Climate-related disclosures for issuers: FCA publishes final rules

The Financial Conduct Authority (FCA) has published a Policy Statement (PS20/17) and final rules and guidance in relation to climate-related financial disclosures for UK premium listed companies.

Companies will be required to include a statement in their annual financial report which sets out whether their disclosures are consistent with the Task Force on Climate-related Financial Disclosures (TCFD) June 2017 recommendations, and to explain if they have not done so. The rule will apply for accounting periods beginning on or after 1 January 2021.

As well as some additional guidance, the FCA has made only one material change to the rules consulted upon in March 2020 (CP20/03) with the final LR 9.8.6(8)(b)(ii)(C) R requiring non-compliant companies to set out details of how and when they plan to be able to make TCFD-aligned disclosures in the future.

With regard to monitoring compliance with the new listing rule, the FCA confirmed in its Policy Statement that it will provide further information on its supervisory approach to the new rule in a Primary Market Bulletin later in 2021.

In light of this latest regulatory development, issuers may also want to consider what, if any, litigation risks may arise in connection with climate-related disclosures (and indeed other sustainability-related disclosures which are made in response to these regulatory developments). There may be an increased risk of litigation under s90 FSMA, s90A FSMA, or in common law or equity. This was considered in greater detail in our recent Journal of International Banking & Financial Law article (published in October 2020) in which we also examined the existing climate-related disclosure requirements, the impact of the FCA’s proposals on issuers and how issuers can mitigate against such litigation risks.

Our article can be found here: Climate-related disclosures: the new frontier?

For a more detailed analysis of the FCA’s Policy Statement, please see our Corporate Notes blog post.

Simon Clarke

Simon Clarke
Partner
+44 20 7466 2508

Nihar Lovell

Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000

Sousan Gorji

Sousan Gorji
Senior Associate
+44 20 7466 2750

High Court strikes out “paradigm” claim for reflective loss in the context of allegedly negligent advice on an IPO

The High Court has struck out the most recent claim to engage the so-called “reflective loss” principle, in proceedings brought by a parent company and its subsidiary against advisers that prepared the parent company for its IPO on the Alternative Investment Market (AIM): Naibu Global International Company plc & Anor v Daniel Stewart & Company plc & Anor [2020] EWHC 2719 (Ch).

To put the decision in context, a significant number of judgments involving consideration of the reflective loss principle were adjourned pending the Supreme Court’s judgment in Sevilleja v Marex Financial Ltd [2020] UKSC 31, with the parties making submissions on the implications of the Marex judgment after it was handed down (in July 2020). This is precisely what happened in the present case, which represents the most recent application by the court of the newly defined rule.

As a reminder, the Supreme Court in Marex confirmed (by a 4-3 majority) that the reflective loss principle is a bright line legal rule, which prevents only shareholders from bringing a claim based on any fall in the value of their shares or distributions, which is the consequence of loss sustained by the company, where the company has a cause of action against the same wrongdoer (see our blog post: Untangling, but not killing off, the Japanese knotweed: Supreme Court confirms existence and scope of “reflective loss” rule).

In Naibu, the court held that the relevant claim was a “paradigm” example of a claim for reflective loss, where the loss and damage pleaded by the parent turned almost entirely upon the loss suffered by the subsidiary, since the alleged loss consisted of a fall in the value of the shares in the subsidiary (to nil). The most interesting aspect of the judgment, is the court’s rejection of the suggestion that it should look at the losses of the parent and subsidiary as they evolved over time, and that the parent should be entitled to recover any loss suffered at a particular stage if it was different in nature or quantum to the loss to the subsidiary. The court found that it would be wholly artificial to carve up the losses by time in an attempt to circumvent the application of the reflective loss rule.

While Marex emphasised the narrow scope of the reflective loss rule, Naibu demonstrates that the court is prepared to take a robust approach and strike out claims falling within its parameters. This result is likely to be welcomed by financial institutions, as the reflective loss rule is an important defence to shareholder claims, as illustrated by the context of the present case.

Background

Naibu (China) Co Ltd (Naibu China) is a Chinese sportswear company and the wholly owned subsidiary of the second claimant, Naibu (HK) International Investment Limited (Naibu HK), which is in turn the wholly owned subsidiary of the first claimant, Naibu Global International Company plc (Naibu Jersey).

