Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2017] CSOH 16

 

CA211/15

OPINION OF LORD TYRE

In the cause

ROBERT GORDON KIDD

Pursuer

against

(FIRST) PAULL & WILLIAMSONS LLP and

(SECOND) BURNESS PAULL LLP

Defenders

Pursuer:  A Smith QC, J Brown;  Levy & McRae

Defender:  RW Dunlop QC, Paterson, Fordyce;  BTO Solicitors LLP

3 February 2017

Introduction
[1]        The pursuer was until September 2009 the owner of the whole share capital of a company incorporated in Scotland called ITS Tubular Services (Holdings) Limited (“ITS”).  The business of ITS consisted of the provision, at various locations worldwide, of downhole tools and drilling equipment to the oil industry, together with ancillary services.  The first defender is a limited liability partnership incorporated on 24 February 2009 to carry on the business formerly conducted in Aberdeen and elsewhere by the firm of solicitors known as Paull & Williamsons (“P&W”).  The second defender was created in December 2012 by a merger of Burness LLP and the first defender. 

[2]        The pursuer is a former client of P&W and, subsequently, of the first defender.  In this action he sues the defenders jointly and severally for the sum of $210 million in respect of loss and damage which he claims to have sustained as a consequence of the sale in September 2009 of part of his interest in ITS.  The loss and damage is said to have been caused by the first defender’s breach of contract, fault and negligence, breach of fiduciary duty and fraudulent misrepresentation.  At the end of a debate which took place between 13 and 16 December 2016, the pursuer moved for summary decree in respect of his case based on breach of fiduciary duty and on fraudulent misrepresentation, and the defenders moved for dismissal of the action.

 

Factual Background:  The Sale of ITS
[3]        The pleadings of both parties are lengthy and complex.  They cover much ground which it is unnecessary to narrate in detail for the purposes of the present opinion.  What follows is a summary of relevant factual matters pled by the pursuer which are either admitted by the defenders or which do not appear to be seriously in dispute.  Until about October 2007, the pursuer was in full time executive control of ITS and its subsidiaries.  In 2007 he wished to step back from management and to pursue a sale of his interest in ITS.  He decided to appoint a new executive director or directors with a view to making the business attractive to potential purchasers.  Mr Jeff Corray was a partner in KPMG in Aberdeen who specialised in corporate finance.  He was a professional adviser to ITS and familiar with its business.  Following discussions with the pursuer, Mr Corray accepted appointment as a director and CEO of ITS, with effect from 1 October 2007.  The pursuer subsequently acceded to a recommendation by Mr Corray that Mr Scott Milne, a director at KPMG in Aberdeen, also be appointed as a director of ITS, with responsibility for corporate development.  The pursuer’s involvement in executive management thereafter reduced. 

[4]        With the pursuer’s authority, Mr Corray began to attempt to identify a potential purchaser of ITS.  The pursuer envisaged that he would personally receive a sum of around $50 million, with an equivalent sum being invested in the company, in return for which the investor would acquire around a one-third interest.  Such a potential investor would probably be a private equity fund looking to achieve growth in the value of the business with a view to realisation of its investment at a profit within a period of five years or less, probably by a sale of the entire business or an initial public offering.  By February 2008 an expression of interest had been received from 3i Investments plc.  P&W were instructed by Messrs Corray and Milne to act as solicitors in connection with the proposed sale of some of the pursuer’s shares in ITS and the investment of funds by 3i.  The P&W partner primarily responsible for carrying out these instructions was Mr Scott Allan.  Mr Corray also appointed Messrs Simmons & Co (“Simmons”), a firm of investment bankers, to advise on the corporate finance aspects of a deal. 

[5]        The proposed transaction with 3i fell through.  In about September 2008, Messrs Corray and Milne instructed Simmons to expose a minority interest in ITS to the private equity market.  The indicative terms provided by Simmons to prospective investors were a total equity investment of $100 to $150 million, including payment of a minimum of $50 million to the pursuer, in exchange for a minority stake in ITS.  Proposals were received in October 2008 from Lloyds TSB Development Capital Limited (“LDC”), TA Associates Limited (“TA”), and Lime Rock Partners (“Lime Rock”).  The proposals differed significantly in their terms.  LDC’s offer was to invest $125 million including a payment of $50 million to the pursuer, leaving 76% of ordinary equity in the hands of the pursuer and/or the executive directors.  TA’s offer was to invest $130 million, including $55 million to the pursuer, in exchange for a 34.5% interest in ITS.  Lime Rock’s initial offer was for payment of $5 million to the pursuer and a further investment of $45 million into the company, in exchange for a 27.5% interest.  None of those proposals was a firm offer capable of acceptance. 

[6]        Negotiations were conducted with the three interested parties.  According to averments by the defenders which are not admitted by the pursuer, those negotiations encountered difficulties because of the global financial crisis and the consequent decline in oil prices.  In December 2008, both LDC and TA indicated that they were unable to put forward firm investment proposals.  A revised indicative proposal was submitted by Lime Rock in January 2009 and negotiations between Mr Corray and Lime Rock continued.  A fresh indicative proposal was subsequently submitted by TA in June 2009, but shortly thereafter TA advised that they were not in a position to proceed with it. 

[7]        On 26 January 2009, a letter of engagement was sent by P&W to the pursuer and to ITS under Mr Allan’s reference, stating inter alia as follows:

“We refer to Scott Milne and Jeff Corray’s recent meetings with our Scott Allan and Ken Gordon.

 

We write to set out our understanding of our scope of work and secondly detailing our business terms for doing that work.  This letter sets out the terms upon which we will act for you and certain information which we are required to give you under Law Society of Scotland rules.  The attached Terms of Business apply except where they are inconsistent with the express terms of this letter.”

 

The scope of work, in summary, was the carrying out of a due diligence exercise and production of a report on ITS and its subsidiaries addressed to Lime Rock.  One of the Terms of Business annexed to the letter of engagement dealt with conflicts of interest: 

“9.1  Subject to certain exceptions, the practice rules of the Law Society of Scotland prevent us from acting for two or more clients whose interests conflict or potentially conflict.  If we believe we may be prevented from advising you or any Other Beneficiaries in connection with any matter as a result of such a conflict we shall advise you or any Other Beneficiaries of this as soon as the potential conflict is identified.  In those circumstances, we may require you or any Other Beneficiaries to seek independent legal advice elsewhere and may require to decline to undertake further work on your or any Other Beneficiary’s behalf.”

 

[8]        There are major factual issues between the parties as to the extent to which the pursuer was kept informed by Messrs Corray and Milne, and/or by Mr Allan, of the progress of negotiations and of the options from time to time available to him, and, consequently, whether he was enabled properly to understand the import of the transactions into which he was advised to, and did, enter.  These are not matters for determination in this opinion.  It is sufficient for present purposes to narrate that on 26 September 2009, agreements were entered into between the pursuer and others on the one hand and Lime Rock on the other.  These included:

(i)         a share purchase agreement between the pursuer and Lime Rock for the sale of 6,612 A ordinary shares in ITS for the sum of $10 million; 

(ii)        an investment agreement among ITS, the pursuer, Lime Rock, and Messrs Corray and Milne and another director, providing for: 

• subscription by Lime Rock of $45 million for 29,752 A ordinary shares in ITS;
• the grant of a right to Lime Rock to appoint and remove up to two directors of ITS; and
• prohibition of appointment of directors of ITS without Lime Rock’s consent, such consent not to be unreasonably withheld;

(iii)        amendment of the articles of association of ITS: 

• to confer upon Lime Rock’s shares a fixed cumulative preferential dividend at an annual rate of 10% of the issue price per share;
• to confer upon Lime Rock a first priority on return of capital on liquidation; and
• to remove the pursuer’s casting vote at board meetings.

 

Post-sale Events:  Pursuer’s Averments
[9]        According to the pursuer’s averments, ITS experienced financial difficulties in late 2012.  These, it is averred: 

“…were substantially caused by gross mismanagement of its affairs by its executive directors, including Messrs Corray and Milne.  The mismanagement included a complete failure effectively to manage the company’s cash flow…  The failure to manage cash receivable was compounded by excessive and unauthorised capital expenditure on plant and equipment, and by the expenditure of very substantial (and in many cases excessive and unnecessary) sums on professional fees”. 

 

This is said to have resulted in alleged breaches of ITS’s bank covenants.  The pursuer further avers that by this time Lime Rock, a US entity, wished to terminate its interest in ITS as soon as possible because of political difficulties caused by ITS subsidiaries’ trading in jurisdictions, including Iran, which were subject to US state department sanctions.  By letter dated 9 November 2012 Lime Rock gave notice that by virtue of the bank covenant breaches, a “trigger event” had occurred entitling Lime Rock to force a sale.  The pursuer attempted to appoint additional directors to the ITS board to address what he saw as the mismanagement of its affairs.  Lime Rock raised interdict proceedings and on 15 January 2013 this court suspended the appointments and interdicted the board from attempting to appoint any director without Lime Rock’s consent.  ITS went into administration on 19 April 2013.  Its business was sold as a going concern to a competitor.  The pursuer received nothing from the sale proceeds.

