). The claimant brought a claim against DSG for:
- Breach of confidence
- Misuse of private information
- Breach of statutory duty, and
In June 2021, DSG applied to the court for summary judgment to strike out all claims (excluding the claim for alleged breach of statutory duty). DSG’s application succeeded and Saini J struck out all claims except the claim for breach of statutory duty. Significantly, Saini J agreed with DSG’s arguments that, in order for a claim relying on breach of confidence or misuse of private information to succeed, the defendant must engage in a positive wrongful act in relation to the private information. Here, there was no suggestion that DSG “purposefully facilitated the attack”. Moreover, neither breach of confidence nor misuse of private information imposed a “data security duty” on the holders of information. The negligence claim was also struck out. The judge explained that there was no room to construct a concurrent duty in negligence when there exists a bespoke statutory regime for determining liability of data controllers. The claimant had also failed to particularise any damage suffered. A “state of anxiety” as argued by the claimant was not enough to give rise to a cause of action.
This decision is important as it narrows the scope for claimants to bring breach of confidence and misuse of private information claims in respect of data protection. This should also impact the availability of ATE insurance and the economic viability of these claims going forward.
COA rules against SIPP provider in landmark judgment highlighting the dangers of using unregulated introducers
Adams v Options UK Personal Pensions LLP (Options) [30.07.21]
Mr Adams set up a self-invested personal pension (SIPP) with Options after being contacted by an unregulated introducer, CL&P Brokers (CL&P), who stated that Mr Adams could achieve better returns with Options. The investment did not perform as hoped and Mr Adams brought a claim for damages against Options on the basis that:
- Options breached Rule 2.1.1R of the Conduct of Business Sourcebook (COBS) Rules by not acting in the best interests of Mr Adams, allowing Mr Adams to bring an action for damages under s.138D Financial Services and Markets Act 2000 (FSMA).
- CL&P had contravened the general prohibition at s.19 FSMA by ‘advising’ and/or ‘arranging’ the SIPP investment, allowing Mr Adams to ‘unwind’ his investment agreement under s.27 FSMA on the basis Options formed the agreement with Mr Adams because of CL&P, who were not authorised.
- Options were liable as joint tortfeasor with CL&P for CL&P’s negligent advice.
While Mr Adams’s claim was initially dismissed, Mr Adams appealed the decision in respect of grounds 1 and 2 above. On appeal, HHJ Dight dismissed the first ground on the basis Options acted on an “execution-only” basis and did not have a duty to act in accordance with rule 2.1.1R. On the second ground, the Court of Appeal held that the actions of CL&P amounted to ‘advising’ and ‘arranging’ on the investment as set out at art.25 and 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Accordingly, Mr Adams was entitled to consequential relief and to unwind the SIPP investment in accordance with s.27 FSMA.
This decision could cause problems for SIPP providers and similar who operate on an execution-only basis in the regulated sector and receive their clients from unregulated introducers. Insurers should consider asking their insureds at the proposal stage whether they undertake such work and, if so, what processes they have in place to monitor the conduct of unregulated introducers to avoid successful Section 27 claims.
Supreme Court issues warning to firms seeking to rely on solicitors undertakings
Harcus Sinclair LLP v Your Lawyers Ltd [23.07.21]
Harcus Sinclair LLP and Your Lawyers Ltd entered into a non-disclosure agreement regarding the VW Emissions Litigation (a class action related to VW cheated emissions testing). An undertaking clause required that Harcus Sinclair LLP ‘undertakes not to accept instruction for or to act on behalf of any other group of claimants in the contemplated group action’ without Your Lawyers’ permission. Harcus Sinclair LLP later acted for a group of claimants in the VW Emissions Litigation.
The High Court initially ruled that Harcus Sinclair LLP was in breach of contract, but this was later overturned by the Court of Appeal, which concluded that the undertaking clause was an unreasonable restraint of trade. Ultimately, however, the Supreme Court (SC) supported the High Court’s decision; it found the clause to be a reasonable protection of Your Lawyers’ interests and therefore enforceable. The clause was not, contrary to its wording, an “undertaking” in the strict legal sense. Instead, it was purely contractual and did not engage the court’s supervisory jurisdiction. As the clause was found not to be an undertaking, there was no necessity in assessing its enforceability against the solicitor who made it on behalf of the firm. The SC also stated that Incorporated legal practices are not officers of the court and the court is yet to recognise an incorporated body as one of its officers. It then stated that, if the undertaking in this case had been given as a solicitor’s undertaking, then it would not have been enforceable against an LLP because it was not given in a personal capacity. Any undertaking that is only given for, or on behalf of, a solicitor practice (LLP or Limited company) will not be enforceable against an incorporated body by way of the court’s supervisory jurisdiction.
These statements, albeit obiter, raise concerns surrounding the potential lack of protection provided for undertakings given by LLPs or Limited companies due to the limitations of the court’s supervisory jurisdiction. The statements also act as a warning to any law firms who accept undertakings to seek personal undertakings from solicitors to ensure they are enforceable as undertakings as opposed to contractual terms.
