Lucy Burnford & Ors v Auotmobile Association Developments Limited

The main question raised by this appeal is whether Judge Paul Matthews (“the Judge”) was right to strike out the claim on the basis that it was barred by the “reflective loss” principle considered by the Supreme Court in Marex Financial Ltd v Sevilleja [2020] UKSC 31, [2021] AC 39 (“Marex”). There is also an issue as to the implications of a settlement agreement (“the Settlement Agreement”) concluded on 22 December 2020 between the second claimant, Mr Oliver Astley, and, among others, the defendant, Automobile Association Developments Limited (“AAD”).

The claimants are all former shareholders in Motoriety (UK) Limited (“Motoriety”). Mr Astley and the first claimant, Ms Lucy Burnford, were also directors of Motoriety. The other claimants (Mr Giles Fitzpatrick, Mr Michael Symons and Mr Kevin Gaskell) were not founder shareholders, but they had subscribed for shares by 21 January 2015 for sums totalling £250,000. AAD is a company in the Automobile Association group (“the AA Group”).

Motoriety’s business involved products called “Automyze” and “Garage Guide”. The former kept an electronic record of a vehicle’s service history and sent prompts to motorists when vehicles were due for servicing or MOT tests. The latter consisted of an online garage directory and booking platform.

In 2015, there were negotiations which ultimately led to AAD investing in Motoriety. According to the particulars of claim, “the Claimants (and Motoriety’s other shareholders) wished to develop and expand Motoriety’s business by finding a suitable investment partner enabling the expansion of the company’s subscriber base” and potential investors included not only the AA Group but Solera Holdings Inc (“Solera”), a subsidiary of which provided a vehicle history checking service. The particulars of claim explain that “[s]ubstantive discussions between the Claimants/Motoriety and [AAD] commenced in February 2015” and that “Motoriety and its shareholders and managers, including the Claimants, were principally represented in these discussions by Ms. Burnford and Mr. Astley”.

In May 2015, heads of terms were agreed between AAD and Motoriety setting out terms and conditions on which AAD was willing to proceed with negotiations with regard to investment in Motoriety. On 28 August 2015, an investment agreement (“the Investment Agreement”) was concluded between the claimants, Motoriety’s other shareholders, Motoriety itself and AAD under which AAD agreed to subscribe for 50% of the shares in Motoriety for £400,000 and also, subject to the delivery by Motoriety of an information technology development plan in an agreed form, to lend Motoriety £400,000 by way of “Marketing Facility”. By clause 12.1, Motoriety’s shareholders, including the claimants, granted AAD an option to become Motoriety’s sole shareholder by purchasing from them the balance of the issued shares. The option could not be exercised unless Motoriety’s “EBITDA” (i.e. the company’s earnings before interest, taxes, depreciation and amortisation for a year) was at least £1.3 million, but, if it was exercised, AAD was to pay the shareholders sums termed the “Initial Option Payment” and the “Earn-out Consideration”. The “Initial Option Payment” was defined to refer to the aggregate of six times 50% of Motoriety’s “EBITDA” for the 12 month period ending immediately before the option’s exercise and an amount in respect of cash held by or on behalf of the company. The “Earn-out Consideration” was calculated by multiplying by six 50% of the mean EBITDA in the year before the option was exercised and (a) the next year, (b) the next two years and (c) the next three years and, in each case, deducting the “Initial Option Payment”.

Also on 28 August 2015, AAD and Motoriety entered into a brand licence and services agreement (“the Licence Agreement”) pursuant to which, among other things, AAD licensed Motoriety to use certain trade marks.

It is the claimants’ case that they and Motoriety concluded the Investment Agreement and the Licence Agreement in “intended and specific reliance on the Immediate Access Representation, the Honesty Representation, the Business Plan Representations and the Services Representation”: see paragraphs 7.6 and 8.4 of the particulars of claim. References to the alleged representations being relied on by both the claimants and Motoriety are also to be found in paragraphs 3.4, 4.7, 6.1.2 and 6.3 of the particulars of claim. The “Immediate Access Representation” is described as follows in paragraph 3.1 of the particulars of claim:

The claimants allege that the Immediate Access Representation, the Honesty Representation, the Business Plan Representations and the Services Representation were all false and made fraudulently in that they were made intentionally or with reckless disregard as to their truth or falsity: see paragraphs 10.1, 11.1, 15.1 and 15.2 of the particulars of claim. It is further alleged that the Immediate Access Representation, the Honesty Representation and the Business Plan Representations were made negligently: see paragraph 12 of the particulars of claim.

