Market trends and climate
Market trends and climate
What is the general state of the securities markets in your jurisdiction, including any notable trends and recent transactions?
The London Stock Exchange is among the world's largest stock exchanges, with over 2,200 companies from over 70 countries listed and trading with a combined market capitalisation of approximately £6 trillion.
Notwithstanding the political uncertainty resulting from Brexit, the initial public offering (IPO) market in London remains strong. In 2017 there were 106 IPOs raising £15 billion, an increase of 63% by number of IPOs and 164% by value compared to 2016. The market has seen a slow but steady start to 2018, with activity expected to increase through the year.
Regulatory framework and enforcement
What is the primary legislation governing the offer and trade of securities in your jurisdiction (both primary and secondary markets)?
There are three primary sources of law relevant to the offering and trading of securities in the United Kingdom, and securities litigation in England and Wales.
The Financial Services and Markets Act 2000 is the key statute that regulates the UK financial services industry, including governing the offer and trade of securities in the United Kingdom.
England and Wales has a common law legal system under which the law has been established by court decisions which are binding in future cases.
EU legislation is either directly or indirectly enforceable in England and Wales. The Market Abuse Regulation (2015/2392/EU), which is directly enforceable, provides the regulatory framework in relation to market abuse. The Market Abuse Regulation allows claimants to bring claims including those for market manipulation, insider dealing and unlawful disclosure of inside information.
Regulatory authorities and enforcement trends
Which authorities regulate the securities markets in your jurisdiction and what is the extent of their enforcement powers?
The Financial Conduct Authority (FCA) is the conduct regulator for 56,000 financial services firms and financial markets in the United Kingdom and the prudential regulator for over 18,000 of those firms. It has a broad range of powers to investigate and penalise firms, individuals and issuers for failure to act in accordance with the Financial Services and Markets Act or the FCA's rules. These include both civil enforcement powers (eg, powers to penalise a firm in relation to failures in that firm's governance, system or controls), as well as the ability to investigate and prosecute criminal offences (eg, insider dealing).
The Serious Fraud Office (SFO), the Crown Prosecution Service and the secretary of state for business, energy and industrial strategy also have powers to investigate and prosecute criminal offences in the capital markets.
Have there been any notable public enforcement trends, including any key recent actions?
The FCA has sought to increase regulation of the financial sector in order to meet its goals of protecting consumers and market integrity. The FCA issued fines totalling approximately £230 million in 2017, with Deutsche Bank AG being fined approximately £163 million for failing to maintain an adequate anti-money laundering control framework. This represented a significant uptick in enforcement action after a historic low in activity in 2016.
In March 2018 the FCA published a document entitled “Our Approach to Enforcement”, which identified the role of enforcement as to achieve fair and just outcomes in response to misconduct and to ensure that the FCA's rules and requirements are obeyed.
Meanwhile, the SFO has been active in the securities market. It has brought prosecutions against three former Tesco executives for false accounting and fraud in relation to Tesco having inflated its profits by approximately £250 million in 2014. The trial began in February 2018 but was halted when one of the defendants suffered a heart attack. A retrial has been requested.
In addition to the actions of the FCA and the SFO, the EU Markets in Financial Instruments Directive II (MiFID II) rules came into force in January 2018. It is a significant piece of regulation that has affected anyone who works, invests or trades in the bond, commodity, derivative and stock markets.
MiFID II aims to better protect investors, increase transparency in these markets and put greater responsibility on financial professionals (eg, in banks, funds and otherwise) for explaining their financial products clearly and targeting appropriate investors.
How is the court system structured in your jurisdiction? Are there any specialist courts with jurisdiction over securities-related actions?
The court system in England and Wales distinguishes between civil and criminal claims. Civil claims begin in either the County Court or the High Court, with higher-value claims typically commencing in the latter. Appeals from the county court are heard in the High Court.
The High Court is separated into various divisions. One of those divisions is the Financial List, which was created in late 2015 to deal with cases (generally worth over £50 million) that raise issues of general importance to the financial markets or which would benefit from being managed and heard by a judge with particular expertise and experience in the law relating to the financial markets.
It is anticipated that the Financial List will be utilised in future securities claims given their likely value and complexity and impact on the financial markets.
Criminal claims typically begin in the Magistrates' Court, with appeals against convictions and sentences usually heard in the Crown Court.
