In 2019 the Courts were required to consider, on appeal from strike-out/summary judgment decisions, vicarious liability (and related issues) in connection with financial advisers and lenders. In the very recent decision in Barness & Ors v Ingenious Media Ltd & Ors, the Court was required to consider whether the claims against the two lender defendants alleging breach of contract, negligence and vicarious liability in connection with a film finance scheme should be struck out. The separate case of Frederick v Positive Solutions (Financial Services) Ltd, in which the Supreme Court heard an appeal in February 2019 against the Court of Appeal's 2018 decision upholding the summary judgment in favour of Positive Solutions, turned on the issue of whether Positive Solutions was vicariously liable for the fraudulent acts of an agent.
Both cases involved a consideration of the test for vicarious liability set out in Cox v Ministry of Justice  UKSC 10, in which a prison authority was held liable for the negligence of a prisoner working in its kitchen. Questions remain unanswered in terms of the application of that test going forward, however, (the line of authorities culminating in Cox was concerned primarily with physical injury and sexual abuse cases) and we can expect further developments in this complex and still-developing area.
Barness & Ors v Ingenious Media Ltd & Ors
The strike out application brought by the defendant lenders, Coutts & Co and NatWest Bank, was part of wider litigation referred to as the "Ingenious litigation" concerning various film schemes promoted using the name "Ingenious". Broadly, the Ingenious litigation involves claims by numerous investor claimants against a range of defendants including Coutts and NatWest (the lender claims), financial advisers, Ingenious entities and related individuals in connection with film financing schemes which were successfully challenged by HMRC and resulted in the claimants suffering loss.
Allegation that lenders vicariously liable for IFA advice
The alleged grounds for the lender claims were that the scheme was sold to the claimants as a single investment proposition consisting of a loan (provided by the lenders) packaged with an investment into the relevant scheme, advice on which was provided by Formation Asset Management Ltd (Formation), an insolvent firm of independent financial advisers (presumably lacking insurance cover for the claims). The effect of this, according to the claimants, was that the lenders owed them duties in contract and tort (which were breached) and were vicariously liable for the advice given by Formation.
Lenders not vicariously liable
In deciding the application, Nugee J had little difficulty in determining the issues in favour of the lenders for the following reasons:
Breach of contract
Although the claimants asserted that there was an implied term to the effect that the lenders would not provide loan finance to investors or allow a loan to be packaged with an investment product unless it was suitable for that investor having regard to their financial position, needs, objectives and attitude to risk (the suitability terms), there was no pleaded basis for the existence of any wider contract over and above the provision of banking services and the loan and no evidence that the investors had entered into such wider contract, let alone any pleaded basis for the suitability terms to be implied into any such contract.
Tortious duty of care
In asserting that the lenders had assumed a responsibility to provide advice to the claimants in line with the suitability terms, the claimants relied on the manner in which the lenders had participated in the arrangements, that is by packaging up the loans with the investments, to give rise to a duty of care. Nugee J rejected this approach and agreed with the lenders that the investors were required to demonstrate that: (i) the lenders had communicated to the investors that they were assuming responsibility for the tasks in question; and (ii) that the investors had relied on such communication, and that neither of these essential constituents of a valid cause of action were pleaded by the investors with the effect that the Court was effectively being asked to find an assumption of responsibility in the abstract, a concept with which Nugee J had great difficulty.
The Cox test
The issue was whether Formation (which undoubtedly gave advice to the claimants on the relevant schemes) was doing so on behalf of the lenders. In applying the test derived from Cox v Ministry of Justice (the Cox test) Nugee J found that, although there was a close commercial relationship between the lenders and Formation for their mutual benefit and that the schemes were presented to the investors as a single package, that "did not amount to an arguable case that when Formation gave advice to its clients to invest in the Ingenious schemes it was doing so as an integral part of the Bank's business activities, or as anything other than as part of its own activities as an IFA".
It being arguable whether the Cox test applies to cases of vicarious liability on the basis of agency (as opposed to employment), Nugee J, in then applying traditional agency analysis, found that there was nothing to suggest that the lenders had either authorised Formation to act as their representative to give advice on their behalf, or that they had held Formation out as authorised to do so.