There are also allegations of breach of contract. This is said in paragraph 9 of the particulars of claim:

Breaches of these terms are alleged in paragraph 14.1 of the particulars of claim. It is said that:

For whatever reasons, Motoriety did not thrive. It went into administration on 24 April 2017 and was dissolved on 5 June 2019. The administrators sold its business and assets for £20,004 to Automobile Association Travel Services Limited, another company in the AA Group, on 25 April 2017.

The claimants contend that they have suffered loss as a result of the misrepresentations and breaches of contract which they allege. So far as misrepresentation/deceit is concerned, paragraph 16.1.1 of the particulars of claim asserts:

This is then said on the subject in the draft amended particulars of claim:

Schedule 1A to the draft amended particulars of claim is headed “Schedule of loss and damage – Misrepresentation/deceit” and divided into two parts. The first, Table 1, has the heading “Loss of Claimant Share Value” and specifies a “Share Value – Range” for each claimant. The second, Table 2, reads as follows:

Turning to breach of contract, the draft amended particulars of claim say this:

Schedule 1B to the draft amended particulars of claim is headed “Schedule of loss and damage – Breach of Contract” and, like schedule 1A, is split into a “Table 1” and a “Table 2”. Table 1 gives somewhat larger figures than schedule 1A’s Table 1, but otherwise corresponds to it. Table 2 reads as follows:

The present proceedings were issued on 7 May 2021 and served on AAD on 3 June 2021. In its defence, served on 27 August 2021, AAD not only denied the substance of the claimants’ allegations against it, but asserted, first, that the loss which the claimants allege that they have suffered is reflective of loss that would also have been suffered by Motoriety and so is not recoverable by the claimants as a matter of law and, secondly, that some of Mr Astley’s claims are barred by the Settlement Agreement.

On 8 October 2021, AAD applied for the claim to be struck out, or for summary judgment in its favour. The matter came before the Judge, sitting as a Judge of the High Court, who, in a judgment dated 28 February 2022, concluded that all the claims against AAD are barred by the “reflective loss” principle and, further, that the Settlement Agreement prevents Mr Astley from making the breach of contract claims and the claim based on the Services Representation. He therefore struck out the claim in its entirety.

It was common ground before both the Judge and us that AAD’s strike out/summary judgment application should be determined by reference to the draft amended particulars of claim which the claimants have provided and on the basis that the facts alleged in that document are assumed to be true. In the remainder of this judgment, references to the “particulars of claim” are to the draft amended particulars of claim.

There are three grounds of appeal. Two of them relate to the applicability of the “reflective loss” principle. The claimants say, first, that the issue is not suitable for summary determination because it raises fact-sensitive questions and the relevant law is uncertain and developing and, secondly, that their claims are not in any event barred by the “reflective loss” principle. The third ground of appeal concerns the Settlement Agreement. It is said that, correctly construed, the Settlement Agreement does not prevent Mr Astley from pursuing any of his claims.

The earliest of the cases concerned with “reflective loss” to which we were taken was Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (“Prudential”). In that case, the claimant alleged that two directors (Mr Bartlett and Mr Laughton) of a company referred to as “Newman” had conspired together to cause Newman to buy assets at an overvalue and, to that end, Newman’s shareholders had been sent a misleading circular. The Court of Appeal (Cumming-Bruce, Templeman and Brightman LJJ) held this “personal claim” to be misconceived. At 222-223, the Court said:

The “reflective loss” principle was the subject of consideration by the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1 (“Johnson”). Lord Bingham said at 35-36 that he considered the authorities to support the following propositions:

The leading case on the “reflective loss” principle is now Marex, where, by a majority, the Supreme Court endorsed it. Lord Reed, with whom Lady Black and Lord Lloyd-Jones agreed, reaffirmed the approach adopted in Prudential and by Lord Bingham in Johnson: see paragraph 89. Prudential, Lord Reed said at paragraph 9, decided that:

As for Johnson, Lord Reed said at paragraph 67 that that case:

Summarising his conclusions, Lord Reed said this:

Lord Reed concluded in paragraph 89:

Lord Hodge, agreeing with Lord Reed, endorsed the proposition that “where a company suffers a loss as a result of wrongdoing and that loss is reflected to some extent in a fall in the value of its shares or in its distributions, the fall in the share value or in the distributions is not a loss which the law recognises as being separate and distinct from the loss sustained by the company”: see paragraph 99. Lord Hodge considered that “the law’s refusal to recognise the diminution in value of a shareholding or the reduction or loss of a distribution, which is the consequence of the company suffering loss as a result of wrongdoing against it, as being separate and distinct from the company’s loss is a principled development of company law”: see paragraph 108.

In Primeo Fund v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22, [2022] 1 All ER 1219 (“Primeo”), Lords Kitchin and Sales, with whom Lords Reed, Hodge and Lloyd-Jones agreed, stressed at paragraph 55 that the “reflective loss” principle is “a rule of substantive law associated with the rule in Foss v Harbottle and concerned with the recognition in law of particular types of loss”, “not a procedural rule concerned only with the avoidance of double recovery”. At paragraph 59, Lords Kitchin and Sales expressed the view that:

In Allianz Global Investors GmbH v Barclays Bank plc [2022] EWCA Civ 353 (“Allianz”), the Court of Appeal proceeded on the basis that, as the Privy Council had held in Primeo, the applicability of the “reflective loss” principle is to be tested by reference to the position when the claimant’s loss is said to have been suffered rather than that when the claim was brought: see paragraphs 19, 45 and 47-49. UCP plc v Nectrus Ltd [2022] EWCA Civ 949 (“Nectrus”) also indicates that that is the correct view: see paragraph 15.

For present purposes, I would draw the following points from the authorities:

In X (Minors) v Bedfordshire County Council [1995] 2 AC 633, Lord Browne-Wilkinson noted at 740-741 that “[w]here the law is not settled but is in a state of development … it is normally inappropriate to decide novel questions on hypothetical facts”. Likewise, in Lungowe v Vedanta Resources plc [2019] UKSC 20, [2020] AC 1045, Lord Briggs, having referred in paragraph 48 to “an assertion that the claim against Vedanta raised a novel and controversial issue in the common law of negligence”, said that “difficult issues of law of that kind are best resolved once all the facts have been ascertained at a trial, rather than upon the necessarily abbreviated and hypothetical basis of pleadings or assumed facts”.

Citing these cases, Mr Stephen Auld KC, who appeared for the claimants with Mr KV Krishnaprasad, argued that the law relating to the “reflective loss” principle is uncertain and developing and, hence, that the applicability of the principle in the present case should be determined at a trial rather than on the basis of assumed facts. Following Marex, Mr Auld submitted, the law is in a state of transition.

However, the “reflective loss” principle has recently been considered in depth by the Supreme Court, which, in Marex, confirmed its existence and explained its scope. As Mr Auld stressed, the principle has since been the subject of debate in Primeo, Allianz, Broadcasting Investment Group Ltd v Smith [2022] EWCA Civ 912, [2022] 1 WLR 1 and Nectrus. However, the points aired in those cases do not give rise to any legal uncertainty relevant to the present case, and the mere fact that it might be possible to identify other issues on which the implications of the “reflective loss” principle might be the subject of argument cannot have required the Judge to decline to determine the strike out/summary judgment application. It is not the case that the Court should not entertain a strike out/summary judgment wherever an undecided question can be discerned in the relevant area of law. In fact, as was pointed out by Mr Andrew Thompson KC, who appeared for AAD with Mr Ben Griffiths, such questions might be said to exist in any legal field. In all the circumstances, I have not been persuaded that the strike out/summary judgment was unsuitable for summary determination on the basis that the relevant law is uncertain and developing.

