Allianz Global Investors GMBH & Ors v Barclays Bank PLC & Ors

The Banks emphasised, by reference to British Westinghouse Electric and Manufacturing Company Limited v Underground Electric Railways Company of London Limited [1912] AC 673 (HL), that the fundamental basis of awards of damages is compensation for pecuniary loss naturally flowing from the breach. But, as explained by Viscount Haldane LC at p. 689:

“…this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to the neglect to take such steps.

As James L.J. indicates, this second principle does not impose on the plaintiff an obligation to take any steps which a reasonable and prudent man would not ordinarily take in the course of his business. But when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.”

At p. 690 Viscount Haldane stated that, for a subsequent transaction to be taken into account (in reduction of the loss), it must be one arising out of the consequences of the breach and in the ordinary course of business. Sums received from a policy for insurance against accident could not be taken into account in an action for injuries suffered by a plaintiff due to a defendant’s negligence: “The reason (Footnote: ²)…was that it was not the accident, but a contract wholly independent of the relation between the plaintiff and the defendant, which gave the plaintiff his advantage”. Again, in an action for delay in discharging a ship of the plaintiff which caused the plaintiff to lose passengers they had contracted to carry (Footnote: ³), the damages were not reduced by reason of the same passengers taking passage in another vessel belonging to the plaintiffs, Viscount Haldane observing that: “what was relied on as mitigation did not arise out of the transactions the subject-matter of the contract”.

In Swynson the claimant lending company made loans to a borrower relying on a report by the defendant accountants. When the loans went unpaid, the claimant claimed damages from the defendant for negligence but, before damages were assessed, the loans had been repaid using funds lent to the borrower by the owner and controller of the claimant by way of a corporate restructuring. The Supreme Court rejected the contention that the refinancing and consequent repayment was a collateral matter as it had resulted in the discharge of the very liability which represented the claimant’s loss. Lord Sumption summarised the principles that represented a coherent approach to avoided loss (and the collateral benefit exception) in the following passage at [11]:

“The general rule is that loss which has been avoided is not recoverable as damages, although expense reasonably incurred in avoiding it may be recoverable as costs of mitigation. To this there is an exception for collateral payments (res inter alios acta), which the law treats as not making good the claimant’s loss. It is difficult to identify a single principle underlying every case. In spite of what the latin tag might lead one to expect, the critical factor is not the source of the benefit in a third party but its character. Broadly speaking, collateral benefits are those whose receipt arose independently of the circumstances giving rise to the loss. Thus a gift received by the claimant, even if occasioned by his loss, is regarded as independent of the loss because its gratuitous character means that there is no causal relationship between them. The same is true of a benefit received by right from a third party in respect of the loss, but for which the claimant has given a consideration independent of the legal relationship with the defendant from which the loss arose. Classic cases include loss payments under an indemnity insurance: Bradburn v Great Western Railway Co (1874-5) LR 10 Ex 1. Or disability pensions under a contributory scheme: Parry v Cleaver [1970] AC 1. In cases such as these, as between the claimant and the wrongdoer, the law treats the receipt of the benefit as tantamount to the claimant making good the loss from his own resources, because they are attributable to his premiums, his contributions or his work. The position may be different if the benefits are not collateral because they are derived from a contract (say, an insurance policy) made for the benefit of the wrongdoer: Arab Bank Plc v John D Wood Commercial Ltd [2000] 1 WLR 857 (CA), at paras 92-93 (Mance LJ). Or because the benefit is derived from steps taken by the Claimant in consequence of the breach, which mitigated his loss: British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Ltd [1912] AC 673, 689, 691 (Viscount Haldane LC). These principles represent a coherent approach to avoided loss. In Parry v Cleaver, at p 13, Lord Reid derived them from considerations of “justice, reasonableness and public policy”. Justice, reasonableness and public policy are, however, the basis on which the law has arrived at the relevant principles. They are not a licence for discarding those principles and deciding each case on what may be regarded as its broader commercial merits.”

The question is, therefore, whether the benefit is to be regarded as arising independently of the loss, even if occasioned by it. A benefit derived from a separate transaction for which the claimant has given consideration (such as an insurance policy, other than one for the benefit of the wrongdoer) or a gift made because of the loss are both likely to be regarded as collateral, being “tantamount to making good the loss from the claimant’s own resources”. In considering the application of those principles, the court should have in mind that they are derived from concepts of justice, reasonableness and public policy, but the court must nevertheless look to apply the principles.