In 2011, Naibu China and Naibu HK instructed the defendants in relation to a proposed floatation on the AIM. The first defendant was instructed to act as their Nominated Adviser (NOMAD) and the second defendant (Pinsent Masons) was retained as their legal adviser. Naibu Jersey was incorporated for the purposes of the AIM floatation, which took place on 30 March 2012 and went on to raise around £6m.

Subsequently, the assets of Naibu China were dissipated (allegedly by its founder) and its factory was closed. The shares in Naibu China held by Naibu HK, and in turn by Naibu Jersey were rendered valueless. Naibu Jersey was de-listed from the AIM on 9 January 2015.

Naibu Jersey and Naibu HK brought proceedings against the defendants alleging breaches of duty and/or negligence in conducting due diligence and preparing Naibu Jersey for its IPO on the AIM.

The present judgment arose in the context of Naibu Jersey’s claim against Pinsent Masons. Amongst other interlocutory activity, Pinsent Masons applied to strike out Naibu Jersey’s claim and sought reverse summary judgment on the following grounds:

  1. No implied retainer or duty of care. There was no contractual retainer between Pinsent Masons and Naibu Jersey, no need to imply any retainer, and no tortious duty of care owed to Naibu Jersey, since Pinsent Masons was engaged to act for Naibu HK and Naibu China only, and the terms and conditions incorporated in the letters of engagement with Pinsent Masons expressly excluded any liability to third parties other than their clients.
  2. Claim barred by the reflective loss rule. The loss claimed by Naibu Jersey was almost entirely reflective of the losses claimed by Naibu HK and therefore irrecoverable under the rule against recovery of reflective losses.
  3. Stay for arbitration. If the strike out / summary judgment applications failed, Pinsent Masons said that Naibu Jersey’s claim should be stayed pursuant to s.9 of the Arbitration Act 1996.

Decision

The court struck out Naibu Jersey’s claim on the basis of the reflective loss principle, save to the extent the claims related to the costs of steps taken by Naibu Jersey to assert control over and investigate the losses suffered by Naibu HK and Naibu China (in relation to which permission was given to amend the particulars of claim). The application for a stay under s.9 of the Arbitration Act was dismissed.

Implied retainer and duty of care

The legal principles governing the implication of a retainer were not disputed. It was common ground that where there is no express retainer, a retainer may nevertheless be implied from the conduct of the parties (as per Dean v Allin & Watts [2001] EWCA Civ 758).

The court was not persuaded that the facts alleged were sufficiently decisive to show that Naibu Jersey had no realistic prospect of establishing an implied retainer. In particular, Pinsent Masons had repeatedly described itself or permitted itself to be described, in formal documents, as being the solicitors for, or instructed by Naibu Jersey.

Given the court’s finding on the implied retainer, Pinsent Masons accepted that it must follow that the case on the duty of care must likewise have a real prospect of success.

Reflective loss

The main issue on the application was therefore the application of the reflective loss principle, i.e. whether Naibu Jersey’s claim against Pinsent Masons was barred because the loss claimed was reflective of the losses claimed by Naibu HK against Pinsent Masons, and therefore irrecoverable under the rule.

The court noted that the starting point in such cases is now the Supreme Court’s decision in Marex, which accepted the rule against reflective loss in Prudential Assurance v Newman Industries (No. 2) [1982] Ch 204, confirming it as a rule of law, but limiting it to claims by shareholders based on the diminution in the value of their shares or distributions that they receive as shareholders.

The court agreed with Pinsent Masons that the loss and damage pleaded by Naibu Jersey turned almost entirely upon the loss suffered by Naibu HK, since the alleged loss consisted of a fall in the value of the shares in Naibu HK (to nil) and a consequent diminution (to nil) of the value of Naibu Jersey’s investment in Naibu HK.

In the court’s view, the claim was a paradigm claim of reflective loss, which was barred by the principle as confirmed and restated in Marex. In reaching this conclusion, the court rejected Naibu Jersey’s submission that it was necessary to look at the losses of Naibu Jersey and Naibu HK as they evolved over time, making the following findings/observations:

