Know your limits: the increasingly high bar for claims to extend the limitation period

Herbert Smith Freehills LLP have published an article in the New Law Journal on recent authorities clarifying the application of the Limitation Act 1980 and the high threshold for claimants to postpone the limitation period under s.32 or s.14A of that Act.

The litigation market is well known to be counter-cyclical – an uptick in disputes usually follows market turmoil. The 2008 global financial crisis was no exception, and disputes with their factual roots in this period are still heard by the English courts today. As an inexorable consequence, the court must grapple with complicated limitation arguments, and recent decisions fleshing out the law demonstrate the judiciary’s willingness to consider time-barred claims on a summary basis, in circumstances where, traditionally, such cases have been less amenable to a strike out or summary determination.

In our article, we examine recent authorities focusing on the operation of the deliberate concealment extension under section 32(1)(b) of the Act and the alternative 3-year extension mechanism for negligence actions under section 14A(4)(b).

The article can be found here: Know your limits. This article first appeared in the 9 July 2021 edition of the New Law Journal.

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Court of Appeal clarifies proper approach to assessing damages for fraudulent misrepresentation

The Court of Appeal has allowed an appeal by a purchaser in the context of its claim for damages for fraudulent misrepresentation against the sellers of certain business assets that it had acquired. In doing so, the Court of Appeal held that damages for fraudulent misrepresentation should, as a general rule, be assessed by ascertaining the actual value of the assets bought at the relevant date and deducting that figure from the price paid: Glossop Cartons and Print Ltd and others v Contact (Print & Packaging) Ltd and others [2021] EWCA Civ 639.

The Court of Appeal found that the High Court was incorrect to apply the “deduction method” to calculate the market value of the business assets as at the transaction date. The approach adopted by the High Court involved deducting from the purchase price the cost of every flaw or defect that the claimant had not itself factored into its calculation of the price. The Court of Appeal said that, in a normal case for fraudulent misrepresentation, this method is wrong in principle, unduly complex and inappropriately requires the court to consider what subjectively the claimant factored into its calculation of the purchase price. These matters are irrelevant to the calculation of direct loss for fraudulent misrepresentation, which merely requires the court to ascertain the actual value of the assets bought at the relevant date and to deduct that figure from the price paid (as per Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254). In Smith New Court Securities, the House of Lords emphasised that the general rule for the measure of damages in deceit claims should not be “mechanistically applied”. However, the Court of Appeal’s decision in the present case suggests that these general principles will be the norm and that there is a threshold question as to when an alternative measure of damages may be applied.

The decision is noteworthy for financial institutions faced with claims founded in the tort of deceit, particularly in the context of mis-selling disputes and shareholder claims. In securities litigation, the judgment is relevant to claims based on alleged fraudulent misrepresentation at common law. It may also be relevant to claims brought under section 90A of the Financial Services and Markets Act 2000, although currently it remains unclear whether the appropriate measure is as for the tort of deceit or the tort of negligent misstatement (and of course there are many additional, complicating factors in measuring damages in securities litigation, not least the impact of “harmed” investors both buying and selling securities during the period in which the misrepresentation is alleged to have endured).

In the context of a shareholder claim based on a false representation, the general rule in Smith New Court Securities means that damages will be assessed on the date on which the securities were purchased (the transaction date). Accordingly, the amount will be calculated as the difference between the price paid for the shares and their actual/true value as at the transaction date. As a result of the Court of Appeal’s decision in Glossop, claimants may face additional challenges where they try to depart from the general rule, for example by seeking to recover the difference between the price paid for the shares and the amount realised on disposal of the shares, which is often one of the methods by which damages are calculated by claimants in such claims. This may be an attractive option for claimants where there has been a later fall in value of the shares due to some separate event.

The extent to which falls in the share price may be claimed by shareholders is an important battleground in securities litigation, and there is a clear (although complex) inter-relationship between the measure of damages (in cases such as Smith New Court Securities and Glossop) and the application of the principle in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 (SAAMCO).

The SAAMCO principle confirms that a claimant can only recover loss that falls within the scope of the duty of care assumed by the defendant issuer, and was recently considered by the Supreme Court in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 (see our banking litigation blog post). In Manchester Building Society, the Supreme Court said that cases should not be shoe-horned into the categories of “information” cases or “advice” cases, and confirmed that the scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty, judged on an objective basis by reference to the purpose for which the advice is being given. Whether or not a claimant can recover an unrelated stock price drop during the period between acquisition and disposal of the shares will usually depend upon whether the defendant’s responsibility extended to the decision to purchase the shares in the first place. This will present a further hurdle for claimants seeking to depart from the general rule as to the measure of damages in such cases.

The case is considered in more detail below.

Background

A packaging manufacturer (Glossop), entered into an asset sale agreement and lease sale agreements (together, the agreements) to buy the business assets of a print company, and the lease of a property owned by Mr Smith and a pension company. The print company was a loss-making company which was ultimately owned and controlled by Mr Smith.

Glossop subsequently issued proceedings against the print company, Mr Smith and the pension company (together, Carton), claiming that it had been induced to enter into the agreements by Mr Smith’s fraudulent misrepresentations about the property.

High Court decision

The High Court found in Glossop’s favour, but held that a claimant in a deceit claim could not recover for losses which directly flowed from the relevant transaction if those losses were the product of the claimant’s own commercial misjudgement.

In attempting to ascertain the market value of the business assets sold, the High Court applied the “deduction method”, deducting from the purchase price the cost of every flaw or defect that Glossop had not itself factored into its calculation of the price. Following this approach, the High Court found that certain crucial flaws or defects could not be deducted from the purchase price, for example where Glossop had appreciated certain risks and had factored them into the purchase price.

Glossop appealed the High Court’s decision, arguing that the deduction method was not an appropriate way to assess damages. It argued that the High Court had failed to award damages for the direct loss caused by the fraudulent misrepresentations: the difference between the actual market value of the business assets sold and the price paid. Glossop argued that the difference was £300,000, which was the sum Glossop claimed it had paid for goodwill.

Court of Appeal decision

The Court of Appeal allowed Glossop’s appeal. It held that the High Court was incorrect to apply the deduction method, and that the direct loss here was simply the difference between the price paid and the market value.

The Court of Appeal referred back to the basic rules applicable where claimants (as in this case) have been induced by fraudulent misrepresentations to buy property, as per Smith New Court Securities. In that case, where the claimant acquired shares in reliance on fraudulent misrepresentations made by the defendants, the House of Lords held that a defendant is liable for all losses directly flowing from a fraudulently induced transaction even if they were unforeseeable. The House of Lords re-stated the general rule for the assessment of damages, which is that damages for tort or breach of contract are assessed at the date of the breach. In a shareholder claim based on a false representation, the House of Lords confirmed the general rule that this would be the date on which the securities were purchased (the transaction date). The amount would be calculated as the difference between the price paid for the shares and their actual/true value as at the transaction date.

In assessing the direct loss for fraudulent misrepresentation, in the Court of Appeal’s view the deduction method is wrong in principle. It is unduly complex and inappropriately requires the court to consider what subjectively the claimant had factored into its calculation of the purchase price. These matters are irrelevant to the calculation of direct loss for fraudulent misrepresentation in a normal case, which merely requires the court to ascertain the actual value of the assets bought at the relevant date and to deduct that figure from the price paid.

The Court of Appeal emphasised that a claimant is entitled to the difference between the price paid and the market value, whatever miscalculations it may have made in entering into the transaction. Claimants may, therefore, be compensated for making (or notwithstanding that they made) a bad bargain, even if they knew or ought to have known about defects before entering into the transaction. The purchaser’s commercial judgements and misjudgements are irrelevant to the evaluation of what direct loss it suffered.

On the facts of the present case, the Court of Appeal held that an alternative “broad brush” approach was appropriate. Glossop was entitled to recover, by way of direct loss, the difference between the price it paid and the market value of the assets purchased at the relevant date. That difference was best represented by the sum of £300,000 which Glossop paid for goodwill (mostly for business contracts) that had no real value and it was hard to see how there could be any goodwill in a loss-making business.

