England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		19th July 2013

Sir Raymond Jack :

1. On 29 November 2011 the claimant, Charles Stanley & Co Limited, a stock broking and investment management company, entered an agreement settling a claim brought against it by the members of a family for the mismanagement of their investments. £375,000 was paid. The claimant recovered £275,000, the excess over £100,000, from its insurers but had to carry the first £100,000 itself. In this action it seeks to recover the £100,000 from Mr John Adams, a self-employed investment manager or broker, who managed the investments in question and others under his contract with the claimant.
2. The claimant's case is that its contract with Mr Adam provided that where the company suffered a loss in connection with a client managed by a self-employed broker, the broker might be liable for the loss. The contract provided a scheme for the determination of his liability. In a case of dispute it was first to be determined by a Determination Committee made up of officers of the claimant, one of whom must also be a director of Charles Stanley Group plc. There might then be an appeal to a Determination Appeals Committee made up of three directors of the claimant, one of whom must also be a director of the plc. Directors who had sat on the Determination Committee were excluded. The claimant's case is that this procedure had been followed resulting in a holding by the Appeals Committee that Mr Adams should be liable for the £100,000. This sum is claimed as a debt due pursuant to the contractual process. It is not claimed as damages for breach of Mr Adams' duty to exercise his function under his contract with due skill and care. I do not have to determine whether there was such a breach. The essence of the family's case, however, was that the portfolios were too heavily invested in high risk small companies when the chosen risk rating for the portfolios was 'moderate'.
3. During his evidence Mr Adams accepted that the terms relied on by the claimant were part of his contract with them. He also accepted that the procedure had been correctly followed. He was undoubtedly right to do so. There was at one point a question as to the Appeals Committee having met when Mr Adams was unable to attend through illness: but in a letter he had asked them to look at a statement and at the correspondence, and to decide on the basis of them. Mr Adams wished to contest the finding of the Appeals Committee on the ground that he had not mismanaged the portfolios. But if the contract terms were binding, this was not open to him.
4. It had seemed to me on first reading the papers that there might be a question whether the procedure which I have outlined ousted the jurisdiction of the court and so was unenforceable as contrary to public policy. As Mr Adams was unrepresented I raised this with Mr Robinson, counsel for the claimant, so he might deal with it. On considering this aspect further it seemed that the point was better put in terms of the claimant being judge in its own cause in deciding what loss a broker should bear, and whether the procedure was therefore unenforceable. At the start of the trial I heard Mr Robinson's submissions. I then asked Mr Adams whether he had understood the point. He replied that he had. I told him that I had no concluded view on it and warned him as to the cost risks. I asked him if he wished to take it up, and he said that he did. As the trial proceeded, it became the sole point requiring determination.
5. The Claimant's compliance manual was part of Mr Adams' contract. It was amended from time to time. I will use the version issued in February 2009. The relevant provisions were unchanged in the version dated June 2011. Section 3 is headed as 'applicable to self-employed persons only'. Paragraph 3.1 is headed 'Brokers Personal Liability'. It provides:

"Fundamental to the Contract for Services of all self employed Brokers engaged by the Company is the understanding and acceptance that they share in the income they generate on their clients and may, in some circumstances, have personal financial liability for losses arising from those clients. While the Company may have professional indemnity insurance to cover certain losses, such insurance shall be invoked by the Company at its absolute discretion. Where any such claim is made by the Company under its policy, then it shall not look for recovery of the same from the Broker, although the Broker may still be liable for any excess under the policy."

The background to this is that a self-employed broker has a substantial share of commissions earned on his clients, which in Mr Adams' case was 40%.

6. Paragraph 3.1.1 is headed 'Liability for Losses and Error Profits'. It states:

"This procedure applies to all losses being borne by the Company or those profits accruing to the Company from errors made by anyone (whether inside or outside the Company). A non-exhaustive list includes:

bad debts,

booking errors,

dealing errors,

loss of securities,

putting right unsuitable investment advice or management,

mistakes/misunderstandings by the client which the Company puts right,

registrars' or CREST errors,

admin/back office errors,

other liabilities of clients (e.g. …)

compensation paid by the Company (whether or not ordered by the Financial Ombudsman Service, the FSA or any other authority) and any associated fees and charges,

……….."

7. Thus a broker is not to be liable simply for losses which arose from his breach of duty, but he is to be at risk of bearing or sharing a loss arising in connection with a client however the loss arose. This is the quid pro quo for his sharing in the profits.
8. Paragraph 3.1.2 provides first for the reporting of situations which might give rise to a loss. It then states:

threshold: Profits and losses up to £200 will be divided 50:50. These will not be subject to the Determination Procedure set out below.

