Terms of business should be reviewed regularly in the light of experience and industry changes. Now is a good time to carry out such a review; for example, to make sure that the RDR rules relating to how IFAs describe themselves and the breadth of their advice services are properly incorporated. But firms with appointed representatives, and the appointed representatives themselves, should also be reviewing the terms of the contracts between each other.
In the course of that review, firms should consider whether the terms of the contract say what is intended and cover all the different scenarios that could arise.
A recent Scottish case illustrates one of the problems with contracts: if the express words of the contract do not cover the situation which arises between the parties, the parties may not agree on what is to happen. If the issue is important enough and involves enough money, it may end up in court, and the court will have to decide what the answer is and whether it is necessary to imply a term into the contract to deal with that situation.
An implied term is one which the law assumes to be part of the contract although it was never actually expressed in words in the contract itself.
In the Scottish case, an IFA firm called Professional Financial Services was a member of the PIA. In January 1999, the firm entered into a contract with Ms Fiona Dick, by virtue of which she became an appointed representative of the firm.
In 2000, Ms Dick advised a couple named Mr and Mrs Anderson to buy an investment. Unfortunately the advice was negligent, and the Andersons lost money as a result. In 2004, the Andersons made a complaint to the FOS. In 2006, the FOS upheld the complaint and awarded the Andersons compensation. The firm paid the compensation.
Although it was insured for professional indemnity risks, the amount in question fell within the excess, and so the firm suffered the loss. It claimed the amount of the compensation from Ms Dick.
The contract was silent on the subject of Ms Dick’s liability to the firm in the event of it having to pay compensation for losses caused by her mis-selling. She denied liability, and the matter ended up in the Scottish Court of Session, which is the equivalent of the English High Court.
Her case was that there was no express clause imposing liability on her; that there was an implied term in the contract requiring the firm to take out and maintain professional indemnity insurance covering the risk of liability to clients arising from its activities, including her activities as its appointed representative; and that there was a further implied term providing that the firm was entitled to recover its losses resulting from compensation paid to clients only from its insurer and not from her.
The judge, Lord Brailsford, decided that she was right, and dismissed the firm’s case. He said that under the PIA rules, the firm was under an obligation to obtain and maintain professional indemnity insurance cover for the activities of itself and its appointed representatives. There was therefore an implied term that the firm would arrange that insurance.
Under the contract, the firm was entitled to retain part of the commission earned by Ms Dick, and that retention went to contribute to the costs of running the firm, including its professional indemnity insurance arrangements.
In the absence of an express clause to the contrary, there was a further implied term that the firm had to rely exclusively on its insurance in order to recover losses caused by the activities of Ms Dick. It had an obligation to insure against the full extent of its professional negligence risks, and it could not recover those losses from her.
The judge relied on a case decided by the English Court of Appeal in 1985 called Mark Rolands v. Berni Inns.
In that case the plaintiff was the freehold owner and landlord of a building part of which had been leased to the defendant. One of the terms of the lease was that the landlord would keep the whole building insured against loss and damage, including by fire. The lease imposed on the defendant an obligation to pay an insurance rent which was a proportionate part of the insurance, based on the proportion of the building occupied by the defendant.
The defendant paid its part of the insurance to the landlord who insured the whole building.
The whole building was destroyed by a fire caused by the negligence of the defendant. The insurer paid the money due under the policy to the landlord, and then brought an action in the plaintiff’s name against the defendant, seeking to recover as damages for negligence the sum paid out to the plaintiff.
The judge who tried the case, dismissed the claim, and Court of Appeal dismissed the plaintiff’s appeal. It followed a line of Canadian cases, and Lord Justice Kerr said:
“An essential feature of insurance against fire is that it covers fires caused by accident as well as by negligence. This was what the plaintiff agreed to provide in consideration of, inter alia, the insurance rent paid by the defendant. The intention of the parties, sensibly construed, must therefore have been that in the event of damage by fire, whether due to accident or negligence, the landlord’s loss was to be recouped from the insurance moneys and that in that event they were to have no further claim against the tenant for damages in negligence. Another way of reaching the same conclusion… is that in situations such as the present the tenant is entitled to say that the landlord has been fully indemnified in the manner envisaged by the provisions of the lease and that he cannot therefore recover damages from the tenant in addition, so as to provide himself with what would in effect be a double indemnity. Although the receipt of insurance moneys by an innocent party is of course normally no defence to a wrongdoer…, considerations of “justice, reasonableness and public policy”… may require exceptions to this general principle. I do not think it necessary to elaborate upon this line of argument in the present case save to say that I accept it.”
So neither the tenant in that case, nor Ms Dick in the Scottish case, was required to pay for losses caused by their own negligence. This was because in both cases there were implied terms in the contracts to the effect that the insurance was for their benefit as well as for the landlord and for the firm.
The law relating to implied terms in contracts is a difficult area, and it is not always easy to say in advance what terms would, or would not, be implied.
It is worth noting that the law will never imply a term which would be contradicted by what the contractual words actually say. The wise draftsman of a contract should therefore try to cover all likely eventualities by expressly stating in clear words what is to happen in each situation. With that thought in mind, when firms review their contractual arrangements, they should try to avoid having to rely on implied terms.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk