Accountability - April 2016

18 April 2016


Gowling WLG's dedicated professional liability team bring you their monthly update on the cases and issues affecting accountants and other financial professionals on a range of liability risk management issues.

High Court dismisses application for judicial review of KPMG's role in redress scheme

The High Court has dismissed an application for judicial review of the role KPMG played in a scheme to provide redress to customers who had been mis-sold financial products. In R (on the application of Holmcroft Properties Ltd) v KPMG LLP the court accepted that KPMG had been assisting the financial services regulator in its performance of its regulatory functions, however KPMG's duties did not have sufficient public law flavour to be subject to judicial review.

Background

The claimant had been sold an interest rate hedging product (IRHP) by a bank. The IRHP was subsequently found to have been widely mis-sold.

In agreement with the Financial Services Authority (FSA) (the FSA at that time, now the Financial Conduct Authority (FCA)), the bank set up a scheme to provide redress to customers who had wrongly been sold the IRHP. KPMG was appointed by the bank to review offers of compensation that would be made to customers under the scheme.

The terms of KPMG's retainer included an express provision that KPMG acted only for the bank and owed no duties to the bank's customers. The bank also agreed not to make any offer of compensation to a customer without first securing KPMG's agreement that the offer was appropriate, fair and reasonable.

The FSA served a 'requirement notice' on the bank under the Financial Services and Markets Act 2000 (FSMA). The notice identified KPMG as the 'independent reviewer' - who could be called to provide reports on the redress scheme to the FSA.

The claimant was made an offer of compensation under the IRHP redress scheme, which had been approved by KPMG. The claimant asserted that the offer made by the bank was inadequate as it did not include compensation for consequential losses. The claimant argued the bank had not acted fairly - it had failed to provide the information used to reach the conclusion that no consequential loss had been suffered. Furthermore, the defendant had acted in breach of its public law duties in approving the bank's 'unfair' stance.

The claimant applied for judicial review of KPMG's approval of the bank's offer of compensation.

KPMG argued that it was not amenable to judicial review as it was not exercising a public function which attracted the principles of public law. In any event the bank was entitled to find that no consequential loss had been suffered and that the process adopted to reach that decision was fair. KPMG did not accept liability for approving the bank's decision and the procedures leading up to it.

The decision

The administrative court held that KPMG's duties did not have sufficient public law flavour to render it amenable to judicial review.

The court recognised there were factors in favour of amenity:

  • KPMG was clearly woven into the regulatory function - it could veto any offer it did not approve and could effectively compel the bank to tailor its offer;
  • The bank conferred the veto power on KPMG because it was required to do so by the FSA;
  • KPMG's reporting requirements were imposed by statute;
  • KPMG was undertaking its duties both for the bank and for the FSA - so as to assist the FSA in the effective performance of its regulatory function.

However, the public element was not sufficiently strong for the following reasons:

  • The FSA had chosen to adopt an essentially voluntary scheme of redress - although it could use more draconian statutory powers if the need arose;
  • KPMG's powers were conferred by contract and it had no relationship with the customers at all. Furthermore KPMG were not appointed by the FSA - the FSA just approved their appointment by the bank;
  • The fact that private arrangements are used to secure public law objectives does not bring those arrangements into the public domain sufficiently to attract public law principles;
  • The FSA had no regulatory obligation to carry out the role undertaken by KPMG - in the absence of a willing skilled advisor;
  • The FSA was not disqualified by the arrangements from talking a more active role in particular cases.

There was, therefore, no direct public law element in KPMG's role. KPMG's approval of the claimant's offer from the bank was not open to judicial review.

The court also stated that even if KPMG were under a public law duty (as alleged by the claimant), on the facts of the case there was no unfairness by the bank in the procedure adopted and there could, therefore, be no material breach by KPMG of any public law duty to secure fair process.

Comment

The claimant has applied to the Court of Appeal for permission to appeal this decision. We will update you once the permission application has been dealt with - in the meantime the decision in this case is welcome news for banks and the 'skilled advisors' who review the decisions they make as part of a redress scheme.

High Court refuses pre-action disclosure for existing claim but allows it for additional and separate causes of action in proposed proceedings

The High Court has confirmed it has no jurisdiction to hear an application for pre-action disclosure once proceedings have been issued, although the claimant's application for pre-action disclosure was successful in relation to a proposed second action against the same defendants.

