His Honour Judge Stephen Davies sitting at the High Court in Manchester has struck out a claim in excess of £2.5m against a football agent represented by law firm FrontRow Legal and leading Counsel, Andrew Thompson QC of Erskine Chambers.
The decision seemingly hinged on the application of the exception to the reflective loss principle.
Background
The Claimants (C1, an individual and C2 and C3 corporate entities) and Defendant (D, an individual), were all members of an LLP in liquidation, (‘the LLP’). The LLP was in business as a manager of football players, including a number of Premiership players. By agreement a company under the D’s control was entitled to 50% of the LLP’s profits. C2 and C3, companies controlled by C1 were entitled to the other 50% of the profits. Those 3 companies and those 2 individuals, C1 and D, were the 5 members of the LLP.
The Claim was for damages for breaches of contractual and fiduciary duties allegedly owed by the D to the Claimants in relation to the D’s alleged conduct as a member of the LLP. It was alleged C2 and C3 also became insolvent (on their case as a result of the damage inflicted by D).
The D made an application for an order striking it out (under CPR 3.4 and/or the inherent jurisdiction of the Court) and/or for reverse summary judgment (under CPR 24).
This application was on the basis that of the various heads of loss pleaded, either those heads were expressly identified as loss suffered not by the Claimants themselves but by the LLP and/or they fell foul of the reflective loss principle, and/or they were hopeless because the conditions on which the alleged contractual liability might have arisen had not in fact been satisfied.
The D’s application first came before the Court in March 2018, but it was adjourned because there was uncertainty about who would end up owning the insolvent LLP’s own cause of action.
The liquidators of the LLP then agreed to assign to the D the LLP's claims against all its members and their associates (not just the D, but also amongst others the 3 Claimants).
The application was relisted later in 2018 but adjourned again by consent because liquidators were due to be appointed for C2 and C3. In November 2018, C1 issued an application for permission to amend the POC to add further claims.
The liquidators for C2 and C3 then offered a bidding process inviting C1 and D to bid for the claims of the proceedings in respect of C2 and C3. The resolution of who acquired their causes of action was only reached in March 2019 where it was claimed that C1 was the owner of C2 and C3’s causes of action, prompting C1, to issue a further application for permission to amend the POC, to plead those assignments.
Reflective Loss Principle
The basic principle is that where both a company/LLP and a member have claims against a defendant, the member cannot bring proceedings to make good a loss which would be made good if the company's/LLP’s assets were replenished through action by the company/LLP against the party responsible for the loss (derived from Johnson v Gore Wood (No.1) [2002] 2 A.C. 1). The principle was first established in relation to companies, but it applies equally to an LLP, which is a separate corporate entity.
There is only one possible exception to the reflective loss principle, which in exceptional circumstances allows a member to sue despite the prima facie application of the reflective loss principle, Giles v Rhind [2003] Ch 618. Generally and loosely, that exception arises “in a case where, by reason of the wrong done to it, the company is unable to pursue its claim against the wrongdoer” (Giles).
As a result of the recent Court of Appeal’s decision in Marex Financial v Sevilleja [2019] QB 173 in which the rationale for the rule was explained, the law as regards reflective loss had become even more favourable to the D in the present facts.
The facts in Giles were extreme and that even prior to Marex, the Giles exception had already been given a restrictive interpretation in subsequent Court of Appeal cases, including in particular Gardner v Parker and Webster v Sandersons [2009] P.N.L.R 37. Reflective loss is seen as an absolute defence and not a matter of discretion.
Hearing on 20 March 2019
At the hearing on 20 March 2019 there were 3 applications before the Court:-
a. the main application, made by the D to strike out the proceedings or for reverse summary judgment in respect of the reasons as set out above; b. an application seeking permission to amend the POC made by the First Claimant; and c. a further application for permission to amend the POC by the First Claimant to plead the assignment of C2 and C3’s claims in favour of C1.
In Marex the Court of Appeal held amongst other matters that the exception can only apply in limited circumstances where the wrongdoing of the defendant has been directly causative of the impossibility the company faces in bringing the claim, the impossibility must be a legal one.
It was claimed by C1’s Counsel that this claim was within the Giles exception. Further C1 also called for an examination at trial of the circumstances in which a partner may owe a duty directly to the other members not just to the partnership itself (just as a director may owe a duty to shareholders) and arguments of a fiduciary duty owed by the D.
It was also pleaded by the D that C1’s application for permission to amend the POC should be refused on the basis that the proposed further claims are all unsustainable, for basically the same reasons that the originally pleaded claims are unsustainable.
In an oral judgment handed down on the same day the High Court ruled in favour of the D and so the claim in its entirety was struck out (six separate heads of loss) with the Judge finding that the exception to the reflective loss principle did not apply. Costs of the proceedings were awarded in favour of the D with a significant payment on account of costs ordered.
Following a refusal of permission to appeal at the hearing itself, any appeal shall lie to the Court of Appeal to which any further application for permission should be made.
Comment
This decision is the latest concerning the reflective loss principle and the Giles exception.
The decision is an important case in its own right and adds to the ongoing jurisprudence in this area of law with the decision consistent with the approach taken in Marex.
FrontRow Legal
