UK: Finance Litigation Briefing - May 2016

Gowling WLG's finance litigation experts bring you the latest on the cases and issues affecting the lending industry:

Bank reference negligent but no duty of care owed

Sufficient proximity is required for an assumption of responsibility and so a duty of care to be owed.

We first reported on Playboy Club London Ltd & Ors v Banca Nazionale Del Lavoro Spa (the Bank) in September 2014 from which the facts of the case can be ascertained. In brief, the Bank provided a customer reference through a requesting bank to the effect that its customer was financially sound and trustworthy and good for up to £1.6 million per week.

The requesting bank named its own customer (Burlington) who requested the reference. That reference was given to Burlington which was an agent for an undisclosed principal being the claimant casino. The Bank's customer never had any money in the account and the cheques he presented to the claimant were counterfeit. The claimant lost around £800,000 which it sought to recover from the Bank as the customer could not be found.

At first instance the claim succeeded and the Bank was held to owe the claimant a duty of care as there had been no attempt to restrict liability to the enquirer and there was no suggestion the reference would not have been given or would have taken a different form if sought by the claimant direct. The claimant was found to be 15% contributorily negligent. The Bank appealed.

Allowing the appeal, the Court of Appeal held that the Bank had assumed no responsibility to the claimant. It was only aware that the reference was for Burlington but not that Burlington was acting as an agent and was totally unaware either of the claimant's existence or that the purpose of the reference was for gambling.

Any special relationship, which is required to find a duty of care, was between the Bank and the agent, and the agent had suffered no loss. It could not be between the Bank and the claimant as the Bank did not know of the claimant's existence. As the claimant had concealed its identity (to preserve its customer's confidentiality), the court held it was not fair, just or reasonable to impose liability on the Bank. The Bank did not owe the claimant a duty of care.

Things to consider

Whether a duty of care arises or not will be fact specific. Often a bank will only know in general terms when it provides a customer reference to another bank that that information is needed for the receiving bank's customer and so takes the risk that a special relationship will be inferred with that customer. There is usually no reason for a bank to think that it will be relied on by anyone else.

Remedy for void dispositions of a bankrupt's property

Section 284 of the Insolvency Act 1986 (IA 1986) provides that any disposition of property made by a bankrupt during the period between the date of presentation of the bankruptcy petition (or the making of the bankruptcy application) and the vesting of the bankrupt's estate in the trustee is void. However, s284 does not set out the remedy available to the trustee where monies are paid away under void dispositions.

The case of Thomas and another v D'Eye and others, has confirmed that the remedy for void dispositions under s284 is an account of money had and received. In D'Eye, payment had been made out of the bankrupt's bank accounts to his father and to purchase a property in the bankrupt's wife's sole name. The trustee in bankruptcy argued that the payment and property acquisition were void under s284 as they were made after the presentation of the bankruptcy petition.

The High Court held that s284 was not a complete regime as it did not spell out the relief to be granted where a disposition was void. The issue under s284 gave rise to a statutory regime (rather than unjust enrichment generally) giving rise to an obligation to account for money had and received to which there are limited defences. Void payments made during the relevant period were held by the recipients as part of the bankrupt's estate which vested in the trustee and which entitled the trustee to an account. This applied equally to the property which was an asset purchased out of funds for which the bankrupt was obliged to account to the trustees and which he had tried to place beyond their grasp.

Things to consider

The court confirmed that the same remedy is available in a trustee's claim to recover monies paid away from the insolvent estate once it has vested in the trustee under s306 of the IA 1986.

Cost consequences of issuing and abandoning claims before service

Where a claim form is issued but abandoned before service, a defendant is still entitled to its cost of dealing with the claim, including its pre-action costs.

This was the decision of the court in Webb Resolutions Ltd v Countrywide Surveyors Ltd, in which the claimant instigated a professional negligence claim against the defendant valuer for over valuation of a property.

The claim was for £24,500. Extensive pre-action correspondence passed between the parties. The defendant denied liability and refused to make an offer of settlement. A claim form was issued just before the expiry of the limitation period. The claimant made a Part 36 offer to accept £12,500 but this was not accepted by the defendant. The claimant's costs were in excess of £60,000 by this stage.