What rules govern court procedure? Are there any provisions specific to securities cases?
The Civil Procedure Rules and the Criminal Procedure Rules govern court procedure for civil and criminal cases respectively. There are no provisions specific to securities cases.
The Civil Procedure Rules' overriding aim is to enable the courts to deal with cases as justly as possible; they include rules relating to the effective service of documents, disclosure requirements and documents that need to be filed prior to a case management conference.
The Criminal Procedure Rules enable courts to avoid unfair and unnecessary delays by actively managing the preparation of criminal cases waiting to be heard.
What rules and procedures govern the appeal process?
Appeals of decisions made in the Crown Court or the High Court will be heard in the Court of Appeal. The Supreme Court hears appeals of Court of Appeal decisions.
A party typically has 21 days from the date of judgment to state that it is seeking to appeal a decision. Permission must be sought from the court whose decision is to be appealed. This is typically denied, but permission can be sought directly from the court where the appeal will be heard; securities-related cases are typically first heard in the High Court, so appeals will normally be heard in the Court of Appeal. If the Court of Appeal also refuses permission to appeal, it is theoretically possible to obtain permission directly from the Supreme Court. However, this is extremely unlikely to succeed.
It is very difficult to obtain permission to appeal a Court of Appeal decision; the Supreme Court will usually grant such permission only where the case involves an important point of principle or is of significant public interest.
Recent case law and litigation trends
Have there been any notable recent cases involving private securities claims or trends in private securities litigation?
Private securities claims are still in their relative infancy in England and Wales but there has been increasing growth in such claims over the past few years, with a number of high-profile cases being pursued. Reasons for this upward trend include the following:
- The 2010 US Supreme Court decision in Morrison v National Australia Bank significantly reduced the extraterritorial application of US securities legislation. Claimants who may previously have pursued claims through the US courts have now looked instead to bring claims in England and Wales.
- The litigation funding market has continued to develop at a rapid pace, with litigation lawyers also increasingly willing to enter into alternative fee arrangements.
- The logistics and procedural mechanisms for putting together a collective action have become more commonly understood.
Recent notable cases include the following.
Royal Bank of Scotland (RBS) rights issue
Investors alleged that the prospectus prepared for the bank's April 2008 rights issue contained misrepresentations as to the financial position of the bank and omitted other material information contrary to Section 90 of the Financial Services and Markets Act. The investors acted through four ‘action groups’. In June 2017 the final action group settled for £0.82 per share, the majority of other claimants having previously settled at a lower rate of £0.41 per share.
After reporting losses of £6.3 billion in 2015, Tesco admitted that it had overstated its expected profit in its half-year update the previous August. The announcement was corrected less than a month later. In October 2016 a litigation funder announced that it was funding legal action by institutional investors under Section 90A of the Financial Services and Markets Act. In March 2017 Tesco was required by the Financial Conduct Authority (FCA) to announce a compensation scheme for shareholders who had purchased shares after the half-year announcement and before its correction. Compensation is being paid subject to a ‘release’ clause, which prevents compensated investors from bringing further claims connected with the statement. It is not yet clear what impact the compensation scheme will have on the civil action.
Investors allege that misrepresentations were made by Lloyds TSB and its directors in the run-up to the bank's acquisition of Halifax Bank of Scotland (HBOS) in 2009. The claimants allege that Lloyds' former directors breached both fiduciary and tortious duties in recommending that shareholders support the acquisition. The claim is subject to a group litigation order and judgment is expected in 2018.
Court approach to securities cases
Would you consider your jurisdiction to be a more claimant-friendly or defendant-friendly forum for securities litigation?
The judiciary in England and Wales is notably professional and independent, but certain aspects of the procedure may benefit claimants and defendants respectively.
Claimants benefit from the court's ability to order a defendant to disclose documents relevant to the case (whether favourable or harmful to its case); this avenue for obtaining sight of documents is not available in many jurisdictions. Additionally, the rigorous process of cross-examination at trial can assist claimants in securities litigation, as the information required for a successful claim is often otherwise difficult to obtain.
On the other hand, litigation in England and Wales is expensive and unsuccessful claimants will nearly always be liable for the majority of the defendant's costs (although the use of litigation funders and adverse costs insurance does limit this disincentive). These factors, combined with the ability of defendants to have unmeritorious claims struck out, make it challenging for claimants to pursue speculative or weak claims.
