CPR 19.8 representative action: “bifurcated process” adopted in claim by bank against representative defendant

The High Court has allowed a claim to be brought against two defendants as representatives of 5,000 others, enabling common issues to be determined in respect of the entire class under CPR 19.8 and individual issues to be decided later: Barclays Bank UK plc v Terry [2023] EWHC 2726 (Ch).

The decision appears to be the first to adopt the “bifurcated process” envisaged by Lord Leggatt in the Supreme Court’s seminal decision on representative actions in Lloyd v Google [2021] UKSC 50, considered in our blog post here. Since that decision, there has been much debate as to the feasability of using a bifurcated process, in which truly common issues (such as whether there has been an actionable breach) are determined for the whole class via a representative action, leaving any individual issues to be dealt with subsequently.

In the present case, the court has adopted the process in order to determine common issues against a class of individuals, where the claimant claims an entitlement to similar relief but accepts that some aspects of the claim must be determined individually. The court’s willingness to adopt the bifurcated process may impact the risk profile of group claims against financial institutions.

The Court of Appeal’s anticipated judgment in the Commission Recovery v Marks & Clerk case is expected to shed some light on the boundaries of the representative action procedure in that context (see our blog post on the first instance decision here). In addition, we understand that a number of claims under s.90A of the Financial Services and Markets Act 2000 have been brought under CPR 19.8 (although not on an opt-out basis), with a strike-out application in one case heard earlier this month. We will report on the outcomes of these cases when the judgments have been handed down.

For a more detailed analysis of the decision, please see our Litigation Notes blog post.

Company not ordered to disclose privileged documents to shareholders in context of late application in securities class action

In an oral judgment delivered at the end of a one-day hearing, the High Court has refused an application by the claimants in a securities class action for disclosure of privileged documents by the defendant company: Various Claimants v G4S PLC [2023] EWHC 2863 (Ch).

The decision considers the boundaries of the so-called “shareholder principle”, ie that a company cannot assert privilege against its shareholders unless the documents were produced for the dominant purpose of litigation between the company and its shareholders. The decision will be of particular interest to banks and listed issuers facing disclosure applications by claimants seeking to rely on the shareholder principle in order to obtain access to a wider pool of documents in securities class actions.

The judge noted that the principle had been recognised in many authorities, including the Court of Appeal’s decision in Woodhouse and Co (Ltd) v Woodhouse [1914] 30 TLR 559, and in Hollander on Documentary Evidence which states that the rule is so well established that it is now probably only the Supreme Court that could overturn it. Accordingly, the judge said, “as a lowly first instance judge, and even though I have my doubts as to the justification now for such a principle”, he could not say that the principle did not exist or should be got rid of.

Ultimately the judge declined to order disclosure on case management grounds, given the real practical difficulties caused by the lateness of the application and the fact that, on the judge’s conclusions, only a small proportion of the claimants would be entitled to see the defendant’s privileged documents. He considered that it would be impossible to manage a trial where privileged documents were deployed by certain claimants and could not be disclosed to others, particularly as the claimants had the same solicitors and counsel. And it was too close to trial to separate out the claimants into different trials to protect privilege.

He did however express his views on a number of points as to the application of the shareholder principle which are unclear in the case law, including that the principle should apply only to registered shareholders, rather those who hold shares through the CREST securities depository or the broad class of those with “interests in securities” sufficient to bring a securities class action under s.90A and Sch.10A of the Financial Services and Markets Act 2000 (FSMA).

For more information, please see our Litigation blog post.

Court of Appeal hands down seminal collective proceedings judgments in the Trucks and Forex proceedings

The Court of Appeal has recently handed down two seminal judgments in the Trucks and Forex proceedings:

The judgments will be of particular interest to financial institutions following developments in the class actions space, as the decisions are likely to have a significant impact on the collective proceedings regime in the Competition Appeal Tribunal (CAT). Notably, the judgments assist in clarifying: (i) the test for determining whether collective proceedings should be certified on an opt-in or opt-out basis; (ii) the test for determining carriage (that is, where multiple proposed class representatives seek to take “carriage” of the same or similar claims) and how the carriage process should be conducted; and (iii) how to resolve potential conflicts of interest within the class. The judgments also contain a number of other important statements (some of which are obiter) which may have implications for the collective proceedings regime.

For more information, please see this post on our Competition Notes blog.

