Contractual duties of good faith: Court of Appeal confirms context is king

The Court of Appeal has allowed an appeal in a case which provides important clarification around the scope and construction of contractual provisions obliging the parties to act in good faith: Re Compound Photonics Group Ltd; Faulkner v Vollin Holdings Ltd [2022] EWCA Civ 1371.

Although set in a non-financial context, the decision will be of interest to financial institutions as it emphasises that good faith clauses must be interpreted by close reference to the particular context in which they appear, and that authorities interpreting similar clauses in other legal or commercial contexts cannot be straightforwardly applied to other situations.

In particular, the Court of Appeal rejected the proposition that it was possible or appropriate to divine from the case law a set of minimum standards that would apply in every case in which a duty of good faith is inserted into a contract, beyond the “very obvious” point that the core meaning of an obligation of good faith is an obligation to act honestly – though it also rejected the argument that a good faith obligation cannot be breached other than by acting dishonestly.

On a practical level, this case serves as a reminder that parties proposing to include an express duty of good faith should define the scope of the duty as clearly as possible within the agreement, including, where feasible to do so, identifying actions that are (or are not) required to satisfy it.

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

Green credentials: walking an advertising tightrope

In October 2022, the Advertising Standards Authority (the ASA) ruled for the first time that a bank had misrepresented its green credentials and engaged in so-called “greenwashing“. In this blog post, we consider how banks and financial services institutions can fall within the remit of the ASA’s advertising codes and the potential risks associated with making “environmental” claims.

The ASA’s role

In the UK, the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing (the CAP Code) is the rule book for non-broadcast marketing adverts (i.e. marketing communications other than TV or radio adverts). The CAP Code applies to all adverts aimed at “consumers“, anyone who is likely to see a given marketing communication (whether in the course of business or not). The central principle for all marketing communications under the CAP Code “is that they should be legal, decent, honest and truthful” (Rule 1.1).

While banks and financial services institutions may not see themselves as “marketers“, to the extent that they produce any marketing communications, including adverts in newspapers and marketing on their websites, they fall within the scope of the CAP Code. One notable exception is that the CAP Code does not apply to “investor relations” material, information addressed to members of the financial community who might be interested in the company’s stock or financial stability.

The CAP Code is designed to be self-regulatory, but the ASA is the independent body that endorses and administers it to ensure that the self-regulatory system works in the public interest. The ASA, therefore, investigates and rules on complaints from consumers or businesses under the CAP Code.

Environmental claims

Environmental claims are a particular focus area for the ASA currently, particularly since the development of its Environment and Climate Change Project. The ASA notes that the project “sends a clear signal that the ASA will be shining a brighter regulatory spotlight on advertising issues that relate to climate change and the environment in the coming months and years“.

Specific requirements for environmental claims are set out at Rule 11 of the CAP Code. In particular:

  • The basis of environmental claims must be clear. Unqualified claims could mislead if they omit significant information (Rule 11.1).
  • The meaning of all terms used in marketing communications must be clear to consumers (Rule 11.2).
  • Absolute claims must be supported by a high level of substantiation. Comparative claims such as “greener” or “friendlier” can be justified, for example, if the advertised product provides a total environmental benefit over that of the marketer’s previous product or competitor products and the basis of the comparison is clear (Rule 11.3).

However, marketers should also be aware of the general prohibitions on misleading advertising, which are equally applicable to environmental claims.

Similar provisions are also contained in the UK Code of Broadcast Advertising, which applies to adverts on radio and television series, but environmental claims have so far most commonly been brought under the CAP Code.

Misleading advertising

Rule 3 of the CAP Code generally considers the potential for marketing communications to mislead consumers. Importantly, the ASA takes into account the impression created by marketing communications, as well as specific claims and rules on the basis of the likely effect on consumers, as opposed to the marketer’s intentions. Particular rules that may be relevant to environmental claims include:

  • Marketing communications must not materially mislead or be likely to do so (Rule 3.1).
  • Marketing communications must not mislead the consumer by omitting material information. They must not mislead by hiding material information or presenting it in an unclear, unintelligible, ambiguous or untimely manner (Rule 3.3).
  • Marketing communications must state significant limitations and qualifications. Qualifications may clarify but must not contradict the claims that they qualify (Rule 3.9).

Implications of non-compliance

If the ASA considers there may be a breach of the CAP Code, it gives the marketer an opportunity to respond (usually in writing). The burden of proof is on the marketer to show that its claims comply with the CAP Code.

The ASA cannot impose legally binding penalties, but its findings are published on its website and often attract a lot of press attention. A negative finding can therefore be a strong deterrent to marketers, particularly in the field of environmental claims as banks face increased public pressure to reduce or halt their financing of oil and gas production.

ASA’s ruling against a bank

The ASA’s recent ruling centred on two adverts which ran on high streets in October 2021, in the run‑up to COP26. The adverts highlighted how the bank in question had invested $1 trillion in financing and investment globally to help its clients hit climate targets and how the bank was helping to plant two million trees. Complainants argued that the adverts omitted significant information about the bank’s contribution to carbon dioxide and greenhouse gas emissions through its other financing commitments.

The ASA upheld the complaint on the basis of CAP Code Rules 3.1 and 3.3 (misleading advertising) and Rule 11.1 (the basis of environmental claims must be clear). The ASA considered that consumers would understand the claims to mean that the bank was making a positive overall environmental contribution as a company and was committed to ensuring its business and lending model would help support businesses’ transition to models which supported net zero targets. Notably, the ASA found that the use of imagery from the natural world, including the image of waves crashing on a beach, contributed to that impression. However, the ASA referred to the bank’s annual reports to demonstrate the bank’s current financed emissions and continuing commitment to financing thermal coal mining, which it did not consider consumers would know. This was found to be “material information that was likely to affect consumers’ understanding of the ads’ overall message“.

Key takeaways

Banks have faced increasing scrutiny over the last year in relation to their climate commitments. Earlier this year, ShareAction accused 24 banks in the Net Zero Banking Alliance of pumping billions of dollars into new oil and gas production despite being part of a green banking group and Adfree Cities (one of the complainants in the ASA case) said it has made similar greenwashing-by-omission complaints against two further banks’ social media adverts.

While banks and financial service institutions will be keen to advertise their long-term commitments to net zero and their financing of projects assisting in the transition to a lower-carbon economy, there is a difficult balance to be struck in respect of their marketing communications to avoid complaints that they are misleading consumers. In particular, thought needs to be given to any necessary qualifications or disclosures (admittedly not what the ad man or woman wants to be concentrating on when devising their advertising concept), and clearly it is dangerous to seek to impute any general knowledge to consumers as to what existing customers or positions banks may have on their books. In this case, the ASA ruled that any future adverts featuring environmental claims must be adequately qualified and must not omit material information about the bank’s contribution to carbon dioxide and greenhouse gas emissions. This ruling is likely to have read-across implications for other banks which are contemplating advertising their green credentials.

So far, the adverts in question are consumer issues, but any negative press around a company’s climate impact will likely concern shareholders particularly as many banks have now passed climate change resolutions. Negative press may therefore lead to an increased risk of activist claims or shareholder reaction.

