Lockton accuses Collyer Bristow of crying wolf over ‘bankruptcy’ fears
3 October 2011 | By Katy Dowell
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Collyer Bristow is in dispute with its insurance broker Lockton Companies International over whether the intermediary has placed adequate liability insurance to cover a potential £50m loss in a fast-approaching negligence battle.
The firm went to the High Court on 22 July this year to formally request an expedited hearing for the case, the outcome of which, it claimed, could determine its financial future.
Later this month (17 October) Collyer Bristow will appear as a joint defendant in the £50m Innovator One case. The claim against the firm and former partners John Bailey and Jonathan Roper concerns complex investment initiatives, known as ‘Innovator Schemes’, that were promoted by the firm as tax-advantage vehicles.
Investors hoped to be able to claim tax relief on sums invested by them for participation in the schemes, which would use the cash to buy and exploit technologies. The intended investment vehicles were 19 entities, 16 of which were LLPs and the remaining three general partnerships.
It is alleged that the project, which Collyer Bristow is accused of promoting, was a scam and a fraud and that conditions for the claimants to become members of the schemes and for their subscription monies to be paid to the partnership vehicles were never fulfilled.
The claimants, who are being represented on a conditional fee arrangement (CFA), instructed Enyo Law partner Michael Green to pursue the matter.
Collyer Bristow drafted in Beachcroft on the defendant side.
Firm strikes back
The saga took another turn in June when Collyer Bristow, seven current partners and a former partner launched proceedings against Lockton, arguing that it had been negligent in the placing of its insurance for the years the Innovator One claim concerns.
The firm argued that it could be at risk of collapse if the court did not grant it an expedited staged trial so it could settle the liability dispute ahead of the Innovator One hearing.
Collyer Bristow and the partners collectively instructed Norton Rose, which drafted in the expertise of David Edwards QC of 7KBW.
The defendants, meanwhile, went to CMS Cameron McKenna, which instructed Crown Office Chambers’ Michael Harvey QC.
Despite arguments detailing the financial risk to Collyer Bristow and assertions that any liability dispute was simple and could be resolved easily , Mr Justice Blair turned the firm down.
This means that, after being in court for 12 weeks defending Innovator One, the firm will also appear in separate proceedings next spring, when it will attempt to persuade the court that the Innovator One case should be indemnified as separate incidents rather than a single event.
The difference in insurance cover is a low of £10m for a single event and £64m for 19 events.
Collyer Bristow alleges that the broker is to blame for the fact that it had in place an insurance programme containing various aggregation provisions in its different layers of cover. The consequence of this would leave it short of funds to pay to the Innovator One claimants should it lose the case.
Appearing in the High Court in the July hearing, Edwards said: “Without Lockton’s liability being established in advance, the likely consequence of an adverse judgment against my clients, either immediately or shortly thereafter, may well be the bankruptcy of the individual claimants […], the withdrawal of their practising certificates and the collapse of the LLP.”
As Blair J put it, for the lawyers involved “it is obviously an anxious time”.
Lockton, however, claimed that an immediate hearing would not allow it to prepare adequately for trial. It was not, as the claimants argued, a simple matter that could be rectified easily, the broker maintained.
Expert witnesses need to be prepared, disclosure exercises carried out and the insurers that provided the cover – RSA for the primary layer and Norwich Union (NU) for the disputed layer – need to make submissions, Harvey told the court.
“Mr Justice Hamblen’s decision in the Innovator One action is likely to set the story out as to how the matter came about, how Collyer Bristow was instructed,” Harvey said, explaining that the forthcoming case would also explore “whether there was one matter, one transaction, several matters, several transactions, how they were related and whether fraud is established or not. They will be the basic building blocks, which can then be used in the second trial to determine how the aggregation clauses apply.”
The broker also contends that the life-or-death scenario the claimant’s counsel foresees is a concocted story established to support the firm’s demand to expedite the hearing.
He said: “If there was a real fear that somehow the guillotine was going to come down and my learned friend’s clients were all going to be made bankrupt overnight, there might be some justification for taking that unusual course [of expediting the trial].
