Accountability Update - August 2016

25 August 2016


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

Dismissal of defence and counterclaim precludes a fresh claim being made on the same basis.

The Court of Appeal (CA) has upheld a decision of the Chancery Court that dismissal of a defence and counterclaim to a bank's claim for payment of debts prevented a fresh claim from being made against the bank on the same basis. It has also re-affirmed the duties owed by administrative receivers.

In Amir Ahmad & others v Bank of Scotland Plc & Others, the appellants appealed against the decision of the Chancery Court to strike out its claim for damages against the defendant bank and against the receivers appointed by that bank.

Background

The claimants were shareholders and directors and their corporate entities (ZDL and ZTL), as well as individuals trading in a partnership. The claimants had a number of facilities with the bank, secured by properties and subject to guarantees given by the individuals and the corporates.

The claimants fell into arrears, following which the bank made demands for payment totalling just over £5.2 million. The individual claimants were liable under the terms of their personal guarantees for £1.25 million.

The bank appointed the PwC receivers as fixed charge receivers of the properties, as well as administrative receivers of the assets and undertakings of one of the corporate entities, ZTL. For regulatory reasons, the PwC receivers were subsequently replaced as the fixed charge receivers by the Grimley receivers. However, the PwC receivers remained as administrative receivers for ZTL.

The PwC and the Grimley receivers realised the value of the various assets over which they had been appointed. The realisation of the properties made enough to settle the partnership account, however the sale of ZDL's and ZTL's assets was insufficient to discharge the corporate borrowing. The bank sought payment of just over £900,000 under the Personal Guarantees. No payment was made and the bank issued proceedings.

The claimants filed a defence and counterclaim, however, the judge at first instance found that the defence disclosed no real prospect of successfully defending the claim and that the counterclaim had no real prospect of success.

The claimants appealed and applied to amend the defence and counterclaim. The main defence to the claim under the personal guarantee relied on an alleged agreement with the bank - reflected in a letter from the bank dated 27 May 2008 (the May 2008 Agreement).

The claimants alleged that the May 2008 Agreement allowed them to market the properties and pay over the proceeds of sale to the bank before receivers would be appointed. They argued that the properties had been placed on the market as agreed. The appointment of receivers in September 2008 was therefore a breach of the May 2008 Agreement, as a result of which the claimants had lost the opportunity to control and realise or retain the fair market value of the assets of the businesses. The claimants argued that they would have realised more and counterclaimed for damages.

Both the appeal against the first instance decision and the application to amend were dismissed. The claimants applied for permission to appeal to the CA.

The CA confirmed the decision that there was no answer to the guarantees and, as judgment was given in the bank's favour, it was also right to refuse permission to bring in cross-claims by way of counterclaim. The court did, however, go on to say that "the right course would be for those claims to be made the subject of a fresh claim by guarantors as against the bank".

The claimants (which now included ZDL and ZTL) did just that - issuing a new claim against the bank and the PwC and the Grimley receivers. The Defendants applied to strike out the claims and for summary judgment.

The judge held there was no claim to answer against the bank or the receivers. The claim against the bank now was exactly the same claim the claimants had tried to bring in by way of counterclaim in the earlier proceedings brought by the bank - i.e. that the bank was in breach of the May 2008 Agreement when it appointed the receivers.

The claimants appealed to the CA.

Court of Appeal decision

The CA held that the claimants had no prospect of succeeding with its claim. The claimants had tried to amend its defence and counterclaim to the claim made by the bank - to include a claim on this basis. Permission to amend had been refused and the defence and counterclaim struck out.

It is an established principle that a party cannot re-litigate an issue or defence that has already been determined (known as cause of action estoppel). On that basis the claim against the bank must fail - there was no arguable case for the bank to answer.

ZDL and ZTL had not been a party to the earlier proceedings and as a result no 'cause of action estoppel' arose in respect of their claims. However, the claims by ZDL and ZTL were based on a breach by the bank of the May 2008 Agreement - and the fact that that the receivers had not been validly appointed as a result.

The CA did not accept that the May 2008 Agreement had bound the bank such that it could not appoint the receivers over ZDL's and ZTL's assets. At most, the agreement delayed their appointment, but the appointment was valid. In any event, the agreement could not have constituted promises made to ZDL and ZTL - they were not parties to the May 2008 Agreement.