  • The court rejected Naibu Jersey’s arguments that: (a) an investigation (through expert evidence) was required to assess the loss suffered by each of the companies at different stages; and (b) Naibu Jersey should be entitled to recover any loss suffered at a particular stage if it was different in nature or quantum to the loss to Naibu HK (Naibu Jersey suggested the losses of the two companies might diverge at different points in time because the shares were being traded in different markets).
  • Where the reflective loss rule is engaged, the decisive question is the nature of the loss claimed by the shareholder, and there is no further requirement that the amount of the loss to the company should be identical to the loss to the shareholder. In this context, the court referred to Lord Reed’s acknowledgement in Marex that a company’s loss and any fall in its share value may not be closely correlated, particularly in cases where the company’s shares are traded on a stock market. That is one of the reasons why Lord Reed rejected the avoidance of double recovery as a justification, in itself, of the reflective loss principle.
  • Given that the total losses of Naibu Jersey were ultimately the same as those of Naibu HK, it would have entirely undermined the purpose of the rule to allow Naibu Jersey to use the simple device of identifying different losses occurring at different times, with the submission that the losses of the two companies might not have been precisely contiguous.
  • The court considered that it was wholly artificial to carve up the losses by time in an attempt to circumvent the application of the reflective loss rule.

The claim by Naibu Jersey was, therefore, struck out, save in so far as it related to alleged losses relating to steps taken by Naibu Jersey to assert control over and investigate losses suffered by Naibu HK and Naibu China. The application for a stay under s. 9 of the Arbitration Act of those remaining claims was dismissed.

Ceri Morgan

Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Supreme Court ruling in Merricks: some important clarifications but a number of unresolved issues

On 11 December 2020 the Supreme Court handed down a very significant judgment relating to the certification of a £14bn opt-out competition collective action brought by Walter Merricks against Mastercard, in respect of losses alleged to have resulted from the use of anti-competitive multilateral interchange fees: Mastercard Incorporated & Ors v Merricks [2020] UKSC 51.

Although set in a competition context, the decision will be of interest to financial institutions following developments in class actions generally.

The Supreme Court largely confirmed the less restrictive approach to certification set out by the Court of Appeal when it overturned the CAT’s original refusal to grant the Collective Proceedings Order (CPO) sought by Mr. Merricks (see our previous briefing). As a result, the CAT will now need to reconsider Mr. Merricks’ application for certification of the claim against the principles set out by the Supreme Court. Thus, the Supreme Court’s ruling does not amount to any determination of the CPO application nor of the merits of the claim. Instead it provides clear principles against which the CPO application is to be reconsidered by the CAT.

For an explanation on the key takeaways and practical implications of the judgment, see this post on our Competition Notes blog.

Our Competition team will be discussing the implications of the Merricks judgment for the UK competition collective actions regime in a webinar taking place at 12pm tomorrow (16 December). You can register for the webinar here.

Class Actions in Italy: a second wave of reform

We are continuing to monitor global trends in class actions that are likely to be of interest to financial institutions, particularly in light of the growing trend of so-called class action tourism.

Having covered updates in France and Germany, we now share an article from our Milan team, considering the widespread criticisms that have been made of the current Italian regime and the key aspects of anticipated reforms.

Although a decade has passed since the introduction of class actions in Italy, only a handful of actions have been brought before the Italian courts and even fewer have been successful. There has been much debate as well regarding the very low amount of damages ultimately awarded by the courts to consumers. A drastic change has been called for, and some hope has also been pinned on the new European legislation fostering collective redress. This has been the driving force behind a comprehensive reform of the Italian class action system, aimed at expanding and encouraging the use of class actions. The implementation of these reforms has however been postponed twice, and it will now be another six months before the new class action rules come into force. Once the rules take effect, businesses should expect to see an increase in the number of collective claims brought against them.

Please see our class actions hub for further insights.

Shaping the boundaries of collective redress in Germany – a glimpse of the future under an EU representative action regime?

A recent judgment handed down by Germany’s highest civil court will be of interest to financial institutions concerned about so-called class action tourism. In a decision that will help shape the boundaries of collective redress in Germany, the German court has dismissed a claim brought against a financial institution under the Model Declaratory Action procedure.

This procedure was introduced in November 2018 in the aftermath of the diesel NOx revelations in Germany and allows an action to be brought against a business by a so-called “qualified entity” on behalf of a group of at least 50 consumers. In the present case, the court held that the plaintiff could not act as a qualified entity because it was not predominantly active in the field of advising and informing consumers.

For more information see this article by Tilmann Hertel on our global class actions hub.

Climate-related disclosures for issuers: next steps from UK financial regulators outlined

This month, there have been some significant regulatory announcements in relation to climate-related disclosures. These announcements are a result of the increasing focus on climate change and sustainability risks across governments, regulators and industry and a continued move towards corporate compliance with the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations.

