The High Court has decided that a party who accepts a FOS determination awarding them the statutory maximum award (now £150,000) can subsequently claim for damages above that amount through the courts.

The Court concluded the doctrine of merger does not apply to FOS decisions. This ruling is in direct conflict with a previous High Court decision (in Andrews) which held that, once a consumer had accepted a FOS decision, its cause of action merged with that decision and could not be pursued further. The firm is seeking permission to appeal this decision and it is therefore possible that it will be overruled by the Court of Appeal on appeal.

The decision may encourage potential claimants with claims of over £150,000 to seek to use the FOS process in the first instance as a means of securing an award with which to fund subsequent litigation claiming the balance of their losses. However, assuming the FOS agrees to determine a complaint likely to exceed the statutory maximum award, such claimants would run the risk that if they accept a FOS award and the recent decision is overruled or not followed, they may be barred from claiming the balance of their losses through the courts.

1. The Decision

In December 2012, the High Court in Clark v In Focus Asset Management & Tax Solutions Ltd [2012] EWHC 3669 (QB) decided that a party who had accepted a favourable Financial Ombudsman (FOS) decision and had been paid the statutory maximum award (then £100,000, now £150,000) by the firm could subsequently bring a damages claim for the full loss they have suffered over and above the FOS award.

Mr and Mrs Clark (the Complainants) had made a complaint to the FOS that financial advice given to them by In Focus Asset Management & Tax Solutions Ltd (the Firm) was inappropriate.  That advice had allegedly caused them losses of in excess of £500,000. 

The FOS upheld the complaint and decided that the Firm should pay compensation in accordance with a formula to put the Complainants back in the position they would have been in had the allegedly inappropriate advice not been given.  However, the FOS's award was capped at the statutory maximum of £100,000 (in January 2012 this statutory maximum award was increased to £150,000).  The FOS made a recommendation that the Firm should pay the full amount of compensation derived from the formula but warned the Complainants that they "may not be able to enforce a greater amount [than the statutory maximum award] in the courts."  The Complainants accepted the FOS's award but added a manuscript rider to the pro forma acceptance form stating: "we reserve the right to pursue the matter further through the civil court". 

The Firm paid the statutory maximum FOS award but did not pay the recommended compensation above this level.  The Complainants banked the cheque for £100,000 and subsequently brought a claim in the County Court for their alleged losses, giving credit for this payment.  However, HHJ Barratt QC granted the Firm's application to strike the claim out, following the High Court decision in Andrews v SBJ Benefit Consultants Ltd [2010] EWHC 2875 (Ch). 

In Andrews (which was decided on very similar facts to Clark v In Focus), HHJ Pelling QC, sitting as a Deputy Judge in the High Court, decided that once a complainant accepts a FOS decision, the doctrine of merger applied to any subsequent court proceedings brought in respect of the same facts.  The doctrine of merger provides that a party which has obtained a final judgment in a tribunal of competent jurisdiction is precluded from later recovering in court a second judgment for the same relief in respect of the same subject matter.  Andrews relied on the reasoning of the Court of Appeal in R (on the application of Heather Moor & Edgecomb Limited) v FOS and Lodge [2008] EWCA Civ 642 in which it was decided that the FOS was a court or tribunal for the purposes of Article 6 (the right to a fair trial) of the European Convention on Human Rights (ECHR). 

The decision in Andrews was widely considered by legal and insurance commentators to have provided much needed clarification to the expected legal position in an area with little relevant case law.

However, in Clark v In Focus Mr Justice Cranston considered that Andrews was incorrectly decided on the issue of whether the doctrine of merger applied to FOS determinations.  Mr Justice Cranston said that the Court in Andrews had ignored an obiter statement in Heather Moor in which Rix LJ had said that the FOS is "dealing with complaints, and not legal causes of action, within a particular regulatory setting".  This comment, in Mr Justice Cranston's view, showed that there was a distinction between the cause of action being considered in the court case and the matter that had been determined by the FOS.  Accordingly the doctrine of merger did not apply. 

Mr Justice Cranston also rejected the reasoning that the FOS should be treated as a tribunal for the purposes of the merger doctrine because it was a tribunal for the purposes of ECHR (as per the decision in Heather Moor). In addition, the Court decided that the acceptance of the award by the complainants as being "final and binding" was "final" only in the sense of being the conclusion of the FOS process rather than in the sense that the complainant could not take further proceedings.  Mr Justice Cranston said that it seemed to him that it was not inconsistent with the aims of the statutory framework of FOS for a complainant to use a FOS award to finance the legal costs of bringing court proceedings.

Interestingly, the Judge held that, if in fact the merger doctrine did apply to FOS decisions (contrary to his primary conclusion), the words written by the Complainants on the pro forma acceptance form for the FOS award ("we reserve the right to pursue the matter further through the civil court") did not mean that they had not given their "final" acceptance of the FOS determination and would not assist them in arguing that merger had not occurred.  

The Firm is seeking permission to appeal the High Court's decision to the Court of Appeal.

It is worth noting that this decision only affects whether the Firm's application for strike out of the claim was successful.  Even if the Complainants are ultimately successful in proving negligence, there is no guarantee that the Court will use the same formula as the FOS to determine the quantum of their loss.

2. Conclusions

If the High Court's decision in Clark v In Focus is upheld, this may have the effect of encouraging complainants with claims larger than the statutory maximum FOS award to utilise the FOS in the first instance with a view to building a "war chest" of legal costs before commencing court proceedings respect of the balance of their claim.  Complainants may also seek to adduce the FOS judgment in support of their court case, particularly given that it is quite common for the FOS to recommend a higher award than its statutory limit.

A key consequence of this judgment is that the FOS procedure can no longer be seen as an 'alternative'  to court.  From a regulatory perspective, the FOS may therefore face a higher volume of claims from complainants with higher value claims.  This may possibly be counteracted if the FOS considers (or firms are able to persuade it) that such cases are better dealt with by the courts given their size and complexity, and should therefore be dismissed by the FOS without considering the merits (which is a ground for dismissal under DISP 3.3.4R(10)).

We anticipate that this decision is likely to have moot impact on complaints that have a value around the level of, or that may moderately exceed, the maximum statutory award. This is because the FOS may agree to determine such cases and the complainant may be keeping alive their option to pursue subsequent court proceedings.   However, quantification of financial and investment loss often gives rise to difficult issues (which may in some cases, of course, have given rise to the complaint in the first place).  The precise level of loss may not be known when the complaint is first made to the FOS.  It would be an unfortunate consequence of this decision if the FOS adopted a more cautious stance to agreeing to determine complaints and dismissed more complaints on the basis that they might exceed the FOS's statutory limit.  This would defeat the legislator's objective of establishing a scheme for resolving lower value financial claims quickly, informally and without recourse to the courts.

More generally, the High Court's decision in Clark v In Focus appears to place significant weight on Rix LJ's statement in Heather Moor that the FOS is "dealing with complaints, and not legal causes of action, within a particular regulatory setting".  The context of Heather Moor was a challenge, by way of judicial review, to a FOS decision on grounds that the FOS was required to determine complaints in accordance with English law but had failed to do so, instead making a decision by reference to what the FOS considered to be fair and reasonable.  Rix LJ's statement was made in the context of distinguishing the FOS, which determines complaints by reference to its "fair and reasonable" jurisdiction, and a judge, who determines legal claims and is bound to apply the law in all its particulars.  There are, of course, strong public policy reasons for this distinction: lower-value financial claims may not merit the full vigour of the legal process and the FOS scheme provides an alternative dispute resolution mechanism to those who cannot afford (or choose not to pay for) it.  There are also strong public policy reasons for resolving such claims efficiently and informally, which the statutory framework establishing the FOS recognises when providing for a "scheme under which certain disputes may be resolved quickly and with minimum formality …"  The decision in Clark v In Focus relies on the principle that the doctrine of merger applies only to causes of action, but a cause of action is (merely) the factual situation which entitles one person to obtain a remedy from a court against another person.  It is not clear why a complaint before the FOS should not be treated as encompassing that factual situation so that the doctrine of merger does apply.  In addition, a complainant is not required to accept a FOS decision (and can instead bring court proceedings), but where he does so, it would seem to meet another aspect of public policy – the need to bring disputes to a final end – for the complainant to be barred from taking his complaint further in a different forum.

It is also interesting to note that the Judge in Clark v In Focus did not consider the fact that DISP 3.3.4R allows, but does not compel, the FOS to dismiss a complaint without considering the merits if the subject matter: (i) has been the subject of court proceedings where there has been a decision on the merits or (ii) is currently the subject of court proceedings.  This reflects the fact that the FOS's jurisdiction to consider complaints is wider than the legal causes of action but the complaint may be equivalent to or encompass the legal cause of action in a given case.

The financial services industry is not likely to welcome the prospect that claimants can now have 'two bites of the cherry' nor the lack of clarity now introduced into this area until the Firm's efforts to appeal are resolved.  In any event, given that there are now two conflicting High Court decisions, determination of the issue by the Court of Appeal would be desirable.