The CA also held that the claimants had failed to make out the claim that the receivers had failed in the performance of their function. It confirmed that as regards the duties on the receivers:

  1. an administrative receiver or a fixed charge receiver is the agent of the relevant companies and not the bank;
  2. absent any contractual relationship, the duties owed by the receivers to the bank and ZDL/ZTL were equitable duties only;
  3. the receivers' primary duty owed to the bank was to realise the bank's security in the best interests of the bank. The receivers' owed a secondary duty to the claimants to exercise care to avoid preventable loss;
  4. receivers are free to sell an asset or property in the condition it is in and as they find it. A receiver is not under a duty or obligation to await or effect any increase in value or improvement in the property;
  5. if the receiver decides to exercise a power of sale, he will generally owe a duty to the companies to take reasonable care to obtain the best price reasonably obtainable at the time of sale in doing so;
  6. a receiver owes a duty in exercising his powers to do so in good faith and for a proper purpose, that is to say, for the purpose of realising the assets comprising the security and obtaining repayment of the sum secured. In this regard, breach of the duty involves something more than negligence or even gross negligence: it requires some dishonesty, or improper motive or element of bad faith to be established;
  7. an administrative receiver does not have a duty to consider a rescue of the company. Nor is he under any duty to trade on, or under any duty to conclude that trading on is not realistic, before seeking to sell assets.

The claimants's claims against the bank and the receivers were dismissed.

Comment

While the law in the area of contractual estoppel is established, this case is a good example of how a party to litigation will be stopped from having two bites of the same cherry.

An unsuccessful attempt to make a claim by way of a defence and counterclaim must prevent the same party from trying to make exactly the same claim by way of fresh proceedings. Once an issue has been determined by the court a party cannot get a second chance at the same argument by issuing the claim under a different banner.

This claim is also a useful reminder of the obligations on receivers and, in particular, as concerns the sale or disposal of assets. An interesting element of the claim was the settlement by the receivers on behalf of ZTL of a claim against their insurers (NIG). The claim for £5 million had been settled by the receivers, on advice, for £1.55 million at mediation.

One of the grounds of appeal was whether the settlement reached at mediation was reasonable. The CA concluded that the correct approach to this was that adopted in solicitors negligence cases, in particular in Moy -v- Pettman Smith [2005] UKHL 5 [2005] 1 WLR 581 and also in Karpenko -v- Paroian, Courey, Cohen & Houston (1981) 117 DLR (3d) 383 (which approach it found was also applicable to the settlement of a claim by administrative receivers) where the correct question was whether there had been any "egregious error".

In the circumstances, the CA concluded that the claim against the receivers (and the evidence advanced by C in support) failed to identify any such egregious error and that the claimants had no real prospect of successfully impugning the settlement figure achieved by the receivers.

Gowling WLG (Jane Howard and Tim Crockford) acted for PwC.

Defendant can recover costs of, and incidental to, a claim issued but not served

The Chancery Court has confirmed a defendant in a professional negligence claim was entitled to its costs of, and incidental to, the claim when it was abandoned by the claimant after issue. The court held that it would be wrong to ignore the considerable expense the defendant had to incur in dealing with the claim, even though the claim form was never actually served.

Background

In Webb Resolutions Ltd v Countrywide Surveyors Ltd the claimant, Webb, issued a claim against Countrywide (the claimants) for damages arising as a result of Webb's breach of contractual and tortious duties in failing to provide an accurate mortgage valuation. Damages were claimed in the sum of £27,000 plus interest.

A Letter of Claim was sent to the claimants in May 2011. The parties engaged in correspondence but neither accepted liability. No agreement was reached and for limitation reasons Webb was required to issue proceedings on 7 August 2013.

Further correspondence was exchanged, including two purported 'claimant' Part 36 Offer letters. Despite confirmation from Webb that particulars of claim would be prepared, the claim form was never in fact served.

In September 2014, the claimants confirmed to Webb that it had incurred almost £8,000 in costs and disbursements in relation to the claim and that, as Webb had 'discontinued its claim', it was liable to pay the claimants's costs. Webb rejected the claimants's claim, arguing that there was no basis upon which the claimants was entitled to recover its alleged costs.

The claimants asserted that it had become entitled - pursuant to section 51 of the Supreme Court Act - to all of its costs of, and incidental to, the proceedings, which would include those costs incurred before the claim form was issued. It received no response from Webb and issued an application as a result - seeking payment of the "defendant's costs of the Claim...to be assessed if not agreed".

Webb subsequently accepted that it was within the court's discretion to award the defendant its costs, and that those costs could include costs incurred pre-issue - if they were costs 'incidental to the proceedings'. However, Webb argued that the court should exercise its discretion in this matter not to award C its costs as claimed - or alternatively only to award the claimants its costs incurred after proceedings had been issued.

