Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 131
A470/07	OPINION OF LORD BRAILSFORD in the cause PROFESSIONAL FINANCIAL SERVICES Pursuer; against FIONA DICK t/a THE HEATHFIELD PARTNERSHIP Defender: ­­­­­­­­­­­­­­­­­________________

Pursuer: Balfour + Manson LLP

Defender: Maclay Murray & Spens

24 September 2010

[1] In this action the pursuer sues the defender for damages for alleged breach of contract. The pursuers are a firm of independent financial advisors. The defender is an independent financial advisor. In November 1998 the defender's name was entered onto a Register of Individuals maintained by the Personal Investment Authority (hereinafter referred to as "PIA"). That registration was instituted and obtained by the pursuers with the defenders' consent. Subsequently by a contract dated 5 January 1999 the pursuers and the defender entered into a contract entitled an "Appointed Representative Agreement". A copy of that contract was incorporated into the pleadings. In essence this contract enabled the defender to become an authorised representative of the pursuers and to offer financial advice to clients and, on the basis of that advice, to sell financial products to such clients. Acting in this capacity in early 2000 the defender provided independent financial advice to a married couple named Mr and Mrs Anderson. On the basis of this advice Mr and Mrs Anderson invested a sum of money in an investment vehicle recommended by the defender. The advice tendered by the defender subsequently proved to have been incorrect and negligently given. As a result of this the couple lost money. In about November 2004 the couple made a complaint regarding the investment advice given by the defender in 2000 to the Financial Ombudsman Service. In May 2006 the couples complaint was upheld and in July 2006 the Ombudsman ordered that financial redress should be made to the couple. There is no dispute that the financial redress owed to the couple was paid by the pursuers. This payment was made by the pursuers in implementation of obligations incumbent upon them under and in terms of the aforesaid contract entered into between them and the defender in January 1999. The pursuers maintained professional indemnity insurance to cover such losses. The sum owed to the couple in terms of the Ombudsman's award was however within the excess on that policy and therefore a direct financial loss to the pursuers was occasioned. The sums which the pursuers seek to recover by way of damages from the defender in the present action represent the loss that they suffered.

[2] The case called for discussion on the Procedure Roll on the defenders first plea-in-law, a general plea to the relevancy of the pursuer's averments.

[3] The defender's submission was that it was an implied term of the said contract between the pursuers and the defender that the pursuers would effect and maintain professional indemnity insurance cover against a risk of liability to clients arising from the negligent acts or omissions of the defender in the course of an appointment as the "Pursuers Appointed Representative". It was further submitted that in the event of the pursuer sustaining a loss as a result of such an insured risk the pursuers were entitled to seek to recoup their loss only from such professional indemnity insurance with no further claim lying against the defender. In support of this submission my attention was drawn to averments of the pursuers in Articles 2, 3 and 7 of condescendence. I was reminded by counsel for the defender before he embarked on an examination of the pleadings that at this stage in the proceedings I was obliged to accept the pursuers averments pro veritate. In Article 2 of condescendence the pursuers narrated that, as already mentioned, they entered into a contract with the defender termed an "Appointed Representative Agreement" on 5 January 1999. A copy of that contract was produced and incorporated into the pleadings. Clauses 2 and 17 of the Agreement were narrated ad longam in the pleadings and are in the following terms:

"2. The representative will be required to act as an Independent Financial Advisor and agrees to be bound by the Rules of the Personal Investment Authority (PIA) as outlined in the Company's Compliance manual as updated from time to time.

17.             The representative agrees that any rules that are incumbent on an Appointed Representative by the PIA, are deemed to be incorporated in this agreement and that these Rules may be changed from time to time by the regulator, and the changed rules are deemed incorporated in the agreement."

