High Court considers Quincecare and dishonest assistance claims against bank in context of Ponzi scheme

The trend of claims against financial institutions alleging breach of the so-called Quincecare duty continues to grow, with the most recent judgment from the High Court refusing to strike out such a claim on the ground that the claimant had suffered no loss because it was an insolvent Ponzi scheme. A parallel claim against the bank for dishonest assistance has, however, been struck out: Stanford International Bank Ltd v HSBC Bank plc [2020] EWHC 2232 (Ch).

In this case, the court considered claims brought by the liquidators of Stanford International Bank Limited (SIB), the infamous Ponzi scheme masterminded by Robert Allen Stanford, the former billionaire who was well known for sponsoring a multi-million pound series of cricket matches with the England and Wales Cricket Board (ECB), before the fraud was exposed and Mr Stanford was convicted in the United States.

The liquidators of SIB have brought proceedings against a correspondent bank (the Bank) that operated various accounts for SIB (which paid out/received deposits to/from investors), arguing that the Quincecare duty required the Bank to have recognised the red flags by 1 August 2008 (at the latest) and to have “sent the balloon up”, freezing the payments to investors out of the accounts and thereby exposing the fraud. The liquidators claim the monies paid out in the period from 1 August 2008 until the accounts were actually frozen in February 2009.

The present judgment relates to a novel application made by the Bank to strike out or seek reverse summary judgment in respect of the Quincecare claim on the basis that SIB has no claim in damages as it suffered no loss. The Bank argued that SIB suffered no loss because its net asset position remained the same during the relevant period: the payments out to investors reduced SIB’s assets, but equally discharged SIB’s liabilities to investors by the same amount.

While the court accepted that the net asset position of a solvent company may remain the same in these circumstances, it found that the position may very well be different for an insolvent individual or company (such as SIB); and said that the counterfactual scenario must be interrogated for the purpose of assessing damages. Here, the court held that if the Bank had frozen the accounts on 1 August 2008, SIB would have had £80 million of assets in its accounts with the Bank. It would have had a very large number of creditors, but it would have had that money in its accounts and available for the liquidators to pursue claims. The court found that SIB did not need to give credit for the fact that it had been saved £80 million of liabilities, because SIB was still just as insolvent, but with a slightly different mix of creditors.

There are a number of Quincecare duty claims progressing through the courts, but still only one finally determined case in which the duty has been found to be owed and breached (see our blog post: Supreme Court upholds first successful claim for breach of the so-called “Quincecare” duty of care). The decision in SIB v HSBC therefore provides a helpful addition to this body of case law, as financial institutions continue to grapple with the emerging litigation risks associated with processing client payments.

The court granted a separate application made by the Bank to strike out the liquidators’ claim for dishonest assistance in relation to breaches of fiduciary duty owed to SIB by Mr Stanford. It held that the allegation of dishonesty was not sufficiently pleaded in the statements of case, clarifying a number of issues in relation to aggregation of knowledge, corporate recklessness and blind-eye knowledge, which are discussed in further detail below.


The underlying claim was brought by the liquidators of the claimant (SIB). SIB was an Antiguan bank, alleged by the liquidators to have been operating a Ponzi scheme fraud since its inception.

The defendant Bank operated various accounts as a correspondent bank for SIB from 2003 onwards. The liquidators claimed that the Bank breached its so-called Quincecare duty of care to take sufficient care that monies paid out from the accounts under its control were being properly paid out. The liquidators argued that the Quincecare duty required the Bank to have reached the conclusion by 1 August 2008 (at the latest) that there was something very wrong and to have frozen payments out of the accounts. Instead, the accounts continued to operate until circa February 2009. The claim was to recover the sums paid out by the Bank during that period, amounting to approximately £118 million (although it is worth noting that the balance in the accounts on 1 August 2008 was £80 million, with the difference between this figure and the amount paid out during the relevant period likely due to new depositors paying into the account).

The payments made by the Bank during this period were made (directly or indirectly) to individual investors holding certificates of deposit who had claims on SIB for the return of their capital and interest, save for one payment to the ECB (which is not considered further in this blog post).

The Bank argued that a Quincecare duty claim is a common law claim for damages for breach of a tortious duty (or an implied contractual duty), and so the remedy is damages to compensate for loss suffered. It said that SIB had no claim for damages, because on a net asset basis it was no worse off as a result of the Bank’s actions: the payment of £118 million reduced SIB’s assets by £118 million, but it equally discharged SIB’s liabilities by the same amount. This was because monies paid out by the Bank went (ultimately) to deposit-holders in satisfaction of their contractual rights against SIB.

The Bank applied to strike out the claim, or obtain reverse summary judgment under CPR Part 24, on the ground that SIB had suffered no loss. For the purpose of the application, the Bank accepted that there was a sufficiently arguable case of breach of the Quincecare duty.

In addition to its Quincecare claim, the liquidators brought a claim against the Bank for dishonest assistance in relation to breaches of fiduciary duty owed to SIB by Mr Stanford, the ultimate beneficial owner of SIB who has now been convicted in the United States. The Bank applied to strike out the dishonest assistance claim on the basis that the allegation of dishonesty was not sufficiently pleaded in the statements of case.


The court described the Bank’s argument on loss in respect of the Quincecare allegation as “simple and beguiling attractive”, but ultimately refused to strike out or grant summary judgment. The court did strike out the allegation of dishonest assistance.

Quincecare duty

The court acknowledged that it is trite law that (with some exceptions) a party suing for damages arising from an alleged wrongdoing must give credit against the loss claimed for any benefits obtained as a result of the same wrongdoing.

In the case of a solvent company, the court said that paying £100 of its money and discharging £100 of its liabilities, on the one hand reduces its assets but on the other hand is offset by a corresponding benefit to the company by reducing the creditors that have to be paid. Accordingly the net asset position of the solvent company is the same.

However, the claimant’s case was that SIB was always heavily insolvent (somewhere in the region of £4 to 5 billion) and the court accepted that the position may very well be different for an insolvent individual or company.  Taking the example above, the court said that if the company is insolvent, then paying £100 on the one hand reduces its assets, but that is not offset by a corresponding benefit to the company and a reduction in its liabilities, as it still does not have enough to pay them all, and it still has no net assets at all.

In a case such as this, where the claimant is insolvent, the court said that the counterfactual scenario must be interrogated for the purpose of assessing damages. The relevant counterfactual scenario in this case was described by the court as follows:

  • As at 1 August 2008, SIB had the sum of £80 million in its accounts with the Bank.
  • If the Bank had frozen the accounts on that date, the Ponzi scheme would have been uncovered and SIB would have collapsed into insolvent liquidation on or around that date.
  • In that scenario, SIB would have had £80 million of assets available to it. It would have had a very large number of creditors, but it would have that money in its accounts with the Bank.
  • Had SIB had the £80 million, it would have had that money available for the liquidators to pursue such claims as they thought they could usefully pursue and for distribution to its creditors.

As a result of what actually happened, SIB did not have the £80 million. Assuming (for the purpose of the application) that the Bank breached its Quincecare duty, the court said that effect of the breach was to deprive SIB of the opportunity to use the £80 million as described above. The court held that this was a real loss and it was contrary to “instinctive and common sense reaction to the facts” to describe SIB as currently being in exactly the same financial position as it would have been on 1 August 2008.

The claimant’s argument on the “no net assets” point (with which the court agreed), was put concisely as follows:

“…once your liabilities vastly exceed your assets, it really is a matter of indifference to you whether you have £5bn of liabilities or £6bn of liabilities. If your assets are only in the hundreds of millions, on any view you are hopelessly and irredeemably insolvent. You therefore have no net assets on any view, but a net liability, and if that net liability is only £5bn instead of £6bn (or £5.118bn), that does not make any difference to you – you still have no net assets.”

In the court’s view, SIB did not need to give credit for the fact that it had been saved £80 million of liabilities, because it did not make SIB any better off, it was still just as insolvent as it was, but with a slightly different mix of creditors.

The Bank argued that the position of SIB as the company (as opposed to the creditors) was no worse off by having £80 million of its assets wrongfully extracted from its bank accounts, given that there would be nothing left over for the company or its shareholders on any view. In this context, the Bank pointed out that the Quincecare duty is only owed to the company and not to its creditors. However, the court rejected this argument, because under the counterfactual scenario, SIB would have had £80 million in the bank, rather than nothing.

Accordingly, the court dismissed the application for reverse summary judgment or strike out of the Quincecare loss claim (for the balance over and above the ECB payment). The court was not asked decide the point on a final basis in favour of the claimant, and so it will technically be open to the Bank to continue to run these arguments at trial.

Dishonest assistance

In respect of the dishonest assistance claim, the only point argued before the court was whether there was a sufficient plea of dishonesty against the Bank to survive the strike out application. The court held that there was not, and the key themes of its analysis are considered further below.

Aggregation of knowledge

Counsel for the claimant acknowledged that he was unwilling to plead dishonesty against any particular individual at the Bank, because he did not have the material to do so at that stage of the proceedings. The claimant therefore pleaded a case of dishonesty against the Bank collectively, on the basis that if disclosure revealed a case that could be properly pleaded against individuals at the Bank, the claimant would seek to amend to do so.

The court noted that it is a thoroughly well-established principle of English law that one cannot aggregate two innocent minds to make a dishonest whole: see Armstrong v Strain [1952] KB 232. As such, the court held that no case could be made against the Bank that relied on aggregating knowledge held by different people at the Bank if none of those individuals was alleged to be dishonest.

Corporate recklessness

In the alternative, the claimant argued that the Bank acted with “corporate recklessness. The court considered the question of whether corporate recklessness is sufficient to amount to dishonesty in the context of a dishonest assistance claim.

The claimant submitted that recklessness could amount to dishonesty, as per the statement by Lord Herschell in Derry v Peek (1889) 14 App Cas 337. In this case Lord Herschell explained the meaning of “fraud” in the context of a claim for deceit, saying said that fraud is proved where it is shown that a false representation has been made: (1) knowingly; or (2) without belief in its truth; or (3) recklessly, careless whether it be true or false.