While not launching new developments or heralding the unexpected, these announcements are noteworthy for issuers as they mark a change in tone from the UK regulators regarding climate-related disclosures. Previously, the Financial Conduct Authority (FCA) and Prudential Regulation Authority took a cooperative and directional view, in recognising that issuers’ capabilities were continuingly developing in some areas which might limit their ability to model and report scenarios in the manner recommended by the TCFD. With the latest announcements, it seems increasingly likely that there will now be a shift away from voluntary climate-related disclosures towards mandatory TCFD aligned disclosures across the UK economy.

Key announcements

Recent key announcements include:

  • HM Treasury publishing the Interim Report of the UK’s Joint Government-Regulator TCFD Taskforce (the Taskforce) on the implementation of the TCFD recommendations and a roadmap towards mandatory climate-related disclosures;
  • the Governor of the Bank of England’s (BoE) speech reaffirming what the BoE is doing to ensure that the UK financial system plays its part in tackling climate change;
  • the FCA’s speech on rising to the climate challenge; and
  • the Financial Reporting Council’s (FRC) publication of its Thematic Review on climate-related risk.

Summary of key announcements

These announcements highlight the UK’s financial regulators’ strategy for improving and developing climate-related disclosures. The key points from these announcements include:

Taskforce

  • The Taskforce’s Interim Report highlighted the UK government’s commitment to introduce mandatory climate-related financial reporting, with a “significant portion” in place by 2023, and mandatory requirements across the UK economy by 2025. The Interim Report considered regulatory steps around tackling climate change, and also identified proposed legislative changes from the Department for Business, Energy and Industrial Strategy (which is intending to consult in the first half of 2021 on changes to the Companies Act 2006 to insert requirements around the TCFD recommendations on compliant disclosures in the Strategic Report of companies’ Annual Reports and Accounts, including large private companies registered in the UK).
  • The Taskforce strongly supports the International Financial Reporting Standards Foundation’s proposal to create a new global Sustainability Standards Board on the basis that internationally agreed standards will help to achieve consistent and comparable reporting on environmental and, social and governance (ESG) matters.

BoE

  • The BoE reaffirmed its commitment to driving forward the business world’s response to tackling climate change and reiterated the importance of data and disclosure in firms’ attempts to manage climate risk.
  • The BoE announced that the delayed climate risk stress test (its biennial exploratory scenario dubbed “Climate BES”) for the financial services and insurance sectors would be carried out in June 2021.
  • While the Climate BES will not be used by the BoE to size firms’ capital buffers, the BoE has put down the marker that it expects firms to be assessing the impact of climate change on their capital position over the coming year and will be reviewing firms’ approaches in years to follow.
  • The BoE also directed financial firms and their clients to the TCFD recommendations to encourage focus and drive decision-making, pointing to the benefits that the BoE has itself felt from reporting this year in line with the TCFD recommendations.

FCA

  • The FCA confirmed that from 1 January 2021 new rules will be added to the Listing Rules requiring premium-listed commercial company issuers to report in line with the TCFD recommendations. As anticipated by last year’s Feedback Statement, the new rule will be introduced on a ‘comply or explain’ basis. The general expectation is that companies will comply, with expected allowances for modelling, analytical or data based challenges. It is expected that these allowances would be limited in scope. The Taskforce’s Interim Report notes that the FCA is considering providing guidance on the “limited circumstances” where firms could explain rather than comply. A full policy statement and confirmation of the final rules are expected before the end of 2020.
  • The FCA is also intending to consult on “TCFD-aligned disclosure” by asset managers and life insurers. These disclosures would be aimed at “clients” and “end-investors”, rather than shareholders in the firm itself. The consultation is intended for the first half of 2021 and is stated that “there will be interactions with related international initiatives, including those that derive from the EU’s Sustainable Finance Action Plan” (it should be noted that such standards cover much more than climate disclosures). Current indications are that these disclosure standards would come into force in 2022.
  • The FCA is co-chairing a workstream on disclosures under IOSCO’s Sustainable Finance Task Force, with the aim of developing more detailed climate and sustainability reporting standards and promoting consistency across industry.

FRC

  • The FRC emphasised that all entities (boards, companies, auditors, professional advisers, investors and regulators) needed to “do more” to integrate the impact of climate change into their decision making. One of the FRC’s ongoing workstreams is investigating developing investor expectations and better practice reporting under the TCFD recommendations.