High Court confirms refusal of permission for ClientEarth derivative action against Shell directors

In the closely-watched proceedings brought by climate-change activist ClientEarth against Shell plc, the High Court yesterday confirmed its earlier decision to refuse ClientEarth permission to continue its derivative action: ClientEarth v Shell plc [2023] EWHC 1897 (Ch). ClientEarth, a minority shareholder in Shell, is seeking to bring a derivative claim in Shell’s name, to challenge the directors’ response to the risks posed to Shell’s business by climate change.

Mr Justice Trower dismissed the application on the basis that, in both its written and oral submissions, ClientEarth has failed to establish a prima facie case for granting permission, as required by s.261(2) of the Companies Act 2006 (CA 2006). Like the court’s initial decision (outlined in our previous blog post), the present judgment shows that it will be difficult for environmental and other campaign groups to use the derivative action procedure to challenge directors’ strategic and long-term decision making. The court will not generally interfere in company management decisions, particularly where they require directors to balance competing considerations. Nor is the court likely to grant permission where it considers that the action has been brought for an ulterior purpose – which may be a ready inference where the applicant is a campaign group with a small shareholding.

The earlier decision refusing permission was made on the papers. ClientEarth then exercised its right under CPR 19.15 to ask the court to reconsider the decision at an oral hearing. The present judgment was given following the oral hearing. It consolidates the original judgment and therefore repeats it to a significant extent. In this post we do not repeat all of the messages from the original judgment but instead focus on the additional points of substance or emphasis in the most recent decision.

ClientEarth has announced that it will seek permission to appeal the decision.

For a more detailed analysis of the decision, please see our Litigation Notes blog post.

Rupert Lewis
Rupert Lewis
Head of Banking Litigation
+44 20 7466 2517
Neil Blake
Neil Blake
Partner
+44 20 7466 2755
James Palmer
James Palmer
Partner
+44 20 7466 2327
Silke Goldberg
Silke Goldberg
Partner
+44 20 7466 2612
Rebecca Perlman
Rebecca Perlman
Partner
+44 20 7466 2075
Maura McIntosh
Maura McIntosh
Professional support consultant
+44 20 7466 2608
Ceri Morgan
Ceri Morgan
Professional support consultant
+44 20 7466 2948

Latest guidance from the High Court on “opt-out” representative actions

The High Court has dismissed an attempt to bring a claim for misuse of private information as an “opt-out” representative action under CPR 19, where the representative claimant was seeking damages based on a “lowest common denominator” of the claimant class: Prismall v Google UK Ltd [2023] EWHC 1169 (KB).

While the case did not arise in a financial services context, banks are a common defendant target for collective proceedings. The outcome may therefore impact the risk profile of claims against financial institutions, not only in respect of data class actions (the subject matter of the present decision), but extending to class actions more generally.

A representative action under CPR 19 can only be brought if the represented class has the “same interest” in the claim. In its high profile decision in Lloyd v Google [2021] UKSC 50 (considered here), the Supreme Court found that a claim for compensation for alleged breaches of data protection legislation could not get round this hurdle by disclaiming any reliance on class members’ individual circumstances, as such claims require proof of damage and cannot be brought for the mere loss of control of data.

The present claim failed because, if assessed on an irreducible minimum basis, it could not be said that every class member had a viable claim. But conversely, if individual circumstances were taken into account, that would mean that the “same interest” test was not met. Either way the claim was bound to fail.

The decision refers in passing to the recent decision in Commission Recovery Ltd v Marks & Clerk LLP [2023] EWHC 398 (Comm) (considered here), where the High Court allowed a claim in respect of secret commission to proceed as a representative action. In that case, the court appeared to accept that some elements of the claim might differ depending on class members’ individual circumstances, and that some information or decisions (e.g. as to remedy) might be needed from them in due course. However, it did not see this as an impediment to allowing the representative action procedure to be used, as there was no conflict of interest between the claims of class members.

It is not easy to reconcile the court’s willingness in Marks & Clerk to allow the representative action procedure to be used where there were potentially significant differences between claimants’ individual circumstances, with the recognition in the present case (and in Lloyd v Google) that a need to take account of individual circumstances would be inconsistent with the “same interest” requirement. This is a developing area of procedural law which we will continue to monitor with interest, given the implications for large corporate defendants.

For more information on this decision, please see our Litigation Notes blog.