The claimant built on the analysis in Derry v Peek to allege a case of corporate recklessness against the Bank for not knowing or caring whether SIB was being run properly not, or was a fraud on its investors, saying this was sufficient to amount to dishonesty in a dishonest assistance claim.

The court disagreed. It held that the words of Lord Herschell cannot be transposed into a generalised allegation that if one does not know or care about something one is dishonest in relation to it. Lord Herschell was dealing specifically with a claim in deceit (a tort that depends on fraudulent misrepresentation) and the court in this case said the claimant’s argument was an attempt to stretch his words beyond their proper application. One could not simply say that companies that act recklessly in the sense of not knowing and not caring are therefore dishonest.

The court considered the sharp distinction between honesty and dishonesty discussed in Agip (Africa) Ltd) v Jackson [1990] Ch 265 at 293E. The court said that this was relevant when considering why the Bank did not ask questions that would have revealed the nature of SIB’s business as a fraud. If questions were not asked because the Bank/its employees did not suspect wrongdoing, then they were not dishonest, even if they ignored the Bank’s own policies, and it did not assist to say that they had developed an ingrained culture of failing to obtain knowledge.

Blind-eye knowledge

The claimant also alleged that the Bank turned a blind eye as to whether SIB was being run dishonestly.

On the question of what will amount to blind-eye knowledge, the court considered the speech of Lord Scott in Twinsectra v Yardley [2002] UKHL 12, which was also referred to by the Court of Appeal in Group Seven Ltd v Nasir [2019] EWCA Civ 614. In summary, this confirms that blind-eye knowledge requires targeted suspicion and a deliberate decision not to look.

Absent an allegation of targeted suspicion and of a deliberate decision not to look (which did not appear in the claimant’s statements of case), the court found that the allegations made against the Bank could not be characterised as allegations of dishonesty.

Strike out

Accordingly, the court struck out the dishonest assistance claim. It noted that, by striking out  the claim rather than granting summary judgment, the claimant would preserve the opportunity to seek to re-plead a case of dishonesty following disclosure, if it could properly do so.

Chris Bushell

Chris Bushell
+44 20 7466 2187

Ceri Morgan

Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Redemption periods and liquidity mismatch in the investment funds market: the litigation risks

The recent announcement by the FCA of its consultation into liquidity mismatch in authorised open-ended property funds (CP20/15), has once again cast a spotlight on the risks arising from mismatches between the redemption periods offered by investment funds and the liquidity of the underlying assets.

The focus of the current FCA consultation is on funds investing directly in property, for example offices, shops and warehouses. However, over the past few years, international regulators have regularly raised more general concerns about liquidity mismatch in the open-ended investment funds market.

We know from the 2008 global financial crisis, from market reaction to commercial property funds following the UK’s referendum on EU membership in 2016, and more recently as a result of market turmoil triggered by the COVID-19 pandemic that – in times of stressed market conditions – there is likely to be an increase in both retail and institutional investors seeking to cash in or transfer assets held in investment funds, which may lead to a liquidity crisis.

Given the ongoing difficulties and interest in this area, we thought it would be helpful to share an article we published in the Journal of International Banking & Financial Law in late 2019, considering the litigation risks which may arise as a result of the mismatch between redemption periods and liquidity. We provide a detailed analysis of the potential causes of action an investor may have against various potential defendants, including: the investment fund itself, the fund manager, the depository, the fund administrator, auditors to the fund, and the investor’s own investment manager/adviser.

The article can be found here: Redemption periods and liquidity mismatch in the investment funds market: the litigation risks

Simon Clarke

Simon Clarke
+44 20 7466 2508

Ceri Morgan

Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

High Court endorses use of CPR Part 86 interpleader application by financial services firm seeking court guidance

The High Court has endorsed the use of an interpleader application pursuant to CPR Part 86 by a financial services firm seeking guidance from the court to determine the appropriate recipient of funds which are subject to potentially competing claims: Global Currency Exchange Network Ltd  v Osage 1 Ltd [2019] EWHC 1375 (Comm).

Part 86 allows (among other things) a stakeholder to apply to the court for a direction as to where it should pay a debt or money when competing claims are made (or expected to be made) by two or more persons in respect of that debt or money. In the present case, the claimant financial services firm had suspicions that one of its customers was engaged in alleged fraudulent activity using its accounts with the firm (including operating a suspected Ponzi scheme). After freezing its customer’s accounts, the firm made an application under Part 86 seeking guidance from the court as to where it should pay the frozen funds.

The judgment will provide financial institutions with some comfort that the court will assist them to determine the appropriate recipient of funds where the firm expects competing claims, including where the firm has reasonable grounds to suspect criminal conduct (even if there is ultimately no finding of fraud or other criminal conduct).

This was a particularly interesting decision in circumstances where:

  • At the time of the hearing, there was no indication of any potential competing claims being brought by the alleged victims. The court considered that such claims were still “expected”, because the firm had coherent reasons for its concerns regarding alleged fraudulent activity, and as such there were reasonable grounds to believe that – once appraised of the facts – the alleged victims would make claims in respect of the funds.
  • Another key battleground was the nature of the competing claims which could be brought. This was an unusual case in the sense that, because competing claims over the funds had not yet been made, the financial services firm was in the position of having to suggest the potential legal basis on which those claims might, in due course, rely.
  • It provides a procedural alternative to a claim for declaratory relief. Both Part 86 and a claim for declaratory relief (under Parts 7 or 8) are procedural mechanisms which may be pursued by parties seeking clarity from the court as to the legal/factual position. One of the key differences between these procedural tools is the potential costs consequences for the applicant. Part 86 expressly provides that the court may make any costs order it thinks “just”, departing from the general rule on costs (i.e. that the loser will pay the winner’s costs, subject to the court’s discretion). With no particular weight given to whether the applicant is successful, this suggests an increased flexibility on costs under Part 86 in comparison to a claim for declaratory relief (where the general rule will apply). This follows, given that the claimant under Part 86 is a stakeholder who will (almost always) be a neutral party seeking protection from liability, rather than looking to make a financial gain. Part 86 also provides that the court may summarily assess the stakeholder’s costs, if the respondent fails to appear at the hearing.

The impact of this decision is not limited to situations where a financial services provider has reasonable grounds for suspecting fraud. It may also assist financial institutions in other circumstances, for example where the authority of an institution or client is uncertain or vulnerable to future challenge. In this scenario, a bank or other financial services provider which wishes to pay money to its customer could potentially use Part 86 to limit the possibility of a claim that it has paid funds to the “wrong party” (i.e. a party which was not authorised to represent the customer). Such application could, in certain circumstances, be made by consent with the claimant as a neutral party requesting the court’s assistance and the “defendant” setting out coherently why it is entitled to the funds.


The defendant (“Osage”) was a company formed in 2014 for the purpose of raising capital through the sale of non-voting shares, in order to acquire and develop the rights to drill for oil in Oklahoma. It received foreign exchange and payment services from the claimant (“GCEN”), which was an FCA-registered payment institution. Prospective shareholder investors paid funds directly into Osage’s accounts at GCEN.

In September 2015, GCEN froze all of Osage’s account facilities because of concerns they were obtained by means of fraudulent misrepresentation. The funds remained frozen for over three years, during which period there was no indication of any potential investor claim.

Part 86 Application

In March 2018, GCEN issued a Part 8 claim in the form of an interpleader application pursuant to Part 86, which allows (among other things) a stakeholder to apply to the court for a direction as to whom it should pay a debt or money where competing claims are made or expected to be made against the stakeholder in respect of that debt or money by two or more persons.

GCEN accepted that the funds did not belong to it and confirmed it would pay the funds to whichever party or parties the court may direct. It anticipated competing claims because:

  • Osage claimed the funds and previously threatened an injunction and proceedings to recover them; and
  • If investors were made aware of the details of Osage’s investment scheme, GCEN expected that they too would make claims against it for the return of the funds.

GCEN sought directions for the service of its application and evidence on various investors to allow them the opportunity to make legal claims to the funds. Osage complained that GCEN was unilaterally withholding payment of monies GCEN held on Osage’s behalf and seeking, via its Part 86 application, an indemnity to which it was not entitled.


The court held that the case fell within Part 86 and gave directions for the investors to be notified of the proceedings.

Applicability of Part 86

The court looked first at the wording of Part 86, which applies where a person is under a liability in respect of debt, and competing claims are made (or expected to be made) against that person in respect of that debt by two or more persons.

The court then approached the question of whether Part 86 was applicable by considering whether: (1) there was any legal basis for prospective investors claims; and (2) whether competing claims were expected.

Legal basis for prospective investor claims

The court found that investors might bring claims against the funds on two bases (rejecting numerous other legal bases asserted by GCEN), each of which is considered in further detail below.

  1. Investors’ right to rescind and claim the funds

On the evidence before the court, it found that investors may have a claim in fraudulent misrepresentation, and concluded that this meant the subscription agreements between the investors and Osage were voidable rather than void, following the general rule summarised in In the Matter of Crown Holdings (London) Limited (in Liquidation) [2015] EWHC 1876 (Ch).

The court rejected GCEN’s attempt to rely on an exception to this principle where the contract itself is the instrument of fraud (i.e. the purported transaction is in effect unreal, a pure instrument of fraud): see Halley v Law Society [2003] EWCA Civ 97. Under this exception, there would be no need for the investors to rescind their investment contracts because they would still own the funds in equity. The court found the evidence did not go that far, meaning that the investors did not have a proprietary claim based on fraudulent misrepresentation unless and until they rescinded their contracts with Osage.

However, the court held that because investors had the right to rescind their subscription agreements with Osage (which would give rise to proprietary claims against the funds), this meant that Osage would then hold the funds on constructive trust for the investors. In the court’s view, a claim which could be brought provided the claimant took a prior legal step (here rescission) was still a competing claim, which was sufficient to satisfy the requirement of Part 86 for expected competing claims (subject to such claims actually being ‘expected’ – see below).

  1. Quistclose trust

It was common ground that pending GCEN’s completion of money laundering checks, it received and held payments made by investors on a Quistclose trust, to hold the funds on behalf of the investor. Thereafter GCEN was to pay those funds to Osage to enable the investor to become a non-voting shareholder in Osage.

The court held that GCEN was unable to fulfil the purpose of the Quistclose trust by making payment to Osage. This would put GCEN at risk of committing a criminal offence contrary to section 327 or 328 of the Proceeds of Crime Act 2002, because it suspected that the funds represented a benefit obtained by Osage from criminal conduct (such as a fraud by false representation contrary to section 2 of the Fraud Act 2006). As a result, the court found that GCEN held the funds on resulting trust for the investors, which would provide the investors with a legal basis for a claim against the funds.

In considering this legal basis, the court made a number of interesting observations, in particular:

  • The court rejected an alternative argument put forward by GCEN as to why it was unable to fulfil the Quistclose trust. This was on the basis that paying the funds to Osage would breach GCEN’s Quincecare duty of care, which provides that “a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company”. Although the Quincecare duty derives from a case of the same name, the only case in which the duty has been found to be owed and breached is in Singularis Holdings (in liquidation) v Daiwa Capital Markets Europe [2018] EWCA Civ 84 (see our banking litigation blog post).
  • The court did not consider Quincecare and Singularis to provide an apt analogy for the present case. It noted that those cases related to a duty to decline to make payments to a third party where any reasonable financial institution would believe the customer was being defrauded. In the present case Osage, not the investors, was GCEN’s customer, and the payment Osage sought was from GCEN to Osage rather than to a third party.
  • Another reason given by GCEN for its inability to fulfil the Quistclose trust was the fact that this could give rise to other civil liability claims by investors against GCEN. In this context, the court commented that it seemed possible that a party which holds funds after receiving notice of grounds for rescission (such as fraudulent misrepresentation) could be bound by the equity which the victim has pending rescission. This would make the party holding funds liable to the holder of the right to rescind if it paid the money away notwithstanding the notice it had been given (even though the equity does not give the victim a proprietary interest in the funds).
  • As an overarching point, the court expressed surprise at the proposition (by Osage) that a person holding funds which it has reason to believe may have been obtained by fraudulent misrepresentation, could escape civil liability by paying them over to the suspected fraudster before the victim of the fraud learned the facts and rescinded the transaction.
  1. Other legal bases

As noted above, the court rejected the other legal bases suggested by GCEN for prospective investors claims. In particular, it is noteworthy that GCEN’s argument that it was the investors’ agent and owed fiduciary duties to them directly (on the basis of receiving investor funds) did not succeed.

Whether competing claims were expected

The court noted that CPR 86.1(1)(b) uses the phrase “claims are made or expected to be made” and not, for example, “claims are made or threatened”. As a matter of ordinary language, the court noted that it is possible for a claim to be “expected” even if it has not yet been asserted.

The court considered that there were reasonable grounds to believe that once appraised of the facts, investors would make claims in respect of the funds, and held that the case therefore fell within Part 86. The court noted that GCEN would be entitled to seek the court’s assistance in any event, for example by suing for a declaration (which would be the only option if none of the investors were to come forward and assert a claim).

Accordingly, the court held that the case fell within Part 86 and gave directions for the investors to be notified of the proceedings.

Simon Clarke

Simon Clarke
+44 20 7466 2508

Ceri Morgan

Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948

Mark Tanner

Mark Tanner
Senior Associate
+44 20 7466 2412

Commercial Court gives guidance on definition of ‘consumer’ under Recast Brussels Regulation in cryptocurrency futures trading case

An individual investor, with substantial means and more knowledge and experience than the average person, may still be considered a ‘consumer’ for the purposes of Article 17 of Regulation (EU) No 1215/2012 on jurisdiction and enforcement of judgments in civil and commercial matters (“Recast Brussels Regulation“), even when contracting to trade a specialised product such as cryptocurrency futures.

The recent Commercial Court decision in Ramona Ang v Reliantco Investments Limited [2019] EWHC 879 (Comm) has confirmed the purposive test to be applied when considering whether an individual investor is a consumer under the Recast Brussels Regulation. While this decision arguably gives a generous interpretation as to who is a consumer under Article 17, it does provide some helpful clarification for financial institutions contracting with retail clients. In particular:

  1. The court held that the key question when assessing if an individual investor is a consumer is the purpose for which the investment was entered into. Specifically, whether the individual entered into the contract for a purpose which can be regarded as being outside his or her trade or profession. While the circumstances of the individual and the nature of the investment activity (including the use of intermediaries/advisers) will be considered, the court emphasised that these factors will not be determinative of the issue.
  2. This decision is a good example of how each case will be fact-specific and will turn on whether the individual is considered to be contracting for a non-business purpose. In this instance, the court held that despite the specialised nature of the products themselves, a wealthy individual committing substantial capital to speculative transactions in the hope of making investment gains was a consumer for the purposes of Article 17 of the Recast Brussels Regulation. It disagreed with the suggestion from other EU Member State courts that such activity must necessarily be a business activity, i.e. cannot ever be a consumer activity.
  3. In cases where a person does meet the ‘consumer’ test, if they have nonetheless given the other party the impression that they are contracting for business purposes, they will not be able to rely upon Article 17. (However, that was not the case here).
  4. This case is a reminder that if an individual investor meets the criteria under Article 17 of the Recast Brussels Regulation and brings a claim in the courts of their choice as a consumer under Article 18, this may trump an exclusive jurisdiction clause under Article 25 (unless certain exceptions apply, such as agreeing the exclusive jurisdiction clause after the dispute has arisen).

It is worth noting that the Court of Justice of the European Union (“CJEU“) has recently published an Advocate General (“AG“) opinion in a similar case, concerning a preliminary ruling on whether a natural person who engages in trade on the currency exchange market is to be regarded as a consumer within the meaning of Article 17: Jana Petruchová v FIBO Group Holdings Limited Case C 208/18. The AG opinion is largely consistent with the decision of the High Court in this case, save that it goes further by stating that no account should be taken of the circumstances of the individual and the nature/pattern of their investment (whereas in the instant case, the High Court said such factors would be considered, but would not be determinative – see the first point above).


The claimant (an individual of substantial means) invested in Bitcoin futures, on a leveraged basis, through an online trading platform (UFX), owned by the defendant. The claimant had no education or training in cryptocurrency investment or trading and was not employed at the time, but she played a part in looking after the family’s wealth and assisting her husband, a computer scientist with cybersecurity and blockchain expertise, who has identified himself publicly as being “Satoshi Nakamoto”, the online pseudonym associated with the investor of Bitcoin.

During the account opening process on the UFX platform, the claimant provided certain information about herself, including that she was self-employed, familiar with investment products including currencies and was a frequent trader (75+ trades). She was provided with and accepted the defendant’s terms and conditions.

The defendant terminated the claimant’s UFX account, the claimant alleged that the defendant did so wrongfully and brought a claim in the English High Court for compensation for the loss of her open Bitcoin positions. In response, the defendant challenged the jurisdiction of the English High Court, by reference to an exclusive jurisdiction clause in favour of the courts of Cyprus in the terms and conditions (and relying upon Article 25 of the Recast Brussels Regulation).


The claimant argued that the exclusive jurisdiction clause in the defendant’s terms and conditions was ineffective, either because she was a consumer within Section 4 of the Recast Brussels Regulation or because the clause was not incorporated into her UFX customer agreement in such a way to satisfy the requirements of Article 25 of the Recast Brussels Regulation.

The High Court held that the claimant was a consumer within Article 17 of the Recast Brussels Regulation, on the basis that she was contracting with the defendant for a purpose outside her trade or profession. As a result, she was permitted under Article 18 of the same regulation to continue her claim in the High Court and the defendant’s challenge to the jurisdiction was dismissed. The court’s decision in relation to Article 17 is discussed further below.

Test to be applied to an individual under Article 17 of the Recast Brussels Regulation

Article 17 of the Recast Brussels Regulation applies to contracts “concluded by a person, the consumer, for a purpose which can be regarded as being outside his trade or profession“. The court noted that the concept of ‘consumer’ had been considered a number of times by the ECJ/CJEU and had an autonomous meaning under EU law, which was independent of national law.

The defendant contended that the ECJ/CJEU had ‘glossed’ the definition of consumer, relying in particular upon the ECJ’s statement in Benincasa [1997] ETMR 447 that “only contracts concluded for the purpose of satisfying an individual’s own needs in terms of private consumption” were protected by the consumer rule under Article 17. The High Court rejected this contention, however, following the approach taken by Longmore J in Standard Bank London Ltd v Apostolakis [2002] CLC 933 and holding that this reference to “private consumption” was not a new or different test to the one under the Recast Brussels Regulation. The court reaffirmed that there were “end user” and “private individual” elements inherent in the notion of a consumer, but that an individual acting for gain could nonetheless meet the test.

In doing so, the court made the following key observations:

  • The court confirmed that the issue as to whether an individual investor is a consumer will be fact-specific in any given case. It emphasised that the question of purpose is the question to be asked, and must be considered upon all of the evidence available to the court and not to any one part of that evidence in isolation.
  • It agreed with the decision in AMT Futures Limited v Marzillier [2015] 2 WLR 187that any assessment of whether an individual investor is a consumer is “likely to be heavily dependent on the circumstances of each individual and the nature and pattern of investment“. However, it emphasised that these factors cannot determine the issue, as to do so would be to effectively replace the non-business purpose test set by the Recast Brussels Regulation.
  • It disagreed with the conclusion reached by the Greek courts in both Standard Bank of London v Apostolakis [2003] I L Pr 29 and R Ghandour v Arab Bank (Switzerland) [2008] I L Pr 35 that “the purchase of moveable property for the purpose of resale for profit and its subsequent actual resale…” was intrinsically commercial, so that engaging in such trading was necessarily a business activity and not a consumer activity.

