12 May 2017
Professions and Financial Lines Brief
Welcome to the latest edition of the Professions and Financial Lines Brief.
In this edition we provide the following insights:
•
U-turn: Supreme Court backs regulator in alleged case of naming and
shaming.
•
A living nightmare? Conveyancers concern at outcome of identity theft
case.
•
Unjust enrichment: Supreme Court tackles another taxing case.
•
Duty bound: Timely guidance on good faith.
•
Ambiguity analysed: Supreme Court confirms rules of contractual
interpretation.
•
Ahead of the game: Risk foresight proves a match-winner.
•
Robo-shop: Risks in the rise of ‘robo-advisory’ services.
•
Beware of the (Watch) Dog: FCA announces new anti-money laundering
role.
•
The devil is in the detail: Conveyancers urged to focus on the small print.
As always, we hope you enjoy reading this edition and welcome your feedback.
Jenny Boldon, Partner
Page 1 of 29
Beware of the small print: yet more problems for
conveyancers
Recent press reports have highlighted the growing problem faced by some
purchasers of leasehold interests (particularly those in new build residential
properties) due to the existence of onerous ground rent clauses.
The contracts in question feature relatively high ground rents — which double
every 10 years — opposed to the traditional 25-year period.
In addition, many leases also allow the landlord (usually the developer) to sell on
the freehold interest to unrelated third parties. The terms of these leases have left
many homeowners with the prospect of exponentially increasing ground rents,
potentially affecting the leasehold value and onward saleability.
Current criticism
Developers are facing criticism on the basis that many new properties have been
sold as leasehold without good reason, and that the onerous terms put leaseholders
at a significant disadvantage.
Certain criticism has noted that some developers have treated freehold interests as
tradeable investments, with little regard to the consequences for the leaseholder.
Of interest to insurers, however, is an increasing number of professional negligence
claims against solicitors for allegedly failing to advise clients as to the impact of
ground rent provisions.
Claims against solicitors
Solicitors are duty bound to advise clients on contract terms and to ensure that the
material provisions are understood.
In particular, solicitors should explain any:
•
•
•
Unusual provisions.
Any provisions of particular relevance to the client’s proposed activities.
Those provisions which may affect the known interests of the client (Sykes v
Midland bank Executor & Trustee Co Ltd [1971]).
Where a solicitor has failed to advise on — or sufficiently draw to a client’s
attention — an unusual and/or onerous ground rent review provision in a lease,
there is a risk that they will be found to have acted in breach of duty.
Individual cases will however turn on the extent and nature of the advice provided.
Redress schemes
Upon learning that its customers had been affected, one developer, Taylor
Wimpey, apologised and announced a £130 million redress scheme for those
affected by this issue.
Page 2 of 29
The scheme is offered to:
•
“Qualifying Customers” (i.e. those who own homes — houses or apartments)
subject to a lease containing a 10-year doubling ground rent clause.
•
Who purchased their home directly from Taylor Wimpey; with
•
Offers to convert the lease to an alternative and less punitive lease
structure, linked to the Retail Price Index.
It is unknown whether other developers will create similar redress schemes.
However, solicitors presented with a complaint or claim should — in the first
instance — direct claimants to the developer to make enquiries as to any available
redress schemes, in mitigation of their potential losses.
Lender claims
Solicitors acting for lenders also owe a duty to advise them of any matters which
might adversely affect the value of the property being purchased. This duty
originates from the Council of Mortgage Lenders Handbook, which is usually
incorporated into the terms of the retainer.
Specifically, under Clause 5.14.9, solicitors must report on any increase in ground
rent which may “materially affect the value of the property”.
It is yet to be seen whether — in the event of a borrowers default — lenders will
bring claims against solicitors for failure to draw onerous ground rent provisions to
their attention.
Insurers should however be aware of the risk of claims where the value of a
leasehold property has been adversely affected, resulting in a loss to the lender.
This is of particular concern given recent press coverage that leaseholders have
been unable to sell their properties due to:
•
•
The existence of the doubling ground rent provisions; or
Excessive premiums for extension/enfranchisement of the lease.
Looking forward
Not only do punitive ground rent provisions have an impact post-completion, but
lenders are also acknowledging the risks of lending against leasehold contracts
which contain such clauses.
Nationwide, one of the United Kingdom’s biggest mortgage lenders has recently
announced a change to its mortgage terms, with the consequence that it will not
lend on properties if ground rent doubles every five, 10 or 15 years. Nationwide
insist that ground rent increases are linked to inflation.
The Law Commission is also aware of the problems posed by ground rent clauses
and recently told Solicitors Journal it was contemplating a review:
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“Concerns about escalating ground rent are one of many issues in leasehold
law that have been raised by stakeholders in our recent consultation on our
next programme of work. We are considering whether to conduct a review
of these issues as part of our next programme, and will be discussing that
with government.”
Insurers should therefore be aware of the likely increase in claims against solicitors
in respect of leases already subject to such clauses, especially from those
purchasers who do not qualify for remedial schemes.
For more information please contact:
John Eastlake: [email protected]
Laura Hurst: [email protected]
Thomas Miles: [email protected]
Page 4 of 29
Robo-advice: risks and rewards of the automated advisor
Fintech start-ups offering ‘robo-advisory’ services have enjoyed rapid success in
recent years. One particular provider reported a 50% rise in assets under
management in the first quarter of 2017 alone. More established providers are
likewise seeking to embrace innovation and expand their online advisory services.