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High Court summarily dismisses alleged LIBOR fraudulent misrepresentation claim on the basis that it is time-barred

The High Court has granted summary judgment in favour of two banks, in connection with an alleged interest rate hedging products (IRHP) mis-selling claim related to LIBOR manipulation, on the basis that it was issued outside the statutory limitation period: Boyse (International) Ltd v NatWest Markets plc and another [2021] EWHC 1387 (Ch). In doing so, the High Court dismissed the claimant’s appeal against the judgment of the Chief Master, considered in our previous blog post: High Court strikes out two IRHP mis-selling claims on the grounds of abuse of process, limitation and underdeveloped allegations of fraud.

The decision is a reassuring one for financial institutions faced with claims issued close to or after the end of the statutory limitation period. The decision provides helpful guidance on when the limitation period will begin to run under the Limitation Act 1980 (the Act) for the purpose of alleged fraudulent misrepresentation claims. In particular, the decision illustrates: (i) the difficulties that may be faced by claimants seeking to rely on the deliberate concealment extension to postpone the limitation period under s.32(1)(a) of the Act; and (ii) the court’s increasing willingness to deal robustly with attempts to extend the limitation period on a summary basis where, traditionally, such cases have been less amenable to strike out or summary determination (see our previous blog posts on limitation issues here).

In the present case, the High Court was satisfied that a reasonably diligent person in the position of the claimant would have been alert to the widely available material about LIBOR at the relevant time and should have been on the lookout for publications such as the Financial Service Authority’s (FSA) (as it was then) Final Notice on LIBOR manipulation in 2013. In the High Court’s view, the Final Notice would have completed the picture required for the claimant to plead a case of fraudulent misrepresentation. Given that more than six years had passed between publication of the Final Notice and the claim being issued in these proceedings, the High Court dismissed the appeal and granted summary judgment in favour of the banks, on the basis that the claim was time-barred.

We consider the decision in more detail below.

Background

The claimant trust company entered into two LIBOR-referenced IRHPs in August 2007 and November 2008 with the defendant banks (the Banks). In 2012, following the then FSA’s announcement that it had identified serious failings in the sale of IRHPs to small and medium-sized businesses by a number of financial institutions, the Banks set up a past business review (PBR) compensation scheme. The claimant was offered a redress payment under the PBR scheme, which it accepted (without prejudice to its right to proceed with a claim for consequential loss). In 2015, the Banks rejected the claimant’s claim for consequential loss under the PBR scheme.

The claimant subsequently issued proceedings against the Banks on 19 February 2019 for: (a) fraudulent misrepresentation/breach of contract for alleged LIBOR manipulation (the LIBOR Claim); and (b) alleged negligent and fraudulent misrepresentations made in relation to the suitability of the IRHPs (the IRHP Misrepresentation Claim).

The Banks applied to the High Court for strike out and/or reverse summary judgment.

Decision of the Chief Master

The Chief Master’s reasoning is summarised in our previous banking litigation blog post.

The Chief Master granted summary judgment in favour of the Banks, finding that the LIBOR Claim was time-barred and that deceit in relation to the IRHP Misrepresentation Claim was not adequately pleaded (refusing the claimant permission to amend).

The claimant appealed against the Chief Master’s decision on the LIBOR Claim, submitting that he was wrong to conclude that it was sufficiently clear that such a claim was barred by the provisions of sections 2 and 32(1) of the Act. The claimant’s case was that the LIBOR Claim was not time-barred on the basis that:

  • Prior to the publication of the Final Notice in relation to LIBOR manipulation (published on 6 February 2013), there was not a sufficient “trigger” for the claimant to investigate the Banks’ LIBOR fraud.
  • The claimant could not have discovered the alleged LIBOR fraud with reasonable diligence on 6 February 2013, and would, in its particular circumstances, have needed to take exceptional measures in order to have done so before 19 February 2013 (the date the claim form was issued).

The claimant did not appeal the strike out of the IRHP Misrepresentation Claim.

High Court decision

The High Court found in favour of the Banks, upholding the Chief Master’s decision to grant summary judgment, for the reasons explained below.

Legal principles relating to limitation periods and discovery of alleged fraud

The High Court in its review of the existing law highlighted the following key principles:

  • Section 2 of the Act provides that an action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued.
  • Claims for fraudulent misrepresentation are an “action based upon the fraud of the defendant” and so fall within the meaning of section 32(1)(a) of the Act. In such claims, the limitation period does not begin to run until the claimant has “discovered the fraud…or could with reasonable diligence have discovered it”.
  • The claimant will have discovered a fraud when he or she is aware of sufficient material properly to be able to plead it (as per Law Society v Sephton and Co [2004] EWCA Civ 1627).
  • As to what is meant by “reasonable diligence” in section 32(1) of the Act, the question is not whether the claimant should have discovered the fraud sooner but whether they could with reasonable diligence have done so. The burden of proof is, therefore, on the claimant. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. The test for reasonable diligence is how a person carrying on a business of the relevant kind would act if he or she had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency (as per Paragon Finance plc v DB Thakerar & Co [1998] EWCA Civ 1249 and FII Group Test Claimants v HMRC [2020] UKSC 47).

Application of legal principles on limitation periods and discovery of alleged fraud

The High Court held that the Chief Master was right to reach the conclusion he did on the LIBOR Claim. A reasonably diligent person in the claimant’s position would have discovered the alleged fraud before 19 February 2013 (six years before the claim form was issued), and there was no real prospect of the contrary being successfully argued at trial.

The High Court commented that the Chief Master described the Final Notice as a “trigger” in the sense of this being the point in time from which the limitation period began to run, because the necessary facts to plead a case were available to the claimant from the time of publication of the Final Notice. It followed that further time for investigation was not required. Accordingly, the Chief Master was entitled to conclude that the evidence contained in the Final Notice in relation to LIBOR manipulation would have completed the picture required for the claimant to plead a case of fraudulent misrepresentation.

In the view of the High Court, the Chief Master was entitled to reach the view that a reasonably diligent person in the circumstances of this case would have been alert to the widely available material about LIBOR prior to February 2013 and should have been on the lookout for publications such as the Final Notice. In particular, the High Court referenced the claimant’s pleaded reliance on the Banks’ representations as to LIBOR, the losses the claimant allegedly sustained as a result of the IRHPs, and the widespread publicity about LIBOR as an outdated/discredited benchmark and its alleged manipulation.

The High Court therefore dismissed the claimant’s appeal on the LIBOR Claim, disposing of the proceedings in their entirety.

Ceri Morgan
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Court of Appeal decision in Adams v Options: the meaning of “advice” and potential implications for financial product mis-selling claims

In the context of an investor’s claim against the provider of his self-invested personal pension (SIPP) under s.27 of the Financial Services and Markets Act 2000 (FSMA), the Court of Appeal has provided guidance on the question of what constitutes “advice” on investments for the purpose of article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), which will be of broader interest to the financial services sector, beyond pensions-related disputes: Adams v Options UK Personal Pensions LLP [2021] EWCA Civ 474.

The underlying claim involved a pensions scheme operated by an unregulated intermediary (CLP), which persuaded the investor, Mr Adams, to cash out his existing pension fund and invest in “storepods” via a SIPP operated by Options UK Personal Pensions LLP (formerly Carey Pensions UK LLP). The Court of Appeal found that Mr Adams only agreed to transfer his pension fund into the Carey SIPP in consequence of things said and done by CLP in contravention of the general prohibition imposed by s.19 FSMA (which bars anyone except an authorised/exempt person from carrying on a regulated activity in the United Kingdom). Despite the fact that Carey had no knowledge that CLP was carrying out regulated activities, the Court of Appeal held that Mr Adams was entitled to recover his investment from Carey pursuant to s.27 FSMA.

The decision provides some interesting commentary on the meaning of “advice” in a financial services context, and the operation of the “no advice” clause in the pension contract between Carey and Mr Adams. These issues are considered below, although for a more detailed analysis of the decision, please see our Pensions Notes blog post.