Application of the test

Applying the purposive test as set out in the Recast Brussels Regulation, the court’s view was that the claimant had contracted with the defendant for a non-business purpose. It is worth noting that the court reached this conclusion despite finding that the claimant had over-stated the extent of her prior trading experience. Given that such over-statement did not go as far as creating the impression that the claimant was opening an account for a business purpose, it did not affect the court’s overall conclusion.

Donny Surtani

Donny Surtani
+44 20 7466 2216

Ceri Morgan

Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948

Phoebe Jervis

Phoebe Jervis
+44 20 7466 2805

Court of Appeal gives guidance on scope of fiduciary duty in “secret commissions” case

The Court of Appeal has found that there was no breach of fiduciary duty where an introducing broker failed to inform its client investors of the amount of commission it received from the financial institution to which it had introduced them: Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2019] EWCA Civ 83.

This decision represents a novel application of the law in this area and it offers helpful guidance as to the scope of the fiduciary duty that may be owed by an agent to its principal to disclose commission payments. The Court of Appeal confirmed the following general principles of broader application:

  • A principal’s knowledge of its agent’s remuneration may limit the scope of the fiduciary duty that the agent owes to its principal to disclose that remuneration.
  • Generally speaking, where a principal knows that its agent is being paid by another party, it cannot complain that it did not know the precise particulars of the amount paid.
  • However, where there is no trade or customary usage, the principal’s knowledge of the commission may need to be “more specific“. Considering the specificity of knowledge required by a principal, the Court of Appeal noted two factors relevant in the present case:
      • Sophistication of the principal – in this case the investors were wealthy and experienced investors.
      • Degree of secrecy – the commission was less “secretive” because the investors knew that all the commission payable to the broker was payable bythe financial institution (the investors did not pay any commission to the broker themselves, they only paid commission to the financial institution).

In the present case, the Court of Appeal concluded that there was no duty on the broker to disclose to the investors the actual amount of the commission it received from the financial institution. The broker’s failure to disclose the amount of commission it received did not, therefore, represent a breach of the broker’s fiduciary duty.


Collins Stewart (now called Cannacord Genuity, the defendant) is an investment firm. It entered into an introducing agreement with a broker, Medsted (the claimant), under which Medsted would introduce investors to Collins Stewart. The agreement provided that Medsted would be paid a proportion of the commission received by Collins Stewart from introduced investors. The agreement contained a non-circumvention term prohibiting Collins Stewart from dealing with introduced investors directly (this was a point of dispute between the parties, but confirmed by the High Court, see below).

Medsted successfully introduced 16 investor clients who traded through Collins Stewart. Subsequently however, Collins Stewart did business with some of them directly, cutting Medsted out of its share of the commission.

High Court Decision

The High Court found that Collins Stewart was in breach of its obligation not to circumvent Medsted by dealing directly with investors introduced by it, and Medsted had suffered loss by missing out on the payments to which it was entitled. However, the High Court awarded nominal damages, because it found that Medsted owed fiduciary duties to the introduced investors, which it had breached by failing to tell the investors of the precise split of commission as between Collins Stewart and Medsted. In this context a key finding of fact by the High Court was that the investors did not pay a commission to Medsted and so must have assumed that Medsted was receiving payment from Collins Stewart, to which the investors did pay commission (this point was not appealed).

Notwithstanding the above finding of fact, the High Court described the payments from Collins Stewart to Medsted as a “secret commission” and denied any substantive recovery on public policy grounds, because otherwise the court would be assisting Medsted to profit from its own breach of fiduciary duty. Medsted appealed.

Court of Appeal Decision

The Court of Appeal upheld Medsted’s appeal, finding that it had not acted in breach of the fiduciary duty it owed to the introduced investors by failing to inform them of the amount of commission it received. In particular, it looked at whether it was within the scope of Medsted’s duty to the investors to inform them how the commission was to be divided between itself and Collins Stewart.

The Court of Appeal in this case considered authority of the same court in Hurstanger Ltd v Wilson [2007] 1 WLR 2351. In Hurstanger, additional commission was paid by a lender to a broker, over and above what had been expressly agreed between the lender and borrower, but a pre-contractual document stated that “in some circumstances this company [a lender] does pay commission to brokers“. The borrower alleged that the additional commission paid to its broker amounted to a “secret commission“. The Court of Appeal in Hurstanger made the following observations/findings:

  • It noted the serious consequences of finding that a secret commission has been paid which, in addition to amounting to a breach of fiduciary duty, is a category of fraud.
  • It questioned whether there was a “half-way house” between the situation where there has been sufficient disclosure to negate secrecy, but nevertheless the principal’s informed consent has not been obtained – because a finding of fraud would be unfair where there has been only partial or inadequate disclosure.
  • The Court of Appeal ruled that it was a “half-way house” case: the pre-contractual document was sufficient to negate secrecy, but insufficient to obtain the borrowers’ informed consent, because – among other things – the lender should have informed the borrower of the amount of the commission. It found that this amounted to a breach of fiduciary duty by the broker, but not the payment of a secret commission.

Applying Hurstanger to the present case, the Court of Appeal held that the investors’ knowledge of Medsted’s remuneration by Collins Stewart, meant that the scope of Medsted’s fiduciary duty to the investors was limited.

Referring to Bowstead & Reynolds on Agency (21st edition; 2018), the court said that where a principal knows that its agent is being paid by the opposite party, it cannot complain that it did not know the precise particulars of the amount paid. Where there is no trade or customary usage, the principal’s knowledge of the commission may need to be “more specific“. Considering the specificity of knowledge required by the investors in the current case, the Court of Appeal noted two principal distinctions with Hurstanger.

  1. Sophistication of the principal – The court noted that an important factor in Hurstanger was the unsophisticated nature of the borrowers, whereas the investors in the present case were wealthy and experienced investors.
  2. Degree of secrecy – Moreover, the commission was less “secretive” than in Hurstanger because the investors knew that all the commission was payable by Collins Stewart; there was no question that any extra commission was being paid over and above what had been agreed.

The court concluded that there was no duty on Medsted to disclose to the investors the actual amount of the commission it received from Collins Stewart. Medsted’s failure to disclose the amount of commission it received did not, therefore, represent a breach of the broker’s fiduciary duty (unlike in Hurstanger, in which the Court of Appeal held that the fiduciary duty had been breached, although the payments in question did not amount to secret commissions).

The Court of Appeal therefore allowed the appeal.

Chris Bushell

Chris Bushell
+44 20 7466 2187


Daniel May

Daniel May
Senior Associate
+44 20 7466 7608

Ceri Morgan

Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948

O’Hare v Coutts: High Court dismisses mis-selling claim and clarifies standard of care required of financial advisors


In O’Hare v Coutts, the High Court dismissed a claim alleging that the defendant bank breached duties in contract and tort to use reasonable care and skill when recommending five investments that the claimants entered between 2007 and 2010.

The Court held that the bank’s duties when giving advice required proper communication and dialogue with the client regarding the proposed investment, in order to ensure the client understood the advice it was given and the risks arising from the recommended course of action. However, the Court found that the relevant approach in this context was not to assess the bank’s actions by reference to what a body of financial advisors would consider acceptable (the “Bolam test”). Rather, the Court would ask whether the bank had taken reasonable care to ensure the claimants were aware of any material risks. This approach, the Court said, takes into account the lack of any clear industry consensus about the extent of communication required and the fact the bank’s regulatory duties—which are “strong evidence of what the common law requires“—do not require reference to industry practice.

Another key issue was the extent to which it was appropriate for the bank to persuade the claimants to take more risks than they otherwise would. The Court could not find anything intrinsically wrong with persuasive salesmanship, provided the products sold were objectively suitable (in which regard the Court said the Bolam test is still applicable). Although, with the benefit of hindsight, the investments had not performed as well as the clients had wished, the Court nevertheless found that reasonable practitioners professing the expertise of the bank could properly have given the same advice the bank did. The Court therefore concluded that the investments were suitable and the claimants should take responsibility for their own investment decisions.

The case is also interesting for the following reasons:

  1. The bank did not call a pivotal witness, the claimant’s former relationship manager, but relied on his contemporaneous notes. The Court admitted the notes as hearsay evidence and declined to draw any adverse inferences in respect of the weight to be given to them because there was no procedural failure on the bank’s part. Nevertheless, the Court was not always prepared to favour the relationship manager’s written notes over the claimants’ oral evidence.
  2. The Court said that if the claims in contract and tort had succeeded, the claimants’ damages would be limited by the more restrictive test of remoteness under contract law.
  3. The Court found that the bank’s promise to apply discounts in favour of the claimants as a “gesture of goodwill” in settlement of a separate dispute constituted a binding legal settlement.

We discuss the decision in more detail below.


Mr and Mrs O’Hare (the Claimants), whose joint net worth was in excess of £25 million, began their relationship with the bank in 2001. Their relationship manager from 2001 to 2008 was a Mr Kevin Shone, after which a Mr Ray Eugeni took over.

Although Mr O’Hare was an astute businessman, the Court did not accept that he was necessarily an experienced investor. The Court found that he was willing to accept some—but not too much—risk, provided he was properly informed about how much risk he was taking.

In 2007 and 2008, the Claimants invested over £8 million on the bank’s advice in three products from the bank’s new line of “Novus” funds (the Novus Investments). The bank classified these as “wealth generation products” (its most risky investment category). The result was a significant shift in the Claimants’ portfolio towards higher risk investment, concentrated in three untested hedge fund products. The Claimants alleged that the Novus Investments were unsuitable because the bank downplayed the substantial increase in risk, there was no capital protection, and the investments caused the Claimants to expose an unjustifiably high proportion of their wealth to loss.

In 2010, the Claimants invested a further £10 million in two additional products that the bank recommended: RBS International funds called Autopilot and Navigator (the RBSI Investments). Unlike the Novus Investments, the RBSI Investments were classified by the bank as “wealth preservation products” (the bank’s least risky investment category). However, the Claimants alleged the RBSI Investments were unsuitable because the bank should have advised against concentrating so much money in one institution and it should have recommended products other than those of it and its parent.