Regulatory reporting requirements and litigation risks for issuers

The recent announcements are a reminder by the UK’s financial regulators that issuers must look beyond the current Covid-19 crisis to the oncoming climate emergency. It is clear that not engaging is not an option, even as the regulatory environment continues to change. Issuers and firms will therefore want to consider the impact of those disclosure requirements/suggestions across the board, from investor interactions to regulatory reporting to meeting supervisory expectations.

As the sands shift, issuers may also want to consider what, if any, litigation risk may arise in connection with climate-related disclosures (and indeed other sustainability related disclosures that are brought out from the shadows with these regulatory developments). There may be an increased risk of litigation under s90 FSMA, s90A FSMA, or in common law or equity. This was considered in greater detail in our recent Journal of International Banking & Financial Law article (published in October 2020) where we also examined the existing climate-related disclosure requirements, the impact of the FCA’s proposals on issuers and how issuers can mitigate against such litigation risks.

Our article can be found here: Climate-related disclosures: the new frontier?

Simon Clarke

Simon Clarke
Partner
+44 20 7466 2508

Nish Dissanayake

Nish Dissanayake
Partner
+44 20 7466 2365

Nihar Lovell

Nihar Lovell
Senior Associate
+44 20 7374 8000

Sousan Gorji

Sousan Gorji
Senior Associate
+44 20 7466 2750

High Court strikes out group claims in light of parallel claims overseas: good news for parent company liability claims?

The High Court has struck out the claims of over 200,000 claimants against two companies in a group of companies (domiciled in England and Australia respectively) arising out of an incident in Brazil. The court struck out the claims as an abuse of process in light of concurrent proceedings and compensation schemes in Brazil: Municipio de Mariana v BHP Group plc [2020] EWHC 2930 (TCC).

Whilst set in a non-financial context, this decision is relevant and comforting to UK-domiciled financial institutions who might be considered to be at risk of claims being brought which allege a duty of care in relation to the actions of their foreign subsidiaries or branches. The Supreme Court in Vedanta Resources PLC & Anor v Lungowe & Ors [2019] UKSC 20 considered whether the implementation of group-wide policies was arguably sufficient to found a duty of care owed by a parent company to third parties. The Supreme Court noted that group-wide policies do not of themselves give rise to such a duty of care to third parties, but they may do so if the parent company: (a) does not merely proclaim them, but takes active steps, by training, supervision and enforcement, to see that they are implemented by the relevant subsidiaries; and (b) in the published materials, holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not do so.

The High Court’s decision therefore provides some comfort to UK financial institutions exposed to such parent liability claims. The decision confirms that the English courts will, in appropriate cases, be prepared to take a robust approach in striking out such parent liability claims filed in the English courts against a UK-domiciled parent company on the grounds that such claims are a clear abuse of process especially: (a) where there is no compelling evidence of difficulties in bringing the claim in the relevant foreign jurisdiction; and (b) there is a concurrent claim in the relevant foreign jurisdiction which relates to the same issues and involves many of the claimants who are seeking the same compensation for the same alleged damages.

For a more detailed discussion of the High Court’s decision, please see our litigation blog post.

Harry Edwards

Harry Edwards
Partner
+61 3 9288 1821

Simon Clarke

Simon Clarke
Partner
+44 20 7466 2508

Class action reform in France: Necessary, but debatable

Proposals for a new, general regime for class actions in France were recently presented to the French National Assembly. If accepted, the new regime will replace the current, sector-based approach where class actions are governed by a variety of consumer, environment, public health and employment legislation. It will also expand substantially the list of organisations or bodies that could initiate a class action.

The proposals will likely be of interest to global financial institutions, in particular those operating/with a customer base in France, given the uptick in so-called class action tourism. This article by Martin Le Touzé and Alexandre Beaussier on our global class actions hub considers the new regime, including certain features which have prompted misgivings on the part of business. (The article was first published in French on 29 October 2020 in L’Agefi Hebdo.)

For further details on class actions, please see our class actions page.

Capital Raisings and Opportunistic M&A in a Covid-19 Environment—Lessons Learned from the Global Financial Crisis

The Journal of International Banking Law and Regulation (JIBLR) has published an article written by members of our securities class action practice: Capital Raisings and Opportunistic M&A in a Covid-19 Environment—Lessons Learned from the Global Financial Crisis.