 

The Pursuer’s Case:  Breach of Contract and Negligence
[10]      The pursuer’s case, in so far as founded upon breach of contract and fault and negligence, is that the first defender, which assumed responsibility for provision of legal services to the pursuer from the date of transfer of P&W’s assets and liabilities in April 2009, failed to provide advice to and take instructions from the pursuer directly, but instead relied upon communication through the medium of persons whose interests conflicted with those of the pursuer.  It is averred that it was the first defender’s duty to inform the pursuer directly not only of the material terms of the transaction but also of their practical effect;  to ensure that he understood the transaction he was proposing to enter into and its foreseeable risks; to recognise that the persons purporting to issue instructions on behalf of the pursuer, namely Messrs Corray and Milne, had conflicting personal interests; and to report that to the pursuer.  It was or ought to have been obvious to Mr Allan that the pursuer’s interests diverged from inter alia those of Messrs Corray and Milne and those of ITS itself.  By failing to avoid acting in conflict of interest, the first defender was in breach of contract and negligent, and thereby caused the loss sustained by the pursuer.  If the pursuer had had the advice to which he was entitled, he would not have proceeded with the transaction with Lime Rock and would not have sustained the loss claimed.

 

The Pursuer’s Case:  Breach of Fiduciary Duty and Fraudulent Misrepresentation
[11]      The pursuer’s case, in so far as founded upon breach of fiduciary duty and fraudulent misrepresentation, has a somewhat different basis.  At the time when it made its indicative proposal with regard to purchase of shares in ITS, Lime Rock was an existing client of P&W.  The partner of P&W (and subsequently of the first defender) with primary responsibility for Lime Rock’s business was Mr Kenneth Gordon.  The pursuer avers that he was not informed by P&W or the first defender of its actings on behalf of Lime Rock, and that P&W and subsequently the first defender represented falsely that it was acting only for ITS and the pursuer.  Reference is made to the terms of the letter of engagement issued by P&W, referred to above.  Under reference to contemporaneous emails, the pursuer avers that in fact Mr Gordon had agreed to act as “unofficial counsel” to Lime Rock in connection with the ITS transaction, while having a solicitor from another firm “front” the negotiation. 

[12]      On the basis of this and other material, the pursuer avers that at all material times from commencement of Lime Rock’s interest, Mr Gordon was actively assisting and advising Lime Rock, including giving commercial advice on negotiation strategy and revising documentation for Lime Rock’s interest.  He did so covertly and arranged for Ledingham Chalmers, another firm, to be presented as Lime Rock’s advisers in order to convey the impression that Lime Rock were being appropriately and independently advised.  The pursuer further avers that Mr Allan was aware of Mr Gordon’s improper activity:  he (Mr Allan) provided information and forwarded documents to Mr Gordon on the basis that they would be reported to Lime Rock;  he asked Mr Gordon for Lime Rock’s position on certain matters; and he purported to negotiate certain matters with him.  In these circumstances, it is averred that P&W and the first defender were at all times from late 2008 in breach of their fiduciary duty both to the pursuer and to ITS.  The breaches were knowing and deliberate, and the representations to the pursuer that they were acting only for him and ITS were dishonest.  Had the first defender disclosed to the pursuer its improper actings on behalf of Lime Rock, it is averred that the pursuer would not have proceeded with the transaction, would have withdrawn the first defender’s instructions, and would have terminated the negotiation with Lime Rock.  He would thereafter have realised the full value of his interest in ITS instead of receiving only $10 million. 

[13]      In response, the defenders admit that Mr Gordon considered himself to be the “unofficial counsel” for Lime Rock in the due diligence exercise conducted by it;  that he passed various information and advice to Lime Rock;  and that he therefore placed the first defender in a position of conflict.  It is averred that Mr Allan was unaware of the role Mr Gordon perceived he was undertaking for Lime Rock or that Mr Gordon was communicating directly with Lime Rock during the transaction.  The defenders accept, however, that Mr Gordon’s actions caused a conflict of interest and admit for the purposes of the present action that the first defender was in breach of its fiduciary duty not to act in a position of conflict.  They do not accept that the first defender was guilty of dishonesty or that it is liable for intentional injury.  They aver that the letter of engagement was issued by Mr Allan who honestly believed in the truth of its content;  it was accordingly not dishonest.  They further aver that Mr Gordon acted out of a desire to continue to assist a longstanding client, and not with the intention of causing harm to the pursuer or to ITS. 

 

The Pursuer’s Motion for Summary Decree
[14]      The pursuer moved the court to grant partial summary decree by sustaining his first, second and third pleas in law to the extent of holding that there was no defence on the merits to the pursuer’s cases based on fraudulent misrepresentation and breach of fiduciary duty.  The defenders did not oppose the granting of partial summary decree in respect of breach of fiduciary duty but maintained that the case based on fraudulent misrepresentation was irrelevant.

 

Fraudulent Misrepresentation
Argument for the Pursuer
[15]      On behalf of the pursuer, the following propositions were advanced.

[16]      (i)  The first defender was liable for every legal wrong committed by its members in the course of its business, and an act of fraud on the part of a member was imputed to it. 

Limited liability partnerships were a statutory creation.  As section 1(5) of the Limited Liability Partnerships Act 2000 made clear, the law relating to partnerships did not apply to LLPs except as provided by the Act.  It followed that the incidence of liability of an LLP for the wrongdoing of a member was governed by the Act and not by analogy with the law of partnership.  Section 6(1) stated that every member of the LLP was its agent.  Section 6(4) stated that where a member of an LLP was liable to any person as a result of a wrongful act or omission of his in the course of the business of the LLP, the LLP was liable to the same extent as the member.  A fraudulent act by a member was accordingly a fraudulent act of the LLP.

[17]      (ii)  The acts and omissions of Mr Gordon and Mr Allan were carried out in the course of the business of the first defender. 

[18]      (iii)  Those acts and omissions were such as to amount to fraud.  Scots law had accepted the definition of fraud in Derry v Peek (1889) 14 App Cas 337 (Lord Herschell at 374), namely “when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false”.  A fraudulent misrepresentation might be express or implied from circumstances.  A firm of solicitors which expressly represented that it was acting for one contracting party impliedly represented that it was not acting for the other party.  Here the first defender contrived an arrangement designed to disguise the existence of the conflict of interest, repeatedly and falsely representing to the pursuer that it was acting only for him and ITS.  Moreover, in certain circumstances mere silence could amount to fraud.  Where there was a positive duty to speak, as there was in a fiduciary relationship between solicitor and client, failure to do so, if dishonest, will amount to fraud: Adams v R [1995] 1 WLR 52 (HL), Lord Jauncey of Tullichettle at 65.  The same conclusion would be reached by analysing the transaction as containing an implied representation of legitimacy or honesty.  It was equally clear that a fraudulent misrepresentation might arise from suppression of information, whether in whole or in part.

[19]      In the present case, it was clear from the emails produced that Mr Gordon had known that what he was doing was improper.  The whole arrangement was dishonest ab initio and remained so.  The practical consequence was that the pursuer, Mr Corray and ITS were prevented from learning the true nature of Mr Gordon’s advice to and actings on behalf of Lime Rock.  There was no room for a defence of mistaken but honestly held belief.  The defenders’ averments regarding Mr Gordon’s alleged motive were irrelevant.  Honesty was measured by an objective and not a personal standard:  cf Starglade Properties Ltd v Nash [2010] EWCA Civ 1314, Chancellor (Morritt) at paragraph 32.  As regards Mr Allan, the defenders’ averment that he was unaware that Mr Gordon was communicating directly with Lime Rock was demonstrably untrue.  The significance of the letter of engagement was that the court could readily infer that both Mr Allan and Mr Gordon were aware of its contents, constituting a specific written representation that they both knew to be untrue yet failed to correct.  It formed part of the dishonest pretence infecting the entirety of the engagement.

[20]      (iv)  Where fraudulent misrepresentation was established, it was presumed that the misrepresentation materially influenced the misrepresentee in the decision to enter into a contract.  The pursuer did not have to prove that his reliance on the representation was reasonable.  For the defenders to avoid liability, they would have to prove that the pursuer, knowing what he knew now, would have acted in the same way.  It was not open to them to speculate as to what different course of action he would have adopted:  Zurich Insurance Co plc v Hayward [2016] 3 WLR 637, Lord Clarke of Stone-cum-Ebony at paragraphs 36-38. 