The market declined in value, following the 2008 financial crisis and the Claimants issued proceedings against the bank, alleging breach of contract and negligence on the part of the bank.

1. Suitability of the products: what standard of care is expected of financial advisors?

The bank undertook to advise the Claimants in their personal capacity, including working with them to understand their “circumstances, objectives and requirements” and to formulate “an investment strategy”. The bank was obliged to give its advice in writing, at such times as it considered appropriate (or otherwise as agreed). Because the bank had undertaken advisory duties, the Court considered whether the products had been suitable for the Claimants (as opposed to just whether the bank has correctly described them).

Uncontroversially, the Court found that the bank owed identical duties in tort and contract to use reasonable skill and care when recommending investments, to the standard of a reasonably competent private banker.

Were the Claimants adequately informed?

The Court held that in the context of giving investment advice, there must be proper dialogue and communication between adviser and client. The bank submitted that this ought to be assessed in line with the traditional test from Bolam v Friern Barnett Hospital Management Committee [1957] 1 WLR 583: namely, by reference to whether a body of financial advisors would consider the extent of its communications acceptable. The Court noted that the Bolam test had recently been overturned in a medical context (so far as the duty to explain is concerned), in favour of a duty to take reasonable steps to ensure the relevant patient is aware of any material risks (see Montgomery v Lanarkshire Health Board [2015] UKSC 11). In Montgomery, the Supreme Court said that a risk is material if, in the circumstances, (1) a reasonable person in the patient’s position would be likely to attach significance to it; or (2) the doctor is aware that the patient would be likely to attach significance to it.

In the context of duties to explain investment risks, the Court also preferred the Montgomery approach to Bolam, in particular because the expert evidence did not establish any industry consensus delimiting the proper role of a financial adviser in this regard. The Court supported its decision by reference to the regulatory regime, which is “strong evidence of what the common law requires“. In particular, the Conduct of Business Sourcebook (COBS), which apply where a sale is advised, includes a duty to explain in similar terms to Montgomery and, unlike Bolam, does not require reference to the opinion of a responsible body within the profession.

The Court went on to say that “compliance [with the COBS] is ordinarily enough to comply with a common law duty to inform, forming part of the duty to exercise reasonable skill and care; while breach of them will ordinarily also amount to a breach of that common law duty.” Accordingly, the Court observed that the content of the various COBS provisions relied on by the Claimants added nothing to the bank’s common law and contractual duty to ascertain the client’s requirements and to advise, including explaining and informing them, about suitable investments. In any event, the Court did not find that the bank had breached any COBS duties.

Applying the Montgomery approach first to the Novus Investments, the Court concluded that the bank’s sales presentations had “left no room for any suggestion that Mr O’Hare did not fully understand the Novus products”, including “an understanding of their higher risk classification as wealth generation products“.

Similarly, in relation to the (later) RBSI Investments, the Court concluded that Mr O’Hare was “fully aware that the capital would be at risk if RBSI should become insolvent but was happy to run that risk because, he reasoned, RBS was effectively state owned.” Likewise, the Court rejected the allegation that “insufficient information about the products (including costs and charges), and insufficient comparative information about alternatives, was provided“.

Were the investments objectively suitable?

Given the Court’s decision that the Claimants were properly informed, the case turned on whether the investments were objectively suitable for the Claimants (the case being one where it was not disputed that advice had been provided by the bank). In this context, the Court accepted that the Bolam test continued to apply, the relevant question being whether “reasonable practitioners professing the expertise of the defendants could properly have given advice in the terms they did“.

The key issue was the extent to which it was acceptable for the bank to persuade clients to take more risk than they otherwise would (and conversely, when the bank would be required to step in and “save the clients from themselves”). Perhaps in a welcome recognition of commercial reality, the Court did not find anything intrinsically wrong with a financial advisor using persuasive techniques to induce a client to take risks (s)he would not take but for the adviser’s powers of persuasion, provided the risks were not so high as to be foolhardy (avoiding the temptation to use hindsight), the client could afford to take the risks, and the client showed itself willing to take the risks. Critically, the Court said that the duty of care must reflect a balance between the client taking responsibility for investment decisions (even mistaken ones) and the principle that the advisor must sometimes save the client from him/herself.

In considering the (earlier, higher risk) Novus Investments, the Court explicitly applied the Bolam test, ultimately agreeing with the bank’s expert witness that “competent practitioners at the time – avoiding hindsight – would not regard investment in the Novus products as foolhardy for persons in the position of the O’Hares, with their wealth and investment objectives“.

In contrast, the Court did not explicitly invoke the Bolam test in its analysis of the RBSI Investments. This may be because the capital-protected RBSI Investments involved de-risking and consequently, there was less scope for the Claimants to suggest that the products were objectively unsuitable. In any case, Mr Eugeni, in his unchallenged evidence for the O’Hares, said that after the 2010 RBSI Investments, he considered the portfolio suitable and well balanced. As such, the Court’s focus was on whether the O’Hares were properly informed about material risks relating to the RBSI Investments (in light of the fact such a large amount of money was being placed with a single banking institution).

On the evidence before it, the Court held that all of the investments in question were objectively suitable for the Claimants, who should therefore reasonably bear responsibility for their own mistaken investment decisions (even in light of the bank’s salesmanship).

2. The absent witness: will courts draw adverse inferences if key witnesses are not called?

A key factual issue relevant to suitability was the extent to which the Claimants were persuaded by their first relationship manager, Mr Shone to make higher risk investments than would be consistent with their unconditioned risk appetite.

Although he was a material witness, the bank did not call Mr Shone and instead chose to rely on his contemporaneous notes (which were referred to and implicitly adopted as true in the statements of two other Bank witnesses, both called orally). The bank explained that Mr Shone was a former employee and had indicated he was too busy to devote time to the proceedings.

The Court first accepted that the hearsay notes were admissible, by virtue of section 1 of the Civil Evidence Act 1995, which abolished the rule against the admissibility of hearsay in civil proceedings. Moreover, because they formed part of the agreed bundle and the Claimants did not give a written notice of objection in respect of them, paragraph 27.2 of Practice Direction 32 confirmed the notes would be admissible as evidence of their contents.

Section 2(4)(b) of the Civil Evidence Act 1995 provides that a failure to comply with the relevant procedural rules may be taken into account as a matter adversely affecting the weight to be given to hearsay evidence. Here, the Court declined to draw an adverse inference in respect of Mr Shone’s notes because it found that the Court had complied with its obligations under CPR 32 and 33 (given that the witnesses who referred to those notes gave oral evidence). It was open to the Claimants under CPR 33.4 to call Mr Shone for cross-examination, but they did not.

In terms of the weight given to those notes, the bank relied on Gestmin v. Credit Suisse [2013] EWHC 3560 (Comm), in which the High Court had held that the best approach for a judge to adopt in a commercial case is “to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts.” Whilst the Court agreed that the approach in Gestmin is “very useful”, it did not accept that the effect of Gestmin was to cause Mr Shone’s notes to be admitted unchallenged (their accuracy having been disputed by the Claimants). Nor did it go so far as to mean Mr Shone’s notes should always be preferred to the oral testimony of the Claimants. Indeed, the Court ultimately preferred Mr O’Hare’s testimony that Mr Shone used persuasion on him over Mr Shone’s notes, which repeatedly described the Claimants as “keen”, without mentioning the exertion of persuasion or influence by the bank.

Although the tactical question of which witnesses to call will always be highly fact specific, this case illustrates the importance of complying with the procedural rules for adducing hearsay evidence in the absence of a witness (and considering whether to apply to cross examine an absent witness on whose hearsay evidence the other party relies).

3. The settlement agreement: when will “gestures of goodwill” be legally binding?

In 2008 and 2009, the Claimants complained that the bank had not properly explained the risk profile of another product called “Orbita Capital Return”, which had performed poorly. The bank had at that time rejected the Claimants’ complaint explaining why it considered that the product had not been mis-sold. Nevertheless, recognising the value of the Claimants’ business the bank agreed as a gesture of goodwill to apply a refund of $250,000 by way of a reduction in fees over a period of time in consideration for the Claimants forbearing to sue. Although Mr O’Hare gave evidence that the agreed currency was pounds sterling, the Court found that Mr O’Hare was genuinely mistaken and that the agreed currency was dollars, reflecting Mr Eugeni’s written notes.

In the proceedings concerning the other products, the Claimants sought to argue that this obligation remained outstanding. In doing so, they sought to exclude discounts that had been negotiated with the bank arguing that these discounts were separate and distinct from the $250,000 that the bank had agreed to pay.

The bank’s primary argument was that the “settlement agreement” was not binding; rather, it was merely a “gesture of goodwill” made without intention to create legal relations. The bank referred to Clarke v Nationwide Building Society [1998] EWCA Civ 469 in which a refund sent in “full and final settlement”, but described as a “goodwill gesture”, was held not to be binding.

The Court expressly declined to hold that Clarke provided authority for a general proposition that offers made as a gesture of goodwill are not capable, on acceptance, of binding the offeror. The Court noted that this was a question that depended on the circumstances of the case. Unlike Clarke, the bank’s offer was made in the context of a pre-existing contractual relationship. This placed a heavy onus on the bank to show that the parties did not intend to be legally bound, which it failed to discharge. Nevertheless, the Court held that the bank had complied with its side of the bargain by applying $250,000 worth of discounts, despite Mr O’Hare’s genuine belief that some of those discounts ought to have been excluded from the sum.

The Court’s approach to this issue highlights the risks in entering into settlements which are not formally documented, given the potential for later disagreement over their terms and the extent to which they have been satisfied. The difficulties here were exacerbated by the absence of evidence from key witnesses (both Mr Shone, who was not called, and Mr Eugeni, who had not given evidence about this point).

4. The damages issue: concurrent claims in tort and contract

Interestingly, the Court said that had the Claimants been successful, it would have confined damages to the more restrictive contractual test of remoteness (rather than the more generous tortious measure). The Court said that it would have taken this approach even in respect of the Novus Investments, where the Claimants’ contractual claim was time barred but its tortious claim was not. To do otherwise would be to allow the Claimants to benefit from their failure to bring the contractual claim less than six years before the cause of action arose and fly in the face of the fact that there was a contractual relationship between the parties.