The FCA created an “Advice Unit” supervising firms offering automated advisory
services in May 2015, and has now refocused attention on the area of robo-advice
in its 2017/18 business plan. The key issue for insureds here is how to ensure — and
evidence — adequate controls, and appropriate assessment of suitability in a
virtual setting.
Financial services insureds should expect increased regulatory contact in the
upcoming months as the FCA seek to ensure sufficient resources within firms are
being dedicated to mitigating consumer risk.
What is robo-advice?
Robo-advisory services either fully or partially replace a human advisor with a
computer or other device. Firms might undertake full ‘fact-finding’ and ‘client
profiling’ through online forms, and algorithms then ‘advise’ the client as to
suitable options.
The level of human involvement in the process will vary by firm, as will the
products or services offered and the targeted clients.
Digitalisation offers an attractive cost-saving solution, particularly at a time when
many firms face profitability concerns arising from the difficult market conditions
since the 2008 financial crisis. New technology enables firms to expand their client
base by reaching out to a younger generation who favour digital and mobile
services, over traditional face-to-face advice.
Robo-risks
The significant regulatory hurdle to enter the automated advice arena has been
acknowledged for some time — notably in September 2015 by Harriet Baldwin, the
(then) economic secretary to the Treasury. The FCA appear to be acknowledging
the increasing resource required to stay abreast of technological innovation within
the financial services sector.
Whether advice is given by virtual means or face-to-face, insureds are nonetheless
advising consumers and the normal regulatory standards will apply.
Firms will need to comply with the overarching requirement of suitability, and
must take reasonable steps to ensure that the consumer understands the
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recommended product or service. Insureds should be careful to identify high-risk
transactions/clients and ensure that an appropriate level of human involvement
remains in place. This should include careful monitoring of:
•
The integration of old and new processes
•
The practices of third party providers.
What will constitute a high risk transaction/client will vary significantly, and a
firm’s information on its client will depend entirely on the appropriateness and
sophistication of its online forms.
Whilst targeting younger investors with online services is likely to be an attractive
area for firms, these new clients carry with them increased risks for the advisor
due to limited investment experience and lower cash reserves. Investment of a
comparatively modest sum in a single product or fund could be outside of the
appropriate suitability criteria for a first time investor. Equally, if firms are seeking
to move towards automated advice for existing clients, firms should ensure proper
integration of analogue and digital data to ensure that future advice will not
overlook their existing knowledge of long-standing clients.
What should insurers be focusing on?
Some key considerations for underwriters at placement/renewal for insureds whose
businesses include automated advice are:
•
Sophistication of the forms and questions used when profiling clients.
•
Adequacy of risk warnings provided and how readily firms can demonstrate
these have been read and understood.
•
Firms’ retention procedures for automated advice.
•
Nature and complexity of the products on offer.
•
A firm’s ability to exclude certain clients or unsuitable
products/services/transactions from being entered into without ‘in person’
advice.
•
Clarity and disclosures made as to applicable costs and charges.
•
Assessment and implementation of appropriate human involvement in the
advisory process.
•
In the case of FinTech newcomers, the insured’s own understanding of its
regulatory obligations and compliance procedures.
Page 6 of 29
With the significant increase in demand for robo-advice, underwriters may also
wish to consider creating thresholds for the payment of additional premiums should
the volume of business on which an insured is advising suddenly balloon.
The future
The Financial Ombudsman Service (FOS) is yet to publish any decisions concerning
complaints relating to robo-advice. However, in December 2016, the Financial
Services Consumer Panel published research which indicated that some automated
advisers were already failing to comply with their regulatory obligations.
These findings should serve as a warning to firms that they must be proactive and
diligent in ensuring regulatory compliance in the virtual arena. Failure to do so may
place firms at significant risk of FOS claims and/or litigation in this growing area.
For more information please contact:
John Bruce: [email protected]
Elisabeth Ross: [email protected]
Sarah Eason: [email protected]
Page 7 of 29
Dreamvar considered: a nightmare for conveyancers?
In a surprise judgment late in 2016, Mischcon de Reya (MdR) was held liable to its
client — Dreamvar — in respect of a property purchase in which Dreamvar was
defrauded by an unknown third party. The case has caused widespread
consternation for conveyancers and transactional lawyers generally.
Mischcon de Reya was required to indemnify its client, despite an
acknowledgement by the judge that it had not been negligent. This amounts to a
requirement that law firms act as guarantor for any losses caused to their clients
by fraudsters.
Mischcon de Reya is appealing the finding, and the Law Society recently announced
that it may seek to intervene.
Background
Dreamvar sought to purchase a £1.1 million property in central London in
September 2014. In November 2014 — after (purported) exchange and completion
— Land Registry enquiries led to the ‘seller’ being identified as an imposter.
Dreamvar was left without title and unable to recover its monies, which had been
paid into bank accounts out of the jurisdiction.
Dreamvar sued its solicitors, MdR, for negligence (in contract and tort) and for
breach of trust. Dreamvar also sued the law firm appointed by the imposter to sell
the property — Mary Monson Solicitors (MMS) — in negligence, and for breach of
warranty and breach of trust.
Findings
Mary Monson Solicitors accepted that it did not act competently in performing due
diligence checks, and that it should have insisted that its client attend its London
office with proof of identity and proof of address.