High Court refuses permission for climate-change activist shareholder to bring derivative action on behalf of Shell plc against its directors

In a significant decision for boards seeking to grapple with how to respond to the impact of climate change on their company’s business, the High Court has refused permission for ClientEarth, a minority shareholder in Shell plc, to continue a derivative action on behalf of the company against its directors (the Directors) under s.261(1) of the Companies Act 2006 (CA 2006): ClientEarth v Shell plc & Ors [2023] EWHC 1137 (Ch).

The underlying claim brought by ClientEarth alleged that the Directors had breached their statutory duties owed to Shell as a result of acts and omissions relating to: (i) Shell’s Energy Transition Strategy (ETS) published and updated between April 2021-2022; and (ii) the Directors’ response to an order made by the Hague District Court (Dutch Order) on 26 May 2021 in Milieudefensie v Royal Dutch Shell plc CLI:NL:RBDHA:2021:5339.

As a shareholder seeking to bring a derivative claim in the name of the company, ClientEarth was required to apply for permission to proceed with the action. However, the court ruled that ClientEarth failed to meet the initial threshold of establishing a prima facie case for granting permission, and so dismissed the application in accordance with s.261(2)(a) CA 2006.

The judgment provides comfort to boards that the court will be slow to allow shareholders with small or de minimis shareholdings to use the derivative claim procedure under CA 2006 as a way to challenge strategic or long-term decisions made in good faith in relation to addressing the risks posed by climate change. The top takeaways from the decision are as follows:

  1. The court is extremely reluctant to interfere in company management decisions. The decision suggests that it will be difficult for environmental or other campaign groups to challenge directors’ strategy and decision making via a derivative action, since the court will generally take the approach that it is for the directors themselves, and not the court, to determine how best to promote the success of the company. This underlying principle is woven into numerous aspects of the reasoning in this decision, including the stringent test for permission to bring a derivative action, which the court will only grant in “limited and restricted” circumstances. The court noted that the management of a business of the size and complexity of Shell will require the Directors to take into account a range of competing considerations, the proper balancing of which is a directors’ management decision, which the court is ill-equipped to interfere with. In the court’s clear view, the proper forum for ClientEarth to voice its concerns as to the Directors’ conduct, is by vote of the members in general meeting. However, it is important to remember that a technical breach of statutory duty by a director could satisfy the prima facie case threshold on other facts (for example, where a directive shareholder-requisitioned resolution has been passed, a breach of any part of that resolution could amount to a technical breach of directors’ duties).
  2. The court rejected attempts to formulate new and absolute duties in respect of climate change. The court was critical of the way in which ClientEarth put its case, by seeking to impose new and absolute duties on the Directors. These alleged new duties cut across the Directors’ general statutory duties under s.172 CA 2006, which require directors to have regard to many competing considerations in determining how best to promote the success of the company for the benefit of its members as a whole. The law does not superimpose on the general statutory duties more specific obligations as to what is and is not reasonable in every circumstance, and the question is whether the decision falls outside the range of decisions reasonably available to the Directors at the time (as per Sharp v Blank & Ors [2019] EWHC 3096 (Ch)).
  3. Relevance of a shareholder’s motivation, good faith and the views of other shareholders. Although the court was considering whether a prima facie case for granting permission had been made out, it nevertheless reflected on the test to be applied at a substantive hearing of an application for permission to bring a derivative action. One of the discretionary factors that the court must take into account under s.263(3)(a) CA 2006, is whether the shareholder is acting in good faith in seeking to continue the claims. In considering this factor, the decision suggests that the court will look at the motivation behind the action and will be unlikely to grant permission if it takes the view there is an ulterior motive and/or the derivative mechanism is being used for a collateral purpose, such as to publicise and advance the shareholder’s own policy agenda, rather than to secure the directors’ compliance with their duties for the benefit of members as a whole. The test for the substantive application for permission also requires the court to consider the views of other members of the company with no personal interest in the matter (s.263(4) CA 2006, a provision which was incorporated into the legislation during the parliamentary drafting process, as a result of efforts led by Herbert Smith Freehills and other concerned parties). Interestingly, the court quoted support for the ETS in votes cast by members at Shell’s AGMs in 2021 (88.4%) and 2022 (80%), as evidence of the strength of the members’ support of the Directors’ strategic approach to climate change risk.
  4. The court is unlikely to grant mandatory injunctive relief in such cases (even if the claim is successful). It is trite law that the court will not grant mandatory injunctive relief if constant supervision is required to enforce the relevant order. In the court’s judgment, the mandatory orders sought by ClientEarth in this case were too imprecise and would require constant court supervision and adjudication on whether the business was being run in accordance with their terms. This is likely to be a sticking point for any campaign group seeking to compel a company to adopt a different strategy.

