The PI Top 5 Cases of 2020 by a Couple of Regular Joes
December 20202020 – what a year it has been. As we look towards a new – and hopefully better – year, we reflect on the most relevant Professional indemnity (“PI”) cases heard by the courts in 2020. Here is our festive ‘PI Top 5’:
1. Dixon Coles and Gill v Box¹
Right up at number 1 is Dixon Coles and Gill v Box, covering a real smorgasbord of issues, including Partners’ liability, limitation and, perhaps most significantly, aggregation in cases of fraud. The case, which concerned equity partner Mrs Box’s theft of over £4 million from Dixon Coles’ client account, provides confirmation of a Partner’s responsibility for the fraudulent acts of a co-partner, and issues guidance on the application of the exception for breach of trust set out in the Limitation Act.
Of most interest, however, is the High Court’s narrow interpretation of the aggregation provisions in the SRA Minimum Terms and Conditions, and its ruling that Dixon Coles’ PI insurers were not entitled to bring together as one claim the various different losses suffered by virtue of Mrs Box’s antics. ‘Ongoing dishonest motivation’ was insufficient to constitute a unifying factor or interconnection for the purposes of aggregation.
Relief for the victims of fraud, concerning for PI insurers, bearing in mind that claims for fraud are rarely confined to one client or one theft. The decision, if not appealed, is likely to lead to yet further premium increases in an already hard and struggling Solicitors PI insurance market.
2. Sports Direct International Plc v The Financial Reporting Council²
Hot on the heels of Dixon Coles and Gill is the Court of Appeal’s ruling in Sports Direct International Plc v The Financial Reporting Council. The FRC issued statutory notices to Sports Direct that obliged it to deliver up documents relevant to the FRC’s investigation of an audit firm. Sports Direct, which was a client of the audit firm but was not itself subject to the investigation, withheld some documents on the ground that they were protected by legal professional privilege.
The High Court agreed with the FRC’s argument that the production of documents to a regulator by a regulated person (solely for the purposes of a confidential investigation into the conduct of the regulated person) was not an infringement of any privilege lying with the regulator’s clients.
The Court of Appeal overturned the High Court’s ruling, holding that the only exceptions to LPP are in respect of communications between a solicitor and client with a criminal purpose, or where there is a clear statutory intention to create an exclusion.
The decision provides welcome reassurance for regulated firms and their insurers, who may have been concerned by the possible extension of a regulator’s wide ranging information gathering powers. It is clear that LLP will continue to provide protection from disclosure in regulatory investigations, no matter whether the privilege lies with the investigated party or one of its clients.
3. Stoffel v Grondona³
Creeping up at number 3 is the Supreme Court decision in Stoffel v Grondona, which considered the much-debated defence of illegality, which denies an individual the right to a legal remedy where his claim relies in any way upon his own illegal act.
Ms Grondona agreed to lend her name (and good credit rating) to Mr Mitchell so that he could obtain favourable mortgage terms. In return, she was to receive 50% of the net profits when Mr Mitchell’s properties were sold. In July 2002 Mr Mitchell bought the leasehold interest in a property in London for £30,000 and shortly afterwards he borrowed a sum against the flat and a charge was registered in the name of the lender. In October 2002 Mr Mitchell sold the lease for £90,000 to Ms Grondona. She obtained an advance of £76,500 from a lender on the basis that the earlier charge would be discharged and a new charge registered in its favour. Stoffel & Co negligently failed to register the documentation or release the prior charge.
Ms Grondona’s lender obtained a money judgment against her and she looked to pass on that liability to Stoffel & Co, who argued that Ms Grondona was not entitled to bring a claim against them on the basis that her arrangement with Mr Mitchell and the mortgage application were immoral, illegal and fraudulent. This argument was rejected at first instance and in the Court of Appeal.
The Supreme Court considered the test for illegality established in the 2016 case of Patel v Mirza 4 and concluded that the essential issue for consideration was “whether to allow the claim would damage the integrity of the legal system” and/or whether it would be “inconsistent with the policies to which the legal system gives effect”. Refusing Ms Grondona a remedy against the solicitors would not be in the interests of public policy nor would it help to stamp down on fraud. Rather, to do so would run counter to another public policy – that of ensuring diligent and non-negligent performance by solicitors.
Not quite the codification and clarification of the law that many were hoping for, but the case illustrates that the courts will continue to apply a flexible approach in this area.
4. Carillion v KPMG5
At number 4 is Carillion v KPMG in which the High Court provided useful guidance on the principles that underpin applications for pre-action disclosure.
Carillion made an application against its former auditors, KPMG, for pre-action disclosure. This was in the context of a threatened claim for professional negligence relating to KPMG allegedly failing to detect that certain financial statements were unreliable. The application was made with a view to obtaining what Carillion said were key documents relevant to the merits of its claim.