Whilst negligence on the part of MMS was admitted in this regard, there was no
duty owed by MMS to the purchaser. Meanwhile — as to breach of trust — applying
the findings in P&P Property Ltd v Owen White & Catlin [2016], Deputy Judge
David Railton QC refused to hold MMS liable. He nevertheless made such a finding
against MdR.
Mischcon de Reya’s breach of trust arose because it held Dreamvar’s monies on
trust pending completion of the transaction. It was said that an implied term of
MdR’s retainer with Dreamvar was that the completion monies would only be
released on genuine completion. As the purchase was a nullity, there had been a
breach of trust.
The claim for breach of trust against MMS was made on the basis it received the
purchase monies from MdR (on behalf of Dreamvar) and was likewise only entitled
to part with them on genuine completion. The court however declined to confer
this similar requirement for completion to be genuine, consequently finding no
breach of trust by MMS in releasing the funds to its client.
Page 8 of 29
Mischcon de Reya sought relief from sanction under s.61 of the Trustee Act 1925,
on the basis it acted honestly and reasonably and ought fairly to be excused.
Whilst it was accepted that MdR acted reasonably and honestly, the court declined
to exercise its discretion to grant relief.
The basis of the finding was that, whether insured or not, MdR was better able to
absorb the loss than Dreamvar, and had been the party better placed to consider
the risk the transaction had posed to Dreamvar
Appeal
Both this case and the P&P Property case are the subject of appeal, however it is
unlikely that either judgment will be handed down until spring 2018.
The decision of the High Court appears perverse, with MMS having admitted
negligence but not being liable because no duty was owed to the purchaser, and
MdR not negligent but liable as a result of breach of trust.
The decision appears to be one of public policy, and to maintain public confidence
in conveyancing. The terms and vigour of the Law Society intervention on this issue
remain to be seen.
Impact
For solicitors and their insurers, the precedent set will be unpredictable.
When acting for a vendor, the present law will assist defence of claims of
negligence/breach of trust; however when acting for a purchaser, it will not do so.
Further, there is the risk that transactional lawyers generally — who hold monies
on trust for clients pending completion of transactions — will be construed as
acting as guarantor against third party fraud, even where there is no question of
fault on the part of the solicitors involved.
Whilst law firms could adapt their terms of business to exclude liability in such
cases, this would likely fall foul of the Unfair Contract Terms Act 1977. For this
reason we are doubtful such amendment would be effective.
Comment
Cases such as this one may highlight the need for identity theft protection
insurance. However, in the short term, such an offering is unlikely to reduce the
burden imposed on professional indemnity (PI) insurers since — as the law stands —
insurers offering this may be able to pursue subrogated claims against PI insurers.
These cases may only prove to make PI insurers more selective concerning the
conveyancing firms they are willing to insure, and to increase premiums.
Page 9 of 29
Whether this will lead to a hardening of the present soft market is uncertain
however, given the move to open market renewal for licences conveyancers and
the increased number of capacity providers looking to write conveyancing business.
For more information please contact:
Fleur Rochester: [email protected]
Elisabeth Ross: [email protected]
Page 10 of 29
When duty calls: Costain provides further guidance on good
faith
Costain Limited v Tarmac Holding Limited [28.02.17]
Parties to a contract must first of all act within its rules, and, secondly, within the
‘spirit’ of those rules where there is a duty of good faith. Whilst the parties must
not ‘game the system’ or improperly exploit the position, this does not prevent
them from acting in their own interests.
Background
Culturally, the concept of good faith, which is crucial to the general operation of
the NEC standard forms of contract, is alien to English common law. This case is
timely guidance on the extent of the duty of good faith in an NEC standard form,
especially for contractors and professionals (and their insurers).
The NEC form of contract has been favoured over the JCT suite of contracts for a
number of years. It is now the pre-dominant standard form in public sector
contracts.
Framework agreements allow public sector bodies to comply with EU procurement
rules. Costain was appointed to The Department for Transport’s Framework
Contract for public transport projects. Tarmac was appointed to a similar
framework agreement in respect of the supply of concrete.
The government engaged Costain to design a concrete crash barrier on the M1.
Costain procured the supply of concrete from Tarmac. Each “call-off” under the
government’s Framework Contract incorporated both the terms and conditions for
the NEC Framework Contract (the Framework) and the NEC Supply (Short) Contract
(the Supply Contract) (together the Framework and the Supply Contract being the
Sub-Contract).
The barrier was defective. The parties agreed that this was caused by sub-standard
concrete supplied by Tarmac, but they disagreed on the scope of the repair works.
The Framework and the Supply Contract each contained separate dispute
resolution clauses.
Conflicting dispute resolution clauses
Clause 93.3(1) of the Supply Contract required:
A dispute to be notified to the other party within four weeks of becoming aware of
it.
Thereafter, a dispute to be referred to an adjudicator within four weeks.
Page 11 of 29
If the parties were unsatisfied with the adjudicator’s decision, the Supply Contract
required the parties to arbitrate. If a party failed to comply with the timescales,
the right to refer the dispute to adjudication or arbitration was lost (the Time Bar).
In contrast, the Framework allowed a dispute to be referred to adjudication “at
any time”. It contained no arbitration requirement and it did not include the Time
Bar.
As is common in NEC standard forms, clause 10 of the Supply Contract, provided
that “… [the parties] … shall act as stated in this contract and in the spirit of
mutual trust and co-operation”. This is widely construed in the industry as a duty
of good faith.