Carey has applied to the Supreme Court for permission to appeal.

Meaning of “advice” in a financial services context

Central to the Court of Appeal’s decision on the s.27 FSMA claim, was its conclusion that CLP carried on a regulated activity by providing “advice” on investments to Mr Adams within the meaning of article 53 of the RAO. The Court of Appeal cited with approval the key authorities considering what constitutes “advice” in this context: Walker v Inter-Alliance Group plc [2007] EWHC 1858 (Ch) and Rubenstein v HSBC Bank plc [2011] EWHC 2304 (QB) and confirmed the following general principles:

  • The simple giving of information without any comment will not normally amount to “advice”.
  • However, the provision of information which is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient is capable of constituting “advice”.
  • Any element of comparison or evaluation or persuasion is likely to cross the dividing line.
  • “Advice on the merits” need not include or be accompanied by information about the relevant transaction. A communication to the effect that the recipient ought, say, to buy a specific investment can amount to “advice on the merits” without elaboration on the features or advantages of the investment.

It is important to recognise the different contexts in which the meaning of “advice” has been considered in the cases cited:

  1. As explained above, in Adams v Options, the court looked at this question to determine whether or not the activity of an unregulated entity was a specified type of regulated activity under the RAO.
  2. In Rubenstein (and more recently in Ramesh Parmar & Anor v Barclays Bank plc [2018] EWHC 1027 (Ch), see our blog post), the court considered whether a sale was advised or non-advised for the purpose of the Conduct of Business Rules (COB) (since replaced by the Conduct of Business Sourcebook (COBS)). In these cases, the question of whether the sale was advised/non-advised underpinned the relevant claimant’s case that the bank was liable under s.138D (formerly s.150) FSMA for breach of COB/COBS rules.
  3. The court has also been asked to consider whether a sale was advised or non-advised for the purpose of establishing whether a bank owed a duty to use reasonable skill and care in giving advice and/or making recommendations about the suitability of a financial product. These questions formed part of the claim in Rubenstein, which included claims for breach of contract and in negligence, and were also considered in Crestsign Ltd v National Westminster Bank Plc & Anor [2014] EWHC 3043 (Ch).

It is unclear whether the general principles confirmed in Adams v Options as to the meaning of “advice” will apply to all of the scenarios identified above, or if they will be confined to the court’s interpretation of the RAO. The court appears to have cited the authorities interchangeably between these cases, but there may be a tension between the ordinary English meaning of the word “advice” (e.g. for the purpose of considering a breach of contract or tortious claim) and “advice” for the purpose of the regulatory regime.

Impact of “no advice” clause in pension contract

Given its conclusion in respect of s.27 FSMA that Mr Adams had been advised, the court held that Mr Adams was entitled to recover money and other property transferred under his pension contract with Carey, unless the court was prepared to exercise its powers under s.28(3) FSMA to enforce the contractual agreement between the parties. Section 28 FSMA empowers the court to allow an agreement to which s.27 applies to be enforced or money/property transferred under the agreement to be retained, if it is just and equitable to do so. In considering whether to take such a course in a case arising under s.27, the court must have regard to “whether the provider knew that the third party was (in carrying on the regulated activity) contravening the general prohibition”.

Although Carey was not aware that the introducer (CLP) was carrying on unauthorised activities, the Court of Appeal rejected Carey’s argument that the pension contract should be enforced.

This outcome raises an interesting issue as to the contractual allocation of risk in the pension contract between Mr Adams and Carey, which expressly provided that Carey was instructed on an execution-only basis. As summarised by Lady Justice Andrews:

“There is nothing to prevent a regulated SIPP provider such as Carey from accepting instructions from clients recommended to it by an unregulated person, and from doing so on an “execution only” basis. But the basis on which they contract with their clients will only go so far to protect them from liability. If they accept business from the likes of CLP, they run the risk of being exposed to liability under s.27 of the FSMA.”

Accordingly, the practical effect of the Court of Appeal’s decision was to sidestep the provisions of the pension contract that defined the relationship as “non-advisory“ and expose Carey to specific risks associated with CLP’s (unauthorised) business model. It is clear that the court’s approach was driven by the very specific exercise of its discretion under s.28 FSMA, in particular to promote the key aim of FSMA to protect consumers, and to reflect the appropriate allocation of risk to authorised persons who have accepted introductions from unregulated sources.

This can be contrasted with the approach adopted by the court to no advice clauses in the context of civil mis-selling claims for breach of contractual and/or tortious duty in advising a customer as to the suitability of a particular financial product. The court has recently confirmed in Fine Care Homes Limited v National Westminster Bank plc & Anor [2020] EWHC 3233 (Ch) (see our blog post) that clauses stating that a bank is providing general dealing services on an execution-only basis and not providing advice on the merits of a particular transaction, are enforceable and are not subject to the requirement of reasonableness in the Unfair Contract Terms Act 1977 (UCTA) when relied upon in the context of a breach of advisory duty claim.

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High Court strikes out claims relating to alleged mis-selling of IRHPs on res judicata and abuse of process grounds

The High Court’s decision in Elite Property Holdings Limited & Anor v Barclays Bank plc [2021] EWHC 772 (Comm) is the latest instalment in a series of claims brought by the same claimant property investment companies against the defendant bank (and others) in relation to alleged mis-sold interest rate hedging products (IRHPs), which were included in the then-FSA (now FCA) past business review undertaken by the bank. The High Court granted the bank’s application to strike out the claim alleging breaches of agreements: (i) in relation to the bank’s assessment of consequential loss suffered by the claimants in respect of their IRHPs and (ii) that the bank would not take enforcement action against the claimants.

The decision is a reassuring one for financial institutions faced with duplicative claims involving the same cause of action, or matters determined in previous proceedings. The decision highlights the High Court’s scope to strike out such claims on the grounds of cause of action estoppel, issue estoppel or abuse of process. It also suggests that claimants may face difficulties in bringing further claims on issues not raised or determined in previous proceedings if, in the court’s view, such issues could or should have been raised then.

In the present case, the High Court was satisfied that the claim involved the same cause of action as was determined against the claimants in the original action or, in the alternative, it raised the same issues previously resolved against the claimants (see our banking litigation blog posts, on the previous decisions by the High Court and the Court of Appeal in related actions brought by the same claimants). Accordingly, the High Court held that the claim was barred by the principle of res judicata. The High Court also observed that: (i) even if it was wrong about the claim being barred by cause of action or issue estoppel, the new claim would fall squarely within the principle in Henderson v Henderson (1843) 3 Hare 100 and/or be an abuse of the court’s process; and (ii)  the claimants’ allegations had no real prospect of success and, if it had been necessary to do so, the court would have granted the bank’s application for summary judgment.

We consider the decision in more detail below.

Background

The claimant property investment companies had entered into a number of IRHPs with the defendant bank (the Bank) between 2006 and 2010. In June 2012, the Bank agreed with the then-FSA (now FCA) to undertake a past business review in relation to the alleged mis-selling of IRHPs (the FCA Review). The claimants’ IRHPs were included in this review. In the context of the FCA Review, the Bank made basic redress offers to the claimants in respect of their IRHPs in June 2014. The claimants rejected the basic redress offers and elected to submit a claim for consequential loss. However, in September 2014, the claimants asked the Bank to pay them the basic redress amounts offered, pending determination of their consequential loss claim. Consequently, the Bank made revised basic redress offers to the claimants. The revised basic redress offers were accepted by the claimants via signed acceptance forms in November 2014 (the 2014 Agreements), which acknowledged that the basic redress payments were in full and final settlement of all claims connected to the IRHPs, but excluding any claims for consequential loss.