How do the courts in your jurisdiction address cross-border securities litigation?
Courts in England and Wales frequently consider cases which involve cross-border issues. As with all cross-border litigation, the court will first seek to identify whether it has jurisdiction to hear the case in question.
Where there is a valid jurisdiction clause, the court will generally give effect to it. Where there is ambiguity as to jurisdiction, the court will determine whether the EU Recast Brussels Regulation (1215/2012) or the English common law rules shall be applied.
Recast Brussels Regulation
The basic principle of the Recast Brussels Regulation is that a defendant domiciled in an EU member state should be sued in its country of domicile. The regulation provides a set of rules by which to determine which court has jurisdiction.
Common law rules
Where the defendant is not domiciled in an EU member state, the common law rules of England and Wales are considered. These rules can give courts in England and Wales jurisdiction to hear cross- border claims in certain circumstances (eg, where the defendant has been served with a claim form while present in England or Wales).
Causes of action
Which causes of action can be asserted by claimants in relation to the offer and trade of securities and which are most commonly asserted?
In relation to publicly listed securities, the principal statutory causes of action arise under Sections 90 and 90A of the Financial Services and Markets Act 2000. The Financial Services and Markets Act should be read alongside the Financial Conduct Authority (FCA) Handbook, which sets out additional requirements that must be followed when listing securities on the London Stock Exchange. These requirements include the Prospectus Rules, which establish rules to which prospectuses and listing particulars must adhere.
Section 90 – compensation for statements in listing particulars or prospectus
Section 90 makes "any person responsible for listing particulars" liable to compensate an investor who acquired securities and suffered loss as a result of an untrue or misleading statement in the listing particulars, or an omission of any matter required to be included by either the Financial Services and Markets Act or the Prospectus Rules.
It is a question of fact whether a statement is "untrue" or "misleading" and the time at which the relevant statement will be tested for accuracy and truth will typically be when the prospectus or listing particular was sent to the FCA.
While currently untested, it is likely that a claimant will not need to show that it relied on the defective prospectus or listing particulars when purchasing the securities to which the defective document relates.
The manner in which the courts will calculate damages payable under Section 90 is yet to be tested.
Section 90A – liability of issuers in connection with published information
Section 90A makes issuers of securities liable to pay compensation to investors in respect of misleading statements or dishonest omissions in published information relating to the securities, as well as dishonest delays in publishing such information.
Section 90A does not apply to prospectuses and listing particulars as these are governed by Section 90.
The investor must show that:
- it suffered a loss by relying on the information in question; and
- the defect in the document was the result of recklessness or dishonesty, rather than the lower standard under Section 90, which is akin to negligence.
Misrepresentation Act 1967
Investors may also bring a claim for misrepresentation under the Misrepresentation Act 1967. This would be suitable, for example, where a claimant entered into a contract on the reliance of a misrepresentation provided by the defendant. Remedies available include damages and rescission of the contract in question.
Other causes of action
If a misleading statement is made dishonestly, the common law cause of action of deceit may be available. For this cause of action, the claimant must prove that the misrepresentation was known to be false (or the defendant was reckless as to the statement being false) and it was intended to be acted upon. Once intent is established, reliance will be presumed and the burden will be on the defendant to rebut this.
The claimant has a further cause of action in negligent misstatement if a statement is made negligently, where the defendant owes a duty of care to the claimant.
If the defendant is authorised by the FCA, and has contravened an FCA rule, a private person who suffers a loss as a result of that contravention could also have a claim for damages under Section 138D of the Financial Services and Markets Act.
Directors’ and officers’ liability
In what circumstances and to what extent can directors and officers be held liable for misrepresentations, omissions or other fraudulent conduct in relation to the offer and trade of securities?
A claim under Section 90 of the Financial Services and Markets Act is brought against the person responsible for the defective document (prospectus or listing particulars). This will generally encompass the issuer and its directors, who will typically have assumed responsibility for the contents of the defective document.
Section 90A of the Financial Services and Markets Act is actionable only against an issuer. However, directors may be liable to the issuer in negligence or receive a penalty from the FCA in accordance with the FCA's penalty regime under Section 91(2) of the Financial Services and Markets Act, which allows directors who were knowingly involved in an issuer's contravention to be penalised.