The arguments
During the pre-action exchanges, Tarmac contended Costain had failed to comply
with the Time Bar. Costain, which had the benefit of legal advice, argued that:
The Time Bar did not apply because the Framework allowed the parties to
adjudicate, arbitrate or to litigate; or
To the extent that it did apply:
Tarmac was estopped from relying on the Time Bar because its lawyers impliedly
represented that Tarmac wished to litigate.
In circumstances where Tarmac had not agreed a form of dispute resolution, the
overarching duty of “good faith” prevented it from relying on the Time Bar.
Tarmac referred the dispute concerning the interpretation of the Sub-Contract to
adjudication. The adjudicator found for Tarmac and held that the dispute in
respect of the cost of repairs to the barrier was time-barred. Costain commenced
proceedings in the Technology and Construction Court for damages. Tarmac
applied to stay the court proceedings on the basis that the Supply Contract
required the parties to arbitrate – in effect, preventing Costain’s claim for
damages.
His Honour Mr Justice Coulson was asked to make a finding on a number of issues,
including:
The construction of the dispute resolution clauses in the Sub-Contract.
Costain’s argument that Tarmac was estopped from relying on the Time Bar.
The operation of clause 10 requiring “mutual trust and co-operation”.
Page 12 of 29
The decision
Mr Justice Coulson dismissed Costain’s contention that the Sub-Contract allowed
the parties to adjudicate, arbitrate or to litigate. He found that the parties had
expressly agreed to include both the Framework and the Supply Contract in the
Sub-Contract, which gave rise to divisible obligations. The Framework applied to
the parties’ wider dealings, whilst the Supply Contract dealt with the quality of the
concrete.
The judge upheld the construction and applicability of the dispute resolution
clause, including the time bar, in clause 93(1) of the Supply Contract. He
concluded that it reflected the commercial intentions of the parties to have two
mutually exclusive procedures for determining disputes. He also rejected Costain’s
estoppel arguments.
The judge agreed with academic analysis that clause 10 equated to an obligation of
good faith (see paragraph 2-004 - Keating on NEC3 (First Edition 2012). He noted
that Tarmac’s lawyers had been silent on the Time Bar, but that this was not
“sharp practice” or a breach of clause 10.
He approved comments in a leading Australian case that:
What constitutes good faith will depend on the circumstances.
Good faith does not require parties to put aside self-interest or give rise to
fiduciary duties.
Normal business behaviour is permitted, but the court will have to evaluate
whether the party has acted unconscionably or capriciously. This may require the
court to consider motive.
The duty of good faith requires parties to have “regard to the legitimate interests
of both parties in the enjoyment of the fruits of the contract as delineated by its
terms” (Automasters Australia PTY Limited v Bruness PTY Limited [2002]).
The rejection of Costain’s arguments allowed Tarmac to rely on the Time Bar and
to defeat the substantial claim for damages.
Comment
The judgment reinforces that the parties to a contract must first of all act within
its rules, and, secondly, within the ‘spirit’ of those rules where there is a duty of
good faith. Whilst the parties must not ‘game the system’ or improperly exploit the
position, this does not prevent them from acting in their own interests.
Page 13 of 29
In this case, the judge’s perception of Tarmac’s conduct was important. The
decision helpfully clarifies that a tactical silence on limitation does not equate to
bad faith.
This is a complex and developing area of law. Parties that encounter issues on site
may benefit from taking early legal advice where issues arise under the NEC form
of contract. Insurers may see the financial benefit of early intervention.
For more information please contact:
Fleur Rochester: [email protected]
Lee Cooper: [email protected]
Page 14 of 29
Beware of the (Watch) Dog: FCA announces new AML
role
The Financial Conduct Authority (FCA) has announced that it is to be given further
responsibility by the Treasury for reviewing the anti-money laundering (AML)
supervision carried out by professional bodies, which will be known as the Office
for Professional Body AML Supervision (OPBAS).
Amidst fears that the government will soon seek to ‘gold plate’ the Fourth Money
Laundering Directive (4MLD) into UK law — should professional service firms be
afraid of more bite?
Supervising the supervisors
While the FCA already holds significant investigative and enforcement powers in
respect of AML and counter terrorist financing (CTF) — displayed in respect of a
probe into HSBC in February this year — OPBAS’s function is set at a slightly
different angle. Funded via a new fee to be levied on professional body supervisors
— such as the Solicitors Regulatory Authority and the Institute of Chartered
Accountants — OPBAS is set to be the ‘supervisor of supervisors’ in respect of AML.
While the full logistics of the arrangement are yet to be confirmed, OPBAS will
seek to remove inconsistencies and loopholes exploited by money launderers across
the various AML regimes in force. The Treasury has proposed that OPBAS will have
powers to fine the supervisors should AML regulations, including 4MLD, be
breached.
Fourth Money Laundering Directive
The move comes as the FCA prepares to assist the Treasury in transposing the
Fourth Money Laundering Directive (4MLD) into UK law. Following an initial eightweek consultation launched in September 2016, which outlined how the
government intended to implement the directive, a further consultation was
published on 15 March 2017 seeking views on the draft regulations. The
requirements of the directive must come into effect by 26 June 2017 – regardless
of Brexit and the forthcoming general election.