Simon Clarke
Simon Clarke
+44 20 7466 2508
Neil Blake
Neil Blake
+44 20 7466 2755
Andrew Lidbetter
Andrew Lidbetter
+44 20 7466 2066
Abigail West
Abigail West
+44 20 7466 3841

Key Supreme Court insolvency ruling clarifies stance on creditor duties

A much-anticipated Supreme Court judgment has confirmed the position as to when directors owe obligations to consider the interests of creditors, dismissing an appeal against the Court of Appeal decision in this case: BTI v Sequana [2022] UKSC 25.

This decision will be of interest to financial institutions involved in turnarounds and restructurings as a majority of the Supreme Court have:

  • affirmed the existence of the duty to consider the interests of creditors;
  • clarified that it is engaged where the directors know, or ought to know, that the company is insolvent or bordering on insolvency or that an insolvent liquidation or administration is probable;
  • explained that where interests of creditors are engaged and diverge from those of shareholders:
    • liquidation is inevitable, creditors’ interests are paramount; and
    • prior to that, there will be a fact sensitive balancing exercise to weigh up the competing interests by reference to the degree of distress.

For more information on the decision and its practical implications, see this briefing prepared by our Restructuring, Turnaround and Insolvency team.


The Court of Appeal has held that a director was not personally liable as an accessory to a tort committed by a company and has given guidance on the applicable principles: Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169.

In good news for the directors/senior managers of financial institutions, the decision suggests that it may be difficult to establish accessory tort liability against a director or senior manager outside of the circumstances where such liability has traditionally been found to exist (although every case will turn on its own facts).

For a director or senior manager to be held personally liable as an accessory to a tort committed by a company requires that person to have assisted the company in the commission of a tortious act pursuant to a common design. Whether the test is satisfied can be a difficult, or elusive, question, requiring the balancing of competing principles, and statements of legal principle must be understood in the context in which they are made.

The competing principles are that individuals are entitled to limit their liability by incorporating a company while, on the other hand, a person should be liable for their tortious acts and should not escape liability merely because they are a director of a company. So far as the context is concerned, consideration needs to be given to the nature of the tort in any particular case. Statements of principle which have been made in the context of strict liability torts (such as certain intellectual property torts, trespass and conversion) and deceit are not necessarily directly applicable to other torts – such as in this case, where the company’s liability was dependent on its assumption of a duty to the claimants in circumstances where the director had no direct dealings with those claimants and had not assumed any duty to them.

To establish that a director is liable as an accessory, something more will be needed than the director controlling or being closely involved in the actions of the company. This will be particularly so where the tort consists of a negligent failure to take a step as opposed to a deliberate act or omission, as in those circumstances it will be difficult to demonstrate a common design to do what makes the conduct tortious.

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

FCA confirms final rules for new Consumer Duty

The FCA has published the final rules and guidance and accompanying non-Handbook guidance relating to the new Consumer Duty (the Duty).

While the nature and scope of the Duty remains largely unchanged in most areas, the final rules and guidance contain some significant changes and clarifications relating to how the Duty will apply in relation to distribution chains, closed books, wholesale markets and funds and asset managers and where firms provide products or services to occupational pension schemes. Helpfully, firms have been given more time to implement the changes needed to comply with the Duty.

From a disputes perspective, the FCA kept its powder dry on the possibility of a private right of action for breaches of any part of the Duty, saying that the possibility was being kept under review following the initial consultation. Financial services firms will welcome confirmation that no private right of action has been incorporated in the final rules. Firms will still be accountable for any breach of the Duty through the Financial Ombudsman Service framework (which is now subject to increased award limits).

For a more detailed analysis of the final rules and timeframe for compliance, please see our FSR Notes blog post.


The Court of Appeal has held that claims brought in the English court by over 200,000 claimants arising out of the 2015 collapse of the Fundão Dam in Brazil can proceed, overturning the High Court’s decision which had 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 (UK) Ltd [2022] EWCA Civ 951.

Whilst set in a non-financial context, this decision is relevant 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 High Court had concluded that the proceedings would be “irredeemably unmanageable”, and that allowing the claims to progress simultaneously in England and Brazil would “foist upon the English courts the largest white elephant in the history of group actions”. The Court of Appeal, however, held that unmanageability could not itself justify a finding of abuse of process, and in any event a conclusion as to unmanageability could not be reached safely at such an early stage of the proceedings, when the precise nature and scope of the issues between the parties had yet to be identified. The proper time for considering how to manage the proceedings would be at a case management conference before the assigned judge, at which point the parties would be obliged to co-operate in putting forward case management proposals.

It was also significant that the Court of Appeal disagreed with the judge’s conclusions as to the claimants’ ability to obtain full redress in Brazil against the particular defendants. In light of the particular procedures in Brazil, and the uncertainty as to which entities could properly bring proceedings, the court was satisfied that there was a real risk that full redress could not be obtained.

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

High Court finds no unfairness in bank’s restructuring of loan arrangements

In a judgment which has only recently become available, the High Court has allowed an application by a bank for summary judgment in its claim against a high net-worth individual, pursuant to a guarantee, for monies due under a loan agreement: Bank of Beirut (UK) Ltd v Moukarzel [2021] EWHC 3777 (Comm).

This is an interesting decision for financial institutions seeking to pursue or defend claims against sophisticated commercial borrowers seeking to set aside any financial restructuring arrangements on the grounds of unfairness. It highlights that borrowers may find it difficult to establish unfairness in the relationship under section 140A of the Consumer Credit Act 1974 (CCA) particularly where: (a) they are a sophisticated counterparty; (b) there were sound commercial reasons for the terms of the lending; (c) there was a clear written warning that the borrower should seek independent legal advice before entering any arrangements; and (d) the financial institution has exercised restraint in its enforcement of any outstanding debt.

In the present case, the court was satisfied that there were no signs which would result in the conclusion that the relationship between the bank and borrower was unfair within the meaning of section 140A CCA. The court emphasised that this was commercial lending to a sophisticated commercial borrower, whereby the part-owner of a multinational group was replacing their own guarantee of some delinquent lending with a new loan on equivalent terms, effectively giving themselves another chance to clear the borrowing, rather than the bank proceeding to enforcement under the guarantee. Furthermore, the borrower could point to nothing about the terms, the way in which the restructuring was done, or about the bank’s subsequent conduct which was suggestive of unfairness.


Between 2006 and 2012, the claimant bank (Bank) provided loan facilities to a Swiss company trading in West Africa (Acacia). These loans were secured by corporate and personal guarantees, one of which was given by the defendant individual (who was one of the ultimate beneficial owners of Acacia).

In 2014, Acacia began to experience financial difficulties. Acacia fell behind on its repayments and the Bank suggested to the defendant that, instead of enforcing the guarantees, it could loan them a sum sufficient to repay Acacia’s borrowing. The defendant would ultimately repay this loan. The defendant accepted the proposal. In 2016, Acacia went into insolvency. The Bank attempted to recover outstanding sums and afforded the defendant ample time to pay. In 2019, the Bank served a notice demanding the repayment of the entire loan. The defendant did not pay.