This follows the approach in Wellesley Partners LLP v Withers LLP[2015] EWCA Civ 1146, where the Court of Appeal said that in cases of concurrent liability in tort and contract, the parties are not strangers and should be confined to the contractual measure of damages (since the contract reflects the consensus between the parties which ought to be reflected when dealing with issues of remoteness).

In this case, the Court doubted whether the distinction would make any real difference. However, in other circumstances, it might be relevant whether the financial advisor is liable for all foreseeable consequences of the breach (for instance, unexpected or catastrophic falls in the market) as opposed to merely loss that is within the reasonable contemplation of the parties at the time the contract is made.


O’Hare v Coutts provides helpful guidance about the extent of financial advisors’ duties to their clients. In particular, the decision erodes the Bolam test in the context of the duty to explain investment risks (as had already happened in cases of medical negligence): in cases where objectively suitable advice has been given, the extent of communications required is simply to take reasonable steps to ensure the client is aware of material risks. On the other hand, the decision affirms that the Bolam test still applies to the assessment of whether the advice given is objectively suitable (which requires reference to whether reasonable practitioners with the expertise of the defendant could properly have given the advice the defendant did).

This decision adds to the theme of recent cases, that make clear that informed investors must be prepared to accept responsibility for their own investment decisions, even where the advisor has used sales techniques to push a particular product or to encourage the investor to take more risk than s/he otherwise would.

The decision also serves to reinforce the basic proposition that evidence at trial should generally be given orally by the witness who proves the fact. Where this is not possible, contemporaneous hearsay notes (albeit admissible) may not be preferred to contradictory oral evidence. Parties who intend to adduce hearsay evidence should take steps to protect themselves by complying with the relevant procedures in the CPR. Equally, parties should consider giving written notice of objection to the admissibility of hearsay evidence which the other side seeks to include in agreed bundles, and consider applying to cross examine the relevant witness, where possible.

Finally, the decision clarifies the approach to damages in cases of concurrent liability in tort and contract. While it may not always be relevant, the Court’s approach of limiting damages to the more restrictive contractual test of remoteness could cushion a bank in circumstances where investments perform poorly due to unexpected or catastrophic changes in the market.

John Corrie

John Corrie
+44 20 7466 2763

Hywel Jenkins

Hywel Jenkins
+44 20 7466 2510

Ben Worrall

Ben Worrall
+44 20 7466 2385

Edward Astle v CBRE: Application of the SAAMCO principle to negligent valuations in information memoranda

The recent case of Edward Astle & Ors v CBRE Ltd (and related actions) [2015] EWHC 3189 (Ch) considers South Australia Asset Management Corp v York Montague Ltd [1997] A.C. 191 (“SAAMCo“) in a novel context. The Defendants allegedly included a negligent property valuation in an information memorandum, promoting an investment in a property-owning trust structure. They applied for summary judgment on the basis that the losses suffered by the investor Claimants fell outside of the Defendants’ scope of duty, as they were caused by factors other than the overvaluation (such as the collapse in commercial property values following the financial crisis).

The Court dismissed the Defendants’ application:

  • The Court reiterated that the principle in SAAMCo will apply in straightforward cases involving negligent valuations to limit the scope of the duty owed by a valuer who is a (mere) information provider to cover only those losses attributable to the overvaluation and not the whole of the investor’s losses from entering into the investment.
  • In applying this principle to the case of a negligent valuation contained in an information memorandum, the Court held it is arguable that the scope of an investment promoter’s duty is qualitatively different from the scope of a traditional valuer’s duty and this wider duty may include statutory duties under FSMA, COB and COBS.
  • The Court held that it is at least arguable that the calculation of loss should be carried out at the date of the valuation, or possibly at the time the valuation is relied on when entering into the relevant transaction. However, the Court did not finally determine this point, given that the case raises the SAAMCo principle in a novel context and the exercise is likely to be fact sensitive.

The Claimants therefore had a real prospect of establishing that the loss they suffered was attributable, at least in part, to the alleged inadequacies in the information memorandum. The decision is considered in further detail below.

Factual Background

The Claimants were investors in a Jersey-based trust (the “Trust“), which had interests in: (a) the freehold or long leaseholds of five sites, which were intended to become regional fire and emergency rescue centres as part of a Government fire control centre project; and (b) the freehold of a property in Cirencester, which was to be developed into an office building to be leased (together, the “Properties“). In March 2006, Bank of Scotland (the “Bank“) advanced a 5-year secured term loan in excess of £100 million to finance the acquisition and development of (a) and a 5-year term loan in excess of £14 million in respect of (b). In addition to these facilities, fixed interest rate swaps were put in place and the Bank advanced working capital facilities, together with bridging facilities and a mezzanine facility, which were intended to be repaid upon the receipt of monies through the issue of units and loan notes by the Trust. CBRE Limited (“CBRE“) was engaged by the Bank to provide expert valuations of the Properties for loan security purposes.

On 3 October 2006, the units and loan notes were issued in accordance with the provisions of an Information Memorandum (the “IM“) prepared by Evans Randall Investment Management Limited (“ERIML“). CBRE’s valuation was summarised in the IM. As part of the terms of the IM, the investors were prohibited from demanding repayment of sums due and owing under the loan notes until all amounts outstanding under the facilities with the Bank and various agreements between the Trust and ERIML were repaid in full. The total amount raised from investors was £33,775,000, and of this £26,775,000 was invested by the Claimants.

Subsequently, the Government project was abandoned so the intended use for the fire and emergency rescue centres was not fulfilled, coupled with a collapse in commercial property values following the financial crisis. The term loans could not be refinanced when they fell due for repayment in July 2011, which led to an event of default and receivers were appointed over the Properties in February 2012. Accordingly, the Claimants lost the full amount of their investment.

The Claimants commenced proceedings against ERIML and CBRE alleging that the IM accorded values to the Properties which were materially overstated and contained a series of factual errors relating to the Properties. The Claimants contend that these misstatements not only go to the value of the Properties, but the viability of the investment generally.

The Defendants applied for summary judgment on the basis that losses were incurred as a result of the cancellation of the intended use for the sites and the general collapse in commercial property values, which are matters which fall outside the scope of any duty owed to the Claimants, in accordance with the principle in SAAMCo.


The Court dismissed the application for summary judgment.

Application of SAAMCo

The Court summarised the SAAMCo principle as follows:

“…a claimant seeking damage for breach of a duty of care must “prove both that he has suffered loss and that the loss fell within the scope of the duty” (per Lord Hoffmann in SAAMCo at p.218B/C). Where the relevant duty is simply a duty to inform and not a duty to advise on whether a transaction ought to be entered into, an application of the “but for” test of causation will not of itself entitle the claimant to recover. He must prove that the loss is a consequence of the information being wrong.”

The Court considered how SAAMCo has been applied in subsequent cases, stating that whether or not the principle will apply (and if so, how it is to be applied) will turn on the precise scope of the duty of care to which the negligent defendant is subject. The Court was not referred to any case in which the SAAMCo principle had been applied to similar facts/alleged duties to the instant case.

In applying the SAAMCo principle to the present case, the Court said it was required to carry out a two-stage process:

a) Stage one required the Court to ascertain the basic loss. It was accepted by ERIML and CBRE that, for the purpose of the summary judgment applications, it would be assumed that the Claimants had established not just the duties and their breach, but also that the Claimants would not have invested in the Trust if the breaches had not been committed. Accordingly, the basic loss was the loss sustained by the Claimants by reason of the fact that they made an investment which is now worthless, which they would not have made but for the negligent valuation. As such, the Claimants suffered ‘basic loss’ amounting to the total value of their investment.

b) Stage two required the Court to assess the maximum amount of loss capable of falling within the duty of care owed by the Defendants, which it does by identifying the consequences attributable to the wrongful act.

Scope of duty

In considering the second stage of the test outlined above, it was assumed that both ERIML and CBRE were subject to duties to take reasonable care in their provision of information.

However, there was a “sharp divergence of view” between the Claimants and ERIML as to whether ERIML’s duty went further. The Claimants argued that ERIML could not compare its role in the promotion of the Trust to the role of a valuer. The policy considerations for protecting the valuers of mortgage security against adverse movements in the markets should not apply to a promoter in the position of ERIML.

The Court found that there was “much force” in ERIML’s case on this issue: that the pleaded duty was to ensure that the facts stated in the IM were true and accurate, which did not extend to giving advice. However, the Court was not persuaded that the Claimants had no real prospect of establishing that there were relevant differences between the scope of a duty owed by a valuer to a mortgage lender and the scope of such duty as ERIML owed to the Claimants. In particular, the Court found that it was arguable that:

  • The range of information contained in the IM which was said to be wrong was wider than the information contained in a valuation and was included for a wider purpose, namely making an investment decision.
  • Where valuation information is provided to an investor for the purposes of making a decision on whether or not to invest, the scope of the promoter’s duty is qualitatively different from the scope of the valuer’s duty where the valuation evidence is provided to a lender for security purposes.
  • As to the scope of that duty, an investment promoter knows that the person receiving the information will be using it to make an investment decision, in relation to which there are statutory duties under FSMA, COB and COBS.

The Court did not elaborate on the precise scope of the extended duties to which ERIML was arguably subject, because of its finding on the application of the SAAMCo principle to the more limited duty owed by CBRE (and ERIML) to take reasonable care in the provision of information (see below).


Notwithstanding its conclusions in relation to the additional duties arguably owed by ERIML, the Court considered the applications on the basis of the more limited duty to take reasonable care in the provision of information (owed by CBRE in any event).

Even on the assumption that the SAAMCo principle applies so as to require the Court to identify the direct consequences of the valuation being inaccurate, the Court held that the Claimants had a real prospect of establishing that the loss they suffered on their investment was at least partly attributable to the alleged inadequacies in the IM.