[21]      (v)  An award of damages for fraud fell to be assessed in accordance with the causation test laid down in Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 and Smith New Court Securities Ltd v Citibank NA [1997] AC 254:  the proper measure was all the damage directly flowing from the fraudulent inducement that was not rendered too remote by the pursuer's own conduct, whether or not the loss was foreseeable by the defender.

[22]      (vi)  Any contractual limitation of liability in the defenders’ terms of engagement did not apply to a fraudulent misrepresentation.

[23]      (vii)  Contributory negligence was not a relevant defence to a case based on deceit, ie fraudulent misrepresentation.

[24]      In these circumstances, partial summary decree should be pronounced holding that there was no defence on the merits to the pursuer’s case based on fraudulent misrepresentation, with proof being restricted to quantification and causation of loss. 

 

Argument for the Defender
[25]      On behalf of the defender, it was accepted (i) that the test for causation in cases of fraudulent misrepresentation was as stated in Doyle v Olby (Ironmongers) Ltd (above);  and (ii) that the contractual limitation of liability did not apply to the case based on fraud.  It was nevertheless submitted that the case based on fraudulent misrepresentation was irrelevant.  The requirements for a case in fraud were set out in Bradford Third Equitable Benefit Building Society v Borders [1941] 2 All ER 205 (HL), Viscount Maugham at 211:  (1) there must be a representation of fact made by words or conduct;  (2) the representation must be made with the knowledge that it is false;  (3) it must be made with the intention that it should be acted upon by the pursuer, in the manner which resulted in damage to him, although it is immaterial that there was no intention to cheat or injure him;  and (4) the pursuer must have acted upon the false statement and sustained damage by so doing.  In the present case, none of those requirements was satisfied.

[26]      Firstly, it was contended, the pursuer failed to aver a representation by the defenders.  He denied receipt of the letter of engagement.  There was no averment of a positive misrepresentation by Mr Gordon to the pursuer.  In so far as the pursuer founded upon silence on the part of the first defender, more was required: silence, however morally wrong, will not support an action based on fraudulent misrepresentation: Peek v Gurney (1873) LR 6 HL 377, Lord Cairns at 403; HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] 2 Lloyds Rep 61, Lord Hoffmann at paragraph 75.  In Nocton v Lord Ashburton [1914] AC 398, the solicitor’s failure to disclose a personal interest was held to constitute a breach of fiduciary duty but did not give rise to an action in deceit.  A breach of a duty of disclosure gave a right to avoid the agreement but did not give a right to damages. 

[27]      Secondly, there were no relevant averments of dishonesty on the part of the first defender.  The pursuer’s argument failed to distinguish between the first defender being liable for a member’s fraud on the one hand and the first defender being attributed a member’s guilty knowledge on the other.  Guilty knowledge on the part of Mr Gordon did not equate to guilty knowledge of the first defender.  Where a representation is said to be fraudulent, the person making the representation must have the guilty knowledge and is not to be fixed with “deemed” knowledge: cf Zurich CSG Ltd v Gray & Kellas 2007 SLT 917, Lord Ordinary (Brodie) at paragraph 23.  The fact that that case concerned a partnership and not an LLP was not a ground of distinction.  It was not averred that Mr Allan, who sent the letter of engagement, knew that it was false when he sent it.  If the case in fraud was based on an implied misrepresentation that the first defender was not acting in conflict, that was a representation by the firm, not Mr Gordon.  As the firm was not fixed with Mr Gordon’s knowledge there was no relevant averment of dishonesty.

[28]      Thirdly, it was not averred that Mr Gordon, or anyone else for whom the defenders were responsible, made a fraudulent misrepresentation about the contract of which the pursuer complained, namely the sale of part of his shareholding in ITS.  Proof of fraud relating to the contract of agency between the pursuer and the first defender was not proof of intention that the representation be acted on in the manner occasioning loss.  The pursuer did not aver that he was induced to sell his shares through fraud on the part of the first defender; there was accordingly no relevant averment of intention.

[29]      Fourthly, the pursuer did not relevantly assert reliance on the supposed fraud.  The only reliance pled was his continuing to allow the first defender to act.  According to the pursuer’s pleadings, the cause of his loss was not the alleged fraudulent misrepresentation, but the first defender’s failure to tender adequate advice on the consequences of entering into the transaction.  In the absence of reliance on the fraudulent misrepresentation, the case was irrelevant.  This was not a case in which a presumption of inducement could be applied.  The only presumption that could be applied would relate to the first defender’s continuing retainer;  it could not be taken further and applied to the pursuer’s decision to enter into the share sale. 

[30]      At worst for the defenders, there were important factual issues to be explored, regarding inter alia Mr Gordon’s intention, Mr Allan’s knowledge, the existence of any inducement, and the extent of the pursuer’s reliance.  The pursuer’s case was at least of doubtful relevance.  It would not be appropriate to pronounce summary decree in relation to fraudulent misrepresentation without inquiry into these matters.  In any event, a defence of contributory fault on the part of the pursuer was available in respect of a case based on fraudulent misrepresentation, and was relevantly pled.

 

Decision
[31]      In my opinion the pursuer has not pled a relevant case against the defenders based upon fraudulent misrepresentation by the first defender.  I reject at the outset the pursuer’s proposition that a fraudulent misrepresentation by a member of an LLP is to be treated, as a matter of law, as fraud on the part of the LLP itself.  There is in my view no basis in the 2000 Act for that suggestion.  Section 6(4) is clear:  it imposes liability on the LLP for the wrongful act or omission of a member.  That is not the same thing as deeming the LLP to have itself committed the wrongful act or omission, and I find nothing else in the Act that would have that effect.  In my opinion, the following observations by Lord Brodie in Zurich CSG Ltd v Gray & Kellas (above) at paragraph 23 are apposite to the present case:

“…The imputed knowledge of the firm and the actual knowledge of the individual partners are different one from the other.  An intentionally false and therefore dishonest statement requires actual knowledge on the part of the person making the statement that the statement he is making is false.  A firm, which is not a natural person, is incapable of dishonesty, although it might be vicariously liable for the dishonest actions of its individual partners (or employees), whether acting alone or together.  Only individuals can lack an honest belief.  Only individuals therefore can make fraudulent misrepresentations.”

 

These are observations of a general nature on the capacity (or otherwise) in law of natural and non-natural persons to make fraudulent representations.  They are not part of the “law relating to partnerships” for the purposes of section 1(5) of the 2000 Act.  They recognise the distinction between, on the one hand, liability of a corporate entity for the dishonest actions of an individual and, on the other, attribution of fraudulent intent to the entity itself.  In the context of an LLP, the former is expressed in section 6(4); the latter is no part of either the statutory scheme or the underlying law.

[32]      In the present case, the pursuer does not aver that any fraudulent representation was made to him by Mr Gordon or indeed by Mr Allan.  The representations founded upon are those contained in the terms of business regarding conflict of interest annexed to the letter of engagement.  Those representations were made by the first defender.  They do not, in any event, appear to me to add anything to the professional duties imposed upon the first defender by the practice rules of the Law Society of Scotland to which the terms of business refer.  As the knowledge of individual members is not, as a matter of law, imputed to the first defender, it follows that the representations are not fraudulent.  For this reason, I reject the pursuer’s first proposition.

[33]      Secondly, I consider that the pursuer has no satisfactory answer to the defenders’ submission based upon the third Bradford Third requirement, ie that there must be a representation made with the intention that it should be acted upon by the pursuer, in the manner which resulted in damage to him.  In Tackey v McBain [1912] AC 186, the defendant made a statement which he knew to be untrue regarding the finding of oil by his employer company, apparently in order to avoid disclosing inside information.  The Privy Council expressed its approval of a jury direction by the trial judge in the following terms:

“The mere fact that [the defendant] misled by a false statement does not necessarily prove that he was dishonestly misleading because he may have thought it necessary to keep this matter close for the interests of the company. The real point you have to consider is what was in his mind when he did that and you must find there is as much as a direct intention that shares should be put upon the market, that is to say that people should be induced to sell and that he must have had the intention when he made his statement of making people sell.”

 

By analogy, it would be necessary in the present case for the pursuer to offer to prove that when the first defender expressly (and indeed impliedly, by accepting and not thereafter declining instructions to act on behalf of the pursuer) represented that it would not act in conflict of interest, it did so with the intention of inducing the pursuer to enter into the transaction which he now avers caused him loss, ie the sale of part of his interest in ITS to Lime Rock.  The pursuer makes no such averment, and its absence is, in my view, fatal to the case based on fraudulent misrepresentation.

