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OUTER HOUSE, COURT OF SESSION
[2008] CSOH 84
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OPINION OF LADY
DORRIAN
in the cause
IRIS JOAN MILNE
Pursuer;
against
HAZEL MARGARET GRAY
and ANOTHER
Defenders:
and
GILLANDERS MOTORS (ABERDEEN)
LIMITED
Pursuers;
against
HAZEL MARGARET GRAY
and ANOTHER
Defenders:
________________
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Pursuers: Benyon;
Lefevre Litigation
Defenders: Reid, Q.C., Simpson; Paull & Williamson
4 June 2008
[1] These
are two associated actions raised against the two individual directors and sole
shareholders of an accountancy company, Scotts Private Client Services
Limited. In each case the pursuers had
invested funds in a scheme offered by an English accountancy firm, Dobb
White. In each case those funds were
remitted for the pursuers by Scotts following, separately in each case, a
meeting in Scotts' offices with the first defender. The use made by Dobb White of those funds is
the subject of an ongoing criminal and civil investigation in both the United
States and the United Kingdom. Scotts were subject to an investigation by
the Financial Services Authority which found that the company had failed to
exercise due skill, care and diligence in their conduct relating to the
investment of funds with Dobb White. A
financial penalty of £25,000 was imposed on Scotts. In each case the pursuers aver that they have
lost their investment and that there is no prospect of recovery from Dobb White
or the partners thereof. Scotts are now
in liquidation and it is averred that they are believed to have no assets. It is further averred that the professional
indemnity insurers for Scotts have declined to be involved on the basis that
investment with Dobb White was not covered by that insurance. It is in these circumstances that the directors,
who were also the sole shareholders, are sued individually. There is a dispute
in each case over whether or not the first defender advised the pursuers to
invest in the Dobb White scheme. What is
not disputed is that the decision to invest was taken in each case after a
meeting at Scotts' offices with the first defender.
[2] In
the Milne case the meeting took place with the pursuer's estranged husband
following which it is averred that the first defender sent a pro forma letter of instruction for the
pursuer to sign, which the pursuer did on 30 January 2002.
The first defender replied by pro
forma letter dated 31 January
2002 which contained the following sentence relating to Scotts,
namely:
"We confirm that
the company carries professional indemnity insurance up to the value of £5
million per claim. If you require any
further information please do not hesitate to contact us".
Receipt of £50,000 was acknowledged
by Scotts on 19 March and receipt of a further £20,000 acknowledged on
22 March, both 2002. The letter of
19 March confirmed that the sum had been invested as discussed. It contained the following sentence: "These
funds remain covered by our professional indemnity insurance."
[3] It
is averred that the pursuer proceeded to invest the sum of £70,000 with Scotts
reliant upon the representations regarding professional indemnity insurance
(P.I.I.) contained in the letters of 31 January
2002 and 19 March
2002. The pursuer avers
that:
"the
representations by the defenders, concerning the coverage or inclusion of the
investment activity being carried out by Scotts for the pursuer, were made
fraudulently. The defenders had no
honest believe that those representations were true."
[4] In
the Gillanders case it is averred that the decision to invest followed a
meeting in Scotts' offices between the first defender and the two principal
shareholders of the pursuers Susan Gillanders and Sally Elington. A similar pro
forma letter of instruction, issued
to and signed of behalf of the pursuers on 5 April 2002, was acknowledged on 5 April 2002 in a letter from
Scotts which included the following statement:
"We confirm that the company carried professional indemnity insurance up
to the value of £5 million per claim.
If you require any further information please do not hesitate to contact
us." By letter dated 29 May 2002 Scotts confirmed that the sum
of £250,000 had been invested as discussed.
That letter went on to say "These funds remain covered by our
professional indemnity insurance." It is
averred that the pursuers proceeded to invest the sum in question reliant upon
the representations relating to professional indemnity insurance in the letters
of 5 April 2002 and 29 May 2002. It is averred that:
"the
representations by the defenders, concerning the coverage or inclusion of the
investment activity being carried out by Scotts for the pursuer, were made
fraudulently. The defenders had no
honest belief that those representations were true."
[5] In
each action the cases made against the defenders are substantially the same,
being first a case of fraudulent misrepresentation against both defenders and
separately a case of negligent misrepresentation.