In Sainsbury’s, merchants had been overcharged (the interchange fee element of the merchant service charge (“MSC”)) for card transactions by acquirer banks in breach of Article 101 and section 2. The question arose as to whether, in principle, the losses they suffered as a result were to be reduced to the extent that the merchants had “passed on” the overcharge by increasing the prices charged to customers. The Supreme Court recognised at [196] that EU law (Footnote: ⁴) required member states to ensure that there was a defence of “pass-on” where overcharges were passed on down a supply chain, that being implemented in UK jurisdictions as an element in the quantification of damages. In that regard, the Supreme Court emphasised the centrality of the compensation principle in the assessment of damages, stating at [197]:

“There are sound reasons for taking account of pass-on in the calculation of damages for breach of competition law. Not only is it required by the compensatory principle but also there are cases where there is a need to avoid double recovery through claims in respect of the same overcharge by a direct purchaser and by subsequent purchasers in a chain, to whom an overcharge has been passed on in whole or in part.”

As regards the test to be applied, the Supreme Court recognised that Viscount Haldane’s statement in British Westinghouse (set out above) gives rise to a question of legal or proximate causation (namely, whether the claimant has taken action in the course of his business which action has diminished his loss), adding at [215]:

“But the question of legal causation is straightforward in the context of retail business in which the merchant seeks to recover its costs in its annual or other regular budgeting. The relevant question is a factual question: has the claimant in the course of its business recovered from others the costs of the MSC, including the overcharge contained therein? The merchants, having acted reasonably, are entitled to recover their factual loss. If the court were to conclude on the evidence that the merchant had by reducing the cost of its supplies or by the pass-on of all the cost to its customers…transferred all or part of its loss to others, its true loss would not be the prima facie measure of the overcharge but a lesser sum.”

Although the Supreme Court did not specifically refer to the concept of collateral benefit (no argument being advanced by the merchants that transactions down the supply chain were independent so that benefits arising from them were collateral), the recognition that issues of legal causation were “straightforward” (and satisfied) in the context of costs being passed on in a retail business answers the point, collateral benefit arising when that test is not satisfied. The passing on of increased costs is a direct form of mitigation of losses suffered by being overcharged, effected by new transactions entered in the ordinary course of business.

The Banks contend that the benefit of lower redemptions is not collateral to the Funds’ losses (and so avoids those losses in whole or in part) because it arises directly from the alleged wrongdoing, being in effect the “passing on” to the investor of the loss suffered by the Funds in the form of a reduced share of the relevant Fund’s net assets.

However, the matters relied on by the Banks demonstrate little more than that any benefit to the Funds in lower redemption values was occasioned by the alleged wrongdoings, just as is an insurance payment or a gift intended to help repair damage. As emphasised in Swynson, it is necessary to consider the nature of the transaction which gave rise to the benefit to determine if it is to be regarded as arising independently of the Funds’ loss: the Banks have focused on the benefit, not the transactions which give rise to it. In my judgment redemptions, and any benefit the Funds derive from them, are independent of the Funds’ losses for the following reasons:

To the extent that it is appropriate to have regard to public policy considerations, I consider that they strongly support the application of the relevant principles in the manner set out above. I have already referred above to the vast complication it would bring to the assessment of damages in many claims brought by companies, trusts and partnerships if lower redemptions reduced the loss that could be recovered. It would give defendants a potential answer (requiring extensive investigation) to what would otherwise be readily established losses. It would also encourage defendants to delay settling claims in the hope or expectation that investors would redeem in the meantime (or that a company might undergo a restructuring). In my judgment, opening such an avenue for defendants to resist damage claims would not only be contrary to well-established principles but would also be unfortunate as a matter of policy.

The further substantial objection to the Banks’ contention is that it would permit defendants to escape liability for losses they have caused through their wrongdoing. The Banks’ answer is that the redeeming investor has a claim for the losses suffered on redemption, the existence of such a claim also giving rise to the risk of double recovery for the same loss unless the loss of the trust, company or partnership is treated as avoided. As discussed above, it is in that context, and that context only, that the trust, company and partnership issues arise. For the reasons set out below, and contrary to the findings of the Judge, I do not accept that redeeming investors have a claim for the diminution in the amount they receive on redemption by reason of the Banks’ alleged wrongdoing. That view further supports my conclusion that the Funds’ loss is not avoided by investors redeeming at a lower level.

Having explained above the context in which the trust, company and partnership issues are relevant to the central question of whether the Funds have avoided some or all of their loss, I turn to those issues, addressing first the company issue (following the approach the parties took in argument). I shall then consider the Banks’ alternative contention that, even if domestic law does not provide redeeming shareholders with a remedy for the loss, such a remedy must be provided to protect rights and claims arising under Article 101.