[34]      Nor, in my opinion, is the pursuer able to rely on a presumption of materiality.  In contrast to the more straightforward circumstances of Zurich Insurance Co plc v Hayward (above) and other cases founded upon by the pursuer, there is no averment (and it is not easy to see how there could be) of direct connection between the representation regarding absence of conflict of interest and the pursuer’s decision to enter into the sale agreement.  The pursuer asserts that if he had been made aware of the conflict of interest, he would have withdrawn his instructions from the first defender and ended the negotiations with Lime Rock.  But that is not the same as an averment that the representation, whether express or implied, that the first defender was not acting in conflict of interest, materially influenced the pursuer in his decision to enter into the contract.  In the absence of such an averment, there is no scope for application of the presumption.  And without the presumption, there is no relevant case pled of reliance by the pursuer on the alleged fraudulent misrepresentation in his decision to sell to Lime Rock.

[35]      For each of those reasons I hold that the pursuer’s case based on fraudulent misrepresentation is irrelevant.  The question of granting partial summary decree in respect of this branch of the case does not therefore arise.  Nor does the defence of contributory negligence, although I address the question of the availability of such a defence in a case based on fraudulent misrepresentation in the course of my discussion below of its availability in relation to a claim for breach of fiduciary duty. 

 

Breach of fiduciary duty
Introduction
[36]      Different issues arise with regard to the pursuer’s case based upon the first defender’s breach of fiduciary duty.  As I have already noted, the defenders admit that such a breach occurred and do not resist the granting of summary decree to that extent.  The following matters, however, remain contentious:

(i)         The correct approach to be adopted in assessing compensation recoverable as a consequence of a breach of fiduciary duty;

(ii)        Whether the pursuer has relevantly averred a causal link between the admitted breach of fiduciary duty and the loss that he claims to have sustained;

(iii)       Whether any such causal link is sufficiently direct to entitle the pursuer to recover the loss that he claims to have sustained;

(iv)      Whether the loss that the pursuer claims to have sustained, if sufficiently directly linked to the first defender’s breach of duty, is reflective of a loss sustained by ITS and accordingly not recoverable by the pursuer; and

(v)       Whether contributory negligence is available as a defence to an action based upon breach of fiduciary duty.

The pursuer also makes averments regarding further breaches of fiduciary duty said to have occurred in 2012 and 2013, which I will address separately.

 

(i)         Equitable Compensation:  Approach to Assessment

[37]      In Nocton v Lord Ashburton, a solicitor made a misleading statement to his client which induced the client to discharge a security, to the detriment of the client and to the personal benefit of the solicitor.  The action was brought on the basis of “fraud”.  The judge at first instance held that the client had failed to prove deceit (according to the definition in Derry v Peek) and dismissed the action.  The Court of Appeal reversed that decision and awarded damages for fraud.  The House of Lords held that the Court of Appeal had had no justification for reversing the finding of fact of the judge at first instance in relation to deceit, but decided that the client was entitled to relief in equity on the basis of breach of fiduciary duty.  A question arose as to the correct form of remedy for this equitable relief.  Viscount Haldane LC observed (page 958): 

“The proper mode of giving relief might have been to order Mr. Nocton to restore to the mortgage security what he had procured to be taken out of it, in addition to making good the amount of interest lost by what he did. The measure of damages may not always be the same as in an action of deceit or for negligence.”

 

[38]      Breach of fiduciary duty is now well recognised in English law and in other common law jurisdictions as a potential ground of liability entirely separate from fraudulent misrepresentation.  It is further recognised that the nature of the appropriate remedy will depend upon the circumstances of the case.  In AIB Group (UK) plc v Mark Redler & Co [2015] AC 1503, Lord Toulson observed (para 55):

“In a case of breach of the duty of undivided loyalty, there are possible alternative remedies.  If the trustee has benefited from it, the court will order him to account for it on the application of the beneficiary.  In Bristol and West Building Society v Mothew [1998] Ch 1, 18, Millett LJ described such relief as ‘primarily restitutionary or restorative rather than compensatory’.  Alternatively, the beneficiary may seek compensation in respect of his loss.”

 

As Lord Toulson acknowledged (para 56), the matter is more complex than this summary might suggest.  One of the principal questions that has arisen – and which arises in the present case – is this:  where the relief is compensatory rather than restitutionary, what is the appropriate measure of the compensation?  Judicial and academic discussion of this question has placed significant emphasis on the equitable – as opposed to common law – origin of the existence of a remedy for breach of fiduciary duty. 

[39]      It is equally clear that Scots law, which has never adopted the English dichotomy between law and equity, has for long allowed claims for breach of fiduciary duty:  see eg Aberdeen Railway Co v Blaikie Brothers (1854) 17D (HL) 20.  In Allen v McCombie’s Trs 1909 SC 710, the court rejected the proposition that breach of trust was correctly categorised as a species of breach of contract.  In Robinson v National Bank of Scotland Ltd 1916 SC (HL) 154, Nocton v Lord Ashburton was distinguished on its facts without any suggestion that it did not represent the law of Scotland.  More recently, in Parks of Hamilton Holdings Ltd v Campbell 2014 SC 726, a company shareholder conducted the negotiation of a sale of the company on behalf of all shareholders, but omitted to disclose to the others that he had agreed a higher price for his own shares than for theirs.  The other shareholders successfully sued on the basis of breach of fiduciary duty for the loss sustained by them as a consequence of the discrepancy in sale prices.  As to appropriate remedy, Lord Drummond Young observed (para 44):

“…The reclaimer could have been made to account for his profit, but the remedy chosen by the respondents is damages for the loss that they suffered.  I consider that such a remedy is competent.  I should note that in São Paulo Alpargatas SA v Standard Chartered Bank Ltd [1985 SLT 433] Lord Grieve expressed the view that damages is not a remedy that is available to remedy a breach of fiduciary duty.  In my opinion this view is plainly wrong.  The only authority cited is a sentence in Gloag, Law of Contract (p 521), but that sentence is not vouched by the authority cited in support.  In my opinion it is clear that either accounting or damages is available as a remedy for breach of fiduciary duty.  The remedy ultimately insisted on by the respondents is damages, and in my opinion that is their entitlement.”

 

[40]      The foregoing observation confirms that Scots law, untroubled by historic distinctions between law and equity, recognises damages as one of the available remedies for breach of fiduciary duty.  It does not, however, go so far as to examine the appropriate measure of such damages and, in particular, whether the analogy should be with damages for intentional wrongdoing, or with compensation for breach of trust, or with damages for negligence.  The point is of practical importance.  If the analogy adopted is damages for fraudulent misrepresentation, then the applicable test is that set out in Doyle v Olby (Ironmongers) Ltd (above), namely all the damage directly flowing from the breach of duty, whether or not foreseeable by the defender.  If the appropriate analogy is damages for negligence, foreseeability becomes relevant.  This matter has not to date, I am informed, been the subject of decision by a Scottish court.

[41]      I am assisted, however, by the fact that the matter has been the subject of recent and detailed analysis by the Supreme Court, in the context of English law, in AIB Group (UK) plc v Mark Redler & Co (above).  In that case, a bank agreed to advance the sum of £3.3 million for the re-mortgage of a property.  The bank instructed the defendant firm of solicitors inter alia to secure the redemption of all existing securities in respect of the property.  The solicitors erroneously repaid the sum outstanding under only one of two accounts, leaving an outstanding indebtedness of £309,000, and paid the balance to the borrowers.  The existing lender refused to release its security.  The bank eventually agreed to enter into a deed of postponement enabling it to register its security as a second charge.  The borrowers defaulted and the property was sold for £1.2 million, of which the bank received approximately £865,000.  The bank, alleging that the solicitors had acted in breach of trust and of fiduciary duty, and in breach of contract and with negligence, sued them for the full amount of the loan, less the amount recovered by the sale.  The judge at first instance held that the defendants had acted in breach of trust to the extent that they had released to the borrowers the amount of their outstanding indebtedness to the existing lender, but awarded the bank only £273,777 by way of compensation.  The Supreme Court upheld this award, holding that where (as here) the appropriate remedy was equitable compensation, the measure was to be assessed at the date of the trial, with the benefit of hindsight and on a common sense view of causation, so as to ensure that the loss recovered had in fact resulted from the breach of trust and not from some other cause.  Foreseeability of loss was regarded as irrelevant. 

[42]      Delivering one of the two leading judgments in AIB, Lord Toulson observed (para 62): 

“There are arguments to be made both ways, as the continuing debate among scholars has shown, but absent fraud, which might give rise to other public policy considerations that are not present in this case, it would not in my opinion be right to impose or maintain a rule that gives redress to a beneficiary for loss which would have been suffered if the trustee had properly performed its duties.”