It is important to note that the present judgment may not bring an immediate end to these proceedings. The application was considered on the papers, and ClientEarth is entitled to ask for an oral hearing to reconsider the decision, provided that it makes a request in writing within seven days of the judgment.

For a more detailed analysis of the decision, please see our Litigation Notes blog post.

Rupert Lewis
Rupert Lewis
Head of Banking Litigation
+44 20 7466 2517
Neil Blake
Neil Blake
Partner
+44 20 7466 2755
James Palmer
James Palmer
Partner
+44 20 7466 2327
Silke Goldberg
Silke Goldberg
Partner
+44 20 7466 2612
Rebecca Perlman
Rebecca Perlman
Partner
+44 20 7466 2075
Maura McIntosh
Maura McIntosh
Professional support consultant
+44 20 7466 2608
Ceri Morgan
Ceri Morgan
Professional support consultant
+44 20 7466 2948

Group litigation orders: binding effect of decisions in test cases

A recent High Court decision illustrates the complexities that can arise in determining the effect a decision in a test case will have on all the other claims pursued under a group litigation order (GLO): Axa Sun Life Plc v Commissioners of Inland Revenue [2023] EWHC 944 (Ch).

The case will be of particular interest to financial institutions following developments in securities class actions, and collective proceedings more generally.

The purpose of a GLO is to enable the court to determine the common or related issues that arise in multiple similar claims, known as the “GLO issues”, more efficiently and cost effectively than if the claims were dealt with individually. With that aim in mind, CPR 19.23 (formerly 19.12) provides that where a GLO has been made, a judgment or order in a claim on the group register in relation to one or more GLO issues is binding on the parties to all other claims on the group register at that time, unless the court orders otherwise.

However, where the court determines GLO issues through the use of sample or test cases, it is not always straightforward to discern precisely what impact the court’s decision will have on the other claims under the GLO. A distinction may be drawn for these purposes between issues which are truly common, in the sense that they apply in precisely the same way to all the claims – eg whether a product supplied by the defendant was defective – and those which are common or related in a looser sense. A classic example in this latter category is limitation, as it is often included among the GLO issues but its determination will often vary at least to some extent by reference to individual circumstances.

The decision in the present case underlines the importance of ensuring that the GLO issues are properly and adequately defined, before the court tries any test claims, so that it is clear what the judge is deciding and disputes do not later arise as to the broader impact.

For more information on this decision, please see our Litigation Notes blog.

Class Actions in England and Wales podcast series: Episode 5 – Shareholder class actions

In this podcast, Rupert LewisSimon Clarke and Gregg Rowan discuss shareholder class actions, which give rise to significant risks for corporate clients. The podcast looks at why these claims have become more prevalent in the English courts in recent years, and the mechanisms for bringing such claims and how these differ from US-style class actions. It discusses the main legal bases for such claims and some of the key battlegrounds that tend to arise.

The presenters are all authors of Class Actions in England and Wales, a textbook authored by Herbert Smith Freehills lawyers and published by Sweet & Maxwell. This is the fifth in our series of podcasts to mark the launch of the second edition of this leading textbook. Future editions will look at other topics of interest relating to class actions or areas where we expect to see growth.

To listen to the podcast, please see our Litigation Notes blog.

Our podcast is also available on iTunesSpotify and SoundCloud and can be accessed on all devices. You can subscribe and be notified of all future episodes.

High Court considers reliance in s.90A FSMA claims in context of split trial application

A recent judgment handed down by the High Court will be of interest to financial institutions following developments in securities class actions: Various Claimants v Serco Group plc [2023] EWHC 119 (Ch).

The decision considers the identity of sample claimants, for the purpose of a split trial order. For those monitoring the risk profile of claims under s.90A of the Financial Services and Markets Act 2000 (FSMA), the most interesting aspects of this judgment are the observations made by the defendant, and the court, on the critical question of reliance, which has become a central battleground in such claims.

The judgment reveals that the shape of the Serco litigation has changed significantly since the first case management conference (CMC) last year. During this period, the court handed down judgment in the first s.90A FSMA case to come to trial in this jurisdiction, in ACL Netherlands BV & Ors v Lynch & Ors [2022] EWHC 1178 (Ch) (otherwise known as the Autonomy litigation; see our banking litigation blog post). In the Autonomy judgment, the court confirmed that reliance must be upon a statement or omission, rather than, in some generalised sense, on a piece of published information (e.g. the annual report for a given year).