Subsequently, in 2015, the claimants rejected the Bank’s consequential loss decision and instead commenced litigation against the Bank (the Original Action). The majority of the claimants’ case was struck-out by the High Court. The Court of Appeal refused to grant permission to appeal (see our banking litigation blog post for further details on the background to this claim and the Court of Appeal’s decision). In 2019, the claimants issued a second claim, this time against BDO LLP, alleging that they had sustained loss and damage due to an unlawful means conspiracy in which the Bank and BDO conspired to mislead KPMG into allowing the Bank to foreclose on the underlying loan of one of the claimant companies when in fact there were no exceptional circumstances justifying that course of action. The High Court struck out the second action on the basis that it was a collateral attack on the Court of Appeal’s findings in the Original Action and it was an abuse of process (see our banking litigation blog post for further details on the background to this claim and the High Court’s decision).

The present decision is in connection with a third claim brought by the claimants, this time against the Bank, alleging breach of: (i) the 2014 Agreements in relation to the Bank’s assessment of consequential loss suffered by the claimants as a result of the IRHPs (the Consequential Loss Claim); and (ii) an oral agreement, claimed to have been made on 24 June 2013, that the Bank would not take any enforcement action against the claimants (the Oral Agreement Claim).

The Bank applied to the High Court to strike out the claimants’ latest claims on the grounds that they were an attempt to re-litigate matters that were (or could and should have been) raised against the Bank in the Original Action and were therefore res judicata and/or an abuse of process. In the alternative, the Bank applied for summary judgment on the grounds that the claims had no real prospect of success. The Bank argued that the Consequential Loss Claim involved the same cause of action that was determined against the claimants in the Original Action by the High Court and the Court of Appeal, or in the alternative, that the claims raised identical issues to those that have already been resolved against the claimants. The Bank also argued that the Oral Agreement Claim was barred by issue estoppel, or in the alternative fell squarely within the Henderson v Henderson principle since the point that the claimants now sought to raise was directly relevant in the conspiracy claims that were made in the Original Action concerning the lawfulness of enforcement action.

Decision

The High Court found in favour of the Bank, striking out the claimants’ Consequential Loss Claim and the Oral Agreement Claim for the reasons explained below.

Res judicata and abuse of process principles

The High Court noted that the principles relating to res judicata and abuse of process were reviewed in Virgin Atlantic Airways Ltd v Zodiac Seals UK Ltd [2013] UKSC 46 and more recently in Test Claimants in the FII Litigation v HMRC [2020] UKSC 47. The High Court then highlighted the following key principles:

  • Cause of action estoppel. Once a cause of action has been held to exist or not to exist, that outcome may not be challenged by either party in subsequent proceedings. This is “cause of action estoppel”. The discovery of a new factual matter which could not have been found out by reasonable diligence for use in the earlier proceedings does not, according to the law of England, permit the latter to be re-opened, and cause of action estoppel also extends to points which have might have been but were not raised and decided in the earlier proceedings for the purpose of establishing or negativing the existence of a cause of action (as per Arnold v National Westminster Bank Plc [1991] 2 AC 93 and Virgin Atlantic).
  • Definition of cause of action. A cause of action was defined in Co-operative Group Ltd v Birse Developments Ltd [2013] EWCA Civ 474 as follows: “In the quest for what constitutes as a ‘new’ cause of action, i.e. a cause of action different to that already asserted, it is the essential factual allegations upon which the original and the proposed new or different claims are reliant which must be compared”. Unnecessary or inessential allegations or facts must be ignored.
  • Issue estoppel. Where the cause of action is not the same in the later action as it was in the earlier one, some issue which is necessarily common to both was decided on the earlier occasion and is binding on the parties, this is “issue estoppel”. Issue estoppel extends to cover not only the case where a particular point has been raised and specifically determined in the earlier proceedings, but also where in the subsequent proceedings it is sought to raise a point which might have been but was not raised earlier in relation to an issue that has already been finally determined (as per Arnold v National Westminster Bank Plc).
  • Henderson v Henderson principle. A party is precluded from raising in subsequent proceedings matters which were not, but could and should have been raised in earlier proceedings. The High Court noted that the correct approach to the Henderson principle was considered by the House of Lords in Johnson v Gore Wood & Co [2000] UKHL 65 where the court said:
    1. The underlying public interest is that there should be finality in litigation and a party should not be twice vexed in the same matter.
    2. The bringing of a claim or the raising of a defence may, without more, amount to an abuse if the court is satisfied (the onus being on the party alleging abuse) that it should have been raised in the earlier proceedings if it was to be raised at all.
    3. A claim may be abuse where it amounts to a collateral attack on the outcome of prior litigation, either between the same parties or with a third party.
    4. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings, it should have been, so as to render the raising of it in later proceedings necessarily abusive. The court should carry out a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all of the facts of the case, focusing attention on the critical question whether, in all the circumstances, a party is misusing or abusing the court’s process by seeking to raise an issue which could have been raised before.
    5. The private and public interests which are served by the Henderson principle are distinct and either or both may be engaged.
  • Abusive proceedings. There is a more general rule against abusive proceedings. The court has an inherent power to prevent misuse of its procedure where the process would be manifestly unfair to a party, or would otherwise bring the administration of justice into disrepute among right-thinking people (as per Hunter v Chief Constable of the West Midlands Police [1981] UK HL 13).

Application of res judicata and abuse of process principles

Consequential Loss Claim

The High Court agreed with the Bank that the Consequential Loss Claim involved the same cause of action as was determined against the claimants in the Original Action, or in the alternative, it raised the same issues which had already been resolved against the claimants, and it was therefore barred by the principle of res judicata. There were four reasons for this:

  1. Both claims were for the alleged breach of the same contract and all the documents relied on in this claim were before the courts in the Original Action. Whilst there now appeared to be a different spin being put on the interpretation of the documents as to the material points of the contract, the fact remained that the same material was before the courts in the Original Action.
  2. Both claims were premised on the Bank having assumed an obligation to deal fairly and reasonably with the claimants’ consequential loss claim. Whilst not identically framed, there were effectively the same allegations of an obligation on the Bank to act fairly and reasonably in accordance with established legal principles in relation to the assessment and payment of the claim for consequential loss.
  3. The alleged breach of contract was the same i.e. a failure to do the assessment correctly resulting in the rejection of the claimants’ consequential loss claim. The allegation in the Original Action was not limited to the failure to assess in accordance with the terms of the FCA Review or the Bank’s agreement with the FCA but was broader, including a failure to assess in accordance with general legal principles and pay ‘fair and reasonable’ redress. The same was now being alleged again. However, it was determined against the claimants in the Original Action that the Bank had agreed to carry out the FCA Review in any particular way or pay redress in any particular form.
  4. The same loss was claimed in both actions i.e. damages for breach of the 2014 Agreements.

The High Court also said that even if it was wrong about the Consequential Loss Claim being barred by cause of action or issue estoppel, it would conclude that such a claim would fall squarely within the Henderson v Henderson principle and/or be an abuse of the court’s process as it was, at most, a different way of putting the same claim as brought in the Original Action.

Accordingly, the High Court struck out the claimants’ Consequential Loss Claim.

Oral Agreement Claim

The High Court agreed with the Bank that the Oral Agreement Claim was barred by issue estoppel as the issue of the lawfulness of enforcement action was live and determined by HHJ Waksman QC in the Original Action. Although the issue was not determined on an appeal to the Court of Appeal in the Original Action, the High Court said that in its view this did not prevent an issue estoppel from arising.

The High Court then said in the present case, the order of HHJ Waksman QC in the Original Action remained in full force and effect (the appeal having been dismissed) and that his decision continued to be fundamental to the disposal of the case. In the High Court’s view, there was also no injustice to the claimants because they could have sought to appeal against the decision of the appeal court which had gone against them.

The High Court also commented that even if had been wrong as to whether the decision of HHJ Waksman QC amounted to issue estoppel, in its view if the claimants wished to run the Oral Agreement Claim, they could and should have done so in the Original Action. Accordingly the attempt to run it in this claim contravened the Henderson v Henderson principle.

Accordingly, the High Court struck out the Oral Agreement Claim.

Summary Judgment

The High Court also commented that had it been necessary to do so, it would have in any event have concluded that both the Consequential Loss Claim and Oral Agreement Claim had no real prospect of success and granted summary judgment.

