Problem plaintiffs in the dock

The resolution of cases involving a group of individual investors and a firm of stockbrokers has resulted in a stern warning from Jersey's courts about the importance of avoiding dirty tactics. Michael O'Connell and Fraser Robertson report. Michael O'Connell is a partner and Fraser Robertson is an associate at Jersey firm Bailhache Labesse.

The Jersey courts have sent a strong message to plaintiffs not to abuse the judicial process and at the same time have provided a groundbreaking ruling on the duty of stockbrokers to their clients and the wider question of indemnity costs.

The cases Dixon and Richardson v Jefferson Seal were tried together before the Royal Court of Jersey in June and July 1997. The plaintiffs were private individuals who had engaged the services of a Jersey firm of stockbrokers Jefferson Seal to provide them with investment advice.

The plaintiffs succeeded at first instance and this is the only case in Jersey and possibly the first in England of a plaintiff establishing liability for negligence and/or breach of contract against a stockbroker in relation to investment advice.

The case has therefore provided a useful guide to the duties which a stockbroker owes to its clients. It has also provided important new guidance concerning costs orders in cases where one party has conducted the litigation in a vexatious, unreasonable or otherwise unacceptable manner.

Perhaps not surprisingly, the court found that a stockbroker's duty included a responsibility to exercise the standard of skill and care of a competent and prudent investment adviser, but it went on to hold, significantly, that those duties included:

a duty to provide investors with full information, in terms which the investor will be able to comprehend, concerning a prospective investment;

a duty to keep investors apprised of all material information and developments which might have a bearing on the investment held; and

a duty constantly to review all investments in a client's portfolio.

Expert testimony from the defendant stockbroker to the effect that the client had the right to information from the broker only if a transaction involving monetary value was contemplated, was by inference rejected by the court.

The defendant stockbroker appealed the decision of the court to the Channel Islands Court of Appeal. The plaintiff investors cross-appealed in respect of the trial judge's decision only to award taxed costs (standard costs) in relation to the trial, seeking instead an order for costs on the much more generous indemnity basis.

Shortly before the appeal was due to be argued the stockbroker indicated that it wished to withdraw its appeal. Thus there were two issues left for the Court of Appeal to determine:

the terms upon which the appeal should be withdrawn; and

the cross-appeal by the plaintiff investors in respect of the limited costs order granted by the judge in respect of the trial.

The Court of Appeal ordered the defendant stockbroker to pay the plaintiffs' costs of and incidental to the appeal and the withdrawal of the appeal on a full indemnity basis.

The court was highly critical of the defendant which, it found, had used the appeal process to attempt to lever an advantageous settlement of the judgment already granted in favour of the plaintiffs at first instance and this amounted to unreasonable conduct and an abuse of the process of the court.

Of particular significance was the willingness of the Court of Appeal to consider the respective positions of the parties. On the one hand there were private individuals pursuing substantial investment losses at their own personal expense. On the other there was a company, owned by a substantial public company, with insurers which, the court observed, had “virtually limitless funds with which to carry out a war of attrition against [the plaintiffs]”.

The court went on to allow the cross-appeal, thereby very unusually condemning the defendant stockbroker to pay full indemnity costs of the trial and the whole action.

The court accepted the argument that it was right to send out a signal of disapproval in respect of the defendant's conduct. The court analysed this conduct and found that there were a number of areas in which the defendant could be criticised:

it had fundamentally breached its discovery obligations, resulting in repeated and late applications for specific discovery;

it had mischievously commenced third-party proceedings against one of the plaintiffs;

it had brought allegations against the plaintiffs which were an abuse of process and absurd;

it had conducted the defence in an ill-co-ordinated way such as to confuse the plaintiffs; and

it had led with evidence at trial which was manifestly different from its pleaded case and had not sought leave to amend its pleadings so as to enable the plaintiffs to know precisely what the defence case was.

It has always been accepted that indemnity costs should only be awarded in exceptional and unusual cases.

Previous reported cases have attempted to define what conduct falls within those categories but, in the relatively recent past, courts have seemed more willing to award indemnity costs where conduct was observed which was tactically motivated and unreasonable.

The Court of Appeal referred to Cepheus Shipping Corporation v Guardian Royal Exchange Assurance (1995) and Munkembeck & Marshall v McAlpine (1995) as authority for the proposition that indemnity costs may be appropriate even in cases where the litigation could merely be said to have been fought bitterly or unreasonably, and it was not necessary for there to have been some deception or underhand conduct.

Mr Justice Eastham approved the judge's views in these earlier cases so that he could and should make a robust order “…so as to discourage other plaintiffs from pursuing litigation in the way this litigation has been pursued on behalf of this particular plaintiff”.

This was the first major case in Jersey since the mid 1980s which had laid down such guidelines on the question of indemnity costs. Whereas the underlying principle remains that there must be exceptional or unusual circumstances to justify an indemnity costs order, the court has now acknowledged that it must be flexible in exercising its unfettered discretion.

Accordingly, rather than attempting to lay down a rigid set of rules or guidelines, this new flexibility is reflected by the clear adoption by the Court of Appeal of the approach of Mr Justice Millet in Macmillan to make such orders in “appropriate” cases.

This decision may well reflect the growing enthusiasm of the courts in England and in Jersey to take a more active role in case management and in the conduct of the parties which come before them.

So if you have litigation to be pursued in Jersey the answer is simple: this is a sophisticated financial centre with strong judicial resources which will deliver justice effectively and efficiently. But the Jersey courts expect and require a clean fight and will take a firm and robust position when faced with inappropriate conduct.

It is plain that the ability of the court to order indemnity costs is an important weapon in the judicial armoury of this jurisdiction which will be used where appropriate to prevent unfairness and injustice.