Fraudulent misrepresentation
[6] The letters in which the
representations were made were sent and signed by the first defender and are on
that basis attributed to her. The
attribution to the second defender is made on the basis of an averment that the
letters were part of:
"pro forma correspondence which had been
provided by Dobb White directly to the second defender. In these circumstances, the pursuer contends
that the representations contained in those letters were made by and with the
full knowledge and agreement of both defenders."
There then follow averments
designed to support the allegation that the defenders had no honest belief in
the representations. These essentially
consist of numerous areas of enquiry, including failure to obtain information
from their professional indemnity insurers.
Negligent misrepresentation
[7] In each action the case on
negligent misrepresentation is based on allegations of assumption of personal
responsibility by the defenders. In each
case it is averred that "there was a direct and proximate relationship ...
whereby the defenders assumed a professional and legal responsibility" for the
pursuers and their investments. In each
case it is averred that the defenders knew or ought to have known that the
pursuers would rely on the correspondence in which the representations were made
as being true and accurate when deciding whether or not to proceed with the
investment with Scotts.
[8] As
to the assumption of personal responsibility, in the Milne case it is averred
that the pursuer contacted Scotts for investment advice on the recommendation
of her then (but estranged) husband. A
meeting took place at Scotts' offices between the first defender and the
pursuer's husband who was acting as her agent.
The pursuer was not present. It
is averred that the first defender advised investing the pursuer's funds in the
Dobb White scheme and that this advice was accepted by the pursuer when
communicated to her by her husband. No
further averments were made by the pursuer, but the defenders aver that the
husband was a longstanding client of a firm in which the second defender had
been a partner and subsequently of Scotts.
[9] In
the Gillanders' case it is averred that the two principal shareholders relied
on and trusted the second defender because of the long period of time that he
had advised and acted for the pursuers on a continuous basis, beginning in the
early 1990s when he was a partner in Rutherford Manson Dows and thereafter at
Scotts. It was averred that he knew and
acted for the parents from the early 1990s onwards and, after the death of
their father in 1991, visited his widow at home and provided financial advice
for her. It is averred that these
circumstances also led to reliance and trust being placed in the second
defender by the pursuers. It is then
averred that after the establishment of Scotts, the first defender became their
main point of contact and "a similar working relationship of trust and reliance
began relative to the first defender".
There are also averments that the investment was recommended by the
first defender who informed the pursuers that it was (a) for selected
clients only; (b) a safe one; and (c) that in any event Scotts had £5
million of professional indemnity insurance.
[10] The defenders deny that any advice was given asserting
essentially that they supplied only a conduit between the pursuers and the said
scheme. They deny any assumption of
personal responsibility. They aver that
any involvement by the defenders was routine by them as directors for and
through Scotts.
Defenders' submissions
[11] In summary, the defenders'
submissions were (1) that the action based on fraudulent misrepresentation
should be dismissed since the averments are not capable of yielding the
inference that the defenders, or either of them, acted fraudulently;
(2) that the action based on negligence should be dismissed since the
averments do not disclose a basis for holding after proof that either of the
defenders assumed personal responsibility to the pursuers, that the pursuers
relied on such an assumption of personal responsibility, or that such reliance
was in all the circumstances reasonable.
(3) In the Gillanders' case the pursuers' reliance on a fax dated 1 June 2002 is attacked as
irrelevant since it is after the date on which the investment was made and
could not therefore have been relied on in the decision to invest and that it
is not averred that the information was provided to the pursuers. (4) In each case an averment that the
FSA imposed a financial penalty on the defenders is attacked on the basis that
the penalty was in fact imposed on Scotts; and (5) finally there were arguments
relating to quantum.
[12] In support of these propositions counsel highlighted the fact
that all the correspondence was signed as a director on behalf of Scotts, in
whose offices the relevant meetings had taken place. In the Milne case the letter of 19 March
2002 came after the fund had already been transferred, at least so far as the
first £50,000 is concerned, and is too late to be relied on as a
misrepresentation inducing action. Even
if it were possible to differentiate between that sum and the subsequent
£20,000, the pursuer does not seek to do so, averring that there was one
decision to invest the sum of £70,000.