Covid-19 will make it inevitable that some companies will need to bolster their capital positions, which will lead to rights issues and other forms of capital raising later this year and into 2021. On the other hand, there will be other companies who emerge from the immediate crisis and identify opportunities to gain market share or pursue other strategic goals through mergers and acquisitions. The article considers class action specific issues which companies may face during these types of transaction. There are certain parallels which may be drawn between the current environment and the financial crisis, and the article identifies learning points from the two class actions commenced in the English courts following major transactions in the run-up to and at the height of the financial crisis—the Royal Bank of Scotland rights issue and Lloyds’ acquisition of HBOS.

In particular, the article considers:

  • The legal tests governing what information is required to be disclosed;
  • Relevant considerations when information is excluded from public disclosures;
  • Forward-looking guidance;
  • Specificity of risk factors;
  • The impact of timetable pressure;
  • Working capital statements;
  • Recommendations to shareholders; and
  • Regulator capriciousness.

Please contact Ceri Morgan if you would like to request a copy of the full article.

Simon Clarke

Simon Clarke
Partner
+44 20 7466 2508

Harry Edwards

Harry Edwards
Partner
+61 3 9288 1821

Chris Bushell

Chris Bushell
Partner
+44 20 7466 2187

Sarah Penfold

Sarah Penfold
Senior Associate
+44 20 7466 2619

Costs recovery when you win – guidance from recent cases

One of the key features of the commercial litigation landscape in England and Wales is that costs generally follow the event, creating a disincentive for claimants to commence unmeritorious claims given their exposure to the defendant’s legal costs if the claim ultimately fails. This is also true (indeed, potentially even more so) if, as is increasingly the case, a claim is backed by a litigation funder and/or the claimant has obtained cover in the after the event insurance market for that exposure. How much of the defendant’s costs can be recovered from the unsuccessful claimant is an important consideration for claimants, insurers, funders and, of course, defendants, but is largely a matter of discretion on the part of the court following its determination of the substantive issues. Where the claim is defeated comprehensively, all other things being equal, defendants can reasonably expect to receive a significant proportion of their actual costs (subject to those costs being reasonably incurred). However, particularly in more complex claims, where the claimants are able to point to certain issues on which they were successful, arguments might be run that the court should exercise its discretion to reduce the defendant’s ability to recover its costs.

A couple of recent cases have shed some light on the approach that the courts will adopt when faced with such arguments and provide useful guidance to defendants in managing their expectations of recovery in cases where costs following the event is less straightforward to apply.

The general rule

Pursuant to CPR 44.2(2)(a), the general rule in respect of orders for costs is that costs follow the event (i.e. the unsuccessful party should be ordered to pay the costs of the successful party).

However, pursuant to CPR 44.2(2)(b), the court has discretion to make a different order. Moreover, CPR 44.2(4) directs the court, in deciding what order (if any) to make about costs, to have regard to a number of matters including whether a party has succeeded on part of its case, even if that party has not been wholly successful.

Notwithstanding the discretion that the court undoubtedly has, there is a line of reasoning which suggests that it ought not to be exercised too readily for fear of undermining the rationale for the general rule. Most notably, in Fox v Foundation Piling Ltd [2011] EWCA Civ 790, Jackson LJ criticised the “growing and unwelcome tendency” of judges to depart from the general rule because of “the uncertainty which such an approach generates”.

Lloyds/HBOS Litigation

The Lloyds/HBOS Litigation provides a very good example of a case where it was open to the unsuccessful claimants to attempt to point to aspects of the judgment that went in their favour and say that this justified the court departing from the general rule and reducing the amount of costs which the defendants could recover. This is because, whilst the claim failed in its entirety, the court did find that, in two respects, the disclosures which Lloyds made in its shareholder circular about the acquisition of HBOS were deficient. Please see our blog post for more details on the Lloyds/HBOS Litigation.