“But there is not that real fear, for the reason that the monetary judgment is going to be limited.”
Edwards retorted: “As far as Collyer Bristow is concerned, they regard the risk of bankruptcy and the demise of the LLP as very real and it’s a cause of discomfort and concern.”
Nevertheless, the defendants argued that, if the Innovator One claims were turned down by the court, liability would not be a disputed issue and the negligence claims against Lockton would be dropped.
Furthermore, counsel for the defence said that if levels of liability are awarded in the Innovator One claimants’ favour they may not exceed the primary cover level of £10m that will be provided by RSA. If the threat of bankruptcy was real, the barrister said, more details should be provided to the court.
“It shouldn’t be thought that there’s going to be a monetary judgment handed down immediately in a sum which is going to exceed the £10m from RSA,” Harvey argued.
“It’s also not to be thought that there’s any realistic likelihood – even if fraud is established – that there’ll be interim payments ordered straight away that are going to produce a bankruptcy.”
The £64m question
To date Collyer Bristow has racked up costs of £11.1m on the case, but Edwards explained that this figure could rise to as much as £40.5m by the end of the trial. The top-end estimate for the cost of fighting off the entire trial is £64m.
If the claimants are successful the 100 per cent uplift could see them claw back a starting amount of £22.2m from Collyer Bristow, in addition to
a £6m after-the-event premium.
“My clients have incurred significant costs, into six figures, which they simply wouldn’t have done if Lockton had done its job properly,” Edwards asserted.
The firm’s inability to settle its dispute with Lockton has hindered any attempt it might have made to settle the Innovator One claims. This was given by the firm’s counsel as another reason why the court should speed up the Lockton hearing.
“My client’s position is that it will be exonerated at the trial of action,” Edwards said. “However, like any litigant, […], we would wish to explore settlement. At present there’s a logjam.
“A finding that Lockton was in breach of duty in recommending and placing insurance with different aggregation provisions in the different layers, and is responsible for the consequences that might flow from that, will mean that one way or another my clients will have at least £40m.”
For Collyer Bristow the stakes are high. As Edwards told the court, the firm’s bank, C Hoare & Co, is following the dispute closely. According to the firm’s Companies House filings, at the end of the 2009-10 financial year Collyer Bristow’s borrowings stood at £738,000 (down from £822,000 a year earlier), with the loan secured against its property at 4 Bedford Row in London.
The firm is heavily involved with the fallout from the phone-hacking scandal. Head of media Steven Heffer is acting for individual alleged victims at the hacking inquiry, while partner Dominic Crossley, who has represented Max Mosely throughout his fights with the tabloid press, is advising the inquiry itself.
In a statement to The Lawyer, Collyer Bristow partner Matthew Marsh said: “Collyer Bristow has a successful and thriving business. Our claim against Lockton arises because Lockton failed to arrange appropriate cover for our insurance programme in 2005-06. If there’s any gap in our cover we and our advisers are confident that Lockton will be held liable to plug the gap.”
The firm is not unused to working on CFAs and while reforms may be in the pipeline this will not affect its current portfolio of CFA work, although financial difficulties could.
For Lockton, one of the largest brokers in the solicitors’ professional indemnity insurance market, an adverse outcome would be hugely problematic.
The cutoff for the 2010-11 renewal season passed on 29 September, but this case is expected to conclude just months ahead of next year’s renewal.
In a statement the broker said: “We do not comment on current proceedings that are being defended and come to trial next May.”
No doubt, whichever way the Innovator One claims go, an application for appeal will be lodged.
For Enyo Law it is a major case that Green carried with him when he broke away from Addleshaw Goddard along with former litigation chief Simon Twigden and partner Pietro Marino.
Any uplift resulting from the claim would be a significant financial boost for the firm.
When a firm is pulled into a dispute over alleged negligent advice, it is its insurer that helps drive the defence of the case, as it picks up the bill. When that relationship goes awry it can have undesirable consequences for all involved and even a knock-on effect on how the profession is insured.
Collyer Bristow’s case against Lockton will be followed closely by the profession and the insurance markets. This is a fight neither side can afford to lose.