In a claim brought under the Misrepresentation Act 1967, or one of the other available tortious claims, the liability of directors and officers will turn on the individual facts of the case.
Can liability be limited in any way?
It is not possible to limit statutory liability under the Financial Services and Markets Act. It is also not possible to exclude liability for fraud; however, other forms of liability may be limited or excluded through a provision in the relevant contract or prospectus. This will be subject to the Consumer Rights Act 2015 (for retail investors) or the Unfair Contract Terms Act 1977 (for business-to-business contracts).
In what circumstances and to what extent can secondary actors (eg, attorneys, auditors and underwriters) be held liable for misrepresentations, omissions or other fraudulent conduct in relation to the offer and trade of securities?
Only the issuer may be liable under Section 90A of the Financial Services and Markets Act. The extent of secondary liability under Section 90 of the Financial Services and Markets Act in securities claims is currently uncertain. Section 90 refers to those who are responsible for the listing particulars or prospectus, but does not identify who may be liable. However, Section 5.5.3 of the Prospectus Rules defines persons responsible as including, in addition to the issuer and its directors:
- any person who has accepted responsibility and is stated in the prospectus as having done so; and
- any person who has authorised the contents of the prospectus.
Accordingly, there is a risk that claimants may seek to bring claims against third-party advisers who assisted in the preparation of the documents, including underwriters, auditors, lawyers and public relations consultants. Audit firms in particular may find themselves at risk, as prospectuses must include an independent report and audited historical financial statements. However, Section 5.5.9 of the Prospectus Rules makes it clear that a person shall not be deemed responsible for a prospectus solely on the basis of having given advice on its contents in a professional capacity.
With respect to auditors and any tortious liability, an auditor will owe a duty of care to the shareholder only if there is a ‘special relationship’ – that is, if it has provided a specific shareholder with information with respect to a specific transaction for a particular purpose of which the auditor is aware.
Can liability be limited in any way?
Under the Prospectus Rules, persons may state that they accept responsibility for the prospectus only in relation to specified parts. This is commonly used by auditors and accountants to make clear the parts of the prospectus that they have prepared.
Given the broad definition of ‘persons responsible’, it is common for third-party advisers to ensure that they are not named in the prospectus as having accepted responsibility for the contents. Further, specific disclaimers may be included in the prospectus to that effect.
Who may file securities claims? Are there any restrictions on foreign claimants? Who are the most common claimants (eg, pension funds, institutional investors)?
Any individual or entity which has a legal personality may bring a securities claim. The individual or entity must itself have purchased the securities and subsequently suffered a loss; therefore, for example, a claim cannot be brought in the name of a company set up to manage a group litigation order.
There are no additional restrictions on foreign claimants, and it is common for foreign claimants to bring claims (including those relating to securities) in the courts of England and Wales. The types of claimant in securities claims vary and include funds, institutional investors and individuals.
Under Section 90 of the Financial Services and Markets Act, any person who has acquired securities to which the defective document relates and who has suffered a loss may bring a claim. This includes a person who has subsequently sold relevant securities and – while currently untested – should also apply to purchasers who have purchased securities in the secondary market.
Pleading and evidentiary standards
What pleading and evidentiary standards apply to securities claims, including with regard to:
(a) Proof of reliance on the relevant misrepresentation, omission or other fraudulent conduct?
The extent to which reliance is necessary when bringing claims under the Financial Services and Markets Act is currently uncertain as it has not yet been tested. However, the common view is that it is unlikely that claimants will have to show that they relied on the relevant misrepresentation or omission in the defective prospectus or listing particulars in order to succeed under Section 90, but that they will have to show such reliance when bringing a claim under Section 90A.
Reliance on a misrepresentation will also be necessary when bringing a claim under the Misrepresentation Act 1967 or in the tort of deceit.
English law and procedure do not recognise the fraud-on-the-market doctrine in US securities law.
(b) Proof of loss causation?
There are no specific requirements regarding proving loss and causation in securities claims. As a matter of general principle, a claimant in English proceedings will succeed only if it can demonstrate that it has suffered loss and that the loss was caused by the relevant breach.