Accordingly, the two sums fall to be treated in the same way. Further, there is nothing in the averments of
the case to take it out of the ordinary course of any transaction in which
someone seeks investment or other advice from a company. There is no basis for attribution of personal
liability to either defender. The
averments are wholly inadequate to the attribute the representations complained
of to the second defender nor are they adequate to allow an inference of the
assumption of personal responsibility for either defender. There is no averment of special reliance, no
averment of reliance on personal responsibility nor is there an averment that
the defenders accepted personal responsibility for the truth of representations
made on behalf of the company.
[13] In the Gillanders' case it was submitted that the reference to
the fax dated June is irrelevant since it comes too late to be relied
upon. In fact the pursuers do not aver
that they relied upon it in the decision to invest. The averments of trust and reliance placed in
the second defender relate to a time when he was acting on behalf of a firm of
accountants or as a director in Scotts and are not enough to infer personal
responsibility. There is no averment
that the defenders assumed responsibility for statements made or for anything
else.
[14] Counsel submitted that an objective test should be applied for
asking the question whether responsibility should be held to have been assumed
by the defender under reference to Henderson
v Merrett Syndicates Ltd 1995
2 A.C.145 at 180. To establish
personal liability of a director there had to have been such an assumption of
personal responsibility as to create a special relationship between the parties
in respect of which an objective test was to be applied, focusing on what was
said or done by the defender or on his behalf, the question being whether the
plaintiff could reasonably have relied, and had relied, on an assumption of
personal responsibility by him. In Williams &c v Natural Life Healthfoods Ltd &c 1998 1 W.L.R. 830 views
had been expressed in the Court of Appeal that a company director can only be
personally responsible from negligent mis-statements if some special
circumstances can be established setting the case apart from the ordinary and
"in the case of a director of a one-man company particular vigilance is needed,
lest the protection of incorporation should be virtually nullified." In the House of Lords, Lord Steyn (page
835) observed that:
"what matters is
not that the liability of the shareholders of a company is limited but that a
company is a separate entity, distinct from its directors, servants or other
agents. ........................ it is not
sufficient that there should have been a social relationship with the
principal. There must have been an
assumption of responsibility such as to create a special relationship with a
director or employee himself."
He also quoted with apparent
approval (page 834) a passage from the Court of Appeal stating that the
category of case in which a director will be fixed with personal liability for
negligent mis-statement is:
" a rare
category and a severely restricted one.
If that were not so representees could set at nought the protection
which limited liability is designed to confer on those who incorporate their
business activities. The mesh is kept
fine by the stringency of the question which the law requires to be asked: do the circumstances when viewed as a whole,
involve an assumption by the director of personal responsibility for the
impugned statement?"
These passages were also relied on by
Levison J in Partco Group Ltd &c
v Wragg &c 2002 2 B.C.L.C.
323 at 332 where he observes:
"At its very
lowest, these views provide not merely a view of the threshold that must be
surpassed but also very good reasons why there is that threshold in the first
place. Whereas I do not go so far as to
say that an express personal warranty is a necessary prerequisite ........ I
certainly endorse the view that the circumstances will be rare and that the
communications which 'cross the line' must do something to identify an
acceptance of personal (as opposed to corporate) responsibility".
Counsel also referred to Standard Chartered Bank v Pakistan Shipping Corporation &c 2003
1 A.C. 959 at paragraphs 20 and 22 which made it clear that a
director cannot evade personal responsibility for fraud by claiming to commit
it on behalf of his company.
[15] As to the averments of fraud, the facts relied on to support an
absence of honest belief or recklessness do not support such inferences. The pursuers do not aver what they say is the
meaning of the misrepresentations relied upon nor what it was understood that
the insurance would cover, whether defalcations in the hands of Scotts or in
the hands of Dobb White or anyone else.
The statements are insufficiently specific to be capable of being
characterised on their face as fraudulent.
All the allegations of failure used to support a lack of honest belief
are drawn from the FSA report and the failures are thus failures of the company
not of the individuals. The failures led
the FSA to a conclusion that there was a breach of due care and skill on the
part of Scotts and it is not apparent why a different conclusion, relating to
fraud or dishonesty, should be reached by this court on the same facts. Counsel submitted that a party was not guilty
of fraud simply because he did not have reasonable cause to believe something
to be true. It is not enough to say that
a party might by ordinary diligence, or even with very little further enquiry,
have satisfied himself that statements made were inconsistent with fact. If they were made in the bona fide belief that they were true then the party making them is
not guilty of fraudulent representation merely because they have no reasonable
grounds for believing the statement to be true.