 

Lord Toulson approved the statement of Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] AC 421, echoing observations of McLachlin J in Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4^th) 129 (Supreme Court of Canada), that the object of equitable compensation for breach of trust was to make good loss which the beneficiary would not have suffered but for the breach.  He concluded: 

“Equitable compensation and common law damages are remedies based on separate legal obligations.  What has to be identified in each case is the content of any relevant obligation and the consequences of its breach.  On the facts of the present case, the cost of restoring what the bank lost as a result of the solicitors’ breach of trust comes to the same as the loss caused by the solicitors’ breach of contract and negligence.”

 

[43]      The other leading judgment was delivered by Lord Reed, who, after a review of English and Commonwealth authorities, likewise concluded that the model of equitable compensation, where trust property has been misapplied and the trust has come to an end, is to put the beneficiary in the position he would have been in if the trustee had performed his obligation.  Lord Reed continued:

“135  The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight.  The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it.  Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach.  The requirement that the loss should flow directly from the breach is also the key to determining whether causation has been interrupted by the acts of third parties...

 

136  It follows that the liability of a trustee for breach of trust, even where the trust arises in the context of a commercial transaction which is otherwise regulated by contract, is not generally the same as a liability in damages for tort or breach of contract.  Of course, the aim of equitable compensation is to compensate: that is to say, to provide a monetary equivalent of what has been lost as a result of a breach of duty.  At that level of generality, it has the same aim as most awards of damages for tort or breach of contract.  Equally, since the concept of loss necessarily involves the

concept of causation, and that concept in turn inevitably involves a consideration of the necessary connection between the breach of duty and a postulated consequence (and therefore of such questions as whether a consequence flows ‘directly’ from the breach of duty, and whether loss should be attributed to the conduct of third parties, or to the conduct of the person to whom the duty was owed), there are some structural similarities between the assessment of equitable compensation and the assessment of common law damages.

 

137  Those structural similarities do not however entail that the relevant

rules are identical…”

[44]      The AIB case was concerned with breach of trust, which is a particular species of breach of fiduciary duty.  Breach of trust has the distinctive feature that where a trust fund continues to exist at the time when the court is called upon to grant relief for a trustee’s breach, the appropriate remedy is likely to be restorative rather than compensatory:  in other words, the trustee will be required to put the trust fund in the position in which it would have been if the breach of trust had not occurred.  But it seems to me that the approach adopted by the Supreme Court in AIB is, and is intended to be, equally applicable to breaches of fiduciary duty where there is (and has been) no trust fund in existence.  An example of such a situation is Canson Enterprises, which concerned a secret profit made by the solicitor acting on behalf of a party to a land purchase transaction.  In her analysis which has subsequently been cited with approval by, inter alia, the Supreme Court in AIB, McLachlin J rejected the proposition that damages under the law of tort provided a suitable analogy for equitable compensation for breach of fiduciary duty not involving a trust fund, observing (page 156): 

“…In my view it is preferable to deal with both remedies under the same system — equity. Rather than begin from tort and proceed by changing the tort model to meet the constraints of trust, I prefer to start from trust, using the tort analogy to the extent shared concerns may make it helpful. This said, I readily concede that we may take wisdom where we find it, and accept such insights offered by the law of tort, in

particular deceit, as may prove useful.

 

My second concern with proceeding by analogy with tort is that it requires us to separate so called ‘true trust’ situations, where the trustee holds property as agent for the beneficiary, from other fiduciary obligations. This distinction is necessary if one proceeds by analogy with tort because the tort analogy cannot apply in the former category…  In my view, however, this distinction is artificial and undercuts the common wrong embraced by both categories—the breach of the obligation of trust and utmost good faith which lies on one who undertakes to control or manage something – be it property or some other interest— on behalf of another.”

 

[45]      What, then, is the position of Scots law on the measurement of compensation for breach of fiduciary duty?  The Court of Session is often described as exercising an equitable jurisdiction, but that does not necessarily mean that it has adopted principles of English law derived from equity as opposed to common law: the law of trusts in Scotland is an obvious example where analysis based on English equitable doctrines has not been received.  For my part, however, I see no barrier in principle to the application in Scotland of the approach adopted by the Supreme Court in AIB, which draws in turn upon analyses by judges in a variety of Commonwealth jurisdictions.  I find support for this conclusion in Lord Reed’s observations in AIB at paragraph 138:

“This does not mean that the law is clinging atavistically to differences which are explicable only in terms of the historical origin of the relevant rules. The classification of claims as arising in equity or at common law generally reflects the nature of the relationship between the parties and their respective rights and obligations, and is therefore of more than merely historical significance. As the case law on equitable compensation develops, however, the reasoning supporting the assessment of compensation can be seen more clearly to reflect an analysis of the characteristics of the particular obligation breached. This increase in transparency permits greater scope for developing rules which are coherent with those adopted in the common law. To the extent that the same underlying principles apply, the rules should be consistent. To the extent that the underlying principles are different, the rules should be understandably different.”

 

[46]      Applying these observations in a Scots law context, I accept the proposition advanced on behalf of the pursuer that where a court in Scotland finds that equitable compensation (as opposed to, for example, restitution of funds or property) is the appropriate remedy for a breach of fiduciary duty, the measure of such compensation is what is required to put the pursuer in the position he would have been in but for the breach.  The assessment is to be made with the benefit of hindsight and not as at the date of the breach.  Foreseeability is not therefore a relevant consideration.  But the loss compensated must flow directly from the breach, and the actings of the pursuer, as well as the actings of third parties after the date of the breach, will be material to the determination of whether the link between breach and loss is sufficiently direct to entitle the pursuer to the compensation sought.  In some cases this may result in a quantification which differs little, if at all, from damages for negligence or breach of contract; in others it may produce a recovery which more closely resembles that appropriate for fraudulent misrepresentation.

 

(2)        Causal Link between Breach and Loss
[47]  I turn now to the application of the foregoing analysis to the circumstances of the present case.  It follows from what I have said, and is in any event common ground between the parties, that in order to be recoverable, the loss which the pursuer claims to have sustained must flow directly from the first defender’s breach of fiduciary duty.  On behalf of the defenders it was submitted that the pursuer failed to aver a relevant causal link.  The defenders’ criticism was directed towards the following averments by the pursuer:

“Had the first defender disclosed to the pursuer its improper actings on behalf of Lime Rock, as it was obliged to do, the pursuer would not have proceeded with the transaction, would have withdrawn the first defender’s instructions and would have terminated the negotiation with Lime Rock.  He would have regarded the behaviour of Lime Rock in seeking covertly and improperly to obtain advice and information from his solicitors as untrustworthy and reprehensible and would have considered them to be persons he did not wish to be in business with.” 

 

It was submitted that this was a flawed analysis.  It assumed the occurrence of the breach, when the appropriate exercise was to ascertain what would have happened if the breach had not occurred.  Reference was made to Nationwide Building Society v Balmer Radmore [1999] PNLR 606, Blackburne J at 671-2.  On behalf of the pursuer, it was submitted that the question whether and to what extent the first defender’s breach caused the loss complained of was a question for proof.  Speculation as to what course the pursuer would have taken if the conflict had been disclosed was irrelevant:  London Loan & Savings Company of Canada v Brickenden [1934] 3 DLR 465 (PC) at paragraph 16.

[48]      In my opinion, the defenders’ criticism of the passage in the pursuer’s pleadings that I have quoted is well founded.  The relevant question for determination in relation to causation is not what the pursuer would have done if he had discovered the breach of fiduciary duty because, as the defenders submitted, this approach assumes the breach to have been committed.  The question is rather what would have occurred if the breach had not been committed:  see eg Canson Enterprises at 160; Target Holdings at 438-9.  In the context of the present case, the question is what would have occurred if the first defender had avoided committing a breach of fiduciary duty by timeous disclosure of the existence of its conflict of interest.  It is irrelevant to consider the hypothesis that the pursuer became aware of the breach prior to concluding the sale of his ITS shares, and the passage quoted must be excluded from probation.

[49]      The pursuer’s case, however, is not founded solely upon this passage.  Immediately before it is the averment “Had the pursuer had the advice to which he was entitled he would not have proceeded with the transaction”.  Immediately after it is the following:  “He would in any event have received independent advice following the termination of the first defender’s agency.  That advice would have been competent and properly independent.  It would have explained fully to the pursuer what the risks of the transaction were, and once such advice was received the pursuer would in any event have withdrawn from the transaction for those reasons, if he had not already done so.”  The pursuer then goes on to aver alternative courses of action that he might have taken if the Lime Rock transaction had been abandoned.  In my opinion those averments reflect the correct test for causation, and are relevant for proof.

[50]      I should note at this point that the defenders’ response is to aver that even if all of the pursuer’s complaints of breach of duty were well founded, he suffered no loss as a result because he would in any event have signed up to the deal proffered by Lime Rock, being the best and only offer available in the market at the material time.  In London Loan & Savings Company of Canada v Brickenden (above), Lord Thankerton, delivering the judgment of the Privy Council, observed (para 16): 

“When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged.  Once the court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant.”