The loss that can be claimed in claims under Sections 90 and 90A of the Financial Services and Markets Act continues to be a complex and uncertain topic. Both sections provide that a defendant is liable to compensate the claimant for loss suffered in respect of the securities as a result of misstatement or omission. However, the Financial Services and Markets Act does not outline the measure of damages, nor is it the subject of any direct authority. Various bases have been put forward, including:
- the price paid for the shares and the price that would have been paid had the true position been known or the relevant untrue and misleading statements not been made;
- the price paid for the shares and their market price once the true position was known;
- the price paid for the shares and their prevailing market value; and
- where the claimant has sold its shares, the price paid for the shares and the price at which they were later sold.
Each of these approaches will give rise to practical issues in demonstrating causation. Pending clarity from the courts, claimants should consider carefully how best to plead their claims in relation to loss and causation as this is likely to be a particularly contentious issue in the proceedings.
(c) Materiality requirements?
Neither Section 90 nor Section 90A of the Financial Services and Markets Act expressly requires a defect in the document to be material in order to found a claim.
However, the courts may arguably conclude that there is at least an element of a materiality requirement. Particularly in relation to Section 90A, a claimant must establish reasonable reliance on the relevant defect, which would be difficult should that defect not be material.
As a matter of practice, as litigation in England and Wales is a costly exercise, it is unlikely that an action would be pursued in relation to an immaterial defect which is likely to give rise to a very limited damages award (if anything), even if successful.
(d) Scienter requirements?
Only certain securities-related causes of action require the defendant to have intended or had knowledge of the wrongdoing in question.
Under Section 90 of the Financial Services and Markets Act, there is no requirement that the person responsible for the listing particulars intended or had knowledge of an untrue or misleading statement in the particulars, or any omission.
In contrast, under Section 90A it is necessary to demonstrate that the conduct of the directing minds of the issuer was dishonest or reckless. ‘Reckless’ in this context means having inadequate regard for whether a statement is true. The position is broadly the same in a claim in deceit.
(e) Any other requirements, standards or considerations?
In civil law cases, the burden of proof is on the balance of probabilities. In the significant majority of cases it is for the claimant to prove its case; however, the burden of proof is reversed in some cases. For example, once a claim in deceit is established, the defendant must show on a balance of probabilities that the claimant did not rely on the representation.
What pre-trial disclosure/discovery mechanisms are available to support claims, if any?
Parties may voluntarily exchange documents at any point during proceedings. However, a potential claimant may apply for pre-action disclosure before proceedings are formally commenced under Rule 31.16 of the Civil Procedure Rules. The threshold for ordering pre-action disclosure remains relatively high and the court will determine whether granting such disclosure is desirable in order to:
- dispose fairly of the proceedings;
- assist the dispute to be resolved without proceedings; or
- save costs.
Parties are required to provide copies of documents mentioned in their statements of case. Additionally, the courts will generally order disclosure of documents relevant to the case. This is typically through requiring ‘standard disclosure’, the disclosure of documents that a party relies on or which adversely or positively affect a party to the proceeding's case. The breadth of documents covered under standard disclosure has led to huge disclosure exercises in numerous cases; the courts have therefore begun moving towards issuing more focused disclosure orders in order to reduce the number of documents that are disclosed.
What rules and standards govern non-disclosure of documents on the grounds of professional privilege or other confidentiality considerations?
Parties need not provide privileged documents to the other side. The two main heads of legal professional privilege are:
- legal advice privilege – protecting communications between a lawyer and his or her client in which legal advice is sought or received. Not all communications between lawyers and their clients will therefore be privileged; and
- litigation privilege – protecting communications between a lawyer or his or her client and a third party, or other documents created on behalf of the lawyer or client, which were created for the dominant purpose of use in litigation and which came into existence once litigation was in reasonable contemplation.
What interim measures are available to claimants in securities cases?
The Civil Procedure Rules form the procedural code which governs civil procedure in England and Wales. Under these rules, multiple interim measures are available to claimants in civil claims, including securities cases. These include:
- security for costs;
- interim injunctions;
- interim declarations;
- freezing orders;
- search orders;
- disclosure orders;
- interim payment orders; and
- orders for payment of moneys into court.
An application for an interim measure will be made by an application notice, and must state the order that is sought and the reasons why the applicant is seeking the order. The Civil Procedure Rules provide detailed guidance on how such an application is made.
The courts also retain their inherent discretion at common law, which allows them to make interim orders other than those specified in the Civil Procedure Rules.
