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The test of the officious bystander

Peter Hamilton

Earlier this month, the Court of Appeal had to decide a dispute between an IFA network and one of its appointed representatives. The dispute was whether or not the network was entitled to recover, from the appointed representative, the amount of compensation the network had paid to a customer of that representative under an award by the Financial Ombudsman Service.

The facts in more detail were as follows. The IFA network was run by a partnership called Berkeley Wodehouse Associates. It had an appointed representative contract with a Mr Philip Shaw until he resigned in December 1999. Shortly afterwards, in 2001, BWA sold its entire business to a company (now called Lighthousexpress Ltd).

Before he resigned, Shaw had given some advice to a client about an investment. But in 2006, after Shaw’s resignation, the FOS decided that the advice was deficient and the client was awarded compensation of £14,600.

Lighthousexpress, having taken over the business of running the network, paid the compensation. It then wanted to recover the amount of that compensation from Shaw.

Shaw refused to pay and maintained that he was not liable for it and so Lighthousexpress sued him. It succeeded in getting judgment in the county court. Shaw appealed to the Court of Appeal.

In the Court of Appeal, counsel for Shaw argued that the right to an indemnity, which was in the appointed representative contract between him and BWA, had not been assigned to Lighthousexpress by the contract under which BWA had sold the network business. But the court rejected that argument and decided that the indemnity had been assigned to Lighthousexpress.

It was also argued on behalf of Shaw that the indemnity clause did not apply in the circumstances of the case.

The relevant part of the clause was to the effect that Lighthousexpress could only recover any excess charged by the professional indemnity insurers under the policy maintained by Lighthousexpress on behalf of its appointed representatives.

That meant that Lighthousexpress had to prove that the sum paid to the client in respect of the FOS award was an excess charged by those insurers. But, it was argued, Lighthousexpress had not produced enough evidence at the hearing before the county court judge and had therefore failed to prove that the award was an excess.

If a contract does not include a term which is clearly one which the parties must have intended to include, the court may be prepared to treat the contract as if that term were actually part of it

Two of the three judges hearing the appeal agreed that Lighthousexpress had indeed failed to prove that the award was part of the excess, and were prepared to allow the appeal for that reason.

The final argument for Shaw was that he was protected by a limitation clause in the AR contract. The clause was badly expressed and the court had some difficulty in deciding what it meant. In the end, however, the court decided that it meant that he would be liable for his debts and other liabilities to BWA (or Lighthousexpress) for a period not exceeding six calendar years following his resignation or the termination of the AR contract. But after the six-year period had expired, Shaw would no longer be liable to Lighthousexpress for any debts or liabilities.

Since Lighthousexpress had not notified a claim to Mr Shaw within six years of his resignation in respect of the compensation paid to the client, Shaw was protected by the limitation clause.

All three of the judges agreed that Shaw’s appeal succeeded on that ground and Lighthousexpress failed to recover the amount paid under the FOS award.

Contracts between an IFA appointed representative and his or her network company will usually have an express indemnity clause, which will give the network company the right to recover anything paid in respect of any liability incurred by the IFA and discharged by the network. The appointed representative contract between Shaw and BWA was therefore not unusual in that respect. What was unusual was that the scope of the clause was narrow and that a liability arising out of deficient advice was not fairly and squarely covered by the indemnity clause.

If Lighthousexpress had notified Shaw within six years of his resignation of the fact that one of his clients had made a claim, the limitation clause as drafted would not have protected him.

What would the situation then have been if there had been no express indemnity clause in favour of Lighthousexpress?

If there had been no express indemnity clause at all, would the court have required an appointed representative in Shaw’s position to indemnify Lighthousexpress? The answer could be, yes. A wrong-doer is generally personally responsible for the wrong committed. If someone else, such as an employer or principal of an appointed representative, pays the compensation for the wrong, the payer is usually entitled to recover the amount paid from the wrong-doer under the ordinary law.

If a contract does not include a term which is clearly one which the parties must have intended to include, the court may be prepared to treat the contract as if that term were actually part of it. Such a term is known as an “implied term”.

One of the tests to ascertain whether or not any particular term should be implied is the so-called “officious bystander” test. This was expressed by Lord Justice MacKinnon in a judgment in 1939. He said: “That which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with a common ’Oh, of course!’”

There would be an argument in court along the lines that no one in the position of the appointed representative would have said that of course an indemnity clause should be implied in the contract. Indeed, that may be one of the reasons why indemnity clauses are usually expressly set out. But a more significant reason is likely to be that the network company would want to draft the clause in very wide terms, so that it could recover from the appointed representative any payment made on the latter’s behalf or in consequence of the latter’s wrong-doing.

There is another test to ascertain whether a term should be implied, which is to consider whether the term was necessary to give business efficacy to the agreement.

In other words, would the contract be ineffective from a business point of view if the term were not implied as being part of the contract?

If that test is applied, it is likely that the court would imply the necessary term in the contract.

Generally speaking, the parties to a contract are free to agree on what they want the contract to say. The court will seek to give effect to that agreement. It follows therefore that the court will not imply a term into a contract which would conflict with what the parties have expressly agreed.

Thus, as in the case involving Shaw and Lighthouse-xpress, the court would not rewrite the indemnity clause that was in the contract.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. This was a poorly argued case over a badly written contract of which there still are many out there today.

    The 6 year clause was indeed badly expressed, however it does reflect the limitation period applicable to contracts.

    There are many arguments against the network’s assertion that it has a right to reclaim from an appointed representative any monies paid out as a result of a successful claim against the network, for example there is the matter of an AR’s counter claim for contributory negligence against the network itself. Or perhaps that the network accepted the business when first written and paid out the agreed split of commission and thereby made a commercial decision which cannot be revisited in the future, particularly beyond the 6 year limitation period.

    I could go on and on all day about the law relating to ‘agent and principal’, in fact I have done so for the last ten years but nobody appears to be listening. Is it beyond their capability to comprehend? By that I also mean the regulators who are sitting on a time bomb.

  2. I keep seeing references to “professional indemnity insurance held by the network on behalf of the appointed representative”.

    The PI is the network’s and nobody else’s.

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