In Marex, Lord Reed PSC (with whom the majority agreed) emphasised that the fact that a claim lies at the instance of a company rather than a natural person does not usually affect the rights of other persons with concurrent claims. The rule in Prudential is a highly specific exception to that general rule, Lord Reed explaining:

“9…It was decided in the case of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 that a shareholder cannot bring a claim in respect of a diminution in the value of his shareholding, or a reduction in the distributions which he receives by virtue of his shareholding, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, even if the defendant’s conduct also involved the commission of a wrong against the shareholder, and even if no proceedings have been brought by the company. As appears from that summary, the decision in Prudential established a rule of company law, applying specifically to companies and their shareholders in the particular circumstances described, and having no wider ambit.

10.

The rule in Prudential, as I shall refer to it, is distinct from the general principle of the law of damages that double recovery should be avoided. In particular, one consequence of the rule is that, where it applies, the shareholder’s claim against the wrongdoer is excluded even if the company does not pursue its own right of action, and there is accordingly no risk of double recovery. That aspect of the rule is understandable on the basis of the reasoning in Prudential, since its rationale is that, where it applies, the shareholder does not suffer a loss which is recognised in law as having an existence distinct from the company’s loss. On that basis, a claim by the shareholder is barred by the principle of company law known as the rule in Foss v Harbottle (1843) 2 Hare 461: a rule which (put shortly) states that the only person who can seek relief for an injury done to a company, where the company has a cause of action, is the company itself.”

At [28] Lord Reed explained that a shareholder does suffer loss, in the form of the diminution of the value of his shares, when the company of which he is a shareholder is damaged by a wrongdoing, but that loss is not actionable on the part of the shareholder:

“As I understand [the reasoning in Prudential], what that court meant, put shortly, was that where a company suffers actionable loss, and that loss results in a fall in the value of its shares (or in its distributions), the fall in share value (or in distributions) is not a loss which the law recognises as being separate and distinct from the loss sustained by the company. It is for that reason that it does not give rise to an independent claim to damages on the part of the shareholders.”

At [38] Lord Reed explained that, in addition to arguments based on the corporate entity doctrine, there are also pragmatic advantages of a clear rule that only the company can pursue a right of action in circumstances falling within the ambit of the rule in Prudential:

“It would be necessary, for example, to take account of the fact that the wrongdoing had resulted in the company’s acquiring an asset, namely its right of action against the defendant, which might have offset any detrimental effect of the wrongdoing on the value of his shares. It would also be necessary to consider the question of double recovery, and how it should be addressed both procedurally and substantively. Those issues might have to be addressed in the context of a proliferation of claims, possibly in different proceedings, at different times, and in different jurisdictions. They would also arise in a context where there might well be conflicts of interest between the shareholder and the company’s directors, its liquidator, other shareholders, and creditors.”

Lord Reed concluded as follows:

“79.

Summarising the discussion to this point, it is necessary to distinguish between (1) cases where claims are brought by a shareholder in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in distributions, 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, and (2) cases where claims are brought, whether by a shareholder or by anyone else, in respect of loss which does not fall within that description, but where the company has a right of action in respect of substantially the same loss.

80.

In cases of the first kind, the shareholder cannot bring proceedings in respect of the company’s loss, since he has no legal or equitable interest in the company’s assets…. It is only the company which has a cause of action in respect of its loss: Foss v Harbottle. However, depending on the circumstances, it is possible that the company’s loss may result (or, at least, may be claimed to result) in a fall in the value of its shares. Its shareholders may therefore claim to have suffered a loss as a consequence of the company’s loss. Depending on the circumstances, the company’s recovery of its loss may have the effect of restoring the value of the shares. In such circumstances, the only remedy which the law requires to provide, in order to achieve its remedial objectives of compensating both the company and its shareholders, is an award of damages to the company.

81.

There may, however, be circumstances where the company’s right of action is not sufficient to ensure that the value of the shares is fully replenished. One example is where the market’s valuation of the shares is not a simple reflection of the company’s net assets…. Another is where the company fails to pursue a right of action which, in the opinion of a shareholder, ought to have been pursued, or compromises its claim for an amount which, in the opinion of a shareholder, is less than its full value. But the effect of the rule in Foss v Harbottle is that the shareholder has entrusted the management of the company’s right of action to its decision-making organs, including, ultimately, the majority of members voting in general meeting. If such a decision is taken otherwise than in the proper exercise of the relevant powers, then the law provides the shareholder with a number of remedies, including a derivative action, and equitable relief from unfairly prejudicial conduct.

82.