The claim form was never served. The claimant's subsequent reasoning for not serving was that it would have been disproportionate in costs to have pursued the substantive litigation. The defendant applied for an order that the claimant pay its costs of the claim (approximately £8,000) on the basis the claim had been discontinued.

The High Court held that the defendant was entitled to its costs of and incidental to the claim which included its pre-action costs. The claimant had been aware of the disproportionate costs being incurred from early on given the low value of the claim and of the level of its costs before it issued. It was also aware that the defendant had no intention of making any offers of settlement. The claimant could have taken the commercial decision not to issue but decided to do so and to try and persuade the defendant to pay its costs by making a low Part 36 (of the Civil Procedure Rules (CPR)) offer which it hoped the defendant would accept, but which it did not.

The court found it could not ignore the expense the defendant had been put to in defending the claim; or ignore the fact the claimant had been aware it was incurring disproportionate expense in the course it had taken; or ignore the court's general discretion to award costs once proceedings have been issued under the relevant provisions of the CPR.

Things to consider

The issuing of a claim form fundamentally changes the position regarding incurring a liability to pay another party's costs. If no claim is issued, there is no liability. Where a claim is issued and discontinued then, whether the claim has been served or not, unless the court orders otherwise, the claimant will generally be ordered to pay the defendant's costs of the claim.

A defendant who knows a claim form has been issued but not served, can call for it to be served or for the claim to be formally discontinued (CPR7.7(1)) so that it can seek to recover its costs.

Setting aside judgment where there was good reason for not attending trial

We first reported on the case of Mohun-Smith v TBO Investments Ltd in October 2014.

In brief, the defendant's director representative had unsuccessfully sought to adjourn the trial of the matter on the basis he was too unwell to attend to represent the defendant due to stress brought on by the proceedings. The trial took place in his absence and judgment was entered against the defendant.

The defendant applied to set that judgment aside under CPR 39.3(3). The court at first instance held the reason for non-attendance though supported by medical evidence was wholly insufficient as the defendant could have been represented by its other director and there had been a delay in applying to set aside the judgment.

The defendant appealed. The issue was whether all three requirements of CPR 39.3(5) had been met:

  • Had the application been made promptly?
  • Was there indeed a good reason for not attending the trial?
  • Were there reasonable prospects of success at the trial?

The Court of Appeal allowed the appeal. Whether a reason for not attending trial was a good reason or not was fact-sensitive and depended on all the circumstances of the particular case. When considering CPR 39.3, cases had to be dealt with justly (the overriding objective) and Article 6 of the European Convention on Human Rights (the right to a fair hearing) had to be complied with. This was particularly important where a party had reasonable prospects of success at a trial which the court held the defendant did have.

The court distinguished between the approaches to be taken on an application to adjourn a trial and an application under CPR 39.3(3) following the trial. A rigorous approach should be adopted on an application to adjourn a trial due to the undesirability of adjourning trials generally. If refused, the trial would still take place although the applicant may be disadvantaged. There should still be a decision on the merits.

However, there should be a less rigorous approach to setting aside where the trial has taken place in a party's absence. If such an application failed, the applicant would have had no opportunity to have an adjudication of the case on the merits. This material distinction is important and justifies the less rigorous approach.

The defendant's reasons for having no representation at the trial were good reasons. The lower court should have adopted a less rigorous approach. Cases should be dealt with justly and in compliance with Article 6 especially where the claim was substantial, the defence had reasonable prospects of success and there would be serious consequences for the defendant in refusing to set aside.

The court should not have reasonably rejected the medical evidence adduced. Further, the court had taken too draconian an approach to the slight delay in making the application. The period of time taken had only been a matter of days and it could not be said the defendant had failed to act promptly.

The court found held all three conditions for setting aside had been met and went on to exercise its discretion under CPR 39.5 to set the judgment aside.

Things to consider

Evidence of ill health which might not suffice on an application to adjourn a trial might suffice on an application to set aside any judgment obtained at that trial in the applicant's absence. Each case will be fact sensitive and for either application, comprehensive and clear medical evidence should be adduced. If on an application under CPR 39.5, each of the three requirements is met, it would be an exceptional case for the court not to exercise its discretion and set the judgment aside.

In case you missed it

Insolvency litigation briefing - May 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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