In March 2020, the Bank brought a debt claim for all outstanding sums due under the loan facility.

The defendant denied the claim. The defendant’s case was that the relationship arising from the facility was unfair for the purposes of section 140A CCA.


The court found in favour of the Bank and allowed its summary judgment application.

The key issues which may be of broader interest to financial institutions are examined below.

Section 140A CCA

The court noted that section 140A CCA provides:

“(1) The court may make an order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair to the debtor because of one or more of the following—

    • any of the terms of the agreement or of any related agreement;
    • the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
    • any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).

(2) In deciding whether to make a determination under this section the court shall have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor).”

The court also noted that section 140B(9) CCA provides that the burden is on the creditor to show that the relationship with the debtor was fair. However, the court highlighted that if a claimant relies on evidence which uncontested and suggests no basis on which the relationship could be said to be unfair, then the evidential burden, or the burden to raise specific complaints, switches to the defendant, who is then required to identify facts which suggest unfairness.

The court also acknowledged the guidance on the applicability of section 140A CCA in Plevin v Paragon Personal Finance Limited [2014] UKSC 61 and Deutsche Bank (Suisse) SA v Khan & Ors [2013] EWHC 482 (Comm).

Was there unfairness?

The court held that there were no signs which would result in the conclusion that the relationship was unfair within the meaning of section 140A CCA.

Sophistication of borrower

The court noted that the defendant was the beneficial owner of an international trading group of companies. In the court’s view, this was someone who was familiar with offshore corporate holding structures, cross border commercial transactions and very substantial financial dealings.

Further, the court highlighted that the restructuring and facility were negotiated against the background of a corporate restructuring, which was carried out with professional advice.

The court concluded that in terms of the relationship between the Bank and the defendant, the Bank was dealing with a sophisticated borrower. This was someone who was an international trader on a very significant scale, and who was in a position to consider their options.

Fairness of terms

The court strongly disagreed that the facility provided for a penal or unreasonably high rate of default interest. In the court’s view, there had been a sound commercial reason for selecting that rate. It was explained to the defendant at the time on that basis. The Bank had also shown its reason for saying that there was nothing surprising or unobjectionable about that rate, namely it was the same rate as had been used before. The court struggled to see how it would be unfair to use that rate again when the lending was restructured.

The court also said that it would not expect that the Bank should have told a borrower like the defendant that banks charge compound interest. It was not something that it would expect a bank to have to explain even to a relatively unsophisticated borrower, and certainly not something that it would expect to need explaining to somebody who had been involved in transactions of this kind for a number of years.

The court rejected the contention that the terms entered into were appropriate for a corporate counterparty, but were not appropriate for an individual. The court underlined the importance of the context. This was a corporate loan which was being restructured because it was in default and had not been repaid. It seemed to the court that, in some ways, the terms that the defendant was able to obtain here were extremely favourable, given that the lending was already in default.

Creditor’s conduct before and at the formation of the agreement

The court underlined that the facility did contain a written warning that, if the defendant was in any doubt as to the consequences, they should seek independent legal advice. It was simply not fair to say that there was no guidance given in that regard.

The court also pointed out that, even ignoring that warning, the defendant was, or appeared to be, sufficiently sophisticated to seek their own advice if they needed it. The court said that even if the Bank had carried out an inadequate investigation of creditworthiness, it would struggle to see how that could amount to unfair conduct in the context of a relationship like this. The defendant was precisely the type of borrower who the court would consider could be expected to take a view about whether they could repay the loan for themselves.

The court rejected the suggestion that the Bank was deliberately putting in place the facility in the knowledge, or even in the hope, that the defendant would not be able to repay. In the court’s view, the defendant was already on the hook. The Acacia borrowing was already attracting default interest. The entry into the facility did very little to change the defendant’s position. Indeed, their position was improved by it.

Finally, there was no reason to think that the defendant had not read and understood the terms. There was no suggestion of any pressure being applied, and there was no complaint by defendant at any earlier point about any unfairness.

Creditor’s conduct following formation and leading up to enforcement

The court highlighted that the Bank had acted with restraint in the enforcement of the debt. The defendant had become delinquent in October 2016 and was afforded with considerable time to pay, even in the face of repeated unfulfilled promises of payment.

Accordingly, for all the reasons above, the court found in favour of the Bank and allowed its summary judgment application.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7466 2529

High Court considers receiving bank’s liability in context of APP fraud

The High Court has dismissed a claim brought by a company against a bank for knowing receipt and unjust enrichment in relation to funds received by the bank in the context of an authorised push payment fraud (APP): Tecnimont Arabia Ltd v National Westminster Bank plc [2022] EWHC 1172 (Comm).

This decision will be of interest to financial institutions faced with claims from non-customers seeking the recovery of funds mistakenly transferred, as part of a cyber-fraud, to their customers’ accounts. The decision highlights that it will be difficult for non-customers to pursue such claims against a receiving bank where: (a) the funds transferred do not constitute trust property; and (b) the bank has not been enriched at the claimant’s expense.

In the present case, the court was satisfied that the bank could not be liable for knowing receipt, because the property transferred was not trust property. Further, the bank could not be liable for unjust enrichment as the bank had not been enriched “at the claimant’s expense” according to the test laid down in Investment Trust Companies v HMRC [2017] UKSC 275.

The court underlined that if it had found the opposite, it would have in any event accepted that the defence of change of position was available to the bank. The court noted that the bank would not have discovered (or been put on notice of the risk of) any fraud being committed by the customer. It could not be said that a reasonable person would either have appreciated that the transaction was probably fraudulent or would have made enquiries or sought advice which would have revealed the probability of fraud.

We consider the decision in more detail below


The claimant company (Tecnimont) was the victim of an APP fraud. Tecnimont intended to make a payment of USD 5 million to an Italian entity in its group. Shortly thereafter, a third party fraudster gained unauthorised access to the email systems of Tecnimont’s Italian entity through a phishing email. The fraudster then sent emails which appeared to originate from the Group Finance Vice President of the Italian entity, instructing Tecnimont that the funds should be sent to a bank account over which the fraudster had control (the Receiving Account). The Receiving Account was held with the defendant bank (Bank). Tecnimont, in the belief that this was a genuine request, asked its bank to transfer the USD 5 million to the Receiving Account (the Transferred Funds).

Once the Transferred Funds were deposited into the Receiving Account, the fraudster arranged for multiple international payments out of this account over the following two days. At the point at which the fraud was discovered, a majority of the funds had dissipated.

Tecnimont accepted that it was not the Bank’s customer, and that the Bank did not owe a duty of care to it. However, Tecnimont brought a claim against the Bank for knowing receipt of property subject to a trust and unjust enrichment. Tecnimont’s case was that: (a) the Transferred Funds represented trust property in which Tecnimont had an equitable proprietary interest and which was unconscionable for the Bank to retain; and (b) the Bank had been enriched at its expense and this was unjust as it resulted from a payment made under a mistake of fact induced by the fraud of a third party.