In the light of Nugee J's judgment, the lender claims do appear to have been ambitious and were presumably pursued because Formation lacked the assets to meet any judgment against it as the adviser. However, the judgment does provide a useful reminder of some of the key duty of care and vicarious liability principles in a financial services context.
Frederick v Positive Solutions (Financial Services) Ltd
The Cox test referred to above was considered in Frederick v Positive Solutions (Financial Services) Ltd which concerned the fraudulent acts of an agent and whether the principal, Positive Solutions (Financial Services) Ltd (Positive Solutions), a firm of financial advisers, was vicariously liable for such acts. The Master hearing the initial summary judgment application gave judgment for the claimants on the issue, which decision was overturned on appeal by HHJ Dight. That decision was appealed by the claimants to the Court of Appeal.
The agent was an individual named Luke Warren who was engaged in a property development business with one Mr Qureshi, a friend of one of the claimants. Mr Warren had an Agency Agreement with Positive Solutions (as a Registered Individual rather than an Appointed Representative) which allowed him access to an online lending portal. Mr Qureshi introduced Mr Warren to the claimants (who were members of the same family) as a mortgage broker who could arrange re-mortgages of the claimants' properties to enable them to raise funds to invest in a property investment opportunity managed by Mr Warren and Mr Qureshi. The claimants apparently ascertained from the FSA Register that Mr Warren was a registered adviser with Positive Solutions and took comfort from that.
No advice was provided by Mr Warren to the claimants; indeed, an unusual feature of the case is that the claimants had no contact at all with Mr Warren, and the claimants' only communication was with Mr Qureshi. Mr Qureshi had no connection with Positive Solutions. Having arranged the re-mortgages via the portal, based on false information submitted by Mr Warren without the claimants' knowledge, the claimants invested the remaining funds (their existing mortgages having been discharged) in the property investment only for it to be misappropriated by Mr Warren. Although a commission payment was automatically transferred from the lender to Positive Solutions, Positive Solutions placed the monies in a suspense account (not being able to allocate it to a known transaction) and only later released it to Mr Warren having been misled by Mr Warren into believing it related to a separate transaction.
Court of Appeal decision
In upholding the decision of the judge, the Court of Appeal (in the leading judgment of Flaux LJ) found that:
- Mr Warren was clearly "moonlighting" or on "a frolic of his own" and, significantly, there were no factors connecting the transaction to Positive Solutions save for the use of the online portal and the payment of the automatically generated commission to Positive Solutions (which did not assist the claimants in any event since Positive Solutions had allocated it to a suspense account).
- The fact that Positive Solutions gave Mr Warren the opportunity of committing the fraud by affording him access to the portal was not sufficient to give rise to vicarious liability, absent any holding out of Mr Warren by Positive Solutions as having authority to act for it.
- To the extent the Cox test was applicable, it was not met in that the dishonest activities of Mr Warren were not an integral part of the business of Positive Solutions and were, rather, undertaken in the context of a recognisably independent business of his own ie the property development scheme.
- Not all of the acts necessary to make Mr Warren personally liable in tort took place within the scope of the alleged agency (for example the claimants were induced to make the investments by Mr Qureshi who was never an employee or agent of Positive Solutions), which the Court accepted was necessary for vicarious liability to be established (as per Credit Lyonnais v Export Credits  1 AC 486 and Dubai Aluminium v Salaam  2 AC 366).
The findings set out above were considered by the Court to be consistent with the decision in Cox, assuming it applied, although the Court left open the question of whether the decision in Cox (which was concerned with employment rather than agency) represents a "unitary modern law of vicarious liability applicable in all cases" (as submitted by the claimants) or whether reliance based torts such as deceit or misrepresentation committed by an agent are in a distinct category from the Cox line of cases so that the principal cannot be vicariously liable unless the agent had actual or ostensible authority.
What is on the horizon for 2020?
Although the Court of Appeal's decision in Frederick was appealed to the Supreme Court and heard in February 2019, the Supreme Court has yet to hand down its judgment and it is unclear whether 2020 will bring a judgment (which would be welcomed) or whether the appeal settled prior to the judgment. Either way, given the unanswered questions in Frederick we can expect further developments in this area of law whether in 2020 or subsequently.
  EWHC 3299 Ch
 UKSC 2018/0067
 Although the Master hearing the initial summary judgment application gave judgment for the claimants on the issue, the Master's decision was overturned on appeal by HHJ Dight