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Mannat Sabhikhi
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High Court finds that a claimant’s “awareness” of a representation is an essential prerequisite to a claim for misrepresentation

In an important decision for financial institutions, the High Court has confirmed that a claimant’s awareness of a representation is an essential prerequisite to a claim for misrepresentation, by striking out implied fraudulent misrepresentation claims in relation to LIBOR against a defendant bank. The claimants had failed to plead that the alleged representations were actively present in their mind when entering into the products in question and therefore the claim stood no realistic prospect of success: Leeds City Council and others v Barclays Bank plc and another [2021] EWHC 363 (Comm).

The decision is particularly helpful in several respects:

  • Requirement for awareness. The court’s detailed consideration of the “awareness” requirement in the context of misrepresentation claims provides important, binding clarity on the topic. This prerequisite means that a representee must have had some appreciation that a representation in the sense alleged was being made, and is a necessary part of the reliance or inducement analysis in misrepresentation claims. Without it, a claim must fail.
  • Satisfying the awareness requirement. What is required to satisfy the awareness requirement will depend upon the precise circumstances. The answer may be one which requires conscious thought, or for the representation to have be “actively present” in the representee’s mind, or some less stringent element of awareness (depending on the facts).
  • Assumptions based on conduct. The court rejected the notion that mere assumption based on the representor’s conduct is sufficient. In the simplest representation by conduct cases, the element of awareness may be very similar to an assumption (e.g. where a bidder at auction represents their willingness and ability to pay a certain sum by raising a paddle). However, this principle should not be inferred in more complex cases where the conduct does not “speak for itself” in the same way so as to permit the quasi-automatic understanding which may look like assumption.

Considering the awareness requirement in the context of the present case, the court commented that the present claim was not being considered in a vacuum and referred to two previous cases based on similar LIBOR-related representations: Property Alliance Group Ltd v The Royal Bank of Scotland plc [2016] EWHC 3342 (Ch) (see our blog post on the Court of Appeal decision) and Marme Inversiones 2007 v Natwest Markets [2019] EWHC 366 (Comm) (see our blog post here). These decisions pointed towards an established position that, in misrepresentation cases of this type, there is a relatively stringent awareness requirement. In the present case, this required each claimant to prove that the alleged representations were “actively present” in their mind. As the claimants failed to plead awareness in the sense required, the claims were struck out.

At first blush, it may appear obvious that a party saying that it has relied upon a representation must also be able to say that it was aware of the representation being made. However, the healthy debate in this case and others demonstrates that the requirement for awareness has caused controversy. Leeds v Barclays provides welcome clarity and certainty on the issue. The approach taken by the court in finding that the alleged representations were not understood in the sense alleged and therefore not relied upon demonstrates a welcome degree of scepticism, particularly given how intricate and complex the alleged representations at issue in the claims have been. It is also noteworthy that to date, no claim relating to LIBOR representations has been successful at full trial.

Background

The claimant local authorities entered into 60 to 70 year term Lender Option – Borrower Option loans (or LOBO loans) with Barclays (the Bank) between 2006 and 2008. The interest rate payable under the loans referenced LIBOR. As is well known, in 2012, it was discovered that several banks on the LIBOR survey panel were engaged in LIBOR manipulation (including the Bank).

The claimants brought an action alleging that fraudulent implied representations in relation to LIBOR were made by the Bank prior to their entry into the loans. In particular, the claimants alleged that the Bank had made implied fraudulent representations to the effect that LIBOR was set honestly and properly and the Bank was not (and had no intention of) engaging in any improper conduct in connection with its participation in the LIBOR panel. The alleged representations were similar in nature to those which have been considered and rejected by the court in the cases of PAG and Marme. The claimants sought rescission of the loans, damages, interest and costs on that basis.

The Bank sought to strike out the claims on the basis that: (1) the claimants could not show that they relied on the representations alleged; and (2) even if the claimants were successful in proving misrepresentation, they had affirmed the relevant contracts. For the purpose of the Bank’s application, the court assumed that the LIBOR representations had been made, were false and had been made by the Bank fraudulently.

Decision

On the question of reliance, the court found in favour of the Bank and struck out all of the claims. Given this outcome, it was not necessary for the court to determine the question of affirmation, but the court considered the alternative application briefly and found that the case on affirmation would not have been suitable for summary determination (and this aspect of the application is not considered further in this blog post).

In relation to the reliance requirement which forms part of misrepresentation claims, the Bank asserted that a necessary building block of reliance in a misrepresentation claim is awareness by the claimant of the representation being made. As none of the claimants had pleaded awareness of the alleged representation, the Bank argued that their claim should be struck out.

The claimants focused only on inducement, pointing to their pleading that, had they known the truth, they would not have entered into the contracts. They argued that awareness cannot be separated from inducement and is not an independent precondition that must be satisfied in its own right before the court can move on to the analysis of inducement.

The court conducted a useful and detailed analysis of the authorities in which the question of reliance has been considered, in particular, the extent to which the relevant representation must operate on a claimant’s mind. The key points of general application are considered below.

Is there an awareness requirement for misrepresentation claims?

The court confirmed that misrepresentation involves some requirement of awareness. In reaching this conclusion, the court considered a number of authorities generally and those specifically in the context of LIBOR manipulation, which indicated that for a misrepresentation to be actionable, the representee must be aware of it. In particular, so far as relevant in a financial services context, the court cited: Raiffeisen Zentralbank Osterreich AG v The Royal Bank of Scotland plc [2010] EWHC 1392, Cassa Di Risparmio Della Republica Di San Marino SpA v Barclays Bank Plc [2011] EWHC 484 (Comm), Property Alliance Group Ltd v The Royal Bank of Scotland plc [2016] EWHC 3342 (Ch), Marme Inversiones 2007 v Natwest Markets plc [2019] EWHC 366 (Comm).

Importantly, the court rejected the claimants’ submission that in the case of a representation by conduct, there is no requirement of awareness. The court confirmed that the existence of the awareness requirement is the same in cases involving representations by conduct and those involving representations by express words (rejecting the argument that the authorities could be divided into separate categories based on cases about representations by conduct vs express words, because most of them concerned representations compounded out of words and conduct). Representation by conduct is discussed in more detail in the next section.

The court also noted that often the requirement for awareness will not be in issue; but that does not mean it is not a requirement. It is just that in some cases, the fact that the claimant was aware of the representation is so obvious that the parties do not bother to argue about it. In contrast, the court said that the existence of the awareness requirement is of particular importance when considering implied representations.

What is required to satisfy the awareness element?

Where awareness is in issue, the court noted that in some cases the question will be what the claimant consciously thought, while in others it may be better expressed by a focus on whether the representation is “actively present” in the representee’s mind (see Marme and PAG).

The court considered expressly the question of assumption, and whether or not an assumption by a claimant (in combination with proof of what the claimant would have done if told the truth) could ever be sufficient. It said that where there is an issue as to whether the representation was ever actively present in the representee’s mind, the authorities indicate there is no scope for reliance on an assumption.

In particular, the court rejected the claimants’ argument that assumption suffices in the case of representations by conduct, so that there is no requirement for awareness in such cases. The claimants’ arguments here were based on the criminal appeal in DPP v Ray [1974] AC 370. In this case, the House of Lords held that by entering the Wing Wah restaurant and placing an order for prawn chop suey and rice, Mr Ray represented that he intended to pay the 47 pence that the meal cost. The court in the present case said that comparisons with DPP v Ray were “overstretched”. Such comparison ignored a number of “not unimportant” facts, including that it was a criminal case; that it focused on the fact that the representation was true when it was made but became untrue (when Mr Ray changed his mind about paying for the meal and absconded after eating); and that it did not deal with the question of an awareness requirement.

In the court’s opinion, there may be cases “where the element of awareness will come close to something which might loosely (and without careful analysis) be characterised as assumption and which is most obviously derived from conduct”. This may be the position for the simplest of representation by conduct cases, where specific conduct may precisely and inevitably equate to a representation, without any room for ambiguity (for example, in the case of a bidder at an auction raising a paddle, implicitly representing by that conduct a willingness and ability to pay the relevant bid amount). In such a case a requirement for separate or distinct understanding or thought to the representations would be artificial.