The Bank denied the claim. The Bank’s case was that it had received Tecnimont’s funds in a ministerial capacity on behalf of its customer and changed its position by paying on those funds on its customer’s instructions. At all times, it had acted in good faith, and had no knowledge or suspicion of fraud.


The court found in favour of the Bank and dismissed the claim. The key issues which may be of broader interest to financial institutions are examined below.

Knowing receipt

The court found that the knowing receipt claim failed as the Transferred Funds did not constitute trust property.

Liability for knowing receipt

The court highlighted that the equitable principle of knowing receipt imposes a liability to account as a constructive trustee of assets received by a person in breach of trust or fiduciary duty where the recipient knows of that breach of trust or fiduciary duty, or otherwise has a state of mind that makes it unconscionable for the recipient to retain the benefit of the receipt.

The court also noted the established principle in Byers v Samba Financial Group [2021] EWHC 60 (Ch) and Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156 that there can be no liability for knowing receipt if the transferred property is not trust property.

The court also underlined that, as per Twinsectra v Yardley [2002] UKHL 12, that a cause of action lies only where the defendant has received or applied the relevant money in breach of trust for their own use.

The present case

The court commented that Tecnimont had paid away the Transferred Funds acting under a mistake induced by the deceit of a third party. The court also agreed that the property did not constitute trust property at the time it was received. Further, the Bank received the deposit for its customer and not for its own account, so there was no valid claim.

Unjust enrichment

The court found that the unjust enrichment claim failed as the Bank had not been enriched at Tecnimont’s expense. If this was wrong, the court said that, in any event, the Bank could rely on the defence of change of position.

Test for unjust enrichment

The court emphasised that, as per Banque Financiere De La Cite v. Parc (Battersea) Ltd and Others [1998] UKHL 7, in order for a claim in unjust enrichment to be made out it was necessary to establish: (a) the defendant was enriched (i.e. has benefitted); (b) the defendant’s enrichment was at the claimant’s expense; (c) the enrichment was unjust; and (d) there was no available defence.

Whether the enrichment was “at the expense” of Tecnimont

The court found that the Bank was not enriched at Tecnimont’s expense. It followed that Tecnimont had no right to restitution of any sums.

The court noted that as per Investment Trust Companies v HMRC, that there were four ways in which a claimant could satisfy the court that the defendant had been unjustly enriched at its expense (assuming there to be a “transfer of value”): (a) the claimant and defendant had direct dealings; (b) the claimant and defendant did not have direct dealings, but the substance of their dealings was such that the law would treat them as direct; (c) the claimant and defendant dealt with each other’s property; or (d) the claimant could trace an interest into property provided to the claimant by a third party.

The court noted that, in the present case, the Transferred Funds had passed through different accounts in the international banking system in order to effect the transfer from Tecnimont’s bank, Saudi British Bank SJSC (SBB), to the Bank. Consequently, the Transferred Funds could not be considered to be a ‘direct’ transfer from SBB to the Bank. Also, the parties did not deal directly with the other’s property.

The court therefore considered whether the Transferred Funds should be seen as a single scheme or transaction on the basis that it would be unrealistic to treat them in any other way than a direct transfer. The court concluded that the Transferred Funds should not be treated as being directly transferred from Tecnimont to the Bank, because to do so would not represent the transactional reality of the Transferred Funds. To do so would fail to recognise the established manner in which international bank transfers are made, and would inappropriately extend the class of cases of international bank transfers.

Accordingly, the court said that the unjust enrichment claim must fail but that it would consider the other aspects of the claim in any event (see below).

Was the enrichment unjust?

The court found (on an obiter basis) that it was satisfied that the enrichment had been unjust.

The court said that there had been a material mistake on the part of Tecnimont. It had completely been taken in by the fraud. Tecnimont’s agents had at every stage believed that they were acting on a true instruction from the Italian entity to pay the money to a bank account at the Bank. That belief was clearly wrong. The court also stated that Tecnimont did not unreasonably run the risk that it was acting on a mistake.

Whether any defences were available to the Bank?

The court found (on an obiter basis), in the event that its conclusion on whether the Bank’s enrichment had been at the expense of Tecnimont was wrong, that the Bank in any case had a complete defence to the claim. The Bank’s conduct at no stage was such that it would be unjust to permit it to rely on the defence of change of position.

The court noted that, as per Lipkin Gorman v Karpnale [1988] UKHL 12, the established principle that a change of position defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively, to make restitution in full.

The court also commented that, as per Niru Battery Manufacturing Company & Anor v Milestone Trading Ltd & Ors [2003] EWCA Civ 1446, where the recipient knows that the payer has paid the money to him as a result of a mistake of fact or indeed a mistake of law, it will in general be unconscionable or inequitable to refuse restitution to the payer.

In the present case, the court noted that: firstly, nothing in the design or operation of the Bank’s systems would make it unjust to allow the Bank to rely on the change of position defence. Secondly, the Bank would not have discovered (or been put on notice of the risk of) any fraud being committed by the customer. It could not be said that a reasonable person would either have appreciated that the transaction was probably fraudulent or would have made enquiries or sought advice which would have revealed the probability of fraud. In the court’s view, none of the Bank’s conduct had been unconscionable. Thirdly, the payment out of money from the Receiving Account was essentially an automated process. The final transfer out was not actively authorised by the Bank and was instead “permitted” by the Bank’s automated processes. In the court’s opinion, the delay in freezing the Receiving Account was not such that it would be unjust to allow the Bank to rely on the defence of change of position.

Accordingly, for all the reasons above, the court found in favour of the Bank and dismissed the claim.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7466 2529
Ariel Wiebe
Ariel Wiebe
+44 20 7466 3844

High Court dismisses Quincecare duty claim giving guidance on the scope and nature of the duty

In good news for financial institutions processing client payments, a multinational bank has successfully defended a US$1.7bn claim brought by the Federal Republic of Nigeria (FRN), with the court finding that the bank did not breach its so-called Quincecare duty: Federal Republic of Nigeria v JPMorgan Chase Bank [2022] EWHC 1447 (Comm).

As a reminder, the Quincecare duty is one aspect of a bank’s overall duty to exercise reasonable skill and care in processing customer payment instructions. It applies by way of derogation from the bank’s primary duty to comply promptly with authorised payment instructions from its customer; and requires the bank to refrain from paying out in circumstances where (allegedly) there were “red flags” to suggest that the order was an attempt to misappropriate the funds of the customer (see our previous blog posts considering the Quincecare duty here).

In the present case, the FRN alleged that the bank breached its Quincecare duty by transferring sums out of the FRN’s depository account to a Nigerian company, when the bank should have realised that it could not trust the senior Nigerian officials from whom it took instructions. The court dismissed the case on a primary finding of fact, holding that the FRN was not the victim of a fraudulent and corrupt scheme in respect of the payments and the recipient of the funds had a legitimate entitlement to them.

