No Duty To Obtain Best Price Reasonable In A Forced Sale – Upheld By Court Of Appeal

No duty to obtain best price reasonable in a forced sale - upheld by Court of Appeal

(1) Rosserlane Consultants Ltd (2) Swinbrook Developments Ltd v. Credit Suisse International [2017] EWCA Civ 91

This was the appeal of an unsuccessful claim against Credit Suisse International (the Bank), in which the claimants alleged that the Bank had failed to secure the best price reasonably obtainable when it exercised its powers of sale under a participation agreement (the Agreement) entered into between the parties.

The claimants had entered into a short-term loan of US$127 million with the Bank in December 2006, to refinance existing debt, and for future expenditure for Caspian Energy Group (CEG), a partnership between the claimants, which owned a stake in a company operating an oilfield (Shirvan).

The loan was secured, to be repaid upon a sale of the claimants' interests in CEG. The parties entered into the Agreement, pursuant to which the Bank was granted the right to force a sale of CEG if a sale of it or its related assets (including the stake in Shirvan) had not been achieved by mid- August 2007, provided that the sale proceeds were not less than US$180 million. The Agreement included an express duty on the claimants to use reasonable endeavours to achieve the best possible price but no such corresponding duty on the Bank.

The claimants failed to achieve a sale and the Bank enforced its right to sell CEG achieving a sale price of US$245 million in February 2008. The claimants alleged that there was an implied duty of care in the Agreement (similar to a mortgagee's duty to obtain the best price when exercising a power of sale over its security), which the Bank breached by selling CEG for less than its true value. It was said that the claimants had lost the chance to sell CEG to Gazprom Neft for US$650 million.

At the hearing in February 2015, the court refused to find that such a duty was owed by the Bank in relation to its right of forced sale, because the Agreement had: (i) been negotiated between sophisticated parties; and (ii) included an express duty owed by the claimants in relation to the sale price, but was silent as to any duty owed by the Bank. The court also concluded that the Bank had not been appointed as agent of CEG, and therefore owed no fiduciary duties to it. As to the loss of chance, the claimants could not establish that they had lost the chance of securing a sale to Gazprom Neft, because Gazprom Neft would not have made an offer without a site visit, which the claimants/CEG would have refused.

The appeal was heard by Lord Justice Christopher Clarke in February 2017 and concerned two issues: whether the judge was wrong to find that: (i) there was no implied duty; and (ii) the claimants would have refused a site visit.

Clarke LJ decided to hear argument on the second issue first. He found that the judge was entitled to reach the conclusions that he did, and accordingly he dismissed the appeal without it being necessary to consider the first issue. His reasoning on the second issue was based on three factual issues as to whether: (i) CEG had a policy about site visits; (ii) Gazprom Neft would have been treated as an exception to any such policy; and (iii) the Bank would have overridden that policy. Having considered the evidence on these matters, Clarke LJ decided that the claimants would not have permitted a site visit.

The judgment did not, however, address the wider point in the first issue as to whether the judge at first instance was wrong to conclude there was no implied duty in the Agreement. The first instance decision therefore remains good law, and reinforces the position that claimants may find it difficult successfully to imply terms into complex agreements negotiated by sophisticated parties.

Skilled Persons Reports need not be treated as the regulatory standard by FOS

Full Circle Asset Management Ltd v. Financial Ombudsman Service and others [2017] EWHC 323 (Admin)

February 2017 saw the High Court dismiss an application for judicial review relating to a decision made by the Financial Ombudsman Service (FOS).

Full Circle recommended to a customer (Mrs King) that she should open an investment account which Full Circle would manage. On Mrs King completing an "attitude to risk and loss" questionnaire, Full Circle recorded her as a "medium risk investor". Mrs King lost £90,000 over 15 months and complained to FOS on the basis that investments were made into funds which were too risky for a standard retail client.

Section 228(2) of FSMA 2000 states that FOS must determine complaints by reference to what is fair and reasonable in the circumstances of the case. This must be read alongside the FCA's Dispute Resolution: Complaints sourcebook (DISP). DISP 3.6.4R (1)(b) states that the Ombudsman must take into account any relevant regulator's rules, guidance and standards when reaching a decision.