 

If one were to adopt a broad interpretation of this dictum, it could be argued that the defence presented in the present case could not be advanced.  That might be regarded as surprising, and the pursuer did not advance such an argument.  The approach taken since 1934 by English and other courts to Lord Thankerton’s observation was examined at length by Blackburne J in Nationwide Building Society v Balmer Radmore.  Blackburne J expressed the view (page 663) that the dictum should be approached with caution and not elevated into a statement of inflexible principle.  At page 670-1, he concluded that

“…where, as in the cases before me, what is at issue is the consequence of a  misrepresentation or non-disclosure made by the fiduciary which has caused the beneficiary to authorise the application of his monies in a particular way, the only sensible approach to the question of compensation for the consequences of the misrepresentation or non-disclosure is to consider what would have happened if there had been no misrepresentation or the appropriate disclosure had been made.  I can well see that, where the fiduciary has induced the giving of the authority by a statement which he knows to be untrue, it may be that the same policy, so clearly articulated in the speech of Lord Steyn in Smith New Court Securities Ltd v. Citibank NA [1997] AC 254 at 279E to 280C, which applies in the case of common law deceit resulting in compensation assessed on the restitutionary or ‘but for’ basis, should apply to the question of compensation in equity.  Short of that however, I do not see why equity should close its eyes to what the beneficiary would have done if there had been no misrepresentation or the appropriate disclosure had been made.”

 

It respectfully seems to me that Scots law should adopt the same approach, and that the defenders in the present case are entitled to offer to prove that the outcome would have been the same if the first defenders’ breach of fiduciary duty had not occurred.

 

(3)        Directness of Causal Link
[51]      The next issue is whether the causal link averred by the pursuer between the breach of fiduciary duty and the loss sustained is sufficiently direct.  It was submitted by the defenders that, applying the approach adopted by the Supreme Court of Canada in Canson Enterprises, such a link was absent.  On the basis of the pursuer’s own narrative (see paragraph [9] above), the cause of the pursuer’s loss was the financial mismanagement of the company by its executive directors.  The defenders could not be held liable for the effect of events occurring up to three years after the breach of duty.  The facts of Canson Enterprises provided an appropriate analogy.  The court could hold now that the ultimate loss of value in the pursuer’s shareholding was not sufficiently linked to the breaches of duty complained of for causation to be established, regardless of whatever ground of action was in play.  For negligence and breach of contract, the duty which the first defender was averred to have breached was a duty to advise the pursuer of the risks and consequences of the share sale, not to protect the pursuer from risks caused by significant mismanagement.  As regards breach of fiduciary duty, the necessary direct link between the breach and the loss was not averred. 

[52]      On behalf of the pursuer it was submitted that proof of causation should be allowed.  After the share sale had been concluded, the pursuer was locked into his business relationship with Lime Rock on the new terms concerning, for example, appointment of board members, preference on liquidation and loss of a casting vote.  The loss sustained by him resulted from the decision to go down the Lime Rock route.  In particular the US sanctions issue which drove Lime Rock’s decision to treat the bank covenant breach as a trigger event to force a sale at a disadvantageous time would not have arisen if the Lime Rock transaction had not gone ahead.  The proper analogy was with the circumstances of Smith New Court Securities Ltd v Citibank NA (above). 

[53]      With some hesitation, I have concluded that the pursuer’s causation case is sufficient for proof before answer.  There is undoubtedly an analogy to be drawn between the facts averred by the pursuer in the present case and the facts of Canson Enterprises.  I have already mentioned that that case concerned a secret profit made by the solicitor acting for a purchaser of development land.  A warehouse was built on the property and the owner sustained loss because of negligence on the part of the soil engineer and the piling contractor.  The owner was only able to recover part of his loss from the engineer and contractor, and sought to recover the balance from the solicitor who had been in breach of fiduciary duty.  As there was no direct causal link between the breach of fiduciary duty and the loss sustained, this branch of the claim failed.  On one reading of the pursuer’s pleadings in the present case, the same might be said: it is specifically averred that the financial difficulties experienced by ITS in 2012 were caused by gross mismanagement of its affairs by its executive directors, including Messrs Corray and Milne.  It is not averred that responsibility for the financial difficulties rests with any person appointed by Lime Rock.  The necessary direct link is, however, said to arise because the pursuer was “locked into” the terms of his agreement with Lime Rock and was consequently unable to take remedial action to restore the value of ITS. 

[54]      The expression “locked in” appears to be derived from the speeches of Lord Browne-Wilkinson and Lord Steyn in Smith New Court Securities Ltd v Citibank NA.  In that case the plaintiff was induced by a fraudulent misrepresentation to purchase shares which, as a consequence of a separate unrelated fraud, subsequently fell in value.  The House of Lords held that the defendant was liable for the whole loss sustained by the plaintiff and not merely the difference between the purchase price and either the market value at the date of purchase or the price which the plaintiff would have paid but for the misrepresentation.  The general rule requiring credit to be given for market value did not apply because the plaintiff had bought the shares for a purpose (as a market-making risk) and at a price which precluded immediate disposal.  It was in those special circumstances that it was held that the plaintiff was “locked into” the shares.

[55]      It is not clear to me that the pursuer in the present case was “locked into” the fortunes of ITS shares in the same way as the plaintiff in Smith New Court Securities.  However, I consider that that is a matter better determined after inquiry into the facts.  The pursuer founds upon the terms of his agreement with Lime Rock and not simply upon the mismanagement (which is not laid at Lime Rock’s door) that is said to have occurred after the sale of part of the pursuer’s shareholding in 2009.  I am not prepared to go so far as to hold at this stage that the pursuer’s case is certain to fail even if all of his averments are proved.  I shall therefore allow a proof before answer with regard to the pursuer’s case based on breach of fiduciary duty.

[56]      It will be apparent, however, from what I have said that I consider that the pursuer’s case is at least of doubtful relevancy, and accordingly that it would not be appropriate for the court to grant summary decree at this stage in respect of anything other than that which is a matter of admission, namely that the first defenders were in breach of fiduciary duty. 

 

(4)        Reflective Loss
[57]      The defenders’ next argument was that the losses that the pursuer claimed to have sustained were not recoverable by him because they were, if established, merely a reflection of losses suffered by ITS.  This argument has its roots in the principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C.  When applied to companies, this is sometimes known as the rule in Foss v Harbottle (1843) 2 Hare 461, which precludes derivative actions by shareholders for losses sustained by the company.  The rationale for the rule was explained by the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 at 222‑223:

“..If directors convene a meeting on the basis of a fraudulent circular, a shareholder will have a right of action to recover any loss which he has been personally caused in consequence of the fraudulent circular; this might include the expense of attending the meeting.  But what he cannot do is to recover damages merely because the company in which he is interested has suffered damage.  He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company.  The shareholder does not suffer any personal loss.  His only ‘loss’ is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding.  The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association.  The shares themselves, his right of participation, are not directly affected by the wrongdoing.  The plaintiff still holds all the shares as his own absolutely unencumbered property.  The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company.”

 

In Johnson v Gore Wood [2002] 2 AC 1 at 35, the principle was formulated by Lord Bingham of Cornhill as follows: 

“Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss.  No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company.  A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss… ”

 

[58]      On behalf of the defenders, it was submitted that the loss claimed by the pursuer was a loss for which ITS could have sued.  The pursuer professed to have been locked into a chain of events which ended with the failure of the company; in essence his claim was for the loss in value of his shares due to the company’s failure.  A claim by a shareholder for diminution in value of his shares was the paradigm example of reflective loss.  If the pursuer had a cause of action against the defenders, then so did ITS.  It was unnecessary that it be the same cause of action, although the pursuer asserted that it was.

[59]      In my opinion, those submissions are unsound.  The circumstances in the present case differ significantly from those in which a shareholder’s loss has been held to be reflective of a loss sustained by the company.  In such cases the damage to the company – and hence the fall in value of its shares – was alleged to have been caused by the wrongdoing (intentional or otherwise) of the person sued.  That is not the case here, where it is averred that the diminution in value of the company – and hence of the pursuer’s shares – was caused by directors’ mismanagement which the pursuer had been rendered powerless to prevent.  It may be that an action for reparation by a shareholder of ITS based on alleged mismanagement would be dismissed as a derivative action seeking to recover reflective loss: that is not a matter I have to decide.  The pursuer’s complaint is rather that he sustained loss because he was, as he asserts, locked into the company’s plight by breach of contract, negligence and breach of fiduciary duty on the part of the defenders in relation to alleged failures in the provision of advice.  That is a loss which the pursuer claims to have sustained as a consequence of proceeding to enter into the transaction on the terms agreed, including the sale of part of his interest in ITS.  It is not in any sense a loss sustained by ITS; if anything, ITS benefited from the share sale because it received an injection of $45 million.  I accept the pursuer’s submission that, on the basis of the case pled, any loss was sustained when the transaction was concluded, albeit that it requires (at least as regards the case based on breach of fiduciary duty) to be quantified with the benefit of hindsight.  I also accept that an important aspect of the rationale underlying the general prohibition of derivative actions, namely the avoidance of double recovery, has no role to play in this case.  This is not, in my view, a derivative action, and the loss claimed to have been sustained by the pursuer is not reflective of a loss suffered by the company.