Decision

The court held that Section 51 SCA and the provisions of the Civil Procedure Rules (CPR) provide for three distinct phases regarding recovery of costs:

  1. Phase 1 - parties incur costs that would be recoverable as pre-action costs if a claim form had been issued - but no claim form is in fact issued;
  2. Phase 2 - claim form is issued but not served;
  3. Phase 3 - claim form is issued and served but the claimant does not take the claim any further.

Phase 1 costs would not generally be recoverable - only in specific circumstances which did not apply to this matter in any event.

Phase 2 and 3 costs could be recovered in accordance with s51 SCA and CPR 44 and a defendant would be entitled to payment of its costs of, and incidental to, the claim. There was case law which held that a defendant was entitled to recover its costs when a claim had been issued but not served, although in those cases the defendant had incurred most of its costs after the claim had been issued.

However, the CPR recognised that costs can be incurred before proceedings are issued and previous case law had also confirmed that costs incurred in complying with a pre-action protocol could be 'costs incidental to the claim' once proceedings had been issued. Issuing a claim form fundamentally changes the position and the fact a claim form has not been served is only a factor to be considered when the court exercises its discretion.

The judge held that in this case the costs soon became wholly disproportionate to the amount being claimed. Prior to proceedings being issued, the claimant had been concerned about the costs it was incurring and, at that stage, it understood the defendant "had no offers to make in relation to settlement".The claimant could have made the commercial decision then to abandon the claim. Instead, Webb chose to issue proceedings and make a further attempt to persuade C to make a payment in settlement.

Taking all of the above into consideration the judge held it would be wrong (a) to ignore the considerable expense the Defendant has had to incur in dealing with the claim; (b) to disregard the way in which C has throughout been aware of the disproportionate expense of the course it was on; and (c) to ignore the difference in the application of s51 SCA and the CPR once a claim form has been issued.

The defendant was therefore entitled to its costs of the claim - to include its pre-action costs of, and incidental to, the claim - to be assessed if not agreed.

Comment

This case is a useful reminder that issuing proceedings can have significant cost consequences - even if proceedings are not subsequently served.

If a defendant is aware that a claimant has issued proceedings but has chosen not to serve them, it should always seek to recover the costs it has incurred in dealing with the claim until that date. Such costs could be significant if, for example, the professional negligence pre-action protocol has been followed, the matter fully investigated and a detailed Letter of Claim prepared.

Adjudication scheme for professional negligence claims

A revised adjudication scheme for professional negligence claims has been launched recently, updating the original scheme that was launched in May 2015.

Take up was low under the original scheme and changes have therefore been made with the intention of encouraging increased participation in the scheme.

The key changes to the scheme are as follows:

  • The scheme is now open to all professional negligence claims - previously it was only available where the dispute involved a claim against legal advisers. There is still no definition of "professional negligence disputes", but the guidance states that the scheme is intended to apply to disputes "between professional persons such as lawyers, valuers, accountants and so forth and their clients".
  • The  £100,000 cap on the value of any claim that can be adjudicated has gone - there is no longer an upper limit;
  • New fee bands have been introduced - the intention being to cap the fees payable to the adjudicator, depending on the value of the claim;
  • Detailed guidance notes on the scheme and its applicable rules have been issued.

The scheme is entirely voluntary and is based on the statutory adjudication scheme for construction disputes, although there are some differences. Adjudication for construction disputes is compulsory, whereas for professional negligence disputes adjudication is voluntary - both the claimant and defendant need to agree in writing that they will be bound by the provisions of the scheme.

It is therefore another form of alternative dispute resolution - although we wait to see whether there might be cost consequences imposed by the court if a party/the parties refuse to consider adjudication (as is currently the case if a party refuses to engage in mediation).

The aim of the scheme is to allow parties to professional negligence disputes to obtain a decision on their dispute quickly and at a relatively low cost. The adjudicator will provide a written reasoned decision within 56 days of his/her appointment. The decision will be binding and, if the adjudicator decides in the claimant's favour, compensation will be payable within 21 days. If payment is not made, the claimant can seek summary judgment to enforce the decision through the courts.

The decision cannot be appealed but it will not be final - it will stand unless or until a successful challenge is made in court or to an arbitral tribunal. An unsuccessful claimant would need to issue proceedings for professional negligence and a defendant would need to seek declaratory relief - a declaration from the court that the defendant is not liable or that the compensation ordered is excessive.

The decision can be final from the outset only if the parties agree that it should be.

See the Professional Negligence Bar Association: Professional Negligence Adjudication Pilot Pack for more information.


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