…[T]he company’s control over its own cause of action would be compromised, and the rule in Foss v Harbottle could be circumvented, if the shareholder could bring a personal action for a fall in share value consequent on the company’s loss, where the company had a concurrent right of action in respect of its loss. The same arguments apply to distributions which a shareholder might have received from the company if it had not sustained the loss….

83.

The critical point is that the shareholder has not suffered a loss which is regarded by the law as being separate and distinct from the company’s loss, and therefore has no claim to recover it. As a shareholder (and unlike a creditor or an employee), he does, however, have a variety of other rights which may be relevant in a context of this kind, including the right to bring a derivative claim to enforce the company’s rights if the relevant conditions are met, and the right to seek relief in respect of unfairly prejudicial conduct of the company’s affairs.”

As prefaced above, an argument that the rule in Prudential did not apply to shareholders who had sold their shares, thereby “crystallising” their losses, was rejected by the Privy Council in Primeo, paragraph [61] of the judgment being set out above. The Board emphasised that, consistently with Marex, a shareholder suffering irrecoverable loss in the form of the diminution of the value of his shares cannot convert that loss into one which is recoverable simply by selling the shares. The Board explained in some detail at [62-63] why the contrary position was untenable:

“Testing the application of the reflective loss rule at the time when proceedings are brought rather than at the time the relevant loss is suffered would lead to other strange consequences, as Mr Smith pointed out. To say, as R1 and R2 do, that the test applies when the claim is brought by a person who happens to be a shareholder at that time and where there may happen to be some relationship between what he recovers by his claim and what the company recovers by its claim, would produce strange and unprincipled results which in fact undermine the Marex principle itself and the values it protects: (a) what if the shareholder commences proceedings at a time before the company appreciates it has a claim of its own or before it commences its claim? It seems that on Mr Gillis’s argument the shareholder should succeed if its claim can be progressed fast enough, but this is contrary to the point in Marex that the rule is a substantive rule of law; (b) it leads to the conclusion, per Flaux LJ in Nectrus, that the shareholder can sell its shareholding and then seek to vindicate its own causes of action against the wrongdoer; but this would make the reflective loss rule easy to circumvent and would subvert its intended effect, since the wrongdoer would be wary of settling with the company for fear that, by selling its shares, a shareholder and prospective claimant could free itself to pursue its own claims; (c) it would mean that where the company’s claim comes to be statute-barred, the shareholder’s claim can be pursued; but such an event cannot change the proper characterisation of the loss suffered by the shareholder for the purposes of the substantive rule stated in Marex; (d) it would imply that if the company happened to settle its claim quickly, the shareholder could at that point bring its distinct claim; but, again, it is difficult to see how that event could change the proper characterisation of the loss suffered by the shareholder for the purposes of that substantive rule.

63.

Overall, to test the application of the reflective loss rule at the time when proceedings are brought rather than when the loss is suffered would have the effect of making the wrongdoer very wary of settling with the company, if the practical outcome of doing so is made uncertain and precarious by the future conduct of the company and shareholder and the vagaries of procedural law. That would undermine the intended effect of the rule (reflecting the rule in Foss v Harbottle), which is to ensure that the company has a full opportunity to decide how to pursue its own cause of action, where properly identified as such, and to obtain as good value from it as is possible. It would also undermine the certainty of effect which the reflective loss rule is intended to achieve, as a bright line rule of law: cf Marex¸ para 38 (Lord Reed).”

A similar analysis of when damage arising from diminution in value of an asset is actionable is to be found in Elliott v Hattens Solicitors [2021] EWCA Civ 720, [2021] P.N.L.R 25, albeit in the different context of when the limitation period starts to run. The claimant alleged that the negligence of the defendant solicitors had resulted in a flawed property transaction, leaving the claimant liable under the terms of her lease (as tenant) and sub-lease (as landlord) in the event of a fire when that was not intended and, as a consequence, she was not insured. The premises subsequently burned down. The claimant brought proceedings against the defendant solicitors less than six years after the fire but more than six years after the transaction. The claimant sought to resist the solicitors’ limitation defence by asserting that she had not suffered damage prior to the fire because, although the leases were flawed and had less value in the market, she had had no intention of assigning her interest. That argument was rejected, Newey LJ stating at [32]:

“Where….a flawed transaction is objectively less valuable from the start, it seems to me that the cause of action accrues at the outset. If negligence on the part of a solicitor served to reduce the market value of an asset, the claimant cannot, in my view, defer the expiry of the limitation period by pointing out that he was not intending to sell it. It is one thing to say that someone suffered damage because he did not get what he wanted regardless of whether what he got was objectively as valuable; It is another to say that someone who, looking at matters objectively, has sustained a financial loss has not yet suffered relevant damage and so could not bring a claim…Where a claimant can be seen to be “financially worse off”, because an asset has a lower market value, relevant damage will, I think, have been suffered whatever the claimant was intending to do with the asset.”