Determination Procedure Principles: The objective of the procedure is to allocate liability for losses and error profits which exceed £200 as reasonably as possible amongst the parties responsible for them. For example, where it can be clearly ascertained that a loss has been incurred by an error made by a Broker alone, it will be allocated 100% to the Broker, and vice versa when it is a General Office or Dealing Room error. In many cases there will be a conflict of evidence, or a genuine misunderstanding (say between a Broker and the Dealers) or it is caused entirely externally, and the loss will be allocated 50:50. In other cases an assessment may be made of the degrees of responsibility on each side, with the loss shared accordingly, e.g. one-third/two-thirds.

…… The degree of care which you exercise may be a factor in any assessment. In relation to bad debts, each case will be considered on its own merit. However the Company would expect that the liability would be as follows:

50% if the Company's credit rules are complied with,

100% if not complied with.

……."

9. Paragraph 3.1.3 is headed 'Procedure'. It provides for losses in excess of £200 to be detailed in a written notice. It provides for comments by the broker, for discussion with the broker, followed by a determination by the company. If the broker disputes the determination, the written notice is to be submitted to a Determinations Committee. The broker may submit further evidence and attend to argue his case, and call others to put their view.
10. Paragraph 3.1.4 is headed 'Appeals'. The appeal is to be a full rehearing by a Determination Appeals Committee. The broker must attend to argue his case. The broker and the committee may call witnesses. The broker may bring a colleague with him to assist him and to speak. The decision of the Appeals Committee is final, subject to the 'final authority of the Charles Stanley & Co Board'.
11. In summary these provisions of the contract provide that the broker may be liable in whole or part for any loss incurred by the claimant in connection with a client managed by the self-employed broker, they provide guidance as to how the question of that liability should be approached, and they set out a process for the determination of the liability in the particular case. They do not deal with the question whether the broker is liable for the loss as damage suffered by the claimant resulting from breach of the broker's duty to the claimant.
12. Provisions broadly to the effect of February 2009 provisions were first introduced on 1 June 1998. It was stated in the 1998 provisions that prior to their introduction the rule had been that every loss was split 50:50 between the claimant and the broker. It was said that this had worked successfully by avoiding complications and disputes, but had come under increasing scrutiny as the business grew and became more complex, particularly where the broker considered himself blameless. So a more sophisticated system was being introduced. Under the old system the broker would simply have been liable for half the loss. That would be a debt due from him to the company. The replacement system provides for the appropriate allocation of loss to be determined, which then becomes a debt due from the broker. The possible problem is that the determination is being made by the claimant as to allocate the loss between the broker and the claimant. It may therefore be said that the Determination Committee and the Appeals Committee are judges in their own cause.
13. My starting point is the well-known passage in the judgment of Denning L.J. in Lee v Showmen's Guild of Great Britain [1952] 2 QB 329 at 342:

"Although the jurisdiction of a domestic tribunal is founded on contract, express or implied, nevertheless the parties are not free to make any contract they like. There are important limitations imposed by public policy. The tribunal must, for instance, observe the principles of natural justice. …..Another limitation arises out of the well-known principle that parties cannot by contract oust the jurisdiction of the court…. . They can, of course, agree to leave questions of law, as well as questions of fact, to the decision of the domestic tribunal. They can, indeed, make the tribunal the final arbiter on questions of fact, but they cannot make it the final arbiter on questions of law."

14. Mr Robinson cited three authorities which involved situations where the parties to a contract had given a power of determination to one of them. In West of England Shipowners Mutual Insurance Association v Cristal Ltd [1996] CLC 240 the contract in question was set up to provide compensation for oil pollution losses. It was between oil companies who contributed to the fund and its administrators, Cristal. It provided that Cristal was to 'be the sole judge in accordance with these terms of the validity of any claim made hereunder'. The claimant association made a claim which Cristal rejected. It was accepted that the association was to be treated as a party to the contract. The main argument was as to ouster of jurisdiction, which argument the Court of Appeal rejected. It was not argued that the fact of Crystal being the sole judge vitiated the agreement. In the course of his judgment Neill LJ stated at page 251:

"… it does not seem to me that any question arises as to the ouster of the jurisdiction of the court. The court clearly has a role to play. The problem is to define the extent of that role.

I see the force of the submission that it is unusual for one party to a contract to be constituted the sole arbiter of the validity of any claim made against it. There is therefore attraction in the argument that the determination under cl.IX is merely, …, a first stage determination….. . I have come to the conclusion, however, that this argument must be rejected."

So the court was not concerned in the circumstances there by the fact that the contract made Cristal judge in its own cause.