The defendant suggested that the Autonomy judgment has had the following impact on the scope of the claims against it in the Serco litigation: (i) cases based on direct reliance are now much more limited; (ii) a material number of claimants have dropped out; and (iii) those claiming on the basis of indirect reliance have great difficulties because of the clarification of reliance in Autonomy. These are interesting (although not unexpected) developments, given that the requirement for a claimant to show what it relied upon will make it more difficult to bring a successful s.90A claim.

The present judgment also confirms that the claimants in the Serco litigation are now relying on two categories of indirect reliance as follows:

  • Market reliance: i.e. a decision, including an automated decision to acquire, continue to hold or dispose of shares in the market at the (inflated) price at which they were in fact acquired and held.
  • Price reliance: i.e. market reliance in circumstances in which the claimant was also aware of the price of the shares, and believed the published information to be true, complete and accurate.

The court accepted that (in some respects) the developments which have occurred since the first CMC have been significant, and the fact that no claimant seeks to advance a direct reliance case based on specific statements in the defendant’s published information is “material”. However, in the context of the application relating to the identity of sample claimants, the court was not persuaded to move away from the sampling approach ordered at the first CMC, and it rejected the defendant’s move to include all of the indirect reliance cases in the second trial.

Background

The decision relates to a claim for losses suffered by certain institutional investors, in relation to shares held in a listed company, Serco Group plc (Serco), between 2006 and 2013, based on s.90A and Schedule 10A FSMA.

The key question before the court in the present judgment related to an order for a split trial, which was made following the first CMC in this case. The court directed that there would be a split trial, as follows:

  • A first trial covering the standing of the claimants and so-called common issues relating to Serco (whether there was fraud; the content of or omissions from published information; whether there had been dishonest delay; who were persons discharging managerial responsibility (PDMR); and whether any PDMR had the requisite knowledge).
  • A second trial covering so-called individual issues related to the claimants, namely, reliance, causation, loss and quantum, and limitation. The issues at the second trial were to be determined in respect of a sample of the claimants or sample funds only.

Since the CMC, the parties had made some progress in agreeing on the number and identity of the sample claimants, but two significant issues remained outstanding, which in large part related to questions of reliance.

Decision

By the time of the hearing, the following important points on the claimants’ reliance case were clear:

  • The reliance placed by the claimants on the defendant’s published information can be categorised as either: (1) direct reliance; or (2) two forms of indirect reliance: market reliance and price reliance.
  • The claimants described what they meant by the two categories of indirect reliance as follows:
    • Market reliance is “[a] decision, including an automated decision to acquire, continue to hold or dispose of shares in the market at the (inflated) price at which they were in fact acquired and held.”
    • Price reliance is market reliance in circumstances in which the claimant was also aware of “(a) the price of the shares and (b) the published information being true, complete and accurate.”
  • Where direct reliance is alleged, it is limited to reliance on the defendant’s published information as a whole, not on individual statements within the published information.

The defendant submitted that it would be proportionate for all of the non-direct reliance cases to be tried at the second trial, because such claimants were likely to have great difficulties in light of the Autonomy decision, and it would achieve certainty if they could be disposed of. However, the claimants said that this approach would move away from the sampling approach and be wrong in principle.

The court accepted that, in some respects, the developments since the first CMC had been significant (in particular, it was material that no claimant sought to advance a direct reliance case based on specific statements). However, in the court’s view, the developments did not justify an inclusion of all the indirect reliance cases to the existing cohort of sample claimants. The court justified this decision based on the following factors and conclusions:

  • Appropriate weight must be given to the fact that the parties have proceeded for the past year on the course set by first CMC order.
  • The addition of 27 master claimants at trial two would detract from a just and effective resolution of the dispute, and from costs efficiency.
  • The defendant had underestimated the evidence required from the claimants to make good the price reliance claims, which may not be straightforward and may well be challenged.
  • The defendant had underestimated the extent of the evidence and disclosure required from each individual claimant to prove that facts relevant to their cause of action under s.90A FSMA had been deliberately concealed from them by the defendant (thereby discharging the burden under s.32 of the Limitation Act 1980).
  • The same point could be made about the expert evidence required for quantification.
  • Each of the new master claimants would have to be treated as a separate claim and the additional burden imposed by their inclusion did not justify the limited benefit of a final resolution of those claims.