The Banks argued that shareholders who redeem their shares are in a different position to shareholders who sell, such that the reasoning in Marex does not apply to the former situation and Primeo is distinguishable. It is difficult to see any merit in that contention for the following reasons:

In the end, the Banks’ answer to the application of the Prudential rule to a redeeming shareholder was that, on redemption (unlike in the case of sale of shares), the company avoids or passes on its loss to the shareholder and so ceases to have a cause of action for that loss. That argument found favour with the Judge but, as addressed above, simply raises the prior question of whether the company’s losses are avoided rather than answering the question of reflective loss, which assumes that they have not been so avoided. I have set out above my reasons for rejecting the contention that redemptions are to be taken into account in calculating a company’s loss, but it is also worth noting that the avoided loss argument would also apply, if it were correct, to the payment of dividends (or other distributions made) by a company, where a reduced payment has been made to a shareholder due to the wrongdoing that caused the company’s loss. Yet reduced dividends and other distributions are firmly encompassed within the Prudential rule.

It follows that I reject the Banks’ contention that redeeming shareholders have their own separate claim for loss that escapes the Prudential rule.

The Judge acknowledged the general rule that where trust property is damaged, the trustee, as legal owner of the trust fund, has title to sue in respect of such damage [57]. The corollary is that beneficiaries do not normally have a cause of action against the wrongdoer. The rule was explained in Webster v Sandersons Solicitors [2009] EWCA Civ 830, [2009] P.N.L.R 37, a case in which a 99% shareholder brought a claim in negligence against solicitors for losses suffered by his company and the company’s pension fund, of which he was a beneficiary. Having set out the rule against reflective loss applicable in relation to the company’s loss, Lord Clarke MR (giving the judgment of the Court) stated at [31]:

“The pension fund is not a corporate body but a trust, whose assets are vested in the trustees for the time being. Similar principles apply. If there is a cause of action against a third party for causing loss to the trust fund, it is vested in the trustees for the time being. It can be asserted by them and, normally, only by them. The proceedings commenced in November 2007 were brought on this basis. Exceptionally, if the trustees fail to pursue such a claim, it may be open to a beneficiary to assert the claim in proceedings to which the trustees are also parties as defendants…This has some similarity to a derivative action in company law, but it does not require further consideration here, since the claimant does not say that the trustees have failed to bring proceedings…A beneficiary under a trust does not have a direct cause of action in negligence against a person who may be liable to the trustees: see Parker-Tweedale v Dunbar Bank Plc (No1) [1991] Ch 12.”

The Judge referred to the earlier first instance decision in Yudt v Leonard Ross & Craig (1998/1999) 1 ITELR 531 as an example of an exception to the general rule where a duty of care is owed not only to the trustee but also to the beneficiaries. In that case two beneficiaries of a trust sued solicitors for negligence in preparing appointments in their favour under the trust, claiming for sums paid out of the trust fund in respect of settling litigation arising from the invalidity of those appointments and the costs of that litigation. Ferris J recognised that the trustees could sue for breach of the duty owed to them to recover any losses (and that the type of special relationship between a solicitor drafting a will and an intended beneficiary recognised in White v Jones [1995] 1 AC 207 did not exist), but nevertheless held that the solicitors had also assumed a duty of care towards the beneficiaries, stating at 576B:

“Beneficiaries under a disposition by way of trust which has already been made before the negligent acts were committed have, like the trustees, a proprietary interest in the trust property. If solicitors instructed by the trustees carry out their work negligently, thereby causing loss to the trust property or putting that property or the interests of beneficiaries in peril, the loss resulting from such negligence will ultimately fall on the beneficiaries, even if it is the trustees who incur it in the form of a diminution of the trust property held by them or in the need to expend money in order to protect the trust. By accepting instructions to act for trustees the solicitors are of necessity assuming to act, to the extent of the matters which they are instructed to deal with, in the affairs of the beneficiaries as well. It seems to me that solicitors who act in these circumstances must be regarded as owing to the beneficiaries the same duties of care in tort as they owe to their clients, the trustees, in both contract and tort.”