In the consequentials hearing, the claimants’ argued that the costs award in favour of the defendants should reflect the fact that, in these two respects, the defendants had been found to have breached their disclosure duties. However, the trial judge comprehensively rejected this approach (Sharp v Blank & Ors [2020] EWHC 1870 (Ch)). In doing so he made the following observations, which are particularly useful in providing guidance on the correct approach in such circumstances:

  1. It is a commonplace that a successful party will not succeed on every aspect of its case. But notwithstanding that very frequent occurrence in litigation, the general rule still applies. Costs are determined by reference to overall success. Here, the defendants had completely defeated the claims which were made.
  2. A degree of caution is needed against a too-ready departure from the general rule for the reasons explained by Jackson LJ in Fox.
  3. There is no reason in principle why a party who succeeds in establishing one element of his cause of action but fails to establish the others should be regarded as partially successful. The cause of action should be viewed as a whole – here breach was but one element of the cause of action. The claimants totally failed to prove that the breaches which were found were causative of any loss since the judge found that the acquisition would have proceeded in any event.
  4. Given the breadth of the attack, which extended to the recommendation given by the directors (which was found not to have been negligent) and well beyond the two disclosure breaches which were made out, the claimants’ degree of success in this case was in fact small.
  5. Even the measure of success achieved by the claimants was so achieved on a fine balance – the judge’s findings of breach were far from clear cut.
  6. It is, of course, not the law that a successful party can only be deprived of the costs of an issue if he has unreasonably resisted that issue any more than it is the law that he should be deprived of the costs of the issue simply because he lost it. In singling out an issue for separate treatment by way of costs the court must look for some objective ground (other than failure itself) which, alongside failure, distinguishes it from other issues and causes the general rule to be disapplied.

Terracorp Limited v Mistry & Ors [2020] EWHC 2623 (Ch)

A further example is found in the recent decision of Mr Justice Miles in Terracorp Limited v Mistry & Ors [2020] EWHC 2623. This decision followed an appeal by the claimant of the first instance decision of HHJ Johns QC.

At first instance, the defendants in Terracorp were successful overall in defending the claim. However, they ran a number of unsuccessful defences and counterclaims, which the claimants estimated took up to 85% of the court and preparation time. As a result, the claimant sought an issues-based costs order, with the defendants being required to pay 90% of their own costs.

In his costs judgment, HHJ Johns QC referred to the relevant provisions of CPR 44.2 and cited a helpful summary of the applicable principles in Sycamore Bidco v Breslin [2013] EWHC 583 (Ch):

  1. In commercial litigation where each party has claims and asserts that a balance is owing in its own favour, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action.
  2. In considering how to exercise its discretion the court should take as its starting point the general rule that the successful party is entitled to an order for costs.
  3. The judge must then consider what departures are required from that starting point, having regard to all the circumstances of the case.
  4. Where the circumstances of the case require an issue-based costs order, that is what the judge should make. However, the judge should hesitate before doing so, because of the practical difficulties which this causes.
  5. In many cases the judge can and should reflect the relative success of the parties on different issues by making a proportionate costs order.
  6. In considering the circumstances of the case the judge will have regard not only to any Part 36 offers made but also to each party’s approach to negotiations (insofar as admissible) and general conduct of the litigation. The conduct of the parties, both before and during the proceedings, is capable of being relevant.
  7. In assessing a proportionate costs order the judge should consider what costs are referable to each issue and what costs are common to several issues. It will often be reasonable for the overall winner to recover not only the costs specific to the issues which he/she has won but also the common costs.
  8. The fact that a party has not won on every issue is not, of itself, a reason for depriving that party of part of its costs.
  9. The reasonableness of taking a failed point can be taken into account.
  10. The extra costs associated with the failed points should be considered.
  11. One still has to stand back and look at the matter globally, and consider the extent, if any, to which it is just to deprive the successful party of costs.

Ultimately, in a decision which demonstrates the uncertainty that the discretion can introduce to the general rule, HHJ Johns QC awarded the defendants only 50% of their costs on the basis that the failed defences which the defendants ran accounted for a large part of the trial (albeit he did not accept that they took as much time as was contended by the claimants). The judge reached this conclusion even though he did not consider that the defendants were unreasonable in running those defences.

The claimant was granted permission to appeal on the question of whether a proportionate order of 50% of the respondents’ costs was unjustifiably high and therefore wrong, given that the appellants were not awarded any of their costs for the issues on which they succeeded at trial. Mr Justice Miles dismissed the appeal, finding that an appellate court will only interfere if satisfied that the judge’s decision was plainly wrong, emphasising the fact-dependent nature of the assessment which the trial judge will be conducting.

Harry Edwards

Harry Edwards
Partner
+61 3 9288 1821

Sarah Penfold

Sarah Penfold
Senior Associate
+44 20 7466 2619