Accordingly, the court concluded that a sampling approach for both indirect and direct claims remained the right way forward.

A sampling approach has been adopted in earlier claims under s.90A FSMA, against RSA Insurance and G4S, and the court explained that its purpose is to try to ensure that decisions on individual issues provide as much guidance as possible, while recognising that the court’s decision will not be binding in respect of individual issues of other claimants. The court stated in this case that sampling requires:

“A balance to be struck between ensuring that appropriate similarities are identified in order to maximise the number of cases which will in practice be resolved, while not at the same time having so many sample cases that the exercise becomes unwieldy and fails to achieve the purpose for which it was imposed”.

The court also rejected an alternative proposal by the defendant: that the existing body of sample claimants should be expanded to add certain specified claimants with market reliance and price reliance claims, because there were no other claims in the sample with the same form of reliance, and/or because it was desirable for larger claims to be resolved at trial two if at all possible.

The court did not agree that it should automatically direct large claims to be included within the sample group, if there was no other justification for doing so. Stepping back and looking at the group of sample claimants as a whole, the court said it must always recognise that not every difference between the position of individual claimants and funds can be captured by a sample, and no answer is perfect. The key is to try to pick those cases which appropriately represent a wider body of claimants and common issues without overcomplication, recognising that not every fine detail can be captured.

The court therefore approved the group of sample claimants agreed by the claimants.

Rupert Lewis
Rupert Lewis
Partner
+44 20 7466 2517
Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Sarah Penfold
Sarah Penfold
Senior Associate
+44 20 7466 2619

Court of Appeal confirms reflective loss rule will bar claims of former shareholders of a dissolved company because the principle must be determined at time of alleged loss

The Court of Appeal has upheld a decision of the High Court to strike out a claim by the former shareholders of a dissolved company against an investor on the basis that all the losses claimed were barred by the reflective loss principle: Burnford & Ors v Automobile Association Developments Ltd [2022] EWCA Civ 1943.

As a reminder, the Supreme Court in Sevilleja v Marex Financial Ltd [2020] UKSC 31 confirmed 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, in respect of which the company has a cause of action against the same wrongdoer (see our blog post).

In the present case, the Court of Appeal agreed with the High Court that although the company had been dissolved, the claimants’ claim fell within the ambit of the reflective loss principle. The decision puts the time at which the reflective loss rule falls to be assessed beyond doubt: it is the time when the claimant suffered the alleged loss and not at the time proceedings were brought.

This timing point has been the subject of uncertainty following the decision of Flaux LJ (as he then was) in Nectrus Ltd v UCP plc [2021] EWCA Civ 57. Sitting as a single judge of the Court of Appeal, Flaux LJ refused permission to appeal in Nectrus and in doing so held that the claim of an ex-shareholder was not barred by the reflective loss principle, finding that the rule should be assessed when the claim is made. Although the Board of the Privy Council in Primeo Fund v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22 found that Nectrus was wrongly decided, the High Court in the present case considered that it was bound by the decision (albeit distinguishing the present case from Nectrus on the facts). On appeal, the Court of Appeal took the opportunity to set the record straight, confirming that the Privy Council’s decision in Primeo is the correct view.

We consider the decision in more detail below.

Background

The claimants were former shareholders in a company called Motoriety (UK) Ltd (Motoriety), whose business was the exploitation of two software-based products for the motoring industry. In 2015, Motoriety wished to expand its customer base and entered into negotiations with Automobile Association plc (better known as “the AA”), on the basis that the AA could invest in the company. Motoriety and the claimants subsequently entered into an investment agreement with the defendant subsidiary company of the AA. The defendant agreed to subscribe for 50% of the share capital of Motoriety and the defendant had a call option for the remaining 50% of Motoriety for consideration produced by a formula contained in the agreement. On the same day, Motoriety granted the defendant a licence to use its software and associated intellectual property rights. In 2017, Motoriety went into administration and was bought from its administrators by another company in the AA group.

The claimants subsequently brought a claim against the defendant for fraudulent or negligent misrepresentation and/or for breach of contract. The claimants alleged that they had entered into the investment agreement and the licence agreement in reliance on false representations by the defendant. The claimants also alleged that the defendant breached implied terms of the investment agreement by pursuing a course of conduct that undermined the basis of the arrangements between the claimants, Motoriety and the defendant. The claimants alleged that this led to Motoriety going into administration. The claimants also pleaded an alternative breach of contract claim that, had it not been for the defendant’s breach of contract, the defendant would have exercised the call option and paid the consideration due.