The emphasis of 4MLD is on risk assessments by Member States to:
• Identify
• Assess
• Understand
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• Mitigate
… the money laundering and terrorist financing risks affecting it, in conjunction
with associated data protection concerns.
Member States are required to designate an authority to co-ordinate the national
response to the risks identified.
OPBAS is likely to be instrumental in filling this role in the UK, ensuring information
is made available to firms to assist with their own money laundering and terrorist
financing risk- assessments. This is particularly so given the Treasury’s apparent
intentions for OPBAS to set the standard for the supervisors to comply with the
obligations of 4MLD.
Impact on professional service firms and their insurers
The full scope of OPBAS’s role is yet to be defined. Currently its focus is on the
supervisors of professional bodies. In theory, therefore, firms should not come into
direct contact with OPBAS.
Nonetheless, the relevant supervisory entities will no doubt be reviewing their own
procedures in respect of checks, investigation and enforcement of AML rules over
their firms. As a result, firms and their insurers can expect to see an increase in
probes and/or enforcement action taken by their regulators.
The government’s policy decisions that emerged from the earlier consultation
process has raised fears that it will seek to ‘gold plate’ 4MLD and place a needless
burden on professional service firms, particularly sole practitioners and small
firms. The final policy decisions (as implemented through domestic legislation) are
awaited with interest.
Investigation and/or enforcement action taken by a regulator is likely to be costly,
time-consuming, and almost certainly negative for a firm’s public image. In order
to avoid scrutiny, firms should continue be proactive in their approach to risk
assessments and compliance with AML and CTF Guidelines.
Underwriters should be mindful of a history of regulator intervention. In respect of
AML and CTF regimes, in particular, they should consider enquiring into the policies
and procedures in place, when considering whether to write the risk.
For more information please contact:
Philip Hartley: [email protected]
Louise Campbell: [email protected]
Page 16 of 29
Macris revisited: synonyms in the spotlight
Financial Conduct Authority v Macris [22.03.17]
In June 2015, we reported on the Court of Appeal’s findings that the Financial
Conduct Authority (FCA) had breached an individual’s third party rights in the
issuance of a decision notice identifying him by the use of a synonym.
The decision has recently been reversed by the Supreme Court (Financial Conduct
Authority v Macris [22.03.17]) with new guidance provided as to the appropriate
legal test to determine whether a warning notice or decision notice issued by the
FCA ‘identifies’ an individual.
If a notice unfavourably identifies an individual who is not the subject of the notice
(as per s.393 of the Financial Services and Markets Act 2000) then a copy of the
notice should be given to the individual in advance of it being made public. Such
‘third party rights’ enable an individual to make representations on any criticisms
of them contained therein, and to request disclosure of any documents upon which
those criticisms are based. These rights are important since adverse commentary
from the FCA can cause serious reputational damage.
Background
In September 2013, the FCA issued notices to JP Morgan Chase Bank N.A. (the
Bank) concerning its supervision failures regarding trading losses of circa £6.2
billion. The notices referenced the Bank “on one occasion (by virtue of the conduct
of CIO London Management) having deliberately misled the FCA”.
Mr Macris acted as the Bank’s International Chief Investment Officer at the
relevant time. He managed Bruno Iksil, the trader responsible for the losses, who
has been dubbed the “London Whale” because of the magnitude of his derivatives
positions.
Both the Upper Tribunal and the Court of Appeal considered the reference to “CIO
London Management” in the Bank’s notice as a reference to Mr Macris, and that Mr
Macris should have been afforded third party rights over the notices.
The failure to grant Mr Macris third party rights was significant and prejudicial to
Mr Macris, since the allegation of deliberately misleading the FCA was not
replicated in notices served on him as an individual. The FCA appealed that finding
to the Supreme Court.
The Supreme Court decision
The Court of Appeal had drawn on the law of defamation to require a “key or
pointer” which would objectively lead persons acquainted with the individual — or
Page 17 of 29
persons operating in the financial services industry — to identify the individual
based on what might reasonably have been known at the date of publication. They
accordingly upheld the finding of the Upper Tribunal.
The Supreme Court (Lord Wilson dissenting) disagreed with this approach, adopting
a more restrictive interpretation of s.393. They clarified that use of a synonym can
only identify an individual where it is clear from the notice itself that they are the
sole person who could be being referenced.
Publicly available information may be used to identify the individual if it is
generally known or easily discoverable — but only in circumstances where that
information is used to interpret the language of the notice.
Lord Sumption proposed that if simple and straightforward enquiries allowed the
public to identify a single individual from a synonym, the test would be satisfied.
Information known to only a small number of individuals or within an industry,
would not. Lord Neuberger and Lord Hodge agreed.
Lord Mance proposed a broader test, more aligned with that of the Court of Appeal
such that if “persons operating in that world, unacquainted with the particular
individual or his company, though familiar with information generally available
publicly to operators in that world”, would identify the individual then that would
be sufficient.
He agreed, however, that Mr Macris had not been identified in the Bank’s notice.
Potential for conflict and inconsistency
Regulated entities often settle with the FCA at an early stage in order to access
settlement discounts, and accordingly firm’s notices are often published long
before the FCA’s investigations into employees have concluded. Employees have
different motivations, since they often face serious personal sanctions.
In a speech on 31 March 2017, Mark Stewart — Director of Enforcement for the FCA
— referenced the Macris case as evidencing the difficulties the FCA face in
managing the employer/employee conflicts in regulatory investigations.