The Court first considered the case of the negligent valuer who owes a duty to a mortgage lender, where the loss on application of the SAAMCo principle will usually be limited to the difference between the valuation and the true value.

In the Court’s view, it was at least arguable that this comparison exercise should be carried out at the date of the valuation, or possibly at the time the valuation was relied on when entering into the relevant transaction. This was possibly more appropriate where the valuation was produced for a purpose that relates to the viability of a wider transaction, even absent the giving of advice. On this basis, the Claimants would be entitled to claim the quantum of the overvaluation on day one, which was approximately £26 million. In accordance with the two-stage test, the qualification established by SAAMCo under the second limb is to impose a limit to the basic amount of damages a party would otherwise be entitled. The Claimants would therefore be entitled to the full amount of their lost investment, because this figure is not greater than the overvaluation.

That said, the Court commented that ERIML and CBRE had a perfectly good case for contending that the use of the above formula did not work very well to identify the loss properly attributable to the inaccuracy of the information in the present case. As at the date of valuation, the Claimants could not make a direct link between the extent of the overvaluation and the extent to which they would be prejudiced by making an investment against assets worth less than they thought, because their interests were subordinated in that respect to the rights of the Bank and other unsecured creditors. If the valuations had been accurate, the Bank would have been better off, but the Claimants would have been in exactly the same position. The formula suggested by ERIML and CBRE would require the Court to examine the extent to which the Claimants would still have suffered the loss they claim, even if the valuation had been correct (which on the Defendants’ case, would produce no loss at all).

However, the Court did not finally determine what approach should be adopted in this case. The application raised the SAAMCo principle in a novel context and the exercise was likely to be fact sensitive. The specific approach to be taken to calculate the Claimants’ losses should be determined at trial and accordingly the Defendants’ summary judgment application was refused.


This judgment relates to an application for summary judgment and so its conclusions are simply arguable and not finally determinative. However, the decision offers guidance as to how SAAMCo will be interpreted outside of the typical valuer cases, specifically in the context of a negligent valuation contained in an information memorandum promoting an investment in an asset-holding issuer.

Importantly, it appears to widen the scope of the duties arguably owed by an investment promoter who has provided information to an investor for the purpose of making an investment decision. It will be for the trial judge to decide whether this is the correct approach, and more generally to decide upon whether it is appropriate to extend the scope of the SAAMCo principle to cases of this kind.

Simon Clarke

Simon Clarke
+44 20 7466 2508

Melissa Federico

Melissa Federico
+44 20 7466 2561

Ceri Morgan

Ceri Morgan
Professional Support Paralegal
+44 20 7466 2948

Worthing v Lloyds: High Court finds no continuing contractual duty to correct investment advice

The recent decision of the High Court in Worthing and Another v Lloyds Bank plc [2015] EWHC 2836 (QB) provides helpful clarification for financial institutions as to their duties when providing regulated investment advice under the Financial Services and Markets Act 2000 (“FSMA“) and conducting subsequent reviews of that advice.

In this case, the Court held that the original investment advice given by Lloyds Bank plc (the “Bank“) was reasonable. However, even if the advice had been wrong, there was no continuing contractual duty for the Bank to correct it. Accordingly, the Claimants were not able to avoid the limitation bar to a claim based on the original advice (given in 2007) by casting the alleged omission of a later correction as a continuing breach of duty. On the facts, the Bank was required to conduct periodic reviews in accordance with its terms and conditions. In performing this obligation the Bank duly discharged its duties.

The following further key points in this case will be of interest to financial institutions:

  1. There is a “clear advantage” in financial institutions using standardised documentation when explaining to customers the nature of products and the associated risks.
  2. The Court rejected a complaint that risk-assessment used in this case ought to have involved more specific and concrete questions involving potential percentage falls in an investment portfolio.
  3. There is no requirement under the COBS Rules for financial institutions to carry out a fresh risk/objectives analysis at every periodic review (and it would seem there is no such duty at common law, given that discharge of the duty to exercise reasonable care and skill when providing regulated investment advice requires compliance with the applicable COBS Rules, and no additional common law duty was found by the Court in this case).
  4. The Court’s strong reliance on the contemporaneous file notes of the Bank when giving the investment advice highlights the importance of keeping thorough and accurate notes when giving such advice to customers.

Factual Background

The Claimants, being a husband and wife of high net worth, sought to recover compensation for investment losses. They claimed that the Bank, in advising them to invest in a medium-risk investment portfolio, acted negligently, in breach of contract and in breach of its statutory duties under FSMA and the Conduct of Business Rules, subsequently replaced by the Conduct of Business Sourcebook Rules (“COB” and “COBS” respectively). In essence, they claimed they only ever wanted a low-risk investment and were not properly advised as to the medium-risk nature of the portfolio.

The investment advice followed several meetings during which the Claimants discussed their expectations and objectives and filled out a number of standardised documents designed to assess their appetite, and capacity, for risk. The Claimants also signed various documents which explained the risk nature of the investment portfolio.

The Bank conducted a review meeting with the Claimants approximately one year later. At around this time the Claimants were experiencing financial pressure from an unpaid overdraft account. At the review meeting the Bank set out a number of options to assist the Claimants with the overdraft, but ultimately recommended retaining the portfolio. Later that year, the Claimants decided to sell the portfolio suffering losses of around £43,000.

At a pre-trial hearing, the Claimants had conceded that their causes of action relating to the original advice were statute-barred (the original investment being made in 2007), with the result that they relied upon claims in respect of the Bank (i) failing to correct the original advice; and (ii) providing further incorrect advice at a review meeting.


The Court dismissed the claim.

Original advice

Although the claims arising from the original advice were statute-barred, the Court considered the reasonableness of that advice in deciding whether there was any duty to correct it. At all relevant times until the making of the initial investment, the giving of investment advice was subject to the COB Rules. The Court found that the Bank had complied with its duties under contract and the COB Rules, as well as its common law duty to exercise reasonable care and skill. The Court accepted the use of the standardised documentation for the purpose of explaining to its customers the nature of its products and the risks attendant on them. That entitlement is now expressly recognised by COBS 2.2.1 R. Interestingly, the Court rejected the claimants’ submission that risk-assessment ought to have involved more specific and concrete questions, such as: “Are you comfortable if the value of the investment falls by 10%? What about 20%? Or 30%?

Continuing duty

The Claimants’ primary submission was that, having given incorrect investment advice in January 2007, the Bank was at all times thereafter under an absolute contractual obligation to correct that advice by recommending that the Claimants either reinvest in a portfolio with low-risk profile or disinvest. This had the same effect as saying that each moment after the giving of the incorrect investment advice was a new breach by way of a failure to rectify the earlier breach. At trial, the Claimants relied upon the terms and conditions to create those continuing contractual obligations, which are set out at paragraphs 32-34 of the judgment. For example:

3. The Service

        ii. We are responsible on a continuing basis for managing the securities in your portfolio, in accordance with the              investment objective and risk category that you have chosen for your portfolio.

       iii. We will contact you from time to time to check whether there have been any changes in your circumstances and         requirements that could affect the way in which we act on your behalf. You should inform us then or at any time if           there are or have been any material changes that may affect your investment objective or attitude to risk for your             portfolio, so that we can discuss with you how best to meet your future needs and objectives.

The Claimants’ amended Particulars of Claim also relied upon an implied obligation under section 13 of the Supply of Goods and Services Act 1982 to exercise reasonable care and skill in and about giving investment advice. However, the argument based on continuing breach of contract required the Claimants to identify the particular contractual obligation that remained unperformed, i.e. the underlying contractual obligation to which the duty of care in section 13 applied. The Claimants failed to do so, and it appears from the judgment that this argument was not relied upon at trial.

The Court held that:

  • The Bank was not under a continuing contractual duty with regard to the original advice; the Claimants were not able to avoid the limitation bar to a claim based on the original advice by casting the omission of a later correction as a continuing breach of duty.
  • The relevant duty (to provide advice in accordance with contractual, statutory and common law duties) arose only at the point of the original advice. It was not the Claimants’ case that the Bank failed to give investment advice at all (which could theoretically give rise to a continuing duty if not satisfied), but that the advice given was incorrect.
  • Once the advice was given, correct or otherwise, the duty to provide advice was satisfied. The Court did not think that the case of Midland Bank Trust Co. Ltd v Hett, Stubbs & Kemp [1979] 1 Ch. 384 provided any support to the Claimants’ argument and nothing in Maharaj and another v Johnson and others [2015] UKPC 28 cast any doubt upon the Court’s analysis (see our blog post on Maharaj here).

The review

The Bank satisfied its duty to conduct the review with reasonable care and skill and in accordance with the COBS Rules (which had replaced the COB Rules by the time of the review). It was not in breach of a strict obligation to correct an error in its original investment advice, because of the conclusions reached above. There was no contractual obligation to carry out a fresh risk assessment at the review, nor was there a statutory duty under the COBS Rules. The contention that the Bank nevertheless failed to advise the Claimants that the portfolio was no longer suitable failed because the claimants’ attitude to risk had not changed. The recommendation provided was suitable in the circumstances (given the Claimants’ main concern was the overdraft not the portfolio), and the future investment objectives of the claimants at that time could not properly be assessed.


This case provides welcome comfort to financial institutions that, where there is an advisory relationship with a customer, the Court will be slow to find that a bank is under a legal duty to update the original advice on a continual basis.

It is worth just briefly considering whether the position might be different after the recast Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR) come into application.

Although regulatory expectations of suitability assessments under MiFID II are arguably more granular, requiring valid and reliable assessment of the client’s knowledge and experience and risk, and recommendations to be suitable in the context of the client’s risk tolerance and ability to bear loss, it seems unlikely that the court would have come to a different conclusion regarding the suitability of the investment in this case.