Background

In Anglia Research Services Ltd and another v Finders Genealogists Ltd and another [2016] the claimants issued an application for pre-action disclosure under Civil Procedure Rule (CPR) 31.16. The application related to proposed claims in defamation and harassment against the defendants.

The claimants had discovered the identity of the defendants as a result of successful Norwich Pharmacal applications, which required 'innocent' third parties to identify those responsible for certain twitter and website postings. It was these postings that the claimants alleged constituted a campaign of defamation and harassment against them.

The claimants sought pre-action disclosure of all documents which contained or referred to the defamatory material (as defined), or provided a link to that material on a specified web page. The claimants issued their application for pre-action disclosure on 26 November 2015. For limitation reasons they were then required to issue defamation proceedings against the defendants on 27 November 2015.

The defendants' challenged the court's jurisdiction to make the order being sought - on the basis that a claim form had now been issued.

Decision

The judge confirmed the starting point was s.33(2) of the Senior Courts Act 1981 and CPR 31.16, Respectively these set out the "Powers of High Court exercisable before commencement of action" and the court rules relating to "Disclosure before proceedings start...". It was clear these sections were directed to disclosure being sought before proceedings had been issued.

The recent decision in Personal Management Solutions Ltd v Gee 7 Group Ltd [2015] (the PMS case) was helpful. An appeal against a refusal by a master to hear an application under CPR 31.16 was dismissed because proceedings had already been commenced and the court no longer had jurisdiction to consider the application.

In the PMS case the judge had set out his analysis of how CPR 31.16 should be applied in various situations that had been canvassed in argument before him:

  • If an application is made before proceedings are commenced but proceedings were commenced before the application was heard, the court would not have jurisdiction to determine it;
  • If a claimant undertook to discontinue the first action and begin a second action - that was not an abuse of process - the court would have jurisdiction to determine an application made in relation to the second action but not made in relation to the first;
  • If one set of proceedings has been brought and a second set are contemplated - that would not be an abuse of process - the court could hear an application in respect of the second 'contemplated' proceedings, notwithstanding that the first action was continuing.

Adopting the position of the court in PMS the judge held that the court had no jurisdiction to hear the pre-action disclosure application in respect of the causes of action complained of in the first action, proceedings having already been commenced.

The court then considered two questions in respect of the proposed second action:

  • Would it be an abuse of process to bring the second action while the first action was still ongoing?
  • Does the pre-action disclosure application relate to the proposed causes of action in the second claim - as opposed to the causes of action pleaded in the first claim?

The court held it would not be an abuse of process for the second action to be commenced. The claimants had more than one substantive cause of action against the defendants. The application, as made, related to a bundle of potential causes of action, including those covered in the issued first action and those contemplated in the proposed second action. The proper course of action was for the court to award early disclosure in respect of the additional and separate causes of action and to disregard those causes of action covered by the 'issued claim'.

Having established that it had jurisdiction to hear the application in relation to the 'proposed claim' the court considered the specific requirements of CPR 31.16 and was satisfied they had been met.

The parties were likely to be parties to subsequent proceedings and the documents were likely to assist the claimant in assessing its claim against the defendant. Furthermore, the documents being sought would be given in standard disclosure if proceedings were commenced and the defendant would only need to undertake a reasonable and proportionate search. As a result ordering the defendant to provide pre-action disclosure in respect of the 'proposed' action would not be unfair or oppressive. The claimant's application in this regard was successful.

Comment

This case, and the PMS case, provide clear and helpful guidance on when the court has jurisdiction to hear an application for pre-action disclosure. It also confirms that pre-action disclosure can be granted in respect of a proposed second claim, provided the making of a second claim would not be an abuse of process.

Measure of damages in negligence and the duty to mitigate

The Court of Appeal has provided a helpful reminder that the general rule regarding recovery of damages in claims for negligence should not be applied mechanistically. The assessment of damages at the date when the damage occurred is the starting point, there is no reason why subsequent events should not be considered.

Background

In Bacciottini and another v Gotelee & Goldsmith (2016) the claimants issued a claim seeking damages for negligent advice given by the defendant firm of solicitors. The claimants had acquired a residential property in May 2007. The defendant had acted for the claimants in relation to the purchase and during that time had negligently failed to advise them that the property was subject to a planning restriction - restricting its residential use (the Restriction).

In 2008 the claimants discovered the Restriction. They received advice from new solicitors to apply to the District Council to have the Restriction lifted. This was done in September 2009, at a cost of £250. No objections to the claimants' application were raised and the application was approved in November 2009.

