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Parties may not claim additional damages in court following acceptance of an FOS determination

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Hitchins Sarah
Sarah Hitchins

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29 May 2014

In Clark & anr v In Focus Asset Management & Tax Solutions Ltd [2014] EWCA 118, 14 February 2014, the Court of Appeal overturned a decision of the High Court that had held that Mr and Mrs Clark (the Respondents) could claim additional damages by way of a civil claim despite the fact they had already accepted a favourable determination by the Financial Ombudsman Service (FOS). The Court of Appeal held that the Respondents could not pursue civil claims in court for damages over and above those received as a result of an FOS decision. 

Background

Focus Management & Tax Solutions Ltd (the Appellant) advised the respondents to invest significant sums in endowment policy plans. The respondents' investments did not perform well and the respondents alleged that they suffered losses in excess of GBP 500,000 as a result of their investments.
 
In November 2008, the respondents complained to the FOS and claimed that the investment advice given to them by the appellant was inappropriate. The respondents sought a determination from the FOS that they should be awarded compensation which would return their capital and also allow them to repay money they had borrowed in order to invest additional sums in the endowment policy plans.
 
The FOS determined the complaint in the respondents' favour and recommended that the appellant should compensate the respondents for their losses so as to put them back in the position they would have been in had they not been given the inappropriate advice by the appellant. The FOS acknowledged that this measure of compensation may result in an amount that was greater than GBP 100,000 plus interest (which, at the time, was the statutory limit for FOS awards pursuant to s229(4) of the Financial Services and Markets Act 2000 (FSMA)).
 
The respondents accepted the FOS determination. Although the FOS determination was stated to be binding and final, when the respondents wrote to confirm their acceptance of it, they wrote that they reserved "the right to pursue the matter further through the civil courts".
 
In accordance with the FOS determination, the appellant paid the respondents GBP 100,000 plus interest but declined to follow the non-binding recommendation made by the FOS that it should compensate the respondents for their losses over and above the (then) statutory limit for FOS awards.
 
In June 2010, the respondents issued proceedings in the county court for their alleged additional losses in excess of the GBP 100,000 they had already received as a result of the FOS determination. The appellant succeeded in striking out the respondents' claim in the county court (which held that acceptance of an FOS determination prevented a person from bringing separate civil proceedings in respect of the same facts).
 
The respondents appealed the order to strike out their claim to the High Court. The High Court overturned the county court's decision and held that individuals who accept a favourable FOS determination are not precluded from claiming damages in court which are in addition to the award that they received from the FOS. In its judgment, the High Court focused on the doctrine of merger and found that this did not apply to FOS determinations that have been accepted by the relevant parties.
 
The High Court's decision introduced a considerable amount of uncertainty into this area of law (not least because it directly conflicted with another High Court decision on the same point, Andrews v SBJ Benefit Consultants [2010] EWHC 2875 (Ch)). It also caused firms to be concerned that they may face civil action, even where an FOS determination has been accepted by the relevant parties and that individuals may use the FOS process to obtain funds and favourable evidence that may then be used in subsequent civil proceedings.

Court of Appeal

The appellant appealed the High Court's decision to overturn the county court's strike out order to the Court of Appeal.
In deciding this case, the Court of Appeal considered two key points:
  1. First, whether the doctrine of res judicata (that, generally speaking, a matter may not be re-litigated once it has been judged on its merits) precludes a claimant from commencing legal proceedings in order to pursue complaints that had already been decided by the FOS.
  2. Secondly, whether s228(5) of the FSMA excludes the operation of res judicata. Section 228(5) of the FSMA states that if a complainant notifies the FOS that he accepts its determination, it is binding on the complainant and respondent and is final.
The Court of Appeal allowed the appellant's appeal for the following reasons and held that an individual who complains to the FOS and accepts a favourable determination may not pursue separate civil proceedings relating to the same cause(s) of action in order to recover additional damages.
 
Application of res judicata
 
When the Court of Appeal turned to consider the application of res judicata to this case, it had to decide whether an FOS decision is a decision of a judicial body for the purposes of the doctrine of res judicata and whether (and, if so, under what conditions) complaints to the FOS and causes of action relied on in subsequent proceedings are the same.
 
The Court of Appeal held that an award made by the FOS constitutes a judicial decision for the purposes of the requirements of res judicata. In support of this decision, Arden LJ (who delivered the leading judgment) noted that the FOS process "involves giving the parties an opportunity to state their case" and that decisions made by the FOS are not simply administrative in their nature. The FOS also intervened in this case at the Court of Appeal stage and accepted that it makes judicial decisions for the purposes of res judicata.
Arden LJ acknowledged that an FOS complaint may consist of, or include, facts that constitute a cause of action. Where this is the case, the Court of Appeal held that a person who has accepted an FOS decision may not pursue separate civil proceedings based on the same facts or cause of action.
 
Application of s228(5) of the FSMA
 
Section 228(5) of the FSMA states that if a complainant notifies the FOS that he accepts its determination, it is binding on the complainant and respondent, and is final. Notwithstanding the statutory description of an FOS determination as being binding and final, the High Court held that allowing persons who accepted FOS decisions to pursue separate civil claims based on the same facts was not inconsistent with the statutory scheme set out in FSMA (including s228(5)) that governs the operation of the FOS.
 
The Court of Appeal disagreed with the High Court on this point. Arden LJ held that although the High Court was "clearly right to consider the relevant provisions in the context of consumer protection and to seek to further Parliament's purpose in that regard through the judicial process of interpretation" the High Court had given "insufficient regard to the limit on [FOS] awards and to the fact that the legislation applied only to complaints so far as that limit was not exceeded". In addition, Arden LJ also noted that: "If Parliament had intended that the complainant should be able to recover loss in excess of the current limit, it is difficult to see why it would have imposed that limit in the first place. By setting up a scheme for resolving disputes… Parliament manifested its intention that consumer protection did not go beyond the [FOS] scheme".
 
As a result, the Court of Appeal found that s228(5) of the FSMA did not preclude the application of the doctrine of res judicata to FOS decisions and the appellant's appeal was allowed.

Comment:

The Court of Appeal's decision in this case has provided some much-needed clarity in relation to the issue of whether persons who complain to the FOS can pursue separate legal proceedings to recover additional sums after accepting a favourable FOS determination. The comments made by Arden LJ in her leading judgment help to reinforce the FOS process as an alternative procedure for resolving consumer complaints to pursuing claims in the civil courts and one which may help disputes to be "resolved quickly and with minimum formality" (s225(1) of the FSMA). 
 
However, the basis for the Court of Appeal's decision in this case (the application of the doctrine of res judicata) is somewhat surprising. Although the Court of Appeal gave reasons as to why FOS decisions constitute judicial decisions for the purposes of res judicata, it should be remembered that the FOS process is still very different to the process followed in typical judicial proceedings (ie civil litigation).
 
Although the Court of Appeal held that persons who complain to the FOS cannot pursue separate legal proceedings to recover additional sums after accepting a favourable FOS decision, Arden LJ expressly acknowledged that this would depend on whether the substance of the proceedings before the courts are the same as those which were considered by the FOS. As a result, it is possible that persons who have accepted a favourable FOS determination may still attempt to pursue separate civil claims to recover additional sums and argue that their civil claims are based on a separate causes of action to the ones that were originally argued before the FOS. However, it is likely to prove difficult for most claimants to successfully take this approach in practice.