15. The second case was Brown v GIO Insurance Ltd [1998] CLC 650. This was part of the Lloyds litigation and it concerned a reinsurance contact which provided for an excess and limit of liability to be calculated on the basis of 'each and every loss and/or series of losses arising out of one event.' It provided 'The Reassured shall be the sole judge as to what constitutes each and every loss and/or one event'. In the course of his judgment Chadwick LJ stated:

"The real question, as it seems to me, is not whether the parties intended that the plaintiff should be left to decide these matters; but whether that is a bargain which the law permits them to make. I start from the position that the courts should be slow to strike down a sensible commercial bargain, made between parties experienced in their field, unless there is some clearly identifiable element of public policy which requires that to be done.

I am satisfied that there is no rule of public policy which prevents parties from agreeing to submit to the final and conclusive decision of a third party some issue which involves questions of construction or of mixed fact and law. … .

It is necessary, therefore, to go on to consider whether different considerations must apply where the effect of their bargain is that the parties have sought to entrust the decision to one or other of themselves rather than to an independent expert. I can see no reason, in principle, why a different approach is required.

It is, of course, necessary to keep in mind that there are some questions of law which it would be repugnant to the very existence of a legally enforceable contract to leave to the exclusive determination of one party. An obvious example would be a decision as to the existence or otherwise of contractual liability in given circumstances. It must also be kept in mind that in many, if not most, situations it will be inherently unlikely that one party will intend to leave a question of law to be decided by the other party. Further an agreement wholly to oust the jurisdiction of the courts is against public policy and is void. But I can see no objection in principle to a bargain in which one party is left to decide (i) what the facts are in relation to some matter which is to arise in the future and which is plainly intended to have some contractual consequence under a provision of the agreement which they have made and (ii) whether or not that combination of facts does fall within that provision. The jurisdiction of the court is not ousted in those circumstances; provided that the agreement which the parties have reached on that matter allows the court to interfere if the decision-making party has acted unreasonably, perversely or in bad faith. It seems to me that the court will be ready (in the absence of express words to the contrary) to construe the agreement, if necessary by implying an appropriate term, so as to impose on the decision-making party an obligation to act reasonably and in good faith. An agreement which did not permit of such a construction would, I think, be void; but that is not an issue in the present case."

16. The third case was Skidmore v Dartford & Gravesend NHS Trust [2003] ICR 721, [2003] UKHL. This was concerned with the right of an NHS trust to decide whether allegations against a surgeon concerned 'personal' or 'professional' misconduct and thereby to determine which of two disciplinary procedures was applicable. It was held that in doing so the trust must comply with the terms of the contract, and that, if it did not, the usual remedies for breach of contract would arise. It was held that in Mr Skidmore's case the trust had misconstrued the relevant provisions and selected the wrong procedure. In the course of his opinion, with which the rest of the House agreed, Lord Steyn stated:

"The likelihood is that the judge [Lightman J in two other cases] had in mind decided cases where the court interpreted a contractual term dependent on the exercise of the will of one party as by implication restricted to a decision taken in good faith and on reasonable grounds, e.g. a clause entrusting a decision as to the adequacy of performance to the absolute discretion of one party. The foundation of such an implication is to satisfy the reasonable expectations of the parties."

Lord Steyn referred to the West of England Shipowners and Brown cases cited above as examples.

17. These cases show that there is no intrinsic bar to the parties to a contract giving a power to one of them to determine something which affects their rights. It is, of course, a very different situation to that where contract provides for a tribunal to determine disputes between the parties, which tribunal is to be independent of the parties, and later a question of bias arises relating to the tribunal. These cases show that the court will intervene when an express term of the contract has not been complied with by the decision-maker, or where an implied term such as to act reasonably and in good faith has not been met. The jurisdiction of the court is not ousted.
18. The intention here was first to provide that a broker should be at risk of bearing or contributing to a loss incurred by the company in connection with one of his clients, and second to provide a procedure for deciding how such a loss was to be borne as between the company and a broker. The procedure was to be quick and cheap, avoiding long and expensive disputes. It included an outline of the principles which were to be followed. It had provisions to ensure fairness to the broker. It was something which the self-employed brokers had accepted as part of their contracts. (As to that, it might be said that they may have had little choice, because the only alternative was to leave. However, the criticism by brokers of the old 50:50 rule led to the introduction of the new scheme which has been modified and improved from version to version. So to say that it was something that was imposed on the brokers gives an incomplete picture. But, even if that were not so, the crucial point that the provisions are part of the contract remains). I do not find that the contractual powers given to the Determination Committee and the Determination Appeals Committee offend against public policy. There is no reason to hold them void.
19. In reaching that conclusion I am conscious that I have only heard argument from one side. For Mr Adams did not address me as to the law.
20. There will therefore be judgment for the claimant in the sum of £100,000 less the commission of £6,775.40 which has been withheld from Mr Adams and which it is accepted is due to him.