In my judgment, the reasoning in Yudt is directly contrary to the general principle accepted by the Judge and, although the decision was not referred to in Webster, it cannot stand in the light of that Court of Appeal authority. Further, it is inconsistent with the view of Neuberger J in Chappell v Somers & Blake [2004] Ch 19 at [15] that there must be considerable doubt as to whether it would be right as a matter of principle to impose any tortious duty to a beneficiary of a will on a solicitor instructed by the executrix of the will. That position is also reflected in Lewin on Trusts 20^th ed (2020) para 47-23, commenting on the decision in Yudt as follows:

“Whilst it is arguable that imposing liability for breach of a responsibility assumed in this way opens the door to direct actions in tort generally by existing beneficiaries of existing trusts against the professional advisers retained by the trustees, it is thought that beneficiaries are entitled to recover directly in tort only in respect of loss which they themselves suffer, beyond the non-recoverable reflective loss which they suffer by reason of a diminution in the value of the trust fund in consequences of negligence of the trustees’ professional advisers, and the consequential diminution in their respective existing interests in the trust fund. In the common case where the negligence has an adverse effect on the trust fund, it is thought that the correct claimants are the trustees, and that the beneficiaries should be entitled to claim only by a derivative action…[citing Webster]. Otherwise the professional advisers would face a multiplicity of actions in respect of the same loss from trustees and beneficiaries which those principles seek to avoid.”

The application of those principles where beneficiaries have redeemed their interest was considered by the Supreme Court of Victoria in Young v Murphy [1996] 1 VR 279. In that case new trustees brought proceedings against former trustees for breach of trust, alleging that assets of the six trusts in question had been lost or diminished. After commencement of the proceedings all those who had been unit holders in the trusts had redeemed at the NAV, being replaced by two new unit holders only. The former trustees asserted that the new trustees could not sue for those who had been unit holders at the time when the loss and damage was suffered. J.D. Phillips J rejected that contention at p 297 line 21 as follows:

“The trustees are suing for loss or damage to the assets held on trust and an order that the former trustee recoup that loss or damage does not answer the claims of particular beneficiaries. As I see it, the identity of the beneficiaries from time to time is irrelevant to such a claim.”

The former trustee further asserted that the new trustee could not recover the amount of the lower redemption due to the damage suffered by the trusts because the investors who had redeemed could still sue the former trustees and, were it otherwise, the recovery by the new trustees could only result in some “windfall” for the new investors. J. D. Phillips J rejected the premise of that contention in each respect, but held [at p. 298] that, in any event:

“The so-called “windfall” is no more than the proper restoration of the trust funds, enuring for the benefit of those who happen for the time being to be the unit holders in these trusts. It cannot be right in principle that the former trustee is no longer bound to make compensation (if otherwise it be so bound) only because the current unit holders have joined the trust after the losses occasioned by those breaches were sustained. Not does that seem to me to be an untoward result. As I said earlier, unit holders have their interest in the trust property as defined by the trust deeds; and just as former unit holders cease to have an interest in the trust property when they relinquish their units, so those who hold the units for the time being have between them – and subject to the trust deeds – the only beneficial interest in the trust property for the time being.”

The Banks argued that, notwithstanding the principles set out above, they did owe a duty to investor beneficiaries of the Funds under Article 101 and those beneficiaries suffered distinct loss in the form of the diminution of the value of their interests, crystallised on redemption. Therefore, they contended, the trust principle does not prevent redeeming beneficiaries from claiming for such losses on redemption.

In my judgment that argument fails at each stage:

It follows that I reject the Banks’ contention that redeeming beneficiaries have their own separate claim for loss that escapes the trust principle.

There was no dispute between the parties that any claim against a third party in relation to damage to a limited partnership Fund is a partnership asset and that only the general partner can bring proceedings against the wrongdoer; limited partners can only bring such proceedings on a derivative basis. In Certain Limited Partners in Henderson PFI Secondary Fund II LLP v Henderson [2012] WEHC 3259, [2013] QB 934, Cooke J explained the position as follows at [26]:

“It is undisputed that any claim against the Manager is a Partnership Asset, owned jointly by the Partners. Under the provisions of s 6(1) of the LPA and [the partnership agreement], which reinforces the statutory provision, no Limited Partner could, on behalf of the other partners and so as to bind them, sue the Manager, which is a third party. Only the General Partner can manage the business of the Partnership and its assets. Only the General Partner has the right to act for the Partnership in external relations in such a way as to bind the Partnership and therefore to bring proceedings against the Manager. If the General Partner will not do so, and here, under the arrangements made, because the Manager is its sister company, with a resulting conflict of interest for the General Partner, there is in reality no way a suit can be brought by the Partnership, unless a new General Partner is brought in who will pursue that cause of action, or the Court permits a derivative suit of some kind by Limited Partners in the name of the Partnership.”