He further acknowledged, “from a broad regulatory and law enforcement
perspective, inconsistent verdicts and findings based on the same facts do not
provide the best authority or precedent or clear bright lines for the rest of the
market”.
Comment
There is a regulatory balancing act at play because the FCA has a conflicting
interest in maximising the “credible deterrence” of a notice — through the
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inclusion of specific details and findings against individuals — whilst seeking to
minimise the engagement of third party rights. Third party rights add complexity to
the drafting of notices and accordingly may significantly delay publication.
Following the Court of Appeal decision in 2015, insurers may have seen an uptake
in FCA-regulated insureds seeking to deploy arguments as to the breach of third
party rights. The FCA stayed such cases pending determination of the Macris case.
Insurers may see an initial flurry of stayed cases grappling with the new test
applied by the Supreme Court. Thereafter we expect to see this argument raised
less commonly in the future.
Whilst the Supreme Court appeared troubled by prejudice suffered by Mr Macris, it
will be a rare case where individuals are considered to have been identified by a
synonym.
Related item: http://www.kennedyslaw.com/casereview/fca-achilles/
For more information please contact:
Jenny Boldon: [email protected]
Elisabeth Ross: [email protected]
Page 19 of 29
Taxing matters: Supreme Court gives judgment in case of
unjust enrichment
The Commissioners for HMRC v Investment Trust Companies (in Liquidation)
[11.04.17]
A successful appeal by Her Majesty’s Revenue and Customs (HMRC) is expected to
have a significant impact on unjust enrichment actions brought by a claimant
against a defendant to which it has not directly provided a benefit.
It is well established that restitutionary remedies are available where a defendant
has been unjustly enriched at the expense of a claimant. Broadly, the obligation to
make restitution can arise where a special relationship exists between two parties
and the law imposes a duty on one to pay a sum of money to the other.
The relationship between HMRC and a customer which paid VAT to a third party
supplier has recently been considered by the Supreme Court.
In the long-awaited judgment of The Commissioners for HMRC v Investment Trust
Companies (in Liquidation) [11.04.17], the Supreme Court allowed an appeal by
HMRC, with the result that a customer which mistakenly paid VAT to a supplier —
which in turn accounted for it to HMRC — did not have a claim for unjust
enrichment to recover it directly from HMRC.
Facts
Investment Trust Companies (ITC) — a number of close-ended investment funds —
sought refunds of VAT paid with respect to the supply of services by investment
managers (the Managers) once it transpired the VAT was not due under EU law.
The Managers who received VAT from ITC paid it to HMRC, believing they were
entitled to deduct input tax (the tax chargeable in respect of taxable supplies
which they had received for the purpose of their business of making taxable
supplies) from the output tax (the tax chargeable in respect of their taxable
supplies).
The case was considered by reference to a notional VAT figure of £100 received by
the Managers from ITC for taxable services before it transpired that the supplies
were VAT exempt.
Where the input tax exceeded the output tax, the Managers would be entitled to a
credit from HMRC. Where the output tax exceeded the input tax, the Managers
would be required to pay the surplus to HMRC but could retain the balance. So, if
the Managers provided taxable services on which the VAT chargeable was £100, the
Managers were bound to account to HMRC for £100. If the Managers had themselves
purchased taxable services on which the VAT was £25 — thereby incurring an input
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tax — the Managers were entitled to deduct that £25, and were required to pay
HMRC only the balance of £75.
Once it became apparent that the services provided by the Managers were VAT
exempt, the Managers made claims to HMRC for refunds under s.80 of the VAT Act
1994 and passed on the refunded VAT to ITC. However, under the 1994 Act, the
Managers were only entitled to a refund of the VAT they had actually paid HMRC,
i.e. the notional £75. As ITC did not receive the full amount of VAT they had been
mistakenly charged, they brought proceedings against HMRC seeking remedies in
unjust enrichment in respect of the notional £25.
The Court of Appeal held that the judge at first instance had been right to
conclude that ITC had a direct cause of action in unjust enrichment against HMRC
for VAT paid under a mistake of law. It also determined that HMRC could have been
enriched by up to the notional £75 (where such claims were not time-barred) and
that ITC’s claim regarding the notional £25 lay against the Managers. Both sides
appealed.
Supreme Court’s judgment
The Supreme Court unanimously allowed HMRC’s appeal, holding that ITC did not
have a common law claim against HMRC for unjust enrichment.
ITC’s payment to the Managers was deemed part of the Managers’ general assets
and the Managers’ VAT liability to HMRC arose independently of whether ITC
actually paid VAT.
It was only from the Managers — to whom the VAT was directly paid — that ITC
could recover the money in an unjust enrichment claim.
As ITC had not paid any VAT to HMRC directly but had ultimately incurred the
expense of unnecessary VAT, the judgment considered the requirement for claims
of unjust enrichment that the enrichment sought by the claimant be “at the
expense” of the claimant. In that regard, the Supreme Court rejected concepts of
underlying economic or commercial reality on grounds of vagueness which had
persuaded the Court of Appeal.
Insurance considerations
The decision is expected to restrict the circumstances in which a claimant may
have a cause of action in unjust enrichment against a party upon which it has not
directly provided a benefit.
From an insurers’ perspective, this case illustrates the kind of complex issues that
can arise in claims of unjust enrichment, which may impact the response of
D&O/professional indemnity cover available to an insured in respect of such
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actions.