The claimants sought damages for losses incurred as a result of the fraudulent/negligent misrepresentation and/or breach of contract. On the claimants’ misrepresentation claim, losses were claimed on the basis that, had the alleged misrepresentations not been made, the claimants and Motoriety would not have done the deal with the defendant, but would have entered into a venture with a third party company and the value of the claimants’ shareholdings would have increased accordingly. Similarly, in relation to the original breach of contract claim, the claimants claimed that if the contract had been properly performed, Motoriety would have thrived and the value of the claimants’ shareholdings would have increased. Alternatively, had it not been for the defendant’s breach of contract, the defendant would have exercised its call option, so that the claimants would have been entitled to the consideration provided for by that option. Three of the claimants also claimed for the loss of their initial investments in Motoriety.

The defendant denied the claim and brought an application to strike out the claim or for reverse summary judgment on the basis that all the losses claimed by the claimants were barred by the reflective loss principle.

High Court decision

The High Court found in favour of the defendant and granted its application to strike out the claim. The High Court’s reasoning is discussed in our previous blog post here.

In summary, the High Court found that the claimants’ claims satisfied all of the conditions (set out in Marex) needed for a claim to be barred by the reflective loss rule. The claimants’ alleged losses were entirely derived from the claimed losses of Motoriety and were not separate and distinct losses. If Motoriety was restored to the register, the loss would still be in the company.

The claimants appealed.

Court of Appeal decision

The Court of Appeal upheld the High Court’s decision to strike out the claim on the basis that all the losses claimed were barred by the reflective loss principle.

The key issues which may be of interest to financial institutions are set out below.

Grounds of appeal

Two of the claimants’ grounds of appeal related to the applicability of the reflective loss principle. The first ground was that the issue was not suitable for summary determination because it raised fact-sensitive questions and the relevant law is uncertain and developing. The second ground was that the claimants’ claims were not in any event barred by the reflective loss principle.

The “reflective loss” principle

The Court of Appeal drew the following points from its review of the authorities, in particular Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, Johnson v Gore Wood & Co [2000] UKHL 65, Marex, Primeo, Allianz Global Investors GmbH v Barclay Bank plc [2002] EWCA Civ 353, and Nectrus:

  1. The reflective loss principle applies where a shareholder brings a claim “in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in distributions, which is the consequence of loss sustained by the company, in respect of which the company has a cause of action against the same wrongdoer” (Marex at paragraph 79);
  2. A shareholder cannot escape the reflective loss principle merely by showing that he has an independent cause of action against the defendant. He must also have suffered separate and distinct loss, and the law does not regard a reduction in the value of shares or distributions which is a knock-on effect of loss suffered by the company as separate and distinct;
  3. There need be no exact correlation between the shareholder’s loss and the company’s for the reflective loss principle to be applicable. The reflective loss principle can apply “where recovery by the company might not … fully replenish the value of its shares” (see Marex at paragraph 42). Equally, the company’s loss can exceed the fall in the value of its shares;
  4. The reflective loss principle will not be in point if, although the shareholder’s loss is a consequence of loss sustained by the company, the company has no cause of action against the defendant in respect of its loss;
  5. Nor will the “reflective loss” principle apply to a claim which is not brought as a shareholder but rather as, say, a creditor or an employee;
  6. The Court has no discretion in the application of the reflective loss principle, which is a rule of substantive law;
  7. The applicability of the reflective loss principle is to be determined by reference to the circumstances when the shareholder suffered the alleged loss, not those when the claim was issued (as confirmed in Primeo).

Although not emphasised in the judgment, proposition (7) had been the subject of uncertainty following the decision of Flaux LJ (as he then was) in Nectrus. Sitting as a single judge of the Court of Appeal, Flaux LJ refused permission to appeal and in doing so held that the claim of an ex-shareholder was not barred by the reflective loss principle, finding that the rule should be assessed when the claim is made. In Primeo, the Board of the Privy Council found that Nectrus was wrongly decided, confirming that the rule falls to be assessed as at the point in time when a claimant suffers loss and not at the time proceedings are brought (see our blog post).