Cooke J held that if a limited partner did bring a derivative action in the name of the general partner, the limited partner would lose the protection of limited liability as he would have taken part in the management of the partnership business within the meaning of section 6(1) of the Limited Partnerships Act 1907.

It is therefore clear (and the parties agreed) that the position mirrors that which applies in the case of trusts: in the usual situation the cause of action for any damage caused to the partnership by wrongdoing will vest in the general partner. The main exception is that a limited partner may be able to pursue that claim in the name of the general partner.

In the case of a limited partner who leaves the partnership whilst it is continuing, Lindley & Banks on Partnership 20^th ed. para 19-11 recognises that the partnership agreement will usually provide for the leaving partner’s financial entitlement and expresses the view that “his share may properly be regarded as a pure debt with effect from the date on which he ceased to be a partner”.

The Banks advanced a parallel argument to the one referred to above in relation to Funds that are trusts: they contend that a limited partner in a Fund is owed a duty under Article 101 and suffers a separate loss by virtue of the debt owed to him on redemption at a lower value than would have been the case but for the wrongdoing damaging the partnership assets. The answer to that argument is the same: as a matter of domestic law the duty is owed to the partnership, the loss is that of the partnership and the limited partner has no cause of action and does not acquire one on redemption.

The Banks contend that if (as I consider to be the case) domestic law does not provide redeeming shareholders with a direct remedy, that is inconsistent with directly applicable European law as encompassed within Article 101, with the result that the domestic courts are required to make a remedy available. The Funds have two answers to that contention. First, they dispute that Article 101 has the effect for which the Banks contend. Second, they submit that, whilst rights accrued under Article 101 continue after 31 December 2020 (the end of the Implementation Period of the UK’s exit from the European Union), the obligation to give effect to such rights in domestic law ended in respect of proceedings commenced after that. The Judge did not accept the first answer but agreed with the second, the latter aspect being challenged by the Banks by way of their Respondent’s Notice.

In Courage Ltd v Crehan [2002] QB 507 a tied tenant asserted that a provision in the tenancy requiring him to purchase beer exclusively from the claimant brewery was contrary to the prohibition on anti-competitive agreements and practices in Article 81 EC (a forerunner to Article 101, which in turn replaced Article 85 of the EC Treaty) and claimed damages. A preliminary question arose as to whether the tenant could maintain that claim notwithstanding that, under principles of English law, he would be debarred from suing on an illegal contract to which he was party. The CJEU first emphasised that the national court must ensure that Community law is given full effect and must protect the rights they confer on individuals, stating:

“25.

As regards the possibility of seeking compensation for loss caused by a contract or by conduct liable to restrict or distort competition, it should be remembered from the outset that, in accordance with settled case-law, the national courts whose task it is to apply the provisions of Community law in areas within their jurisdiction must ensure that those rules take full effect and must protect the rights which they confer on individuals…

26.

The full effectiveness of Article 85 of the Treaty and, in particular, the practical effect of the prohibition laid down in Article 85(1) would be put at risk if it were not open to any individual to claim damages for loss caused to him by a contract or by conduct liable to restrict or distort competition.

27.

Indeed, the existence of such a right strengthens the working of the Community competition rules and discourages agreements or practices, which are frequently covert, which are liable to restrict or distort competition. From that point of view, actions for damages before the national courts can make a significant contribution to the maintenance of effective competition in the Community.

28.

There should not therefore be any absolute bar to such an action being brought by a party to a contract which would be held to violate the competition rules.”

The CJEU then qualified that general rule with the following:

“29.

However, in the absence of Community rules governing the matter, it is for the domestic legal system of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive directly from Community law, provided that such rules are not less favourable than those governing similar domestic actions (principle of equivalence) and that they do not render practically impossible or excessively difficult the exercise of rights conferred by Community law (principle of effectiveness)….

30.

In that regard, the Court has held that Community law does not prevent national courts from taking steps to ensure that the protection of the rights guaranteed by Community law does not entail the unjust enrichment of those who enjoy them…

31 Similarly, provided that the principles of equivalence and effectiveness are respected… Community law does not preclude national law from denying a party who is found to bear significant responsibility for the distortion of competition the right to obtain damages from the other contracting party. Under a principle which is recognised in most of the legal systems of the Member States and which the Court has applied in the past… a litigant should not profit from his own unlawful conduct, where this is proven.

32.

In that regard, the matters to be taken into account by the competent national court include the economic and legal context in which the parties find themselves and, as the United Kingdom Government rightly points out, the respective bargaining power and conduct of the two parties to the contract.

33.