More generally — in assessing the appropriate response of the policy to claims for
unjust enrichment — it remains appropriate to assess to what extent, if at all,
cover is available for an adverse award if the insured is deemed to have been
unjustly enriched. If an adverse award is restitutionary in nature, rather than
compensatory — depending on the scope of cover available — it might be legitimate
to say that the insured has not suffered a loss.
Further — depending on how an insured came to be unjustly enriched — coverage
defences based on excluded perils relating to the conduct of the insured (e.g.
dishonesty, unlawful profit), as well as public policy, may be available.
For more information please contact:
John Bruce: [email protected]
Dónal Clark: [email protected]
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Foresight may provide the best risk insight in a multinational
programme
In the competitive multi-national insurance environment, insurers must
increasingly convert risk insight and trends to actionable intelligence. Risk insight
unquestionably improves customer relationships and sharpens underwriting results.
The sizeable investments made to attract and service each multi-national
insurance programme require proactive strategies to consistently strengthen those
relationships and favourably drive the retention of these highly valued customers.
The time to “earn the business” with insightful discussion is well before the multinational insurer and insured have experienced a major loss in a faraway place. Preloss stress testing a multi-national programme offers the insurer and insured
confidence that their programme will operate as intended.
Yet, it is quite common for multi-national insurance programmes to achieve clarity
and crystalise contract certainty only through hindsight. A significant loss far from
the insured’s corporate headquarters and the lead underwriter’s desk quickly bring
the cross-border realities of such a programme into focus. Unquestionably, the risk
manager and the programme’s broker are expecting immediate reassurance that
their programme has been well attended. This expectation only amplifies if the
loss has attracted the interest of one or more local regulators, governmental
authorities, or the multi-national’s senior management. Insureds, and insurers,
understandably expect their programme will function as well outside their primary
markets as it does within. Programme clarity, confidence, and credibility are
paramount.
As anyone who serves the multi-national insurance market knows - the sheer
volume of verbal and written communication across multiple languages, variances
in insurance customs and practices, and ever changing regulatory environments
provide ample opportunity for miscommunication or misunderstanding to occur.
These complex insurance programmes deserve a quality assurance review.
Pre-loss stress testing provides these programmes with that quality assurance
opportunity. By testing their programme, the insurer and insured not only have the
opportunity to spot inadvertent programme challenges but perhaps more
importantly, pre-loss testing provides them with an opportunity to strengthen the
relationship, preparedness, and collaboration needed when a loss abroad does
occur.
Ample scenarios
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The headlines as well as the parties’ respective loss portfolios provide ample
scenarios to measure the regulatory, legal, and adjustment environments their
programmes will globally encounter. Testing scenarios should be tailored to the
unique risks, territories, and products most notable in the programme, such as:
hurricanes, earthquakes, floods, fires, environmental damage, explosions in
industrial or business centers, political unrest, corporate investigations, claims
against executives, and cyber risks.
At minimum stress testing illuminates routine insurance issues under foreign law,
such as principles of insurable interest, construction/interpretation, and language
translation risk. More significantly, such testing illuminates compliance with antimoney laundering laws, the practical implications of extra-territorial master
policies, prohibitions against post-loss policy amendment, tax implications
associated with loss, exchange rate impacts of indemnification through DIC/DIL
provisions, and effects on repatriation of defense or settlement funds to the loss
country. The issues will vary with the products and territories implicated. Selective
and periodic pre-loss stress testing will not eliminate all risks inherent in a multinational programme but over time improvements in clarity and confidence will
enhance the programme, as well as the parties’ relationship. These insights will
steadily influence the underwriting of the insurer’s multi-national portfolio,
undoubtedly sharpening their results.
A straightforward testing example would be to consider a significant weather event
- a hurricane - severely damaging several properties in a country where the loss
experience has been limited under the programme. To be meaningful, the test
should apply the full measure of actual policy terms, regulation, and unfamiliar
territorial practices, as if the loss happened immediately after policy inception.
For illustration, consider a programme insuring a multi-national real estate
investment company domiciled in Australia, with luxury resort properties located
along several beautiful coastlines. The insured and insurer would select one or
more locations where the insured holds property to examine - the Caribbean, the
Mediterranean, or South America. Fundamental loss facts would need to be agreed,
e.g. two separate properties suffer a covered total loss of buildings and personal
property, each valued as significant eight figure losses.
Correcting errors
Through testing, insurers would confront whether the policy completely and
accurately designates all the entities with an insurable interest in the property,
and whether the valuations are accurate. As insurers and insureds identify and
correct any errant policy provisions they may expose, they will have avoided
problems otherwise potentially experienced by strict laws prohibiting post-loss
policy amendment at the time of an actual loss. Such a review also allows
confirmation of compliance with all anti-money laundering requirements, clearing
the path to timely advance payment and expediting the insured’s recovery.
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Pre-loss testing enables identification of potential “differences in conditions”
between the programme’s local and master policies and reconciliation of any
inconsistencies that may impact the flow of proceeds under either policy.
Examining scenarios before an actual loss allows the insured and insurer to spot
and remedy unintended costs relating to currency exchange or repatriation of
funds paid abroad. Further, substantial losses suffered by a foreign domiciled
insured may well attract the attention of various governmental or taxing
authorities, and insurance regulators. Programme stress testing provides an
opportunity to consider those anticipated inquiries and ensure that local law and
regulation are confidently addressed on behalf of both the insured and insurer.