Notwithstanding the decision in Primeo, the High Court in the present case considered that it was bound by Flaux LJ’s decision in Nectrus, albeit the High Court considered that the present case was distinguishable on the facts from Nectrus. However, in the context of the present appeal, the court said that two further decisions of the Court of Appeal indicated that Primeo was the “correct view”, namely Allianz and a subsequent decision in the Nectrus litigation: UCP plc v Nectrus Limited [2022] EWCA Civ 949 (granting Nectrus’ application to reopen Flaux LJ’s decision and granting Nectrus permission to appeal).

Suitability for summary determination

The Court of Appeal was not persuaded that the reflective loss issue was unsuitable for summary determination on the basis that the law is uncertain and developing.

The Court of Appeal underlined that the reflective loss principle had recently been considered in depth by the Supreme Court in Marex, where its existence and scope were confirmed. Also, while the principle had been the subject of debate in a number of subsequent cases, the points aired in those cases did not give rise to any legal uncertainty relevant to the present case. The Court of Appeal went on to emphasise that it is also not the case that the court should not entertain a strike out or summary judgment application wherever an undecided question can be discerned in the relevant area of law.

The misrepresentation claim

The Court of Appeal found that the misrepresentation claim was wholly barred by the reflective loss principle and the High Court was right to strike it out. The applicability of the principle did not depend on any factual disputes.

The Court of Appeal highlighted that it was evident that if the allegations of misrepresentation were well-founded, Motoriety would itself have (or have had) a cause of action against the defendant in respect of them. There were multiple references in the particulars of claim to Motoriety having relied on all the alleged representations implying that they had been made to it as well as to the claimants. The Court of Appeal also considered that the loss of the claimants’ share value was a knock-on effect of loss suffered by Motoriety for which it would itself have (or have had) a cause of action and hence was not separate and distinct. The Court of Appeal concluded that, as per Marex, the claim is in this respect one relating to loss which the claimants would have suffered as shareholders “in the form of a diminution in share value…which is the consequence of loss sustained by the company, in respect of which the company has a cause of action against the same wrongdoer”. It was thus barred by the reflective loss principle.

The breach of contract claim

The Court of Appeal found that the breach of contract claim was also barred in its entirety by the reflective loss principle and the High Court was right to strike it out.

The Court of Appeal said that any good faith obligations would have been owed to Motoriety as well as the claimants. The Court of Appeal could not see that the terms the claimants alleged would have been implied solely in favour of the claimants. If the terms were implied in the investment agreement, they would surely have been implied in favour of all the defendant’s counterparties, including Motoriety, the more so since they related to the conduct of the business which Motoriety was conducting. The Court of Appeal therefore considered that if the claimants had a contractual cause of action in respect of the matters they alleged, so would Motoriety. That being so, the claimants’ claim would be barred by the reflective loss principle unless they were alleging separate and distinct loss.

The Court of Appeal then noted that the loss of the claimants’ share value did not constitute a separate and distinct loss and the position was similar to the corresponding head of claim for misrepresentation. The loss in share value would be reflective of loss sustained by Motoriety in respect of which it would itself have (or have had) a cause of action against the defendant.

The Court of Appeal also considered that the reflective loss principle applied to the loss of the consideration from the call option the claimants claimed the defendant would have exercised. This loss related to what the claimants’ shares would have fetched if sold to the defendant following its exercise of the call option. The claimants’ allegation was that the defendant’s alleged breaches of contract meant that the claimants would not be paid anything for their shares and that reflected the fact that the breaches had brought about Motoriety’s failure such that there was no longer any prospect of either earnings or distributions. The loss claimed represented one way of measuring loss of share value. If the claimants’ case was correct, breaches of contract by the defendant caused Motoriety to fail and, in consequence, rendered the claimants’ shares worthless, both in the sense that they lost any value in the general market and in the sense that there was no longer any prospect of selling them to the defendant pursuant to the option. The Court of Appeal concluded that the claimants were therefore claiming in respect of loss “in the form of diminution in share value…which is the consequence of loss sustained by [Motoriety], in respect of which the company has [(or had]] a cause of action against [AAD]”. Further, there may or not be a precise correlation between the claimants’ loss and Motoriety’s, but no such correlation was required for the reflective loss principle to apply.

Accordingly, for all the reasons above, the Court of Appeal found in favour of the defendant and dismissed the claimants’ appeal.

Julian Copeman
Julian Copeman
Partner
+44 20 7466 2168
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7466 2529
Claire Nicholas
Claire Nicholas
Senior Associate
+44 20 7466 2058