 

(5)        Contributory Negligence
[60]      The final contentious issue in relation to the pursuer’s case based on breach of fiduciary duty concerns the availability of a defence of contributory negligence.  The defenders plead (in answer 25) that any loss sustained by the pursuer was caused or materially contributed to by his own fault and negligence.  This defence proceeds on the basis of averments by the pursuer that he was unaware of the content of the deal with Lime Rock which, it will be recalled, had been concluded by documents that he himself had executed.  The defenders aver that: 

“If [the pursuer] truly executed the contracts without reading same or taking time to query, even briefly, the content thereof, and if so doing caused him any loss (which is denied) then he was the author of his own misfortune and the sole cause thereof.  Esto there was any parallel and causative breach of duty on the part of the first defender, which is denied, any damages should be reduced on account of the pursuer’s own gross culpability.”

 

[61]      On behalf of the pursuer, it was submitted that contributory negligence was not a relevant defence to his claim based on breach of fiduciary duty.  The same principles applied to breach of fiduciary duty as applied to fraudulent misrepresentation, with regard to which the defence was not available: Standard Chartered Bank v Pakistan National Shipping Corporation [2003] 1 AC 959, Lord Hoffmann at paragraphs 10-18;  Lord Rodger of Earlsferry at paragraphs 42-45.  As there was no material difference between the relevant English and Scottish provisions of the Law Reform (Contributory Negligence) Act 1945, there was no reason why the same rule should not apply in Scotland.  There were, moreover, policy reasons why the defence should not be available with regard to breach of fiduciary duty.  The essence of the fiduciary relationship was that A placed reliance and trust upon B, and should not have to look over B’s shoulder.  It was repugnant to principle that A’s claim should be reduced due to a failure to police B’s actings on his behalf.  In Pilmer v Duke Group Ltd [2001] HCA 31, the High Court of Australia had rejected the concept of “contributory fault” in a claim for equitable compensation for breach of fiduciary duty. 

[62]      On behalf of the defenders, it was submitted that the dicta in Standard Chartered Bank founded upon by the pursuer, although of high authority, were not consistent with the law of Scotland and should not be followed.  The implication of those dicta was that in any case where contributory negligence was accepted, it was necessary to determine whether, prior to enactment of the 1945 Act, contributory negligence would have been a complete defence at common law.  There was no Scots law authority that before 1945 contributory negligence was not a defence to intentional wrongdoing.  The fact that wrongdoing was intentional did not exclude defences based on the pursuer’s actings:  assault and defamation were examples where such a defence was clearly available.  The focus under Scots law had been on culpa, which included both negligence and intentional wrongdoing: see eg McNaughton v Caledonian Railway Co (1858) 21D 160, Lord Justice Clerk Inglis at 163.  The preferable view was that the availability of a defence of contributory negligence depended upon the circumstances of a particular case: cf Day v Mead [1987] 2 NZLR 443, Cooke P at 451.  Here the pursuer did not assert fraudulent inducement to enter into the Lime Rock contract, and there was no reason why contributory negligence should not apply.

[63]      Section 1(1) of the Law Reform (Contributory Negligence) Act 1945 provides as follows: 

“Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage…”

 

Fault is defined, so far as applicable to England and Wales, as “negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this Act, give rise to the defence of contributory negligence”.  In the application of the Act to Scotland, fault is defined as “wrongful act, breach of statutory duty or negligent act or omission which gives rise to liability in damages, or would apart from this Act, give rise to the defence of contributory negligence”.

[64]      In the absence of any directly relevant Scottish authority, I take the Standard Chartered Bank case as my starting point.  In this case Standard Chartered made payment to a seller under letters of credit after having been presented late with a bill of lading which, unknown to them, had been falsely dated.  Standard Chartered waived the late presentation and sought payment from the issuing bank, misrepresenting in their turn that the bill of lading had been timeously presented.  The issuing bank refused payment and Standard Chartered sued the seller for damages for deceit.  A defence of contributory negligence was rejected by the House of Lords, on the ground that there was no such defence at common law to a claim based on fraudulent misrepresentation.  Having quoted the terms of the 1945 Act, Lord Hoffmann (with whom all others agreed) observed:

“11.  In my opinion, the definition of ‘fault’ is divided into two limbs, one of which is applicable to defendants and the other to plaintiffs.  In the case of a defendant, fault means ‘negligence, breach of statutory duty or other act or omission’ which gives rise to a liability in tort.  In the case of a plaintiff, it means ‘negligence, breach of statutory duty or other act or omission’ which gives rise (at common law) to a defence of contributory negligence… 

 

12.  It follows that conduct by a plaintiff cannot be ‘fault’ within the meaning of the Act unless it gives rise to a defence of contributory negligence at common law.  This appears to me in accordance with the purpose of the Act, which was to relieve plaintiffs whose actions would previously have failed and not to reduce the damages which previously would have been awarded against defendants.  Section 1(1) makes this clear when it says that ‘a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but [instead] the damages recoverable in respect thereof shall be reduced ...’”

 

[65]      This dictum was criticised by the defenders because it attributed two different meanings to the word “fault” and also because it required investigation of whether, under pre-1945 Act law, the act or omission founded on as contributory negligence would have created a complete defence.  It was highly unlikely it was submitted, that modern law was circumscribed by such constraints, and was not so regarded by Scots law in which contributory negligence was admitted as a defence in many cases where the act or omission founded on would not have been a complete defence before 1945.  In my opinion the difficulty with this criticism is that it relates to the express wording of the Act rather than to the observations of Lord Hoffmann.  It is the definition of fault, both as applicable in England and Wales and as applicable in Scotland, that directs examination of the common law.  The House of Lords was obviously bound to apply that definition, as am I. 

[66]      It is important to read the observations in Standard Chartered Bank in the context in which they were made, namely a principal claim based on intentional wrongdoing.  At paragraph 42, Lord Rodger of Earlsferry (with whom Lord Hobhouse agreed) stated: 

“As Lord Hoffmann has explained, whether or not the defence of contributory negligence is available to Mr Mehra depends on whether Standard Chartered's payment of the sum under the letter of credit would, apart from the Law Reform (Contributory Negligence) Act 1945, give rise to a defence of contributory negligence.  In agreement with Mummery J in Alliance & Leicester Building Society v Edgestop Ltd [1993] 1 WLR 1462 , Lord Hoffmann has concluded that there is no common law defence of contributory negligence in the case of fraudulent misrepresentation.  I respectfully regard that conclusion as compelling.  As Mummery J pointed out, if the negligence of the plaintiff had been a defence to an action of deceit at common law, this would have meant that it would have been a complete defence, absolving the fraudulent defendant of all liability.  Such an extreme doctrine could hardly have passed through the law without leaving its mark in the cases.  But there is no trace of it.  Indeed, the signs are that before 1945 the defence of contributory negligence was thought not to apply where the defendant intended to cause the plaintiff harm.”

 

I can see no reason why that statement is not equally applicable to Scots law.  Section 1(1) is in the same terms for both jurisdictions, and there is no difference of substance between the parallel definitions of fraud.  I am not convinced that the examples suggested by the defenders, involving defamation and provocation, are truly cases of contributory negligence under pre-1945 law.  I regard the observations of Lord Hoffmann and Lord Rodger as at least highly persuasive and conclude that under Scots law the defence of contributory fault would not be available in a case based upon fraudulent misrepresentation.

[67]      The issue for me, however, is whether the same applies to a case based upon breach of fiduciary duty.  Applying Lord Hoffmann’s interpretation of the 1945 Act in Standard Chartered Bank, the question becomes whether breach of fiduciary duty is an act or omission which, apart from the Act, would give rise to the defence of contributory negligence.  Again I was not referred to, and am not aware of, any direct Scottish authority on the point, one way or the other.  Historically, Scots law has adopted an uncompromising stance to breach of fiduciary duty.  Restitutionary remedies such as reduction of a transaction or accounting for profit have been granted regardless of whether the transaction was objectively fair, or whether the fiduciary acted reasonably, or whether the estate suffered a loss:  see eg Scottish Law Commission Discussion Paper 123 on Breach of Trust (September 2003) at paragraph 4.2ff.  It has been regarded as immaterial that the fiduciary was unaware that he was acting in breach of his duty:  Cherry’s Trs v Patrick 1911 2 SLT 313, Lord Ordinary (Ormidale) at 315. 