However, the court recognised that this principle should not be inferred in more complex cases where the conduct does not “speak for itself” in the same way so as to permit the quasi-automatic understanding which may look like assumption.

Accordingly, what is required to satisfy the awareness requirement will depend upon the precise circumstances, and the answer may be one which requires conscious thought or some less stringent element of awareness (depending on the facts). In this context, the court emphasised throughout the judgment that misrepresentation is capable of occurring in a huge range of factual circumstances of varying complexity; and the difference in complexity of different representations may have an impact both on how the representation is spelled out and how it is received (and understood).

The court recognised that the above analysis could lead the issues in the present application to be unsuitable for determination at the strike out/summary judgment stage. However, the court was conscious of previous case law which had considered the issue on essentially the same facts (see the section on reliance in the context of interest reference rate manipulation cases below).

Awareness in the context of interest reference rate manipulation cases

As mentioned when discussing the test for awareness, the court found that what is required to satisfy the awareness requirement will depend upon the precise facts as to the representation.

Looking at the facts of the present case, the court commented that it did not operate in a vacuum and referred to two previous cases based on similar LIBOR-related representations as this one, where the court found that awareness was required:

  • PAG: this case concerned LIBOR representations and, at first instance, the court considered the question obiter. It found that the claimants had no understanding of what were extremely complex and intricate representations, and concluded that they did not cross the relevant principals’ minds. As a result, they could not have understood the representations to have been made and therefore did not rely on them.
  • Marme: this case concerned EURIBOR representations and, although also obiter, the court commented that there would need to be “some contemporaneous conscious thought” given to the fact that some representations were being impliedly made.

The court was clear that PAG and Marme pointed towards an established position that, in misrepresentation cases involving interest reference rate manipulation, there is a relatively stringent awareness requirement. In the present case, this required each claimant to prove that the alleged representations were “actively present” in their mind.

In contrast, the claimants failed to plead that the representations were “actively present” in their mind. Their pleaded cases relied on their assumption that LIBOR was honest and not being manipulated rather than anything more, which was not sufficient. As a result, the LIBOR misrepresentation claims were struck out.

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Financial product mis-selling claims against banks: the increasing willingness of the English courts to strike out allegations of fraud in “appropriate” cases

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the increasing willingness of the English courts to deal with opportunistic claims against banks (and other third parties) involving allegations of fraud without the need for a full trial, in “appropriate” cases.

Traditionally, in a financial product mis-selling context, claims against financial institutions involving allegations of fraud, LIBOR manipulation and unlawful means conspiracy have not been amenable to strike out or summary determination. However, the recent decisions in Boyse (International) Limited v Natwest Markets plc & The Royal Bank of Scotland Plc [2020] EWHC 1264 (Ch) and Elite Properties and Ors v BDO LLP [2020] EWHC 1937 (Comm) represent useful additions to the body of English court judgments arising out of financial product mis-selling allegations, which are likely to be of broader interest to financial institutions. In both cases, allegations of fraud were made against the defendant entity, and in both cases, the court struck out the claim/granted reverse summary judgment, finding that these were cases in which it was “appropriate” to deal with the claims without the need for a full trial. The decisions, taken together, could be viewed as an encouragement by the courts for financial institutions to seek to dispose of mis-selling claims at an early stage of the litigation proceedings.

In our article, we examine the lessons learned from Boyse and Elite as to when it will be “appropriate” to strike out/summarily determine mis-selling fraud claims, and the impact of these decisions upon the litigation tactics of defendant financial institutions facing such claims.

This article can be found here: Financial product mis-selling claims against banks: the increasing willingness of the English courts to strike out allegations of fraud in “appropriate” cases. This article first appeared in the January 2021 edition of JIBFL.

John Corrie
John Corrie
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Ceri Morgan
Ceri Morgan
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Nihar Lovell
Nihar Lovell
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Nic Patmore
Nic Patmore
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High Court considers First Tower judgment in the context of no-advice clauses and confirms UCTA does not apply

The High Court has dismissed the latest interest rate hedging product (IRHP) mis-selling claim to reach trial in Fine Care Homes Limited v National Westminster Bank plc & Anor [2020] EWHC 3233 (Ch).

The judgment will be welcomed by financial institutions for its general approach to claims alleging that a bank negligently advised its customer as to the suitability of a particular financial product (whether an IRHP or otherwise). While there are some aspects of the decision which hinge on the unsophisticated nature of this particular claimant, the touchstone of when it can be said that a bank owes a common law duty to advise, the content of that duty and what a claimant must prove to demonstrate that the advisory duty (if owed) has been breached, will be of relevance to similar claims faced by banks in relation to other products or services.

The aspect of the judgment likely to be of greatest and widest importance to the financial services sector, is the court’s analysis of how the doctrine of contractual estoppel should be applied in these types of mis-selling cases.

The question in this case was whether the bank was entitled to rely on its contractual terms as giving rise to a contractual estoppel, so that no duty of care to advise the customer as to the suitability of the IRHP arose. In good news for banks, the court determined that clauses stating that the bank was providing general dealing services on an execution-only basis and was not providing advice on the merits of a particular transaction (precisely the sort of clauses which are typically relied upon to trigger a contractual estoppel), were not subject to the requirement of reasonableness in the Unfair Contract Terms Act 1977 (UCTA) when relied upon in the context of a breach of advisory duty claim.

This may appear an unsurprising outcome, given the Court of Appeal’s decision Springwell Navigation Corpn v JP Morgan Chase Bank [2010] EWCA Civ 1221. However, certain obiter comments by Leggatt LJ in First Tower Trustees v CDS [2019] 1 WLR 637 could be read as conflicting with Springwell in relation to the effect of so-called no-advice clauses and the application of UCTA in relation to them.

In the present case, the court emphasised the clear distinction made in First Tower between, on the one hand, a clause that defines the party’s primary rights and obligations (such as a no-advice clause), and on the other, a clause stating that there has been no reliance on a representation (a “non-reliance” clause). It said that the Court of Appeal’s decision in First Tower was limited to the effect of non-reliance clauses given the nature of the clause at issue in that case. First Tower confirmed that where the effect of a non-reliance clause is to exclude liability for misrepresentation which would otherwise exist in the absence of the clause, section 3 of the Misrepresentation Act 1967 will be engaged and the clause will be subject to the UCTA reasonableness test. In contrast, the clauses at issue here were not non-reliance clauses, but rather clauses that set out the nature of the obligations of the bank, and therefore were not subject to section 2 of UCTA.

Contractual estoppel has regularly been relied upon by banks defending mis-selling claims to frame the obligations which they owe to customers, particularly in circumstances where claimants have sought to argue that, notwithstanding the clear terms of the contracts upon which the transactions were entered into, the banks took on advisory duties in the sale of financial products which turned out to perform poorly. The decision in Fine Care Homes will therefore be welcomed by financial institutions, particularly against the backdrop of the First Tower decision. While in many circumstances, no-advice clauses would be likely to meet the requirements of reasonableness under UCTA in any event (as was the outcome in the present case), removing a hurdle that must be cleared in order to rely on such clauses is clearly preferable from the bank’s perspective, adding certainty to the relationship.

Background

In 2006, the claimant (Fine Care Homes Limited) took out a loan with the Royal Bank of Scotland (the Bank) to finance the acquisition of a site in Harlow on which it intended to build a care home (the land loan). The claimant also intended to borrow further funds from the Bank to finance the development of the site (the development loan), although ultimately the parties were unable to reach agreement on the terms of the development loan.

In 2007, the claimant took out an IRHP with the Bank, as a condition of the anticipated development loan. The IRHP was a structured collar with a term of five years, extendable by two years at the option of the Bank (which was duly exercised).

In 2012, the IRHP was assessed by the Bank’s past business review (PBR) compensation scheme (which had been agreed with the then-Financial Services Authority (FSA)) to have been mis-sold. In 2014, the claimant was offered a redress payment by the Bank’s PBR.