The Court has the power to order a potential party to subsequent proceedings to disclose documents on the application of another potential party to those proceedings in circumstances set out in CPR 31.16. For such an application to be successful, a number of conditions must be satisfied, including (and relevant here):
a. The documents sought must fall within the scope of the standard disclosure the respondent would otherwise have to provide in the anticipated proceedings; and
b. The pre-action disclosure must be desirable in order to assist in the fair disposal of the anticipated proceedings and/or must either help the dispute to be resolved without proceedings and/or save costs.
The court found that it was more likely than not that Carillion’s request for documents was within the scope of standard disclosure. In relation to the second issue, however, it concluded that (whilst pre-action disclosure would undoubtedly help Carillion particularise its claim), due consideration needed to be given to the extent of the disclosure being requested and the burden that its early disclosure would place upon the defendant.
The Court ultimately determined that KPMG would be put to disproportionate effort relative to the benefit that Carillion would gain from obtaining the documentation now, rather than at the duly appointed time in the procedural timetable. Carillion’s application was therefore dismissed.
A significant case for defendants and their PI insurers, in circumstances where pre-action disclosure in its various guises is becoming an ever more popular pre-litigation battleground. It usefully confirms that pre-action disclosure orders ought to remain the exception rather than the rule.
5. Sevilleja v Marex6
Scraping in a number 5 is the Supreme Court ruling on reflective loss in the case of Sevilleja v Marex. In circumstances where a company has suffered a loss as a result of the defendant’s wrongdoing, a shareholder cannot bring a separate claim against the same defendant for a resultant diminution in the value of their shareholding. This is the rule on reflective loss and applies even if the defendant’s conduct involved a wrong against the shareholder and even if the company itself has taken no action against the said defendant. The shareholder’s loss is reflected from the company’s loss. It is not a personal, distinct loss and is therefore not recoverable from the defendant.
Mr Sevilleja owned two companies involved in foreign exchange trading (“the Companies”). Marex obtained judgment debts against the Companies in the Commercial Court. After a confidential draft of the judgment was provided to the parties, Mr Sevilleja boldly transferred funds held by the Companies to his personal accounts, meaning that the Companies could not pay the judgment debt in Marex’s favour and were put into insolvent voluntary liquidation.
Marex brought proceedings against Mr Sevilleja for inducing or procuring the violation of Marex’s rights in relation to the judgment debts and for causing it to suffer loss by unlawful means. Mr Sevilleja argued that some of the losses claimed were irrecoverable on the basis that Marex’s loss as a creditor was reflective of the loss suffered by the Companies, which had concurrent claims against him, and was therefore irrecoverable. The Court of Appeal agreed with Mr Sevilleja and held that the reflective loss principle prevented Marex from recovering the majority of the judgment sum.
The Supreme Court unanimously agreed to allow Marex’s appeal, concluding that the rule of reflective loss does not apply to creditors of a company. Furthermore, the rule only applies to a shareholder who brings a claim for a reduction in the value of his shareholding which is the consequence of a wrong done to the company and where the company has (or had) a cause of action against the wrongdoer. There is no longer any exception to this bar: the case of Giles v Rhind7 , which recognised an exception where the wrongdoer’s conduct prevented the company from pursuing its own claim, has been overruled. The rule prohibiting claims for reflective loss does not apply to non-shareholders nor to a shareholder who has a separate and distinct claim in another capacity e.g. as a creditor, or as an employee.
The Supreme Court has overturned nearly 20 years of decisions which had expanded and restated the rule against reflective loss, previously notoriously complex. The complex majority and minority judgments in the case do leave questions unanswered – it will be interesting to see how the ruling is interpreted by the lower courts in future cases. In the meantime, however, the decision appears to have opened the door for non-shareholder claimants, such as creditors, to pursue direct claims against directors and officers, and other professionals, even where the company has suffered loss as a result of their actions. It is certainly an area to watch as the law develops.
And finally…
There are many more cases that have been of interest this year – this note represents our take on the ‘top 5’ of most interest to professionals and their insurers alike.
As a bizarre and unprecedented year draws to a close, we look forward to 2021 and the developments – both legal and non! – that it might bring.
Merry Christmas!
¹ Lord Bishop of Leeds v Dixon Coles & Gill (a firm) & Ors [2020] EWHC 2809 (Ch)
² Sports Direct International plc v The Financial Reporting Council [2020] EWCA Civ
³ Stoffel & Co v Grondona [2020] UKSC 42
4 Patel v Mirza [2016] UKSC 42
5 Carillion v KPMG [2020] EWHC1416
6 Sevilleja v Marex [2020] UKSC 31
7 Giles v Rhind [2003] Ch 618
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