The claimants also suggest that the strike out/summary judgment application raised issues of fact which could not be determined. Plainly, the Judge would have been wrong to strike out the proceedings if the application of the “reflective loss” principle depended on the resolution of such issues. If, on other hand, it can be seen at this stage, assuming the facts pleaded in the particulars of claim to be correct, that the claimants’ claims are barred by the “reflective loss” principle, then the existence of hot dispute between the parties on factual matters is immaterial. I shall turn, therefore, to whether that is the case, taking the misrepresentation claim first.

The claimants allege that they have suffered very substantial loss by way of “Loss of Claimant Share Value” as a result of misrepresentations by AAD. In essence, what is suggested is that the claimants’ shares were rendered valueless in consequence of the decision to proceed with AAD rather than Solera and that that decision was made in reliance on false representations by AAD.

However, it is evident from the particulars of claim that, supposing the allegations of misrepresentation to be well-founded, Motoriety would itself have (or have had) a cause of action against AAD in respect of them. Ms Burnford and Mr Astley are said to have represented Motoriety as well as shareholders in negotiations with AAD; the “Immediate Access Representation” is explicitly stated to have been made to “the Claimants and Motoriety” and the “Honesty Representation” is said to have been implied in the making of the “Immediate Access Representation”; there are multiple references to Motoriety having relied on all the alleged representations, implying that they had been made to it as well as to the claimants; and the particulars of claim proceed on the basis that contracting with AAD rather than Solera was disastrous for Motoriety.

It is evident, too, that the “Loss of Claimant Share Value” which is alleged is reflective of loss which, on the claimants’ case, Motoriety sustained. The claimants’ shares became worthless because of the company’s failure.

The Judge said this on the subject in paragraph 88 of his judgment:

I agree. The loss of share value would be a knock-on effect of loss suffered by Motoriety for which it would itself have (or have had) a cause of action and, hence, not be recognised by the law as “separate and distinct”. The claim is in this respect one relating to loss which the claimants would have suffered as shareholders “in the form of a diminution in share value … , which is the consequence of loss sustained by the company, in respect of which the company has a cause of action against the same wrongdoer”. It is thus barred by the “reflective loss” principle.

In the alternative, Mr Fitzpatrick, Mr Symons and Mr Gaskell maintain that the alleged misrepresentations resulted in their being unable to recover the £250,000 which they had invested in Motoriety. Mr Auld confirmed during the hearing before us that the sums in question were those that Mr Fitzpatrick, Mr Symons and Mr Gaskell had paid for their shares in Motoriety. By the time the misrepresentations are alleged to have been made, therefore, Mr Fitzpatrick, Mr Symons and Mr Gaskell no longer had the £250,000, having exchanged it for shares. If Motoriety had prospered, Mr Fitzpatrick, Mr Symons and Mr Gaskell might have been able to recoup their investments from their shares, but the failure of the company has made that impossible. In substance, therefore, the complaint is once again about loss of share value. The inability of Mr Fitzpatrick, Mr Symons and Mr Gaskell to recover the £250,000 they invested is a consequence of the fact that their shares have lost any value, and that is itself a consequence of the failure of Motoriety for which, on the claimants’ case, the company has (or had) a cause of action against AAD. To adapt Lord Bingham’s proposition (1) (quoted in paragraph 22 above), Mr Fitzpatrick, Mr Symons and Mr Gaskell are seeking “to make good a loss which would be made good if [Motoriety’s] assets were replenished through action against [AAD]”. Accordingly, the “reflective loss” principle must again be applicable.

The Judge said this about this head of loss in paragraph 117 of his judgment:

In my view, the Judge was correct. The misrepresentation claim is, in the circumstances, wholly barred by the “reflective loss” principle and the Judge was right to strike it out. The applicability of the principle does not depend on the resolution of any factual disputes.

The breach of contract claim proceeds on the footing that the Investment Agreement contained implied terms as to good faith which AAD breached and that, as a result, the claimants have been deprived of the value which their shares would otherwise have had or, alternatively, have lost the “Initial Option Payment” and “Earn-Out Consideration” which they would have received pursuant to clause 12 of the Investment Agreement.