In support of these submissions reference was made to Derry v Peek 1889 14 A.C.337, Lees
v Todd 1882 9 R. 807 and H & J M Bennett (Potatoes) Ltd v Secretary of State for Scotland 1986
S.L.T. 665 (Outer House) and 1990 S.C.(H.L.) 27 (Inner House and House of
Lords). Counsel referred to Royal Bank of Scotland plc v Holmes 1999 SLT 563 to confirm the
need for very specific averments where fraud is alleged. Counsel did not proceed to address arguments
on items 4 and 5 noted at paragraph 11 above as the pursuers' counsel is
offered to amend on these matters.
Pursuers' submissions
[16] On these last two issues,
Counsel sought leave to amend in both cases to reflect the fact that the
penalty of £25,000 had been imposed on Scotts rather than the defenders and
that substitution was allowed. Should the
case survive procedure roll, counsel would amend in relation to the defenders
criticisms of the pleadings on quantum. As far as the law was concerned he
indicated that there was no dispute between the parties. His submission was that both cases were
suitable for enquiry, as they were not bound to fail even if all the averments
were established.
[17] In the Milne case counsel relied on five averments to
establish assumption of personal responsibility. These were:- that the defenders were the
whole directors of Scotts; that they were the whole shareholders; that the
responsibilities which each of them had were averred; that advice was provided;
and that her husband, as agent, explained that the funds were for secure
long-term investment. Counsel suggested
the matter be looked at in chronological form.
Stage one was the meeting with the husband. Stage two was the husband's repeating of
the advice. Stage three was the
sending of the first letter which she signed.
Stage four was the reply letter of 31 January. She says at page 15C that she relied on
the representations in that letter. At
page 21 she offers to prove that if proper enquiry had been made the
absence of P.I.I. cover for the scheme would have become apparent and the loss
would have been avoided. She offered to
prove that P.I.I. would never have been available because of the nature of what
Scotts were doing.
[18] The pursuers' case is that there was a course of common conduct
between the defenders in relation to the Dobb White scheme such that the
representations were made on an agreed and informed basis by both
defenders. The fact that Dryburgh did
not sign the letters is nothing to the point.
Counsel submitted there were three critical issues, first, whether
there was a representation which can be fixed to both; second, whether there
was a personal assumption of responsibility;
and third, whether there was reliance on the representation. He submitted that for the reasons given there
were adequate pleadings in relation to the first of these. The second item was the more difficult but
each case had to be taken on its own facts and there were differences between
this case and the cases of Williams
and Partco, most significantly that
in those cases the parties had been at commercial arm's length. In this case that was not so. The original meeting was with her husband,
there was a request for advice and there were only two directors whose
responsibilities for compliance and operational matters are averred. The pursuer offers to prove that there was a
complete failure on their part to do anything.
[19] As to reliance, it is averred at page 19 that the
defenders knew or ought to have known that the pursuer would rely on the terms
of the correspondence as being true and accurate when she was deciding whether
or not to proceed with her investment with Scotts. The fact that the pursuer does not go on to
identify individual failures by the directors personally as opposed to in their
capacity as directors did not make the case irrelevant. The FSA determination does not bind the
court, nor does it preclude, the pursuer having a relevant case.
[20] In the Gillanders' case counsel submitted that it was too
narrow a reading of the pleadings to think that the averments were confined to
the second defender having been a partner in a previous firm and thereafter
being a director of Scotts. The point is
that there was a personal trust and reliance on the second defender throughout
this long history. The fact that the
contractual dealings were with the first defender does not preclude the
existence of trust and reliance. The
pursuers offered to prove that their business followed Mr Dryburgh and
because of this the relationship with the first defender was also personal. He highlighted the averments which allege
that the pursuers were told the investment was for selected clients only and
was a safe one covered by P.I.I..