Under MiFID II, firms providing portfolio management (such as the Bank in this case) will be required to provide periodic suitability assessments, and firms giving investment advice to disclose whether or not they will provide such assessments. Where these assessments are provided, firms will be required to issue a periodic report containing an updated statement of how the investment meets the client’s preferences, objectives and other characteristics of the retail client. However, ESMA’s Technical Advice to the European Commission on MiFID II and MiFIR suggests that periodic suitability reports would only need to cover any changes in the instruments and/or the circumstances of the client. ESMA accepts (p.106 of its final report) that this falls some way short of an obligation to provide on-going monitoring of suitability. Assuming that the Commission acts on ESMA’s advice, it therefore seems unlikely that the outcome of this case would be substantially different under MiFID II.

Rupert Lewis

Rupert Lewis
+44 20 7466 2517

Angus Tummel

Angus Tummel
+44 20 7466 2457

Ceri Morgan

Ceri Morgan
Professional Support Lawyer
+44 20 7466 2949

High Court Ruling in Pension Funds’ Action Against Fund Manager

The High Court has ruled largely against a group of institutional investors on preliminary issues in proceedings brought against the manager and general partner of an infrastructure fund alleging breach of investment mandate.

The ruling is of interest not only for its consideration of the investment mandate allegations but also for its acknowledgment that, in certain circumstances, investors in a partnership vehicle may be able to pursue claims against a fund manager by bringing an action on behalf of the fund itself.

In Certain Limited Partners in Henderson PFI Secondary Fund II LLP v Henderson PFI Secondary Fund II LP & Ors [2012] EWHC 3259 (Comm), the fundamental allegation was that the fund did not invest exclusively or principally in private finance initiative (PFI) concession companies, as the investors allege it was required to do, but instead acquired a corporate group which also held interests in other types of assets, exposing them to substantial losses.

In a preliminary hearing, the Court was called upon:

  • to rule on whether the investors could bring claims against the fund’s Manager and General Partner as derivative actions – that is, standing in the place of the General Partner to bring an action on behalf of the fund in circumstances where the General Partner would not do so; and
  • to interpret the relevant contractual documents with respect to the scope of the investment mandate and the Manager’s liability.

It was held that:

  • as against the General Partner, the investors were not entitled to pursue derivative claims;
  • as against the Manager, there were sufficient ‘special circumstances’ to permit derivative claims but, if the investors elected to pursue such claims, they would forfeit their limited liability for the entirety of the partnership debts for the period in which they did so; and
  • all of the contractual interpretation issues were determined in favour of the defendant managers, including a finding that the relevant corporate acquisition was within the scope of permissible investments.


In September 2006, Henderson Equity Partners launched the Henderson PFI Secondary Fund II (the Fund), for the purpose of investing in PFI and public private partnership concession companies.

The key governing documents were a partnership agreement and a management deed under which the General Partner had appointed one of its sister companies as Manager.

The Fund raised £573.5m, the majority of which was used in the £1bn public to private acquisition of the Laing group of companies (Laing). Laing owned shares in numerous PFI concession companies but also had substantial interests in other assets. By June 2009, the value of the Fund had fallen by 60%.

In December 2011, 22 of the 29 limited partners in the Fund (the Claimants) filed proceedings against the Fund, the General Partner and the Manager.

In relation to the fundamental allegation regarding the unauthorised acquisition of Laing, the principal claims are for damages:

  • against the Manager for breach of the management deed;
  • against the General Partner for breach of the partnership agreement and in equity; and
  • against the Manager for alleged misstatements in the relevant private placement memorandum (PPM).

The Claimants sought to bring the first two of those claims by way of derivative actions on behalf of the partnership since s6(1) of the Limited Partnerships Act (LP Act) prohibits limited partners from taking part in the management of the partnership business – including the conduct of proceedings, which was a matter for the General Partner.

The preliminary hearing did not address the PPM misstatement allegations or a number of additional allegations concerning unauthorised allocation of assets and liabilities as between the Fund and a parallel fund.


Could the Claimants bring derivative claims?

Derivative claims are effectively an exception to the usual rule that only the party in whom a cause of action vests can bring a claim in respect of that action. They are most commonly used to allow a party to pursue an action on behalf of the body in whom the action vests in circumstances where the controllers of that body are unable or unwilling to bring the claim (often because of a conflict of interest).

Derivative claims are effectively an exception to the usual rule that only the party in whom a cause of action vests can bring a claim in respect of that action. They are most commonly used to allow a party to pursue an action on behalf of the body in whom the action vests in circumstances where the controllers of that body are unable or unwilling to bring the claim (often because of a conflict of interest).

The classic example is a minority shareholder seeking to bring action on behalf of a company against wrongdoers in control of the company. However, while it is clear that derivative claims are not limited to that corporate context, there is no previous example in English law of a limited partner seeking to pursue such an action on behalf of a limited partnership. The Claimants submitted that there was no reason in principle why they could not be available in the partnership context.

Derivative claims will only be permitted where there are ‘special circumstances’. The categories of ‘special circumstances’ have never been defined but a claimant must be able to show that it has a legitimate interest in the relief being claimed and that an injustice would arise if the relief was not able to be pursued.

Applying that test to the present case, Cooke J refused to allow derivative claims against the General Partner on the basis that there was no bar to the Claimants suing the General Partner under the partnership agreement in their individual capacities (as the majority of them were in fact doing, alongside the derivative claims). There was therefore ‘no need and no room for a derivative claim’.

However, in the case of the claims against the Manager, the Court accepted that ‘special circumstances’ existed, warranting a derivative claim. In particular:

  • It was undisputed that any claim against the Manager, as a third party, was a partnership asset owned jointly by the limited partners and could, in the normal course, only be brought by the General Partner.
  • The ‘special circumstances’ in this case arose from the General Partner’s conflict of interest in being a sister company of the Manager – so that there was in reality no way the partnership would bring an action against the Manager unless the existing General Partner was replaced under the mechanism for doing so in the partnership agreement.
  • The existence of that alternative remedy of replacing the General Partner was a factor that was relevant but not conclusive. Cooke J accepted factual evidence that, in this case, replacing the General Partner would have such ‘drastic consequences’ (in terms of likely additional losses to the Fund) that it was not a realistic course. The interests of justice therefore demanded that derivative claims be allowed.
  • That conclusion was reached notwithstanding the defendant managers’ objection that the General Partner’s conflict of interest was built into the architecture of the partnership, to which the investors had freely agreed.
  • Cooke J also rejected the defendants’ argument that permitting derivative claims in a partnership context would run contrary to the statutory framework – given the prohibition in the LP Act (s6(1)) on limited partners participating in the management of the partnership business.
  • However, he accepted that, if the Claimants did elect to bring such claims, s 6(1) LP Act would operate so as to require them to forfeit their limited liability status for as long as they were participating in the management of partnership business by pursuing the claims. In this regard, the Claimants were unsuccessful in arguing that such liability should be limited to debts directly linked to the pursuit of the claims. Rather, it was held that they would be liable for all debts and obligations incurred by the partnership during the period in which they were pursuing the claims in the place of the General Partner, in exactly the same way the General Partner would have been.

The investment mandate

A key provision in dispute was a clause in the ‘Investment Policy’ section of the partnership agreement which, on its face, appeared to permit the Manager to invest in any type of assets at all during the two year commitment period (provided it used reasonable endeavours to realise or divest itself of any non-PFI assets during that period).

The Claimants accepted that this was the literal meaning of the wording but argued that that could not be what was meant by the parties, because it would be inconsistent with the clear PFI-based purpose of the Fund, as identified in the PPM and in the balance of the stated Investment Policy. They submitted that the clause should be read as being limited to allowing non-PFI investments only as ancillary investments, where the relevant portfolio consisted of principally operational PFI concession companies.

The Court rejected that interpretation, finding that:

  • it was simply not what the clause said;
  • there was a clear rationale behind the clause as drafted, which was also reflected in other provisions of the partnership agreement – to allow the Manager to achieve a strong income stream during the first two years, while pursuing the overall strategy of building a PFI-based portfolio; and
  • there was no reason to read down the wording of the clause by reference to the PPM or to incorporate the PPM into the partnership agreement (which prevailed in any event if there was inconsistency between the two).

Based on that and on its interpretation of other relevant provisions, the Court concluded that the investment in Laing did not fall outside the investment policy and was not a breach of the Manager’s obligations under the management deed.

It is also worth noting that the Court was prepared to base its conclusion, in the alternative, on a general clause in the partnership agreement entitling the Manager to undertake all acts ‘..as are necessary or desirable in the reasonable opinion of the Manager in furtherance of the foregoing powers and consistent with the terms of this Agreement..’.

The Court confirmed that this meant that, even if the Laing investment was in fact outside the express mandate on a proper construction of the documents, if the Manager reasonably believed that the investment was within those powers, its authority was effectively extended to include that investment. Further, while any such belief must have been objectively reasonable, in any case where there was room for a difference of view in this regard the benefit of any doubt should be given to the Manager.


The decision in respect of derivative claims is notable as perhaps the first acknowledgment by the English courts of the potential for investors in a partnership vehicle to pursue claims against a fund manager by standing in the place of the general partner to bring an action on behalf of the fund itself.  Such claims may be available if a court is satisfied that there is, in practical terms, no realistic way in which the investors could otherwise obtain redress.

However, the likelihood of floodgates being opened in this respect would appear limited given the Court’s unequivocal conclusion that the price of pursuing such a claim is the complete forfeiting of limited liability for the period in which the claims are pursued.

While the Court’s findings on the interpretation of the contractual documents are largely specific to the documents in question in this case, they reinforce the importance of careful drafting on the issue of investment mandate. In particular, they highlight the potential for mandate to be effectively expanded by general clauses giving fund managers broad discretionary powers limited only by their ‘reasonable opinion’.

Further, the Court’s general approach in refusing to depart from the literal interpretation of the partnership agreement, particularly by reference to the placement memorandum, is of potential wider relevance in other cases where parties seek to rely on such information documents to advance their preferred interpretation of their contractual documents.

Damien Byrne-Hill

Damien Byrne-Hill
+44 20 7466 2517


Rupert Lewis

Rupert Lewis
+44 20 7466 2517


Simon Clarke

Simon Clarke
+44 20 7466 2508