[4] My attention was also drawn to averments in Answer 2. In drawing my attention to these averments counsel noted that the Procedure Roll debate was concerned with the pursuers pleadings. He submitted however that the averments he referred to in Answer 2 were not denied in the pursuers pleadings. As a matter of general pleading practice averments which are not denied are deemed to be admitted. It was therefore legitimate to have regard to these averments by the defender in the debate. Counsel for the pursuers did not demur from this submission. The relevant averments in Answer 2 to which my attention were drawn were in the following terms:

"As at November 1998 and the time when the parties entered into a Appointed Representative Agreement, in terms of the Rules of the PIA in order for a person to work as an independent financial advisor it was necessary that they either enter into a contract to become a Appointed Representative of a firm authorised by the PIA or that they obtain authorisation themselves from the PIA. In terms of the agreement, in return for the Pursuers being entitled to part of the commission earned by her, the pursuers were to ensure that requirements were met for her to be able to work as an independent financial advisor. This required that they complied with regulatory requirements in respect of themselves and in respect of her. In terms of the PIA rules hereinafter condescended upon, the firm required to obtain insurance cover for the activities of the firm including its appointed representatives."

[5] My attention was then drawn to averments in Article 7 of condescendence where some further elucidation in relation to the issue of professional indemnity insurance was averred as follows:

"With reference to the defenders averments in answer, admitted that the pursuers maintained professional indemnity insurance under explanation that the claim by the Andersons fell well below the excess level in the policy so the pursuers did not have any indemnity in respect of this claim. Admitted that the defender paid a percentage of her commission to the pursuers. Admitted that the percentage of her commission paid to the pursuers was used to partly contribute to the cost of professional indemnity insurance as well as other administrative and compliance costs."

[6] On the basis of these pleadings the defender submitted that it was an implied term of the contract between the pursuers and the defender that the pursuers would effect and maintain professional indemnity insurance against inter alia the risk of liability to clients arising from the negligent acts or omissions of the defender in the course of an appointment as the pursuers Appointed Representative and that such insurance would comply with the then applicable PIA rules. It was further said to be an implied term of the contract that in the event of the pursuer sustaining a loss as a result of such insured risk, the pursuers were entitled to seek to recoup their loss only from such professional indemnity insurance with no further claim against the defender. It was submitted that since in the passages of the pleadings I have referred to there were admissions by the pursuers as to the existence of the contract and the incorporation into that contract of the PIA rules, including the obligation upon the pursuers to effect professional indemnity insurance, all the necessary facts to determine this issue were before the court and that there was no need for proof of any further matters. It was therefore open to the court at this stage to hold the implied term contended for as a term of the contract.

[7] Following this excursus through the pleadings and their implications I was taken by counsel for the defender to what he submitted was the applicable law. This was said to rest on a decision of the English Court of Appeal in Mark Rolands Limited v Bernie Inns Limited [1985] 3WLR 964 and the decision of the Second Division in Barras v Hamilton 1994 SC 554. In Mark Rolands Limited (supra) the plaintiff was the owner of a building part of which had been leased to the defendant. The defendant had covenanted, inter alia, to pay to the plaintiff an insurance rent equal to the amount expended by the plaintiff in insuring the basement, that being a fair proportion of the premiums paid by the plaintiff to insure the whole building against loss and damage. The plaintiff covenanted to keep the whole building insured. The defendant paid the insurance rent and the plaintiff insured the building. The whole building was destroyed by a fire caused by the defendant's negligence. The insurer paid the plaintiff in terms of the policy and brought an action in the plantiff's name against the defendant seeking to recover as damages for negligence the sum paid out to the plaintiff. In the Court of Appeal it was held that the plaintiff's leasehold covenant to insure against fire, which necessarily covered fire caused either by accident or by negligence, indicated that it had been the intention of the parties to the convenant that in the event of damage to the building by fire, whether due by accident or negligence, the plaintiff's loss was to be recouped from the insurance monies, and that in the event it was to have no further claim against the defendant for damages in negligence. That decision was based upon consideration of the law as developed in a series of Canadian cases all quoted in the judgment of Kerr L.J. He accepted the line of reasoning in those cases and expressed the applicable principle in the following terms:

"An essential feature of insurance against fire is that it covers fires caused by accident as well as by negligence. This was what the plaintiff agreed to provide in consideration of, inter alia, the insurance rent paid by the defendant. The intention of the parties, sensibly construed, must therefore have been that in the event of damage by fire, whether due to accident or negligence, the landlord's loss was to be recouped from the insurance monies and that in that event they were to have no further claim against the tenant for damages in negligence. Another way of reaching the same conclusion, on which Mr Harvey also relied, is that in situations such as the present the tenant is entitled to say that the landlord has been fully indemnified in the manner envisaged by the provisions of the lease and that he cannot therefore recover damages from the tenant in addition, so as to provide himself with what would in effect be a double indemnity."