[21] Turning to the fraud case, counsel submitted that in the Milne
case the pursuer is saying that the letter of 31 January represented that
the scheme which Scotts were proposing was covered by P.I.I. That is sufficient because the pursuer in
fact goes on to offer to prove that it was not so covered. That is a matter of evidence which needs
enquiry. The pursuer offers to prove
that the failures for which the defenders are responsible amount to
recklessness. The failure to enquire was recklessness and that would establish
that there was no honest basis for the representation.
[22] Counsel moved on to deal with the issue of timing of the
representation. In the Milne case the
first representation was made on 31 January
2002 and there was then a gap of over two months before the
actual transfer of the £50,000. Simply
to delete reference to the letter of 19 March as too late would not bring
an end to the case as the question is whether the loss was inevitable by
then. That applies with more force
relating to the £20,000. Similar points
apply in relation to the Gillanders' letters although there was only
one tranche of investment. The
letter of June 2002 in the Gillanders' case does not give a route to
establishing liability, but cannot be said to be irrelevant.
Senior counsel's submissions for defenders
[23] In adopting the submissions
of his junior, senior counsel for the defenders started by addressing the
negligence cases which were averred in article 6 in each action. He submitted that the weakness in each action
is highlighted by the defenders' averments at page 11 calling upon the
pursuer:
"to specify the
acting she relies upon (a) to show that the defenders or one or other of
them was assuming personal responsibility towards her and (b) to justify
any reasonable belief on her part that the defenders or one or other of them
was assuming personal responsibility towards her."
In neither case does the pursuer
identify what they took from the representations or what was done to convey to
them that personal responsibility was being assumed. The factors relied on by the pursuers do not
begin to take the cases out of the ordinary.
It can thus be said that even if everything were proved the negligence
cases in each action are simply bound to fail.
[24] Moving onto fraudulent misrepresentation, the first step must
be to identify the misrepresentation complained of. This can be found in the Milne case at
page 15 as being the representations in the letter of 31 January 2002 that Scotts carried
professional indemnity insurance up to the value of £5 million and in the
letter of 19 March that the funds "remained covered by our professional
indemnity insurance". The article goes
on to aver that "the representations by the defenders concerning the coverage
or inclusion of the investment activity being carried out by Scotts for the
pursuer were made fraudulently." Similar
averments are made at pages 17 and 18 in the Gillanders case. The representation is thus said to be one
concerning coverage or inclusion of the investment activity being carried out
by Scotts. However, the pleadings do not
indicate what the pursuers suggest these representations were meant to convey
or what they took from them. The
defenders are entitled to know what it is that each pursuer says was conveyed
to them by the alleged misrepresentations.
Were they to be covered if Scotts embezzled the money? If someone else did? If the value of the investments simply
dropped? If Scotts were negligent? There is no clue given as to whether any real
discussion about this question of P.I.I. took place nor is there any indication
that any particular importance was attached to this part of the letter. There is no offer to show what the statement
would convey to a reasonable recipient of such a letter far less what it
actually conveyed to each pursuer.
[25] These difficulties in identifying what was conveyed by the
representation lead onto questions of what the pursuers actually relied on for
the purposes of causation. In Milne, at
page 7B it is averred that the advice to invest was communicated to the
pursuer by her husband and that she relied and acted upon it. That is inconsistent with the subsequent
averments about reliance on the documentation and in itself makes the action
irrelevant. Similarly in the Gillanders
case it is averred that they were advised to invest in the bond that it was
available through a financial advisor in Dundee, that
they accepted the advice, met with Mr Grant and invested in the bond. It is averred that a representation as to
P.I.I. was made at the original meeting.
However, subsequently it is averred that the investment proceeded in
reliance of correspondence and again there is an inconsistency.
[26] As to the perpetrator of the alleged misrepresentation, this
could only be the first defender who signed the letters. The imputation of knowledge which the
pursuers seek to draw from the pro forma
correspondence is not justifiable. There
is no averment that the second defender knew the letters were being sent
out. Dealing with fraud rigorous
standards for specification are required.
In the absence of averments that the second defender gave the pro forma to the first defender and knew
that it was going out and was sent it cannot be inferred that he was acting in
concert or part of some common enterprise.
[27] In seeking to raise an inference of dishonesty the pursuers
simply lift criticisms from the FSA report.
The FSA considered the question of whether there had been recklessness
or a deliberate act on the part of Scotts but decided there had been no
deliberate or reckless conduct. They
concluded that there had been a breach of a duty of care by Scotts. Clearly that is not binding on the court but
the pursuers must do more than simply take the conclusions of the FSA and
repeat them, asking the court to come to a different conclusion. One cannot make a jump from the failures
alleged to an inference of the absence of honest belief. The pursuers rely on them as an accumulation
of factors but even examined individually it is difficult to identify what each
factor or circumstance has to do with an honest or dishonest belief that Scotts
had P.I.I. cover to £5 million per claim.
Pursuers' reply
[28] In a short reply counsel for the pursuers submitted that it was
important for the pleadings as a whole to be considered. One should beware of over-analysis: the pursuers' case is simply that the absence
of P.I.I. relative to the scheme that Scotts proposed lies at the heart of the
fraud. There is a complete absence of
P.I.I. cover relative to this scheme. If
that is right then the issue of what the pursuers subjectively took from the
representations flies off. The complete
absence of cover is the basis of the dishonesty.
Discussion
[29] In each action the case on negligence depends on the assumption
by the two directors of personal responsibility towards the pursuers. In Milne the only contact was with the
pursuer's husband and it is not averred that the pursuer herself at any stage
had personal dealings with either of the directors. The averments do not go
anywhere near the sort of averment which is required to take a case out of the
ordinary and elevate it to one where the directors were assuming personal
responsibility.
[30] In the Gillanders case there is at least more of an effort to
make averments directed to this issue, but there too the averments are of a
fairly basic kind. It is averred that the pursuers had prior dealings with the
second defender such as to justify an inference that in his dealings with the
pursuers he was assuming a personal responsibility. However, the dealings with
the second defender were all in a professional capacity. The fact that the
pursuers' business might have followed him as he moved from one post to another
is neither her nor there: such a practice is relatively common in all
professional relationships. People continue to take their business to the same
accountant or solicitor through changes of firm on a regular basis, and once
even did so with bank managers, without an assumption of personal
responsibility being implied by the acceptance of that business. As far as the
first defender is concerned, the situation is even weaker. There are no
averments of prior dealings and the pursuers simply rely on an assertion that
because they had come to place reliance on the second defender their dealings
with the first defender, as his associate, must be vested with the same
quality. Even if there had been enough to impute responsibility to the second
defender, these averments relating to the first defender simply would not do.
It is not averred that the first defender was even aware of the prior dealings
with the second defender and there is no basis at all for making the leap to an
assumption of personal responsibility by the first defender. In each case what is required are averments
from which a pursuer might be able to show that a relationship had gone beyond
the merely professional and had become in some way personal. The fact, relied
upon heavily by the pursuers, that there were only two directors is wholly
neutral. It is worth noting that the averments in each case are that the
pursuers consulted Scotts, not either of the defenders individually. The investment
was placed on their behalf "by Scotts" and the meetings in question took place
in Scotts' offices. The letters were signed on behalf of Scotts and not in any
personal capacity. In the Milne case it
is specifically averred that that the contract was with Scotts. The averments
do not take the professional relationship out of the ordinary in any way which
would entitle a court to make an objective assessment that a line between
professional and personal responsibility had been crossed.
[31] Turning to the fraudulent misrepresentation cases, the first
issue I require to address is the attempt to attribute the alleged
misrepresentation to the second defender. It is not averred that the second
defender knew that the representations in the specific letter had actually been
made to the pursuers or that he instructed or authorised the representations.
The case is simply that since the first representation was in a pro forma
letter allegedly given to him by Dobb White, he must have known that the
representations were being made and so bear responsibility for any use to which
the letters were put. I cannot accept that to be the case. In each case he
personally had no dealings with the pursuers in respect of the transactions
complained of and the only point of contact was the first defender. In the
absence of averments from which it could properly be averred that the second
defender was a knowing party to the allegedly fraudulent misrepresentations
made to each pursuer I do not think any case against him on such a basis can
succeed.
[32] Clearly no dispute about attribution arises in relation to the
first defender. However, there are other areas of difficulty in the fraudulent
misrepresentation cases made against her.