The claimants subsequently issued proceedings against the defendant, seeking damages in respect of their negligent advice. They said that had they received proper advice they would not have purchased the property or, alternatively, that they would not have purchased the property for any more than its value with the Restriction attached.

The defendant admitted it had been negligent, however, the Restriction could be, and in fact was, lifted at very little cost. There was no material effect on the value of the property, so the only loss the claimants had suffered was the cost of lifting the Restriction.

The trial judge accepted that the claimants had paid approximately £100,000 more than the property was actually worth with the Restriction attached. However, he also held that applying to lift the Restriction was a simple, obvious and cheap step to take. As a result he did not accept the claimants' argument that they would have purchased the property at a reduced price or that they would have withdrawn from the sale had they been told about the Restriction at the outset.

The court held that awarding the claimants damages as claimed "would overcompensate" them. The principles of mitigation needed to be applied. In summary, they had no other realistic option but to apply for the Restriction to be lifted. The application was made pursuant to their duty to mitigate, it was not independent of the defendant's negligence. The overpayment they had made was then eradicated as a result of the steps they had taken.

Damages in the sum of £250 were awarded - representing the cost of the application to remove the Restriction, nothing more.

The claimants appealed.

The appeal

The claimants argued that the trial judge should have awarded them the sum of £100,000 (with interest) representing the difference between the value of the property in May 2007 without the Restriction and the value of the property at that date with the Restriction.

They relied on the general principle established by earlier case law that "damages must be assessed at the date when the damage occurred, which is usually the same day as the cause of action arises". This was the difference in value of the property with and without the Restriction as at the date of purchase. They said their successful application to remove the Restriction was a collateral and independent decision, an act they had pursued for their own benefit which lacked sufficient causal connection with the original breach of duty by the defendant.

The claimants argued that had they been properly advised they could have purchased the property at a price reduced by negotiation and could then have applied to lift the Restriction as part of their development plans. The gain secured by the reduced purchase price would then have been theirs outright.

The defendants argued that as a result of the successful application to lift the Restriction the claimants had got what they should have got. To award damages for the diminution in value at the time of purchase would involve double payment and overcompensating them for a loss they had not suffered. The claimants were under a duty to mitigate by applying to lift the Restriction, and even if that duty had not arisen they had mitigated their losses and the consequences of their mitigation had to be considered.

The decision

The appeal was dismissed. The Court of Appeal held that historic case law has encapsulated the core principle in cases of this kind - the measure of damages is ordinarily "...that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been if he had not sustained the wrong for which he is now getting his compensation or reparation".

Lord Justice Davis held that by applying to remove the Restriction the claimants had suffered no loss over and above the £250 fee they had paid. There was, therefore, nothing in respect of which they required compensation.

He held that there was no absolute principle in relation to capital loss cases that "damages must be assessed at the date when the damage occurred, which is usually the same day as the cause of action arises". The 'normal measure' is only to be applied if it produces a fair result - the assessment of damages is to be undertaken realistically and not mechanically. The 'normal measure' is a convenient starting point - but no less or no more.

There is no reason why events following the breach should not be considered. Issues such as mitigation and avoidance of loss will necessarily be geared to events occurring or steps taken after the date of breach and after the cause of action has accrued.

The claimants were under a duty to take steps to seek to remove the Restriction - to do so was not out of the 'ordinary course of things'. The procedure was "simple, obvious and cheap". In any event, even if they had not been under a duty the fact remains that they did mitigate their losses.

The application to lift the Restriction was not an independent development decision, pursued for the claimants' own benefit and taken at their risk. The original breach was the reason for the application - the application was a direct consequence of and was directly caused by the defendant's negligence.

The claimants were only entitled to recover the fee they had paid to apply to lift the Restriction: £250.

Comment

This is a welcome reminder that a party can only be compensated for the loss it suffers, which is not to be measured only at the date of the breach. A claimant is under a duty to take reasonable steps to seek to mitigate its losses and if the steps so taken substantially reduce or eradicate the loss suffered the claimant should not be able to recover more.

In case you missed it... Liquidator deemed not personally liable for solicitor's fees under CFA

The Chancery Court has held that an insolvency practitioner was not liable for his solicitor's fees under a CFA, despite the fact the definition of success had been met. See the March edition of our Insolvency Litigation alert for the full analysis.


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