The court proceeded to consider the detailed Quincecare arguments (on an obiter and non-binding basis) and the judgment is significant because it engages with questions about the ambit of this controversial duty. In particular, the decision highlights the following points which are likely to be of broader interest to financial institutions:

  • Notice requirements. The judgment confirms a key point on the scope of the Quincecare duty, namely what the bank must be on notice of in order to trigger the duty. The court said that the bank must be on notice that the payment instruction itself may be vitiated by fraud. This means that a red flag in relation to historic corruption or past financial crime is not sufficient to trigger the Quincecare duty, the red flag must involve present-day dissipation of funds. This may have the effect of narrowing the application of the duty.
  • Red flags. The court gave some guidance as to what might amount to a red flag in order to trigger the Quincecare duty. The red flags considered in the judgment are necessarily specific to the factual circumstances of the case, but some general principles are identified around past financial crime, press articles and criminal/regulatory investigations. These are considered in the more detailed analysis below.
  • Terms & Conditions. The judgment underlines the importance of exclusion clauses in the T&Cs governing a customer’s account. In this case, the terms of the depository agreement modified the Quincecare duty, so that the FRN had to prove gross negligence on the part of the bank in processing the payment requests in order to succeed in its claim, rather than the ordinary standard of negligence (which is lower) usually applicable to the Quincecare duty

As a result of the decision in this case, there is still only one case to date in this jurisdiction in which the court has found that the Quincecare duty was owed and breached: Singularis Holdings v Daiwa Capital Markets [2019] UKSC 50 (see our blog post).

We consider the decision in more detail below.


The proceedings arose out of a long-running dispute, principally between the FRN, Malabu Oil and Gas Ltd (Malabu) and a subsidiary of the oil company Shell, over the rights to exploit an oilfield off the Nigerian coast. These disputes were settled pursuant to various agreements, under which Malabu surrendered its claims in exchange for US$1.1 billion to be paid via the FRN.

To facilitate this payment, the FRN opened a depository account in its name with JPMorgan Chase Bank, N.A. (the Bank). The Bank subsequently paid out the whole of the deposited sum in tranches in 2011 and 2013 on the instructions of authorised signatories of the FRN.

Following a change of government in Nigeria, the FRN brought proceedings against the Bank, asserting that the settlement agreements and these transfers were part of a corrupt scheme by which the FRN was defrauded. The FRN said that the Bank was on notice that Malabu’s past was “extremely murky” (Malabu’s name had been closely associated with a former oil minister who was convicted in France in 2007 of money laundering in an unrelated transaction) and that Malabu and certain members of the Nigerian government giving the payment instructions (including the then-Attorney General, Mr Adoke) transferred these sums for their own benefit and for the benefit of other corrupt officials.

The FRN brought a claim against the Bank on the basis that the payments were made in breach of the Quincecare duty of care, named after the case of Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363 in which this duty of care was first described. There was no allegation that the Bank knew about or was in any way involved in the alleged fraud, but it was said that the Bank should have realised that it could not trust the senior Nigerian officials from whom it took instructions. The FRN claimed that the Bank should not have made the payments it was instructed to make; that in making the payment the Bank was grossly negligent; and was therefore liable to pay damages to the FRN in the same sum as the transfers out plus interest.


The High Court found in favour of the Bank and dismissed the claim. The key issues which may be of broader interest to financial institutions are examined below.

The nature and scope of the Quincecare duty

The court recognised that the law on the Quincecare duty is found in a relatively limited number of authorities, and cited the original formulation by Mr Justice Steyn in Quincecare itself, as follows:

“a banker must refrain from executing an order if and for so long as the banker is ‘put on inquiry’ in the sense that [they have] reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company.”

The court then considered each of the subsequent authorities considering the duty, highlighting in particular the following themes:

  • Purpose of the duty. The court noted the observation of Baroness Hale PSC in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd (Rev 1) [2019] UKSC 50, that the purpose of the Quincecare duty is to protect a bank’s customer from the harm caused by the people for whom the customer is, one way or another, responsible. She said that the purpose was to protect a company against the misappropriation of funds which, by definition, is done by a trusted agent of a company who is authorised to withdraw its money from the account.
  • Internal or external fraud? There was some discussion in the judgment as to whether the Quincecare duty is limited to “internal fraud” cases described in the bullet point above, i.e. to protect a corporate customer from its trusted agent who is perpetrating a fraud on the bank’s customer. However, the court noted the decision in Philipp v Barclays Bank UK plc [2022] EWCA Civ 318, which said that the Quincecare duty may apply where the instruction comes from someone other than the agent of the customer, i.e. outside the internal fraud paradigm.
  • Narrow and confined duty. Despite the extension of the duty beyond the original paradigm of internal fraud, the court pointed to a number of authorities which emphasise that the Quincecare duty is narrow and confined (including Quincecare and Philipp).
  • When will the duty arise? The court also highlighted obiter commentary from Philipp, suggesting that the duty is applicable whenever a banker is on inquiry that the instruction is an attempt to misappropriate funds (based on the logic of the principles which establish the duty).
  • What will put the bank on notice? Against this backdrop, the court said if the Quincecare duty to is to extend beyond the original paradigm of internal fraud, it becomes particularly important to focus on what is the content of that obligation. In the court’s view, it would be right to say that: (a) the duty arises in relation to the payment instruction; (b) there needs to be a clear focus on the issue of what it is of which the bank in question must be on notice; and (c) unless the bank is on notice that the instruction in question may be vitiated by fraud – that the payment instruction is an attempt to misappropriate the customer’s funds – the duty does not arise.

The court concluded that the FRN had to prove that the 2011 and 2013 payments were part of a contemporaneous fraud on it, and the Bank was on notice of the possibility of that fraud. In other words, FRN had to establish that the Bank was on notice (to the relevant standard) of the specific fraud in 2011/2013 which was said to vitiate the payment instruction.

Was there a fraudulent and corrupt scheme?

The court underlined that it was critical to the FRN’s Quincecare case that there was a fraudulent and corrupt scheme involving the agreement under which sums were said to be due from FRN to Malabu (i.e. that Malabu had no legitimate entitlement to the funds). The court found that the FRN’s case that it was the victim of a fraudulent and corrupt scheme failed on this primary finding of fact. We consider the court’s analysis on this aspect of the case briefly below, before turning to the court’s obiter commentary on the alleged breach of duty.

Foreign act of state doctrine

The court had to consider an antecedent question, namely whether the foreign act of state of doctrine prevented it from deciding whether there was a fraudulent and corrupt scheme.

The court found that the foreign act of state doctrine did not apply in this case.

The court noted that, as per “Maduro Board” of the Central Bank of Venezuela v “Guaidó Board” of the Central Bank of Venezuela [2021] UKSC 57, there is a rule that courts in this jurisdiction will not adjudicate or sit in judgment on the lawfulness or validity of an executive act of a foreign state under its own law, performed within the territory of that state. This is founded on the respect due to the sovereignty and independence of foreign states and is intended to promote comity in inter-state relations. However, it said this rationale could not apply where the English court is giving effect to a decision of a foreign court that the relevant executive act was unlawful and a nullity.