The claimant did not to accept the offer under the PBR and pursued the following civil claims against the Bank at trial:

  1. Negligent advice claim: A claim that the Bank negligently advised the claimant as to the suitability of the IRHP, in particular by failing to tell the claimant that the IRHP would impede its capacity to borrow, or that novation of the IRHP might not be straightforward / might require security.
  2. Negligent mis-statement / misrepresentation claim: A claim that the information provided by the Bank regarding the IRHP contained negligent mis-statements or misrepresentations in the same two respects as the negligent advice claim.
  3. Contractual duty claim: A claim that the Bank was subject to an implied contractual duty under section 13 of the Supply of Goods and Services Act 1982 to exercise reasonable skill and care when giving advice and making recommendations, which was breached in the same two respects as the negligent advice claim.

Decision

The court held that all of the claims against the Bank failed, each of which is considered further below.

1. Negligent advice claim

The court’s analysis of the negligent advice claim was divided into three broad questions: (i) did the Bank owe a duty of care to advise the claimant as to the suitability of the IRHP; (ii) could the Bank rely upon a contractual estoppel to the effect that the relationship did not give rise to an advisory duty; (iii) if there was an advisory duty in this case, was it breached by the Bank in the two specific respects alleged by the claimant?

(i) Did the Bank owe a duty of care?

It was common ground that the sale of the IRHP was ostensibly made on a non-advisory rather than advisory basis, but the claimant alleged that the facts nevertheless gave rise to an advisory relationship in which a personal recommendation was expressly or implicitly made. In this regard, the claimant relied on the salesperson at the Bank being held out as being an “expert” (as an approved person under FSMA); that he advised the claimant to buy the particular IRHP and that the Bank therefore assumed a duty of care which required it to ensure that the IRHP was indeed suitable.

As to whether the Bank owed an advisory duty on the facts of this particular case, the court referred in particular to two substantive trial decisions considering a claim for breach of an advisory duty in the context of selling an IRHP: Property Alliance Group v RBS [2018] 1 WLR 3529 and LEA v RBS [2018] EWHC 1387 (Ch). The court highlighted the following key points from these cases:

  • A bank negotiating and contracting with another party owes in the first instance no duty to explain the nature or effect of the proposed arrangement to the other party.
  • As a point of general principle, an assumption of responsibility by a defendant may give rise to duty of care, although this will depend on the particular facts (applying Hedley Byrne v Heller [1964] AC 465).
  • In the context of a bank selling financial products, in “some exceptional cases” the circumstances of the case might mean that the bank owed a duty to provide its customer with an explanation of the nature and effect of a particular transaction.
  • There are a number of principles emerging from the cases as to the way in which the court should approach this fact-sensitive question. In particular, the court must analyse the dealings between the bank and the customer in a “pragmatic and commercially sensible way” to determine whether the bank has crossed the line which separates the activity of giving information about and selling a product, and the activity of giving advice.
  • However, there is no “continuous spectrum of duty, stretching from not misleading, at one end, to full advice, at the other end”. Rather, the question should be the responsibility assumed in the particular factual context, as regards the particular transaction in dispute.
  • Assessing whether the facts give rise to a duty of care is an objective test.

On the facts, the court did not consider that this was to the sort of “exceptional case” where the bank assumed an advisory duty towards its customer. The court highlighted the following factual points in particular, which are likely to be of broader relevance to mis-selling disputes of this nature:

  • The court noted that it is quite obviously not the case that in every case in which an IRHP is sold by an approved person (as it will inevitably be) a duty of care arises to ensure the suitability of the product.
  • The claimant was unable to point to anything at all in the exchanges between the Bank and the claimant which contained advice to buy the IRHP. The court rejected the claimant’s argument that the Bank’s presentation of the benefits of IRHP products in general could amount to advice to buy any specific product. Referring to the decision in Parmar v Barclays Bank [2018] EWHC 1027 (Ch), the court confirmed that if a recommendation is to give rise to an advised sale, it must be made in respect of a particular product and not IRHPs in general. Although Parmar was decided in the context of a statutory claim under s.138D FSMA, the court found that the principle applied equally to a mis-selling claim of this type (see our blog post on the Parmar decision).

Accordingly, the court found that the Bank did not owe an advisory duty in relation to the sale of the IRHP.

In reaching this conclusion, the court rejected any suggestion that the rules and guidance set out in the FSA/FCA Handbook could create a tortious duty of care where one did not exist on the basis of the common law principles (applying Green & Rowley v RBS [2013] EWCA Civ 1197). The relevant context in Green & Rowley was whether the (then-applicable) Conduct of Business rules and guidance (COB) could create a concurrent tortious duty of care, but the court in this case extended the same reasoning to the Statements of Principle and Code of Practice for Approved Persons (APER). The court stated that APER code could not carry any greater weight in relation to the content of the common law duties of care than the COB rules.

(ii) Could the Bank rely upon a contractual estoppel?

The court found that the Bank was entitled to rely on its contractual terms as confirming that the relationship between the Bank and the claimant did not give rise to a duty of care to advise the claimant as to the suitability of the IRHP, and that the claimant was estopped from arguing to the contrary by those contractual terms.

The terms of business included the following material clauses:

“3.2 We will provide you with general dealing services on an execution-only basis in relation to…contracts for differences…

3.3 We will not provide you with advice on the merits of a particular transaction or the composition of any account…You should obtain your own independent financial, legal and tax advice. Opinions, research or analysis expressed or published by us or our affiliates are for your information only and do not amount to advice, an assurance or a guarantee. The content is based on information that we believe to be reliable but we do not represent that it is accurate or complete…”

The court rejected the claimant’s argument that these clauses were subject to the requirement of reasonableness under UCTA.

In reaching this conclusion, the court referred to the decision in First Tower Trustees v CDS [2019] 1 WLR 637, which considered the effect of a “non-reliance” clause (a clause providing that the parties did not enter into the agreement in reliance on a statement or representation made by the other contracting party). First Tower confirmed that, where the effect of a non-reliance clause is to exclude liability for misrepresentation which would otherwise exist in the absence of the clause, section 3 of the Misrepresentation Act will be engaged and the clause will be subject to the UCTA reasonableness test.

However, the court in Fine Care Homes found that clauses 3.2 and 3.3 in the present case were different from non-reliance clauses, being clauses that set out the nature of the obligations of the Bank. The court highlighted that the judgments of both Lewison LJ and Leggatt LJ in First Tower, clearly distinguished between a clause that defines the party’s primary rights and obligations, and a clause stating that there has been no reliance on a representation. In respect of the former, First Tower provided the following articulation of the position:

“Thus terms which simply define the basis upon which services will be rendered and confirm the basis upon which parties are transacting business are not subject to section 2 of [the 1977 Act]. Otherwise, every contract which contains contractual terms defining the extent of each party’s obligations would have to satisfy the requirement of reasonableness.”

In First Tower, Lewison LJ had gone on to refer to Thornbridge v Barclays Bank [2015] EWHC 3430 (a swaps case) which considered a clause stating that the buyer was not relying on any communication “as investment advice or as a recommendation to enter into” the transaction. In First Tower, Lewison LJ explained that this clause defined the party’s primary rights and obligations, and was not a clause stating that there had been no reliance on a representation.

Applying this reasoning to the present case, the court found that clauses 3.2 and 3.3 (stating that the Bank was providing general dealing services on an execution-only basis and was not providing advice on the merits of a particular transaction), were primary obligation clauses that were not subject to the requirement of reasonableness in UCTA (or, by parity of reasoning, COB 5.2.3 and 5.2.4).

Had UCTA applied, the court said that it would in any event have found the clauses reasonable, noting that some of the claimant’s objections effectively asserted that it could never be reasonable for a bank selling an IRHP to a private customer to specify that it was doing so on a non-advisory basis – which the court did not accept.

(iii) If an advisory duty was owed, was it breached by the Bank?

