Article by Richard Harrison and Marianne Robson
In Dubai Aluminium Company Limited v Salaam in which judgment was handed down on 5 December 2002, the House of Lords considered the vicarious liability of partners in the context of the alleged dishonesty of one of their fellow partners, a professional adviser.
Their Lordships held that a firm could be vicariously liable for the alleged acts of a dishonest partner if those acts were so closely connected with the business of the firm that they could be characterised as part of the ordinary business of the firm. This issue has already been the subject of a briefing note prepared by this firm and can be obtained from publications@blg.co.uk. The purpose of this article is to consider the important issues of contribution that also arose in the case and to consider their impact on insurers.
Once their Lordships had decided that vicarious liability could apply, they then considered whether receipts of fraud could be taken into account when deciding on the amount of contribution to be awarded to a less culpable party. This decision provides useful guidance to insurers on the factors to take into account when agreeing to a settlement with a claimant when insurers’ intend to claim a contribution from another party who has benefited substantially in financial terms.
This action arose out of a fraud perpetrated on the Dubai Aluminium Company ("Dubal") whereby Dubal was induced to pay out some $50million under bogus consultancy agreements. Dubal’s claims were settled for substantial sums by various parties to the proceedings at various stages during the course of the trial, which ran between October 1997 and final judgment in July 1998. Contribution claims were brought against, amongst others, two of those found to be largely responsible for the fraud ("the Respondents") by one of the defendants, a firm of solicitors ("the Firm"), who were alleged by Dubal to have been vicariously liable for the allegedly dishonest acts of one of their partners who had drafted the consultancy agreements and who had paid $10 million in settlement of the claim. No findings of dishonesty were ever made against the partner. Both Respondents still retained substantial amounts from the fraud, even after their respective settlements with Dubal, of $13 million in one case and $7.5 million in the other. However, neither the Firm nor the partner who was alleged to have been dishonest, had ever received anything other than a modest sum in payment of their professional fees.
The contribution claims were therefore brought to recover the whole of the $10 million paid to Dubal by the Firm. The contribution claims were based on the Civil Liability (Contribution) Act 1978 ("the Act"). Under section 1(1) of the Act anyone liable in respect of any damage suffered by another person may recover contribution from another person liable in respect of the same damage. Section 1(2) of the Act further provides that in order to recover contribution under section 1(1) a person must also have been liable for the loss suffered. Their Lordships held that the Respondents were clearly liable for Dubal’s loss and that the Firm was vicariously liable for the alleged wrongdoing of the partner involved. Consequently, the Firm could in principle claim contribution from the Respondents.
The question that then had to be determined was the level of contribution to be ordered in favour of the firm. Under section 2 (1) of the Act the amount of contribution recoverable is what is found to be just and equitable having regard to the extent of the responsibility for the damage of the person against whom contribution is sought. The Respondents had retained large sums from the fraud even after settling with Dubal, whereas the Firm had not received anything bar a modest fee for legal services. Consequently, the Firm argued that it would be just and equitable for the Respondents to contribute the whole of the sum paid by the Firm in settlement. The Respondents argued that section 2(1) did not extend to receipts, as had been held by the Court of Appeal, and that therefore the Firm could not recover any contribution from them.
Their Lordships dismissed the Respondents’ argument and ordered that the Respondents should indemnify the Firm for the whole of the $10 million it had paid to Dubal. Their Lordships rejected the narrow interpretation of responsibility espoused in the Court of Appeal and in the earlier case of Madden v Quirk [1989] and returned to a wider interpretation of the Act first adopted by the Court of Appeal in Friends Provident Life Office v Hillier Parker May & Rowden [1997]. (These authorities were argued before their Lordships although not cited in the judgment). Giving the leading judgment of the House, Lord Millet said that: "Where the wrongdoing has produced not only a loss to the plaintiff but a profit to the defendants, it is obviously just and equitable to direct that any contributions required to allocate the cost of meeting the claim fairly among those responsible should be paid first out of their retained profits. It is increasingly recognised today that the ends of justice sometimes go beyond compensating a plaintiff for his loss and may extend to stripping a defendant of his profits."
The House of Lords’ decision is helpful as the previous uncertainty about whether a contribution, or indeed a complete indemnity, could be recovered from another party based on their undisgorged receipts has been removed. When deciding on the amount of contribution recoverable, a court will have regard to the overall effect of any order, taking into account the relative positions of all those involved. Where another defendant has retained substantial receipts even after reaching its own settlement, insurers are likely to be able to obtain a contribution properly to reflect the parties’ relative responsibilities. The insurers of a professional caught up in a fraud can, after settling the claim, now have a real prospect of making a full or substantial recovery from the fraudsters.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.