High Court rules directors breached their fiduciary duties in allotting shares
TMO Renewables Limited (In Liquidation) v Yao [20.07.21]
TMO Renewables Limited (TMO), by late 2012, was on the verge of administration. In September 2013, a major shareholder requisitioned an EGM seeking to change the board of directors. Shortly before the EGM, TMO allotted 75 million shares to a new investor. The investor was to pay for the shares within two years of the allotment and undertook to vote against the EGM resolutions. The EGM resolutions were defeated and, subsequently, TMO entered administration, followed by liquidation. TMO, through its joint liquidators, alleged that in allotting the shares, the directors had exercised their powers for an improper purpose and in bad faith, contrary to Sections 171 and 172 of the Companies Act 2006. TMO argued that, but for the directors’ breaches, the company would not have become insolvent, and instead would have increased in value.
The High Court determined that, in allotting the new shares, the directors were in breach of their fiduciary duties. The court found that it was commercially unsound for TMO to have entered into the allotment on such terms, given its urgent need for funding, and highlighted the directors’ failure to carry out due diligence. However, the case ultimately failed on causation grounds. The court considered that, although control of the board would have changed at the EGM but for the directors’ breaches, TMO would most likely have entered an asset stripping insolvency procedure thereafter. The court was also critical of the “less than impressive” evidence provided by TMO’s expert, finding that TMO had failed to provide evidence that it would not have entered into insolvency had the directors acted differently.
This case serves as a warning to directors to only exercise their powers for their proper purpose and for the company’s benefit. A director must not exercise their powers for a “collateral purpose” to advance their own position or consolidate control over the company.
Contacts: Fleur Rochester and Suleen Latif
COA rule on the rule against reflective loss where the shareholder is also a contractual promise
Broadcasting Investment Group v Smith [18.06.21]
Under the “rule against reflective loss” (also known as the “rule in Prudential”), a company shareholder cannot claim against a third party for loss which the company has a legal right to claim from that same third party, and which merely reflects loss suffered by the company itself. The Court of Appeal (CA) has found that the rule on reflective loss will not bar a shareholder’s claim who is also a contractual promisee in circumstances where the company (in which the shares are owned) has a right to bring a claim with regard to that contract against the same wrongdoer pursuant to s.1 of the Contracts (Right of Third Parties) Act 1999 (1999 Act).
The High Court held that the company (of which the contractual promisee was a shareholder) acquired the right to enforce the contract pursuant to s.1 of the 1999 Act. However, the promisee’s claim was barred by the rule in Prudential. It further found s.4 of 1999 Act (enforcement of the contract by the promise) was subject to generally applicable legal principles, including the rule in Prudential. However, the CA disagreed. It held that, since the right to enforce the contract was conferred by the 1999 Act, it was subject to terms and limits imposed by that statute. Since the rights created under s.1 of the 1999 Act enable the Prudential rule to be invoked, the CA found it could not bar a promisee’s right to enforce a contract as prescribed by s.4 of the Act. To interpret Prudential independently of the 1999 Act was artificial, and sidestepped the limits imposed by section 4 to protect a promisee. The CA found this would effectively extinguish the promisee’s right to enforce the contract, which was impermissible by the statute.
This decision will impact financial institutions as it has clarified the scope of the ‘reflective loss’ principle which was recently revisited in the Supreme Court case of Sevilleja.
Supreme Court rules on calculation of time for midnight deadlines
Matthew and others v Sedman and others [21.05.21]
The Supreme Court (SC) has ruled that, where a cause of action accrues at midnight, the whole day after midnight should be included when calculating time for limitation purposes.
The appellants were the trustees and beneficiaries of a trust (the Trust) with principal assets as shares in a company called Cattles Plc (Cattles). The respondents were the former trustees of the Trust. In April 2009, trading in Cattles’ shares was suspended. In December 2010, Cattles and its subsidiary, Welcome Financial Services Ltd (Welcome), applied to enter into court sanctioned schemes of arrangement. These included a provision for shareholders to make claims which had to be submitted “on or prior to the Bar Date”. This was defined as the first business day falling three months after the “Effective Date,” which was 2 March 2011. The deadline fell on 2 June 2011. The respondents did not make a claim on or before the deadline and the appellants issued a claim in negligence and breach of trust on 5 June 2017. The respondents argued that the claim was statute barred as limitation for the claim expired six years from the date on which the cause of action accrued. The court had to consider whether Friday 3 June 2011 should be included in the calculation of the limitation period in light of the midnight deadline. If Friday 3 June 2011 was included, the limitation date would expire on Friday 2 June 2017. If Friday 3 June 2011 was not included, then the limitation period would end on Saturday 3 June 2017. However, the parties had agreed that, if this was the case, proceedings could be issued on Monday 5 June 2017.
At first instance, the court held that the cause of action had accrued at the very first moment of 3 June 2011. Hence, the claim was issued out of time. The CA upheld this decision and concluded that it was wrong to attribute the accrual of the cause of action to the day after the expiry of the midnight deadline. The relevant cause of action accrued by the first moment of the day after midnight, as opposed to the day following midnight. As such, the claim was issued out of time. The SC further upheld the CA decision and concluded that, regardless of whether the cause of action was considered to accrue on 2 June 2011 or 3 June 2011, the 3 June 2011 was still a complete and undivided day and not a fraction of a day. Therefore, if the day was not included, the appellants would receive the benefit of an additional day alongside the six year limitation period, which would prejudice the respondents. Accordingly, the claim was brought outside of the limitation period.
The ruling is a welcome clarification of the circumstances surrounding midnight deadlines and offers useful guidance to both claimants wishing to protect their position on limitation and defendants wishing to advance limitation defences.
Contacts: Fleur Rochester and Francesca Gormally