Although it was not necessary for the court to consider the specific breaches of duty alleged by the claimant (given its findings above), the court proceeded to do so for the sake of completeness.

The court applied Green & Rowley, confirming that the content of the advisory duty (if owed) “might” be informed by the COB that applied at the time of the sale (here COB 2.1.3R and COB 5.4.3R) and the APER code. However, the claimant did not in fact identify any specific respect in which the FCA framework had a material impact on the claimant’s case.

By the time of the trial, the claimant’s case was narrowed to two quite specific allegations concerning what it should have been told by the Bank in relation to two key issues: (1) that the Bank negligently failed to explain to the claimant that the Bank’s internal credit limit utilisation (CLU) figure for the IRHP, would affect the claimant’s ability to refinance existing borrowings / borrow further sums (from the Bank or another lender); and (2) that the Bank should have warned the claimant that novation of the IRHP might require external security to be provided.

The arguments on these allegations were fact-specific, and ultimately the court found that there was no evidence to support them.

2. Negligent mis-statement / misrepresentation claim and contractual claim

The claims on these alternative grounds also failed, given the court’s finding that what the Bank told the claimants was correct, in respect of the two complaints identified.

Consistent with the position found in Green & Rowley, the court noted that the content of the Bank’s common law duty in relation to the accuracy of its statements was not informed by the content of the COB rules or APER code (in contrast with the advisory duty, where the content of the duty might be informed by the FCA framework).

Accordingly, the claim was dismissed.

John Corrie
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Harry Edwards
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Supreme Court rejects illegality defence to claim where claimant had engaged in an illegal act (mortgage fraud)

The Supreme Court has held that a claimant who had engaged in mortgage fraud was not barred from bringing a negligence claim in relation to the property transaction associated with the fraud: Stoffel & Co v Grondona [2020] UKSC 42.

While the claim in this case was against the claimant’s solicitors, it is a noteworthy decision for financial institutions considering how to resist claims where there is some element of illegality involved on the claimant’s part (such as mis-selling claims where the claimant has provided deliberately false information).

The decision illustrates the application of the (relatively) new test for the illegality defence, as established in Patel v Mirza [2016] UKSC 42 (considered here). This replaced the test adopted by the House of Lords in Tinsley v Milligan [1994] 1 AC 340, which turned on the formalistic question of whether the claimant had to rely on the illegality to bring the claim. The current test is described by the Supreme Court in the present case as “a more flexible approach which openly addresses the underlying policy considerations involved and reaches a balanced judgment in each case, and which also permits account to be taken of the proportionality of the outcome”.

The decision suggests, however, that while the test is no longer one of reliance, this question may still have a bearing on whether the fraud is central to the claim, which may in turn be relevant in considering whether it is proportionate to deny the claimant relief. It also suggests that, in the ordinary course, a claimant is unlikely to succeed in a claim to recover the profits of the fraud – not because the claimant would have to rely on the fraud in order to establish the claim, but because this is likely to be the outcome when the court balances the competing policy considerations. As the court commented in this case: “Clearly, it would be objectionable for the court to lend its processes to recovery of an award calculated by reference to the profits which would have been obtained had the illegal scheme succeeded.”

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

High Court says bank need not comply with numerous and repetitive DSARs which were being used for a collateral purpose

The High Court has dismissed a Part 8 claim against a bank for allegedly failing to provide an adequate response to the claimant’s Data Subject Access Requests (DSARs). This is a noteworthy decision for financial institutions, particularly those with a strong retail customer base, as it highlights the robust approach that the court is willing to take where it suspects the tactical deployment of DSARs against the institution: Lees v Lloyds Bank plc [2020] EWHC 2249 (Ch).

The claimant alleged, among other things, that the bank had failed to provide adequate responses to various DSARs, contrary to the Data Protection Act 2018 (DPA 2018) and the General Data Protection Regulation (EU) 2016/679 (GDPR). The court found that the bank had adequately responded, but gave some strongly-worded obiter commentary on the court’s discretion to refuse an order, even where the claimant can demonstrate that the bank has failed to provide data in accordance with the legislation. In the court’s view, there were good reasons for declining to exercise its discretion in favour of the claimant in this case (even if the bank had failed to provide a proper response), including that: the DSARs issued were numerous and repetitive (which was abusive), the real purpose of the DSARs was to obtain documents rather than personal data, and there was a collateral purpose underpinning the requests (namely, to use the documents in separate litigation with the bank).

In financial mis-selling cases, DSARs are often used by claimants as a tool to obtain documents from a financial institution in advance of the issue of proceedings or during litigation to build their case. DSARs can be made in addition to pre-action and standard disclosure under the CPR, and will often seek to widen the scope of documents that could be obtained via traditional disclosure routes. This can create significant workstreams for the bank, which are time-consuming and costly. The present decision provides some helpful guidance as to when it may be appropriate for banks to resist “nuisance” DSARs. It is unclear whether the conclusion in this case would take precedence over the UK privacy regulator’s guidance with respect to DSARs, which has previously been that they should be “motive blind”, but has more recently suggested that there is no obligation to comply with DSARs that are “manifestly unfounded”.

Finally, a significant practical difficulty for financial institutions, is that DSARs can be received by a number of internal teams within the financial institution, either at intervals or all at once. This decision is an important reminder of the need for centralised monitoring of DSARs.

Background

The claimant individual entered into buy to let mortgages in respect of three properties with the defendant bank between 2010 and 2015. The claimant submitted a number of DSARs to the bank between 2017 and 2019 alongside claims in the County Court and High Court concerning the alleged securitisation of the relevant mortgages in an attempt to prevent possession proceedings by the bank in relation to the properties (which were all held to be totally without merit). The bank responded to all the DSARs it received from the claimant.

The claimant subsequently issued a claim alleging, amongst other things, that the bank had failed to provide data contrary to the DPA 2018 and GDPR.

Decision

The court held that the bank had provided adequate responses to the claimant’s DSARs and was not in breach of its obligation to provide data. Given the DSARs under consideration, the court concluded that the DPA 1998 was the legislation in force at the relevant time and this provided data subjects with rights of access to personal data to similar to those under the GDPR. However, given that the subject access rights under the DPA 1998 were essentially the same as those now provided for under the GDPR (and the DPA 2018), it seems likely that the court’s conclusion would have been similar if the case had been considered under the current legislation.

The court commented that even if the claimant could show there was a failure by the bank to provide a proper response to one or more of the DSARs, the court had a discretion as to whether or not to make an order.

In this case, in the court’s view, there were good reasons for declining to exercise the discretion to make an order in favour of the claimant in light of:

  • The issue of numerous and repetitive DSARs which were abusive.
  • The real purpose of the DSARs being to obtain documents rather than personal data.
  • There being a collateral purpose that lay behind the requests which was to obtain assistance in preventing the bank bringing claims for possession.
  • The fact that the data sought would be of no benefit to the claimant.
  • The fact that the possession claims had been the subject of final determinations in the County Court from which all available avenues of appeal had been exhausted. It was improper for the claimant to mount a collateral attack on these orders by issuing this claim.

The court therefore dismissed the claim as in its view it was totally without merit.

Interaction with Information Commissioner’s Office (ICO) guidance

It is worth noting here that the UK privacy regulator’s guidance with respect to DSARs has previously been that they should be “motive blind” and any collateral purpose should not impact whether or not a controller is required to comply.

The latest draft guidance from the ICO refers to DSARs potentially being “manifestly unfounded” (with therefore no obligation to comply) when: (i) the individual clearly has no intention to exercise their right of access (for example an individual makes a request, but then offers to withdraw it in return for some form of benefit from the organisation); or (ii) the request is malicious in intent and is being used to harass an organisation with no real purposes other than to cause disruption.

However, the court’s comments seem to extend this position and it is unclear whether the decision in this case would therefore take precedence over the regulatory guidance – something which would undoubtedly be welcomed by controller organisations.

Julian Copeman
Julian Copeman
Partner
+44 20 7466 2168
Miriam Everett
Miriam Everett
Partner
+44 20 7466 2378
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Senior Associate
+44 20 7374 8000