The first question which arises in this context is whether, supposing the claimants’ contractual claim to be well-founded, Motoriety would also have (or have had) a cause of action against AAD. Mr Thompson queried whether it is even open to the claimants to suggest the contrary when, he said, they had not done so before the Judge. That the claimants did not at that stage dispute that the alleged obligations of good faith were owed to Motoriety as well as the claimants is, perhaps, borne out by passages in the claimants’ skeleton argument for that hearing in which it was said, in paragraph 6.3.5, that “[t]he Claimants (not just Motoriety) were parties to the Investment Agreement” and “[c]omplaints about the Defendant’s breaches following the conclusion of the Investment Agreement were made by the Claimants as well as Motoriety”. Leaving aside that point, however, it seems to me that, on the basis of what is alleged in paragraph 9 of the particulars of claim, any implied good faith obligations will have been owed to Motoriety as well as the claimants. Paragraph 9.1, from which the implied terms specified in paragraph 9.2 are said to be derived, asserts that “the Investment Agreement including the Business Plan and the Licence Agreement were part of a relational transaction which was akin to a joint venture” and that there was a mutual intention “for the parties to perform with integrity and fidelity to their bargain”. The “parties” in question must include Motoriety since the claimants were not parties to the Licence Agreement while Motoriety was a party to both that and the Investment Agreement. Further, it is pleaded in paragraph 9.2 that there were implied terms of the Investment Agreement “and/or as necessary the Licence Agreement between Motoriety and the AA”, confirming that implied terms in favour of Motoriety (as the only party than AAD to the Licence Agreement) were being alleged. In any case, I cannot see that the terms which the claimants allege would have been implied solely in favour of the claimants. If the terms were implied in the Investment Agreement at all, they will surely have been implied in favour of all AAD’s counterparties, including Motoriety, the more so since they related to the conduct of the business which Motoriety was conducting. Why, for example, would there be an implied obligation only to the claimants, and not to Motoriety, to exercise good faith in relation to the contents of the Business Plan?

It thus appears to me that, if the claimants have a contractual cause of action in respect of the matters they allege, so will Motoriety have (or have had) one. That being so, the claimants’ claim will be barred by the “reflective loss” principle unless they are alleging “separate and distinct” loss.

It is plain, I think, that the “Loss of Claimant Share Value” which the claimants allege does not constitute “separate and distinct” loss. The position as regards this head of loss is similar to that in relation to the corresponding head of claim for misrepresentation. As the Judge said in paragraph 88 of his judgment, “[i]f the defendant had performed its contract, the company would have been much more valuable, and so would the claimants’ shareholdings”. The loss in share value would be reflective of loss sustained by Motoriety in respect of which it would itself have (or have had) a cause of action against AAD.

That leaves the alternative claim for loss of the “Initial Option Payment” and “Earn-Out Consideration” which, the claimants say, they would have received pursuant to clause 12 of the Investment Agreement but for AAD’s breaches of contract. The Judge said this about it in paragraph 115 of his judgment:

Taking issue with the Judge’s view, Mr Auld argued that this head of claim relates to loss of contractual rights, not diminution in the value of shares. He further pointed out that it was the claimants, not Motoriety, which granted the option for which clause 12 of the Investment Agreement provided and, hence, that Motoriety could never have become entitled to the “Initial Option Payment” or “Earn-Out Consideration”. The claimants are thus, Mr Auld said, seeking compensation for loss in respect of which Motoriety could never have had a claim. Mr Auld accepted that AAD would not have been obliged to exercise the option, but submitted that that does not matter in circumstances where the claimants allege that AAD would in fact have exercised it if its breaches of contract had not led to Motoriety’s downfall.

For his part, Mr Thompson supported the Judge’s conclusion. The claimants are still, Mr Thompson said, claiming in respect of loss which they claim to have suffered in the form of a diminution in share value: they are merely using a different valuation mechanism to measure that diminution. The value that it is alleged that the claimants’ shares would have had but for AAD’s breaches of contract is being identified by reference to a specific exit route as opposed to general market value. That, however, is an immaterial difference, Mr Thompson submitted.