Further to its analysis in this case, the court concluded that the doctrine does not apply where a state requests that the English court adjudicate on its own acts as the FRN did. The court added for completeness that if the doctrine did in principle apply to the acts in question, the present case would fall within the exception that the doctrine will not apply to foreign acts of state that are contrary to English public policy.

Fraudulent and corrupt scheme

The court cited Braganza v BP Shipping Ltd [2015] UKSC 17, Portland Stone Firms Ltd v Barclays Bank plc [2018] EWHC 2341 (QB), Three Rivers DC v Bank of England [2001] UKHL 16 and JSC Bank of Moscow v Kekhman [2015] EWHC 3073 (Comm) for the standard of proof it should apply to the allegations of a fraudulent and corrupt scheme, summarising the position as follows:

  • The standard of proof for these allegations was the ordinary civil standard of the balance of probabilities.
  • It was not the case that the FRN had to establish that there was no other explanation which fit the facts.
  • What one was looking for was the presence of facts which (against all the relevant background) tilted the balance in favour of a finding of fraud.
  • If the facts were equally consistent with honesty and dishonesty, a conclusion of fraud could not result.

The court was not persuaded that there was a fraudulent and corrupt scheme perpetrated on the FRN. In its view, there was no fact which tilted the balance when one looked at the whole picture so as to justify an inference of dishonesty.

Was the Bank in breach of its Quincecare duty?

The court went on to find that the Bank was not grossly negligent and had not breached its Quincecare duty in any event (see below as to why the standard of duty applied was gross negligence). Given its primary finding of fact, all of the court’s observations on the Quincecare duty in this case were made on an obiter and non-binding basis.

Test for gross negligence

Historically, cases considering the Quincecare duty have applied the ordinary standard of negligence, because it is the duty imposed on the bank to refrain from executing the order if it has reasonable grounds for believing the payment instruction is an attempt to defraud the customer. This was confirmed in Quincecare itself to be an objective test, judged by the standard of an ordinary prudent banker.

However, in this case, the FRN accepted that it would have to allege and prove gross negligence in processing the payment requests in order to succeed in its claim. This was because the terms of the depository agreement modified the Quincecare duty, by including a clause excluding the Bank from liability to the customer for action pursuant to the agreement unless caused by “fraud, gross negligence or wilful misconduct”.

Both sides agreed that the leading authority on what is required to prove gross negligence is The Hellespont Arden [1997] 2 Lloyd’s Rep 547, in which the court summarised the standard as follows:

“‘Gross’ negligence is clearly intended to represent something more fundamental than failure to exercise proper skill and/or care constituting negligence. But, as a matter of ordinary language and general impression, the concept of gross negligence seems to me capable of embracing not only conduct undertaken with actual appreciation of the risks involved, but also serious disregard of or indifference to an obvious risk.”

The court highlighted that the concept of gross negligence is fact sensitive and a “notoriously slippery concept”, which requires something more than negligence but does not require dishonesty or bad faith and does not have any subjective mental element of appreciation of risk. The court underlined that even a serious lapse is not likely to be enough to engage the concept of gross negligence. The target is mistakes or defaults which are so serious that the word reckless may often come to mind, even if the test for recklessness is not met.

The court concluded that to establish gross negligence in this case, it would need to consider two questions:

  1. Was there an obvious risk that FRN was being defrauded in 2011 and 2013?
  2. Did the Bank’s conduct evidence serious disregard for that risk?

For each of the 2011 and 2013 payments, the court assumed that there was a fraud (contrary to its primary conclusion of fact on this point) and considered whether the risk of that fraud was obvious to the Bank at the relevant time. This analysis is considered below in respect of each tranche of payment transfer.

2011 payment

The court found that (assuming that there was a fraud, contrary to its primary finding of fact) there was no obvious risk of that fraud in 2011.

The parties agreed what was known by the Bank at the time of the payment transfer in 2011, but there was a massive disjunction as to what that knowledge imported. On the FRN’s case, the Bank knew of sufficient facts which a reasonable and honest banker would have considered to give rise to a serious or real possibility that the FRN was being defrauded. The Bank maintained that the same facts did not put it on enquiry.

The court considered the list of facts or “red flags” said to put the Bank on notice for the purpose of its Quincecare duty, alongside expert evidence from both sides as to the standards of a reasonable and prudent banker.

In respect of the 2011 payment, the list of red flags relied by the FRN related to money laundering and past financial crime. The court said that while red flags of that type might well be said to be “many, glaring and obvious” in this case, there was no serious or real possibility that the Bank might have thought that the FRN was being defrauded in relation to the 2011 transaction. In reaching this conclusion, the court made the following general observations:

  • It was not enough to ask about fraud in broad terms, because that did not engage the particular fraud which needed to be proved. This was a transaction which had unattractive features, but these and an association with past corruption could not be enough to trigger a Quincecare duty in the context of a case about a specific fraud in 2011.
  • It was necessary to ask whether there was a serious and obvious risk that the agreements pursuant to which the 2011 payment was made were themselves fraudulent (that Mr Adoke was acting in fraud of the FRN in bringing them and the machinery of payment under them into existence).
  • There were plainly high-risk features for the purposes of AML and financial crime and corruption generally, but those were “plainly not enough”. The court recognised that the Bank filed multiple suspicious activity reports in relation to the payments, but ultimately determined that AML best practice was not a relevant consideration in the context of the Quincecare duty.
  • The court also took account of the Bank’s understanding of the commercial rationale for the 2011 transaction, which formed the backdrop to the Bank’s actions. In circumstances where the Bank had identified the commercial rationale for the transaction – absent something else to move the dial – there would be no reason why the Bank would be wrong, let alone grossly negligent, not to inquire why the parties had used the contractual structure that they had. However, the court did note that what would move the dial would be a suite of circumstances.

Accordingly, the FRN’s case on the 2011 payment failed, even if there had been a fraud.

2013 payment

The court was satisfied that the FRN’s case on the 2013 payment would also fail, even if there had been a fraud.

There was again common ground as to what the Bank knew in 2013, but disagreement as to whether these matters put the Bank on notice so that it was grossly negligent in making the 2013 payment without raising an inquiry with the FRN.

The court said that there was also common ground (in essence) that there was an apparent risk throughout this transaction of past corruption, but the question was (as per the 2011 payment), whether the Bank was on notice of a serious possibility of current fraud/corruption in respect of the 2013 transaction.

In its assessment, the court considered certain press articles published at the time about a Nigerian corruption scheme. The court noted that these moved the Bank closer to being on inquiry but alone, given the vagueness of the allegations and the tension with the comprehended commercial rationale, they did not move the dial. The court also considered a cluster of investigations undertaken between 2012 and 2013 and agreed that the fact of an investigation would not have suggested to a reasonable and honest banker in the Bank’s position that the bona fides of the FGN’s authorised officers had specifically been called into question. The court also accepted that the fact the authorities (such as SOCA) gave their consent to the payments – after carrying out an investigation – would have been a source of considerable comfort to a reasonable and honest banker. However, the court emphasised that the investigations added to the effect of the press reports. It was not merely bad press; it was the antennae of multiple authorities twitching.

The court concluded that as at 2013 (emphasis added):

“JPMC were on notice of a risk (possibly amounting to a real possibility) of the relevant fraud and that it failed to act. However, the gross negligence test is not met. I do not consider that the evidence reaches the level of establishing an obvious risk. There was a risk – but it was, on the evidence, no more than a possibility based on a slim foundation. There was insufficient connection between what was known and the fraud whose risk would need to be obvious.”

The court also found that there was no serious disregard of the risk of the sort required by the authorities on gross negligence (although the court regarded the two limbs as going hand in hand, so that if there had been an obvious risk, a failure to act would have been a serious disregard of the risk).

Loss and contributory negligence

The court made various further obiter findings on loss and contributory negligence, which are beyond the scope of this blog post as they did not impact the outcome and are fact specific.

Accordingly, the claim against the Bank failed.

Chris Bushell
Chris Bushell
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Ceri Morgan
Ceri Morgan
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Nihar Lovell
Nihar Lovell
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How to navigate the Autonomy judgment: guidance for corporate issuers defending Section 90A / Schedule 10A FSMA shareholder claims

The High Court has handed down its long-awaited judgment in the US$5 billion civil fraud action brought by the Hewlett Packard group in connection with its acquisition of the UK software company Autonomy Corporation Limited in 2012: ACL Netherlands BV & Ors v Lynch & Ors [2022] EWHC 1178 (Ch).

The judgment follows a previously published Summary of Conclusions, in which the High Court confirmed that the claimants “substantially succeeded” in their claims against two former Autonomy executives (see this post on our Civil Fraud and Asset Tracing Notes blog, which sets out the background facts to the dispute and summarises the outcome).

The successful claims were brought under s.90A of the Financial Services and Markets Act 2000 (FSMA), common law misrepresentation and deceit, and the Misrepresentation Act 1967, as well as claims for breach of the defendants’ management duties.

The 1657-page judgment is significant, not only because the case is one of the longest and most complex in English legal history, but also because it is the first s.90A FSMA case to come to trial in this jurisdiction.

As a reminder, s.90A (and its successor, Schedule 10A FSMA) is the statutory regime imposing civil liability for inaccurate statements in information disclosed by listed issuers to the market. It imposes liability on the issuers of securities for misleading statements or omissions in certain publications, but only in circumstances where a person discharging managerial responsibilities at the issuer (a PDMR) knew that, or was reckless as to whether, the statement was untrue or misleading, or knew the omission to be a dishonest concealment of a material fact. The issuer is liable to pay compensation to anyone who has acquired securities in reliance on the information contained in the publication, for any losses suffered as a result of the untrue or misleading statement or omission, but only where the reliance was reasonable.

In recent years, there has been a noticeable uptick in securities litigation in the UK, in particular in claims brought under s.90A/Sch 10A FSMA. The purpose of this blog post is to distil the key legal takeaways on s.90A FSMA arising from the judgment, which may be relevant to such claims.

Scope of s.90A / Sch 10A FSMA

The court accepted the defendants’ “general admonition” that the court should not interpret and apply s.90A/Sch 10A FSMA in a way which exposes public companies and their shareholders to unreasonably wide liability.

It emphasised that, in considering the scope of these provisions (and in particular in considering the nature of reliance which must be shown and the measure of damages), the history of the s.90A regime is relevant. The court highlighted the following background to the provisions of FSMA, in particular:

  • Prior to s.90A, English law did not provide any remedy (statutory or under the common law) for investors acquiring shares on the basis of inaccuracies in a company’s financial statements (in contrast to the long-established statutory scheme of liability for misstatements contained in prospectuses). The rationale for the different treatment of liability for misstatements in prospectuses and those in other disclosures was because an untrue statement in a prospectus can lead to payments being made to the company on a false basis, but the same cannot be said of an untrue statement contained in an annual report, for example.
  • The ultimate catalyst for the introduction of a scheme of liability was the Transparency Directive (Council Directive 2004/1209/EC), which included enhanced disclosure obligations and the requirement for a disclosure statement. This gave rise to concerns that the English law’s restrictive approach to issuer liability would be disturbed and that issuers (and directors and auditors) might be made liable for merely negligent errors contained in narrative reports or financial statements.
  • The regime for issuer liability was introduced in this jurisdiction in a piecemeal fashion, recognising the historical tendency against liability. The government was aware that the scheme would involve a balance between: (a) the desire to encourage proper disclosure and affording recourse to a defrauded investor in its absence; and (b) the need to protect existing and longer-term investors who, subject to any claim against relevant directors (who may not be good for the money), may indirectly bear the brunt of any award against the issuer.
  • The original s.90A provisions introduced by the government were subsequently extended with effect from 1 October 2010 as follows: (a) to issuers with securities admitted to trading on a greater variety of trading facilities; (b) to relevant information disclosed by an issuer through a UK recognised information service; (c) to permit sellers, as well as buyers, of securities to recover losses incurred through reliance on fraudulent misstatements or omissions; and (d) to permit recovery for losses resulting from dishonest delay in disclosure. However, liability continued to be based on fraud and no change was suggested or made to the limitations that: (i) liability is restricted to issuers; and (ii) liability can only be established through imputation of knowledge or recklessness on the part of PDMRs of the issuer. Further, no specific provisions to determine the basis for the assessment of damages were introduced.

Two-stage test for liability under s.90A /Sch 10A FSMA

The court confirmed that the provisions of s.90A / Sch 10A FSMA make clear that there is an objective and a subjective test, both of which must be satisfied to establish liability:

  • Objective test: the relevant information must be demonstrated to be “untrue or misleading” or the omissions a matter “required to be included”.
  • Subjective test: a PDMR must know that the statement was untrue or misleading, or know such omission to be a “dishonest concealment of a material fact” (referred to in the judgment as “guilty knowledge”).

Each of these tests is considered separately below.

The objective test (untrue or misleading statement or omission)

The court said that the objective meaning of the impugned statement, is “the meaning which would be ascribed to it by the intended readership, having regard to the circumstances at that time”, endorsing the guidance provided in Raiffeisen Zentralbank Osterreich AG v The Royal Bank of Scotland plc [2010] EWHC 1392 (Comm).

The court gave some further guidance as to how to establish the objective meaning of a statement for the purpose of a s.90A/Sch 10A FSMA claim, including the following:

  • The content of the published information covered by s.90A/Sch 10A will often be governed by certain accounting standards, provisions and rules, which involve the exercise of accounting judgement where there may be a range of permissible views. The court confirmed that a statement is not to be regarded as false or misleading where it can be justified by reference to that range of views.
  • Where the meaning of a statement is open to two or more legitimate interpretations, it is not the function of the court to determine the more likely meaning. Unless it is shown that the ambiguity was artful or contrived by the defendant, the claim may not satisfy the objective test.
  • The claimant must prove that they understood the statement in the sense ascribed to it by the court.