[33] The first relates to specification of the alleged
misrepresentation. The pursuers in each
case content themselves with averring that in essence the misrepresentation was
one "concerning the coverage or inclusion of the investment activity being
carried out by Scotts for the pursuer", the "coverage and inclusion" being
related to Scotts' P.I.I. They aver that the defenders can have had no honest
belief "that investment by Scotts of (the) funds would be covered by Scotts
P.I.I." It is averred that Scotts P.I.I. did not extend to or include cover in
respect of the investment which was to be effected on behalf of the pursuers by
Scotts". The actual wording complained of is, in the first letter: "We confirm
that the company carries professional indemnity insurance up to £5 million per
claim." This is a general statement
regarding P.I.I and not a representation "concerning the coverage or inclusion
of the investment activity being carried out by Scotts". The second letter states "These funds remain
covered by our professional indemnity insurance". Neither pursuer avers what they understood
from the representation nor what such representations might reasonably be said
to convey, as to the extent of the cover. Counsel for the pursuers submitted
that such averments were not necessary since the position was simply that there
was no P.I.I. cover of any kind or extent in relation to this investment. I
have given careful consideration to the question of whether in these circumstances the pursuers' scattered
averments, taken together, might not suffice. However, I have come to the
conclusion that they will not suffice. I have had regard to the observations of
Lord Macfadyen in Royal Bank of Scotland v Holmes 1999 SLT 563 at 570 that it
is "essential for the party alleging fraud clearly and specifically to identify
the act or representation founded upon.....". In this case the detail of the
exact representation is not set out sufficiently clearly to give the defenders
fair notice. It is important in a case of this kind that the exact nature and
extent of the representation, and its implications, be identified as a
necessary first step in determining whether the representation induced actings
of the pursuers which would not otherwise have followed. It is impossible to
ascertain whether the basis on which the pursuers say they proceeded was a
confidence that their funds would be protected against defalcations at the
hands of Scotts; or negligence by Scotts; or of defalcations at the hands of
Dobb White; or by someone else; or whether they thought that they would be
entirely protected from risk: in other words that the presence of P.I.I. might
protect them against the risk that "the value of investments might go up as
well as down". This is especially so in the Gillanders case where one aspect of
the complaint is that they were told that the investment was "a safe one
covered by P.I.I.". In my view the pursuers require to aver what exactly it was
in the representation that they relied on.
[34] The import of this defect in specification can truly be seen
when one looks at the question of reliance.
In the Milne case there is barely an averment of reliance. In article 2
page7B-C it is in fact averred that she accepted and relied upon the advice
given to her husband at his meeting with the first defender and repeated to her
by the husband. It
is not averred that any representation regarding P.I.I was made at that meeting
or conveyed to the pursuer by her husband. The averments that she relied on
representations in the correspondence of 31 January and 19 March 2002 are entirely inconsistent with
these earlier averments. The letter of 19 March post-dates the investment and
cannot in any sense be the basis on which the pursuer made the decision to
invest. The representation in the letter of 31 January is only the general
representation regarding the holding of P.I.I. by Scotts. I do not consider
that these averments are sufficient to enable the pursuer to demonstrate
representations on which reliance was placed by them for the purposes of
investing in the scheme in question.
[35] The position is slightly different in the Gillanders case since
in that case it is averred that a representation was actually made at the
meeting. That representation might not be specifically relied upon by the
pursuers but it would in my view be capable of colouring the subsequent general
representation made in the letter of 5 April. That letter pre-dated the
investment and could form the basis of reliance if the nature and extent of the
representation were made clear: however, for the reasons I have already given I
do not think this has been done. The letter of 29 May is after the investment
was made and cannot form the basis for reliance. The subsequent fax is even
more remote.
[36] Finally I turn to the question of whether the averments would
be sufficient to entitle the pursuers to a proof on the absence of an honest
belief. In my view they are not. The averments taken as a whole do not amount
to more than saying that the defenders did not take reasonable care to ensure
that the statement made was consistent with fact. The case based on failure to
inquire is at heart a case that by ordinary diligence or with very little
further inquiry the defenders might have satisfied themselves that the
representations were inconsistent with fact. Such averments are clearly
insufficient to establish a lack of honest belief.
[37] Accordingly in each case I shall dismiss the action by
sustaining the defenders' first plea in law.