To my mind, the Judge was right that the “reflective loss” principle applies to this head of loss as well as the others put forward by the claimants. The value of a share can in principle be assessed by reference to the company’s anticipated future earnings, to the prospects of distributions to shareholders and to what the share could be sold for (which will normally in practice itself be affected by likely future earnings/distributions). The claim for “Loss of Claimant Share Value” relates to the general market value of the claimants’ shares, that for loss of “Initial Option Payment” and “Earn-Out Consideration” to what the shares would have fetched if sold to AAD following its exercise of the clause 12 option. Either way, the allegation is that AAD’s alleged breaches of contract meant that the claimants would not be paid anything for their shares, and that reflected the fact that, on the claimants’ case, the breaches had brought about Motoriety’s failure such that there was no longer any prospect of either earnings or distributions. The figures given in schedule 1B to the particulars of claim suggest that the claimants would have stood to obtain substantially more for their shares in the general market than under clause 12 of the Investment Agreement (between £46.7 million and £62.8 million as opposed to £31.5 million), but the essential point is that loss of “Initial Option Payment” and “Earn-Out Consideration” represents one way of measuring loss of share value. If the claimants’ pleaded case is correct, breaches of contract by AAD have caused Motoriety to fail and, in consequence, rendered the claimants’ shares worthless, both in the sense that they lost any value in the general market and in the sense that there was no longer any prospect of selling them to AAD pursuant to clause 12 of the Investment Agreement. The claimants are therefore claiming in respect of loss “in the form of a diminution in share value … , which is the consequence of loss sustained by [Motoriety], in respect of which he company has [(or had)] a cause of action against [AAD]”. There may or not be a precise correlation between the claimants’ loss and Motoriety’s, but no such correlation is required for the “reflective loss” principle to apply.

In my view, the Judge was right that the claim is barred in its entirety by the “reflective loss” principle and, accordingly, to strike it out. The principle can be seen to be applicable now, without the matter going to trial.

In 2019, Mr Astley brought proceedings in the Employment Tribunal, but they were disposed by the Settlement Agreement under which he was paid £60,000 and withdrew his claims. For present purposes, it is clause 4 of the Settlement Agreement that is important. That was in these terms:

The letter from Stewarts LLP to AA plc dated 27 August 2020 explained that it was written in accordance with pre-action obligations and addressed “[t]he relevant factual background which applies to the Claimants’ legal claims” and “[a] detailed summary of the Claimants’ legal claims”. It contained a detailed account of the history, including references to what were termed the “Member Marketing Representation”, the “Immediate Access Representation” and the Investment Agreement before stating in paragraph 48:

The letter did not mention either the “Services Representation” or the possibility of Mr Astley having a contractual claim. In the circumstances, AAD contends, and the Judge accepted, that Mr Astley cannot maintain against AAD any claim based on the “Services Representation” or for breach of contract. The Judge concluded that these claims had not been “specifically referenced” in the letter and so had been compromised.

Challenging the Judge’s view, Mr Auld argued that High Court proceedings could be “in relation to” a claim “specifically referenced” in the Stewarts letter without the particular cause of action or allegation having been expressly identified in the Stewarts letter. In that connection, he pointed out that, in the letter, the claimants “reserve[d] the right to plead any additional cause of action in due course” and that facts relevant to the “Services Representation” and breach of contract claims were to be found in the letter.

I agree with the Judge, however. The Stewarts letter excludes from the compromise for which it provides High Court proceedings “in relation to the claims specifically referenced in the letter”. There being no mention of them at all in the letter, the simple fact is that the claims based on the “Services Representation” and breach of the Investment Agreement were not “specifically mentioned” in the letter. The fact that the claimants may have reserved their right to plead further causes of action does not mean that such causes of action were “specifically referenced”. Nor can it be enough that some of the facts relevant to the “Services Representation” and breach of contract claims were included in the letter. Those claims were not “specifically referenced” and, to that extent, the present proceedings are not “in relation to” claims so referenced.

I would dismiss the appeal.

I agree.

I also agree.