In particular, it is for the national court to ascertain whether the party who claims to have suffered loss through concluding a contract that is liable to restrict or distort competition found himself in a markedly weaker position than the other party, such as seriously to compromise or even eliminate his freedom to negotiate the terms of the contract and his capacity to avoid the loss or reduce its extent, in particular by availing himself in good time of all the legal remedies available to him.”

The Banks contended, and the Judge accepted, that the effect of that decision is that duties under Article 101 are, as a matter of European law, owed to all individuals, including redeeming shareholders, and that the English court was required to give effect to the right of such shareholders to claim for the losses they suffer by reason of the breach of such duties.

The immediate difficulty with that contention is that it would, if correct, entail that duties were also owed to current shareholders, beneficiaries and partners who have simply suffered a diminution of their shareholding, requiring the English courts to permit them to sue: it would mean that Marex (where this point was not raised) reached the wrong result. Logically, there would be no end to the persons entitled to claim for the losses of an entity: shareholders of corporate shareholders would have a direct claim, as would their shareholders, ad infinitum.

The correct answer, in my judgment, is that it is a matter for English law to determine how, in this jurisdiction, the rights of shareholders, beneficiaries and limited partners are to be protected in respect of losses consequent on damage to the company, trust or partnership caused by a breach of Article 101. English law does so by providing that those rights are to be protected and vindicated by action through the entity (including through derivative actions) rather than by the individuals directly, for reason of both principle and policy as discussed above. There is no European authority which suggests that shareholders, beneficiaries and partners must be entitled to sue for losses they suffer by reasons of breaches of European law which cause damage to the relevant company, trust or partnership.

Indeed, in Unibet (London) Ltd v Justitiekanslern [2007] 2 C.M.L.R 30 the CJEU emphasised at [40-41] that, although the EC Treaty has made it possible for private persons to bring a direct action, it was not intended to create new remedies in national courts to ensure the observance of Community law: it would be otherwise only if it were apparent from the overall scheme of the national legal system that no legal remedy existed which made it possible to ensure, even indirectly, respect for an individual’s rights under Community law. As further recognised in Impact v Minister for Agriculture and Food [2008] 2 C.M.L.R 47 at [43] and Mono Car Styling SA v Dervis Odemis [2009] 3 C.M.L.R 47 at [48-49], the general principle of Community law is that there must be effective judicial protection of rights derived from that law.

The question of direct claims by shareholders under what was then Article 85 was considered by the Supreme Court of Ireland in O’Neill v Ryan [1993] ILRM 557. The Court expressly rejected the contention that it was a requirement of European law that the rule in Prudential should be disregarded and a cause of action under (what was then) Article 85 given to shareholders.

There is no issue with the principle of equivalence (and none was suggested), as all domestic rights and remedies are also subject to the company, trust and partnership rule. Neither can it be said, in my judgment, that the enforcement of rights (if necessary by derivative action) is impossible or excessively difficult.

It follows that I do not accept the Banks’ contention that redeeming investors must be given a direct right to claim their loss on redemption under Article 101 and I consider that the Judge was wrong to accept that contention.

Even if there would have been a requirement to give a direct right to claim under Article 101 before IP Completion Day on 31 December 2020, the question arises as to whether that requirement continues in relation to claims started thereafter.

Before the Judge the Banks argued that the principle of effectiveness continued to apply after 31 December 2020, an argument the Judge rejected. Despite challenging that finding in their Respondent’s Notice and re-asserting that the principle of effectiveness still applied, the Banks did not pursue that contention in their skeleton argument or in oral argument, accepting that after IP completion day rules of common law could not be disapplied by general principles of EU law such as effectiveness.

Instead the Banks relied on section 5 of the European Union (Withdrawal) Act 2018, which provides that the principle of the supremacy of EU law continues to apply on or after IP completion day so far as relevant to the interpretation, disapplication or quashing of any enactment or rule of law. Mr Hoskins argued that the right of investors to claim, overriding the rule in Prudential, the trust principle and the partnership principle (on the Banks’ case, contrary to my view), was a matter of substantive law, governed by the question of supremacy, not procedural efficacy.

I see no merit in that point, even if it is open to the Banks to run it on this appeal. The EU authorities referred to above make clear that the issue is one of effective judicial protection, which may be by way of indirect remedy. The applicable remedy is expressed as one of effectiveness and not one of supremacy of EU law over domestic law.

It follows that, even if Article 101 did, as a matter of EU law, bestow rights on investors to make direct claims for losses suffered by the Funds, the requirement to give effect to that in English law did not survive Brexit.

For the reasons set out above I would allow the appeal and order that the Banks’ allegation that the Funds’ losses have been avoided or passed on by redemption of investments be struck out.