The subjective test (guilty knowledge)

As in the common law of deceit, it must be proven that a PDMR “knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading”; or alternatively, that they knew that the omission of matters required to be included was the dishonest concealment of a material fact. The court noted that for both s.90A and Sch 10A, the language used shows that there is a requirement for actual knowledge.

The court clarified several key legal questions as to what will amount to “guilty knowledge” for the purpose of the subjective test, including the following:

  • Timing of knowledge. In the context of an allegedly untrue/misleading statement, a party will be liable only if the facts rendering the statement untrue were present in the mind of the PDMR at the moment the statement was made. In the case of an omission, the PDMR must have applied their mind to the omission at the time the information was published and appreciated that a material fact was being concealed (i.e. that it was required to be included, but was being deliberately left out).
  • Recklessness. In the context of s.90A/Sch 10A FSMA, recklessness bears the meaning laid down in Derry v Peek (1889) 14 App. Cas. 337, i.e. not caring about the truth of the statement, such as to lack an honest belief in its truth.
  • Dishonesty
    • Even on the civil burden of proof, there is a general presumption of innocent incompetence over dishonest design and fraud, and the more serious the allegation, the more cogent the evidence required to prove dishonesty.
    • For deliberate concealment by omission, dishonesty has a special definition under Sch 10A (although s.90A contained no such special definition), which represents a statutory codification of the common law test for dishonesty laid down in R v Ghosh [1982] 1 QB 1053 (although in a common law context, that test has been revised by Ivey v Genting Casinos (UK) Ltd [2018] AC 391). Under the Sch 10A definition, a person’s conduct is regarded as dishonest only if:

“(a) it is regarded as dishonest by persons who regularly trade on the securities market in question, and (b) the person was aware (or must be taken to have been aware) that it was so regarded.”

    • Any advice given to the company and its directors from professionals will be relevant to the question of dishonesty (see below).
  • Impact of advice given by professionals on the subjective test
    • The court emphasised that, where a PDMR receives guidance from the company’s auditors that a certain fact does not need to be included in the company’s published information, then the omission of that fact on the basis of the advice is unlikely to amount to a dishonest concealment of a material fact (even if the disclosure was in fact required).
    • Similarly, where a PDMR has been advised by auditors that a particular statement included in the accounts was a fair description (as required by the relevant accountancy standards), it may be unlikely that the PDMR had knowledge that the statement was untrue/misleading or was reckless as to its truth (unless the auditor was misled).
    • However, in the court’s view, directors are likely to be (and should be) in a better position than an auditor to assess the likely impact on their shareholders of what is reported, and (for example) to assess what shareholders will make of possibly ambiguous statements. Accordingly, the court said “on matters within the directors’ proper province, the view of the company’s auditors cannot be regarded as a litmus test nor a ‘safe harbour’: auditors may prompt but they cannot keep the directors’ conscience”.
    • Accordingly, narrative “front-end” reports and presentations of business activities cannot be delegated by directors, as their purpose/objective is to reflect the directors’ (not the auditors’) view of the business and require directors to provide an accurate account according to their own conscience and understanding.
  • Subjective test to be applied in respect of each false statement. The court confirmed that liability is only engaged in respect of statements known to be untrue. If a company’s annual report contains ten misstatements, each of them relied on by a person acquiring the company, but it can only be shown that a PDMR knew about one of those misstatements, the company will only be liable in respect of that one, not the other nine.


Reasonable reliance is another necessary precondition to liability under s.90A and Sch 10A, although the precise requirements of reliance are not defined in those provisions. In the Autonomy judgment, the court considered the question of reliance in further detail, providing the following guidance:

  • Reliance by whom? The court held that reliance must be by the person acquiring the securities, and not by some other person.
  • Individual statements vs published information. The court held 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).
  • Express statements vs impression. The court suggested that statements and omissions may in combination create an impression which no single one imparts and, if that impression is false, that may found a claim (subject to the “awareness” requirement below).
  • Awareness requirement. The court held that, in order to demonstrate reliance upon a statement or omission, a claimant will have to demonstrate that they were consciously aware of the statement or omission in question, and that it induced them to enter into the transaction. The requirement for reliance upon a piece of information will not be satisfied if the claimant cannot demonstrate that they reviewed or considered the information: “it cannot have been intended to give an acquirer of shares a cause of action based on a misstatement that he never even looked at, merely because it is contained, for example, in an annual report, some other part of which he relied on”. Further, the relevant statement “must have been present to the claimant’s mind at the time he took the action on which he bases his claim”, i.e. made his investment decision.
  • Standard of reliance. The court held that a claimant must show that the fraudulent representation had an “impact on their mind” or an “influence on their judgement” in relation to the investment decision.
  • Presumption of inducement. The court held that the so-called “presumption of inducement” applies in the context of a FSMA claim to the same extent as it does in other cases of deceit. This is a presumption that the claimant was induced by a fraudulent misrepresentation to act in a certain way, which will assist the claimant when proving reliance. The presumption is an inference of fact which is rebuttable on the facts. In addition, for the purposes of s.90A and Sch 10A, any reliance must be “reasonable”, and that reasonableness requirement mitigates the effect of the presumption by introducing an additional test for the claimant to satisfy. The court also made clear that the presumption of inducement is subject to the “awareness” requirement above, i.e. the presumption of inducement will not arise if the claimant was not consciously aware of the representation.
  • When is reliance reasonable? The court held that “the test of reasonableness is not further defined, but is plainly to be applied by reference to the conditions at the time when the representee claimant relied on it. Circumstances, caveats or conditions which qualify the apparent reliability of the statement relied on by the claimant are all to be taken into account. The question of when reliance is reasonable is fact-sensitive.”

Loss in the context of FSMA claims

The court expressed its provisional view on some “novel and difficult issues” in the context of loss. In particular, it said that it is for the court to decide, and not for the defrauded party to make an election, as to whether “inflation” damages (i.e. if the truth had been known the claimant would have acquired the shares at a lower price) or “no transaction” damages (i.e. if the truth had been known, the claimant would not have purchased the shares in question) are available. The court will return to this question when addressing issues of quantum (the present judgment considered liability only).

Future use of s.90A / Sch 10A claims in M&A disputes

In the present case, the alleged liability of Autonomy under s.90A/Sch 10A was used as a stepping-stone to a claim against the defendants. This was described by the court as a “dog leg claim” because Autonomy (now under the control of HP) accepted full liability to its shareholder, and Autonomy sought to recover in turn from the defendants as PDMRs of Autonomy at the relevant time. The court said that there was no conceptual impediment to this, but that it was right to bear in mind that in interpreting the provisions and conditions of liability, the relevant question was whether the issuer itself should be liable.

This may open the door for future M&A disputes to be brought by way of a s.90A FSMA claim by disgruntled purchasers against the target company in order – ultimately – to pursue a claim against former directors of the target company (i.e. the vendors), based on breach of their duties owed to the target company.

Simon Clarke
Simon Clarke
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Ceri Morgan
Ceri Morgan
Professional Support Consultant
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Rupert Lewis
Rupert Lewis
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Chris Bushell
Chris Bushell
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