In the ever changing global landscape, a loss arising under the intersecting
complexities of a multi-national insurance programme will always be a source of
valuable insight. To the extent acquiring this insight precedes a significant loss, it
will be most meaningful to the programme and insurance relationship. Pre-loss
amendment or better programme design based on such insight allows the insurer to
“earn the business” well before a faraway, disruptive loss experience may
ultimately shape the relationship. “Of all the forms of wisdom, hindsight is by
general consent the least merciful, the most unforgiving.” A strategy to take
careful foresight of the multi-national insurance programme would yield a
significant return on the insurer’s investment and may well provide the
competitively actionable intelligence needed to serve its relationship with a most
valued customer.
This article was first published by Insurance Day on 26 April 2017.
For more information please contact:
Dan Sanders: [email protected]
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The interpretation of contractual terms: no longer
Confused.com?
Wood v Capita [29.03.17]
The Supreme Court recently handed down a decision confirming the courts’
approach to contractual interpretation.
The decision is a reminder to ensure that key terms of contracts are:
• As clear as possible
• Carefully considered in the context of other contract terms.
Although the decision relates to a share purchase agreement, it has general
application to all types of contracts. This includes insurance policies — and, in
particular — when regard can be had to the “factual matrix” surrounding contracts.
It affirms the general principle that:
•
Where policy terms are unambiguous, they will be given their plain and
ordinary meaning; but
•
When choosing between ambiguous interpretations, the intentions of the
parties and other extraneous factors will be taken into consideration.
Background
Sureterm Direct Ltd sold motor insurance via websites such as Confused.com.
Sureterm sold their shares to Capita Insurance Services Ltd in April 2010 via a Share
Purchase Agreement (SPA).
A dispute arose as to whether Capita could rely on an indemnity clause in the SPA
to claim the cost of a Financial Services Authority (FSA) imposed circa £2.5 million
remediation scheme from Sureterm’s former owner — Mr Wood — following the
discovery of numerous mis-sold insurance policies.
The indemnity clause obliged Mr Wood to indemnify Capita for “all actions,
proceedings, losses, claims, damages, costs, charges, expenses and liabilities
suffered or incurred, and all fines, compensation or remedial action or payments
imposed on or required to be made by [Sureterm] following and arising out of
claims or complaints registered with the FSA”.
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Relevantly the SPA also contained warranties, under which Mr Wood specifically
confirmed that he was not aware of any circumstances which were likely to give
rise to any FSA investigation or regulatory issues.
Mr Wood’s liability under the warranties was limited to two years after completion,
whereas his liability under the indemnity clause was not time limited.
The courts’ decisions
Mr Wood said that the remediation scheme fell outside of the indemnity clause. He
stated that the requirement to compensate customers arose from an internal audit
— rather than from a claim by customers — or a complaint by the customers to the
FSA.
Further, he said any claim by Capita should have been brought pursuant to the
warranties, and they had failed to do so within the two-year period specified.
Capita’s position was that the wording of the contractual indemnity was not
limited to loss arising out of a claim or complaint — and was not time limited — so
they were entitled to rely on it.
The judge at first instance concluded that Mr Wood was obliged to indemnify
Capita even though there had been no claim or complaint by a customer. The Court
of Appeal disagreed with this decision. It said that liability could not arise unless a
claim was made against Sureterm or a complaint was registered with the FSA by its
customers.
The Supreme Court agreed. In considering the scope and meaning of the indemnity
clause, they said it is necessary to consider the context of the contract as a whole
to see whether the wider factual matrix gives guidance to its meaning. The
warranties were time limited and the scope of the indemnity clause — that was
unlimited in time — should be assessed in the context of those time-limited
warranties.
Intention
In Wickman v Schuler [1973], the House of Lords concluded that whilst the parties
to a contract (which contains ambiguous terms) could have agreed something
unreasonable or foolish, the more unreasonable the result of an interpretation, the
more unlikely it is that the parties could have intended it.
This principle was affirmed in Rainy Sky SA & others v Kookmin Bank [2011]. Lord
Hodge referred to this case in Wood v Capita, in concluding that, “where there are
rival meanings, the court can give weight to the implications of rival constructions
by reaching a view as to which construction is more consistent with business
common sense. But, in striking a balance between the indications given by the
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language and the implications of the competing constructions, the court must
consider the quality of drafting of the clause”.
He said it was not contrary to business common sense for Sureterm and Capita to
have agreed wide-ranging time-limited indemnities, and to then agree a further
indemnity which is not time limited, but which is triggered only in certain
circumstances.
Comment
These cases remind us of the importance of ensuring that the terms of contracts —
including insurance policies — should be clear and consistent, as they could be
considered in a wider context if there is any ambiguity. For example, if an
insurance policy contains an obligation on an insured to notify claims only over a
certain financial threshold, it could be argued that such a threshold impacts any
policy provisions concerning disclosure of material facts.
Each policy provision should therefore be clear. Where there is a risk of ambiguity,
clarification wording should always be included.
For more information please contact:
Jenny Boldon: [email protected]
Laura Hurst: [email protected]
Kennedys is a trading name of Kennedys Law LLP. Kennedys Law LLP is a limited liability partnership
registered in England and Wales (with registered number OC353214).
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