[68]      The point was addressed, albeit obiter, by the High Court of Australia in Pilmer v Duke Group Ltd (above), a case in which the breach of fiduciary duty alleged does not appear to have been an intentional one.  The court’s reasons for rejecting the argument that contributory fault could have operated as a defence to a claim for equitable compensation for breach of fiduciary duty were encapsulated in the following passage (para 86) in the judgment of four of the five members of the Court:

“Contributory negligence focuses on the conduct of the plaintiff, fiduciary law upon the obligation by the defendant to act in the interests of the plaintiff.  Moreover, any question of apportionment with respect to contributory negligence arises from legislation, not the common law.”

 

On this approach, contributory negligence is excluded as a defence even where the breach of fiduciary duty is unintentional.  The case is not, however, directly in point because in contrast to the position under Scots law, it did not require construction of a statute whose interpretative provisions referred expressly to the common law.

[69]      I have already noted that it has been recognised in certain cases, such as Cherry’s Trs v Patrick and the New Zealand case of Day v Mead (above) that circumstances may arise where a breach of fiduciary duty is “innocent”, or unintentional.  The breach of duty committed by the defender in such cases may be more akin to negligence than fraudulent misrepresentation.  Is a defence of contributory negligence nevertheless always excluded?  Or, to put it in the statutory context, would a defence of contributory negligence still be excluded, apart from the 1945 Act?  In order to answer that question I refer again to the observations of Lord Reed in the AIB case upon which I have placed reliance.  Contributory negligence did not have to be addressed in AIB, but it seems to me that Lord Reed’s observation at paragraph 135 that “losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach” is not necessarily restricted to acts or omissions of the claimant that occur after the date of the breach.  It would be a somewhat inequitable type of equitable compensation if, in circumstances akin to negligence, the compensation due approximated to the damages that would have been awarded for negligence except that the deduction which could be made for contributory fault of the pursuer in a negligence case was prohibited.  I therefore conclude that, at least in cases where the breach of fiduciary duty is found to have been unintentional, a defence of contributory fault may be available to the defender.

[70]      Applying this conclusion to the present case, the defenders deny acting dishonestly.  They aver that although Mr Gordon acted in the manner he did deliberately, he did not do so with the intention of causing harm to the pursuer.  In my opinion it cannot be said without inquiry into the facts that there are no circumstances in which a defence of contributory fault will be available to the defenders.  This is particularly so where the alleged contributory negligence of the pursuer (failure to read and confirm his understanding of contractual documents) is unconnected with the admitted breach of fiduciary duty (acting in conflict of interest).  The availability of a contributory fault defence in the circumstances of the present case will be best determined after findings in fact have been made.  I shall therefore allow proof before answer of the defenders’ averments of sole fault and contributory negligence of the pursuer.

 

Breach of Fiduciary Duty in 2012
[71]      In Article 20 of the summons, the pursuer avers that certain separate and subsequent breaches of fiduciary duty were committed by the defenders, and in particular by Mr Gordon.  I referred earlier in this opinion to the pursuer’s narrative that following the alleged bank covenant breaches by ITS in November 2012, Lime Rock gave notice that a “trigger event” had occurred entitling Lime Rock to force a sale.  It is averred by the pursuer that Mr Gordon, by then a member of the second defender, attended at least one board meeting of ITS in the capacity of solicitor for Lime Rock, without disclosing his earlier actings in 2008-09 on their behalf.  This, it is asserted, was a further breach of fiduciary duty.  The second defender subsequently accepted instructions to act for Lime Rock in the interdict proceedings against the pursuer to which I have referred; this is characterised by the pursuer as “a further conflict of interest”.  The pursuer avers that by withholding disclosure of their earlier actings on behalf of Lime Rock and of Lime Rock’s “complicity in and procurement of improper actings”, the defenders deprived the pursuer of the opportunity to make use of that information in the interdict proceedings.  Had he had access to that information, the pursuer might have sought to reduce the investment agreement. 

[72]      The defenders challenged the relevancy of the pursuer’s assertion that a breach of fiduciary duty had occurred in 2012.  It was not suggested by the pursuer that by 2012 the defenders continued to act for him.  After the termination of a solicitor’s retainer, there was no continuing fiduciary relationship: Prince Jefri Bolkiah v KPMG [1999] 2 AC 222, Lord Millett at 235.  There could not therefore have been a breach of fiduciary duty.

[73]      In his oral submission to the court, senior counsel for the pursuer explained that the averments regarding events in 2012 (and into 2013) were not to be read as a separate ground of liability, but rather as part of the narrative of causation of loss.  Properly characterised, the complaint was of a breach of a duty of confidentiality which subsisted after the solicitor/client relationship had been terminated.  Reference was made to Lord Hope of Craighead’s speech in Prince Jefri at page 227.  It was impossible for the pursuer to know whether confidentiality had been breached when the defenders acted for Lime Rock against him in 2012.

[74]      It is, in my view, quite clear from the speech of Lord Millett in Prince Jefri, with which the other members of the Judicial Committee concurred, that there is no conflict of interest, real or perceived, where a solicitor acts for a client against a former client.  As Lord Millett put it:

“The fiduciary relationship which subsists between solicitor and client comes to an end with the termination of the retainer. Thereafter the solicitor has no obligation to defend and advance the interests of his former client. The only duty to the former client which survives the termination of the client relationship is a continuing duty to preserve the confidentiality of information imparted during its subsistence.”

 

In the circumstances of the present case, the defenders owed a continuing duty to the pursuer to preserve the confidentiality of any information imparted by him during the time when they acted on his behalf.  There is, however, no hint in the pursuer’s pleadings of any case based upon breach of that duty.  This is perhaps not surprising when one recalls that the pursuer’s case against the first defender is based upon alleged absence of direct communication.  In any event, I am satisfied that the only case made regarding events in 2012 and 2013, based on alleged breach of fiduciary duty arising out of conflict of interest, has no foundation in law.  I am not minded to exclude from probation the whole of the pursuer’s averments of those events, lest they turn out to be material in relation to causation of loss.  I shall however exclude the specific averments (i) that when Mr Gordon attended meetings in the capacity of solicitor for Lime Rock this was a further breach of fiduciary duty, and (ii) that the second defender acted in conflict of interest when accepting instructions to act on behalf of Lime Rock in the pursuer’s interdict proceedings. 

 

Pursuer’s Case based on Breach of Contract and Negligence
[75]      It has been unnecessary in this opinion to say much about those branches of the pursuer’s case that are based on alleged breach of contract and negligence on the part of the first defender.  It is, however, necessary to record that some of the defenders’ arguments were directed against those branches of the case as well as the branches based on fraudulent misrepresentation and breach of fiduciary duty.  In particular, I was invited to sustain the defenders’ first plea in law (a general relevancy plea) and to dismiss the action if I upheld the defenders’ arguments with regard to either or both of issues (iii) (absence of sufficiently direct causal link between breach and loss sustained) and (iv) (reflective loss) in paragraph [36] above.  As I have found the pursuer’s pleadings to be relevant for proof before answer as regards the first of those issues and have rejected the defender’s argument in relation to the second, no question arises at this time of dismissal of the entire action.  The defenders’ general relevancy plea will remain standing until after inquiry.

 

Summary and Disposal
[76]      The practical consequences of the foregoing opinion may be summarised as follows:

1.         The pursuer’s case based upon fraudulent misrepresentation will be dismissed as irrelevant.
2.         With regard to the pursuer’s case based upon breach of fiduciary duty: 

(a)        Summary decree will be granted to the extent of finding that the first defender was in breach of its fiduciary duty to the pursuer;  quoad ultra the pursuer’s motion for summary decree will be refused; 

(b)        Averments by the pursuer of a causal link based upon failure by the first defender to disclose its breach of duty (see paragraph [48] above) will be excluded from probation; 

(c)        Averments by the pursuer of separate breaches of fiduciary duty in 2012-13 will be excluded from probation; 

(d)       Quoad ultra the relevancy of the pursuer’s claim to have sustained loss as a consequence of the first defender’s breach of fiduciary duty will be determined after proof;

(e)        The relevancy of the defence of contributory negligence will be determined after proof.

3.         The defenders’ motion to dismiss the action based upon breach of contract and negligence as irrelevant at this stage will be refused. 

[77]      I wish to express my gratitude to all counsel for their very full and carefully researched presentation of difficult issues.  Before pronouncing an interlocutor I shall put the case out by order to discuss further procedure, including more precise identification of the passages in the pleadings that are to be excluded from proof.  Questions of expenses are reserved.