[8] The ratio thus expressed was followed in Scotland by the Second Division in the case of Barras (supra) (see the Lord Justice Clerk (Ross) at 551F). The present case was said to be on all fours with Barras (supra) and therefore the aforesaid principle was submitted to be binding upon me.

[9] Having regard to all these factors the submission before me was that there being insurance cover in place to cover the eventuality of a claim arising out of the defenders negligence the intention of the parties was that there was to be no further recourse against the defender. On this basis there was a fundamental irrelevancy in the case presented by the pursuer. The defenders first plea-in-law should therefore be upheld and the action dismissed.

[10] In response to these submissions counsel for the pursuer maintained that, at the very least, it was too early to uphold the defenders plea. His position was that the implied term contended for was not a matter of admission and therefore the court would be going too far too soon in adhering to the defenders motion. Beyond that he sought to distinguish the case of Barras (supra) from the present case. He submitted that the ratio in Barras (supra) was not as wide as that contended for by counsel for the defenders. Whilst Barras was a decision following a Procedure Roll discussion the implied term in that case was a matter of admission by the pursuers. That was distinguishable from the present case where, as aforesaid, counsel maintained there was no admission as to the terms of the implied term. Counsel further sought to narrow the ratio of Barras by submitting that it applied only to situations such as landlord and tenant or maters directly analogous thereto. In that regard my attention was drawn to the case of Lister v Romford Ice and Cold Storage Company [1957] A.C. 556. In that case a lorry driver was employed by a company and took his father with him as his mate. Whilst reversing the lorry the driver injured his father who recovered damages from the company in respect of the driver's negligent act. The company then brought an action against the driver claiming that as joint tortfeasor they were entitled to a contribution from him. By a majority the House of Lords held that the company was entitled to recover from the driver damages for breach of that contractual obligation and that there was no implied term in the contract of service that the driver was entitled to be indemnified by the company, his employer, either if the company was in fact insured or was required by the Road Traffic Act 1930 to be insured. It was submitted by the pursuers in the present case that the case of Romford (supra) was a closer analogy to the facts of the instant case than were the cases of Mark Rollands Limited (supra) and Barras (supra). This was said to arise out of consideration of the fact that the regulatory regime under the PIA was closer in its purpose and intent to the statutory regime of compulsory insurance under the Road Traffic Act than the situation in relation to landlord and tenant and other mutual contracts which were purely of a private nature. Having regard to all these factors counsel submitted that the appropriate course was to allow a proof before answer.

[11] In determining this matter I would firstly observe that the underlying factual nexus appears to be clear and is not the subject of dispute between the parties. The pursuers and defenders entered into a contractual arrangement, the purpose of which was, no doubt, intended to be mutually financially beneficial. I accept that the instant cause of entering into such a contractual arrangement was the need by both parties to comply with a regulatory regime but that feature does not, in my view, distinguish the case from the cases of other mutual contracts in any meaningful way. It further seems clear to me that the terms of both the contract between the pursuers and the defender and the regulatory regime they were subject to have been admitted in the pleadings, in the manner described by counsel for the defenders, and I am therefore entitled to have regard to the terms of both the contract and, so far as applicable, the regulatory regime. That being so I consider that it is open for me to determine whether or not an implied term of the sort contended for by the defenders was in fact operative in this case. Having considered the terms of the contract, the regulatory regime and the surrounding circumstances I am of the view that the implied terms contended for by the defenders did in fact exist. That being so I am satisfied that it was a matter of agreement between the defenders and the pursuers that the pursuers would affect and maintain professional indemnity insurance against the risk of liability to clients arising from the negligent acts or omissions of the defender whilst she was holding the appointment as the pursuers Appointed Representative.

[12] As I have already indicated I do not consider that the fact that the contract between the pursuers and defenders was entered into because of a need to comply with a regulatory regime constitutes a material distinguishing feature from similar circumstances which arise when the contract between persons was entered into in the absence of a regulatory regime. That being so I consider that the ratio in Barras (supra) is binding upon me. I consider the current case to be on all fours with that case. It follows that I consider the submissions of the defender to be well founded in this case.

[13] In the event I will uphold the defenders first plea-in-law and dismiss the action.