FOS upheld Mrs King's complaint on two grounds. The first was that Full Circle had personally recommended a portfolio that was unsuitable for Mrs King in her circumstances. In addition, the fact that Full Circle had obtained a Skilled Persons Report (SPR) (accepted by the FSA) stating Mrs King's portfolio was a "medium risk profile" did not detract from the finding that the portfolio was unsuitable for Mrs King.

Full Circle argued that FOS' decision should be quashed on numerous grounds. Notably, Full Circle argued that the SPR constituted a set of standards for the purposes of DISP 3.6.4R (1)(b). As the Ombudsman had departed from the SPR (and therefore the standards) without explaining why, Full Circle argued the decision should be quashed per R (Heather Moor and Edgecomb) v. Financial Ombudsman Service [2008] EWCA Civ 642. Furthermore, Full Circle argued that FOS had considered issues, such as whether Full Circle recommended the portfolio, which were not envisaged in Mrs King's complaint.

The court roundly dismissed all aspects of Full Circle's application. Addressing Full Circle's complaint regarding the SPR, Nicol J held that the report did not constitute a set of standards for the purpose of DISP 3.6.4R (1)(b) as it had not been created to investigate a complaint such as Mrs King's. Mrs King's complaint was not that the portfolio was not "medium risk"; it was that the portfolio was not suitable for her personally. FOS had upheld the complaint and the SPR did not provide a legal basis to challenge this.

In respect of the argument that FOS should have limited what it considered to Mrs King's initial complaint, Nicol J held that the Ombudsman's first task when adjudicating is to determine the scope of the complaint. The judge noted the comments of Irwin J in R (Keith Williams) v. Financial Ombudsman Service [2008] EWHC 2142 (Admin) that the Ombudsman's jurisdiction is "inquisitorial not adversarial". In addition, Nicol J held that the Ombudsman was not confined to the contents of the complaint form completed by Mrs King; it was the right of the Ombudsman to broaden the scope of his enquiries to the correspondence which Mrs King had provided. This exercise led the Ombudsman to conclude that Mrs King's personal circumstances (being over 60, not wanting sizeable cash holdings and seeking to obtain long-term income with the investments) meant that assigning any "medium risk" portfolio would not be sufficient.

The Full Circle case can be seen as useful guidance in the way the court deals with arguments regarding FOS determinations. Nicol J's judgment robustly defends the right of FOS to deal with a complaint in a manner it deems fair and reasonable. This right extends to broadening the scope of the initial complaint and considering additional evidence.

Any party applying for judicial review will also need to be cautious before attempting to interpret a "regulator's standard" too broadly for the purpose of DISP 3.6.4R. As can be seen from Full Circle, the fact the FCA approved a report into the status of Full Circle's portfolio did not mean it was a relevant document in the context of Mrs King's complaint. If the court holds that a document is not relevant for the purposes of DISP, the Ombudsman will not be under an obligation to provide reasons for departing from the reasoning in that document.

It is notable that Nicol J's judgment appears to rest on the finding of the Ombudsman that Full Circle recommended the portfolio to Mrs King. Full Circle did not contend this finding was an error in law; this meant the application proceeded on the basis that the Ombudsman was entitled to make that finding. It is arguable that this amounted to a large concession which left much of Full Circle's application without merit.

High Court confirms FOS may depart from the general law when determining what is fair and reasonable

Aviva Life & Pensions (UK) Ltd v. Financial Ombudsman Service [2017] EWHC 352 (Admin)

The High Court has upheld an application for judicial review by Aviva, which had challenged a decision made by the Financial Ombudsman Service (FOS).

The decision made by FOS arose from Aviva's avoidance of a life insurance policy on the grounds that the policyholder, Mr McCulloch, failed to make relevant disclosures in his application. Mr McCulloch was suffering from a rare form of dementia; FOS determined that it was Mr McCulloch's illness that resulted in the non-disclosure rather than any carelessness or negligence on behalf of the policyholder. FOS also determined that Mr McCulloch's policy be reinstated. This ran contrary to the relevant law (s2 and s3 of the Consumer Insurance (Disclosure and Representations) Act 2012) which allows an insurer to void a policy in the event of a careless misrepresentation.

Aviva applied for judicial review on two grounds. The first was that, whilst FOS could depart from the law under s228(2) of the Financial Services and Markets Act 2000 (FSMA), the Ombudsman failed to follow the requirements set out in R (Heather Moor and Edgecomb Ltd) v. FOS [2008] EWCA Civ...