Statute of limitations
What is the statute of limitations for filing claims?
Limitation in civil actions is governed by the Limitation Act 1980 and the applicable limitation period, and the manner in which it is calculated will depend on the claim being pursued. If the applicable limitation period has expired, the defendant shall have a complete defence to the claim.
For an action founded on tort or for a breach of contract, the starting point is that a claim will be time barred if brought later than six years after the date on which the cause of action accrued (Section 9 of the Limitation Act). In a claim for breach of contract this is the date of the breach of contract; in a claim in tort it is the date on which the damage was suffered.
In cases concerning negligence in respect of latent damage, the limitation period is the later of six years from the date when the damage occurred or three years from the date when the claimant had the requisite knowledge and the right to bring such an action – with a 15-year longstop (Section 14A of the Limitation Act).
For an action brought in deceit, the limitation period is more generous and does not start running until the claimant has discovered the fraud or could have done so with reasonable diligence (Section 32 of the Limitation Act).
What defences are available to defendant issuers and broker-dealers?
The defences available to a defendant will depend on the type of civil claim involved. The defences to Section 90 of the Financial Services and Markets Act are outlined in Schedule 10 of the same act and include that:
- the person responsible for the listing particulars or prospectus in which the untrue or misleading statement was made, made the statement reasonably believing it to be true and not misleading;
- the person responsible for the listing particulars or prospectus in which the omission was made reasonably believed that the matter whose omission caused the loss was properly omitted; and
- the claimant acquired the securities knowing that the statement was false or misleading, or with knowledge of the omitted matter.
A defendant in a claim under Section 90A will not be found liable for a dishonest omission or dishonest delay if he or she would not have been considered dishonest by persons who regularly trade on the securities market in question, or the person was not aware that his or her actions would have been considered dishonest by persons who regularly trade on the securities market in question. However, while the test for dishonesty is outlined in Schedule 10A(6), it is based on the two-stage test set out in R v Ghosh ( EWCA Crim 2); this test has now been redefined in Ivey v Genting Casinos Ltd t/a Crockfords ( UKSC 67), giving rise to a level of uncertainty as to how the courts will determine dishonesty under Section 90A and Schedule 10A(6).
Meanwhile, a defendant to a claim for negligent misstatement will have a defence where, among other things, it can demonstrate that it did not owe the claimant a duty of care. A defendant may also argue that the claimant contributed to the negligent misrepresentation by not taking advantage of an opportunity to identify the truth and therefore prevent incurring its loss.
What preliminary procedural mechanisms are available to defendants to counter claims, if any (eg, motions to dismiss)?
Defendants can apply to have a claim wholly or partially struck out or for summary judgment.
The courts have inherent jurisdiction to strike out a claim. More commonly, a party may seek to have a claim struck out on the basis that:
- the statement of case discloses no reasonable grounds for bringing the claim;
- the statement of case is an abuse of the court's process or is otherwise likely to obstruct the just disposal of the proceedings; or
- there has been a failure to comply with a rule, practice direction or court order.
In practice, the courts are reluctant to use their strike-out powers; they do so only in clear cases. A successful strike-out application of a claimant's case will prevent the claim from proceeding any further.
In addition to, or instead of, applying to have (part of) a case struck out, a defendant can apply for summary judgment.
Summary judgment in favour of a defendant can be sought on the grounds that the claimant has no real prospect of succeeding on the claim or issue, and there is no other compelling reason why the case or issue should be disposed of at trial.
The courts are reluctant to provide summary judgment and will not do so in complicated matters where a trial would be necessary to give full consideration to the issues.
Damages and costs
What rules and standards govern the calculation and award of damages?
In general terms, damages are intended to be compensatory.
However, given the lack of claims that have proceeded to trial, the appropriate measure of loss and damages that may be claimed under Sections 90 and 90A of the Financial Services and Markets Act is an area of ongoing uncertainty.
In breach of contract claims, damages are intended to compensate claimants and place them in the position in which they would have been had the contract been performed without the breach occurring.
In tort claims, damages are intended to compensate claimants and place them in the same position in which they would have been had the tort not been committed.
In determining whether damages are payable, the courts will consider the questions of causation, remoteness and mitigation:
- Causation – the courts will commonly apply the ‘but for’ test to determine whether there is a causal link between the breach of contract or tort and the loss suffered by the claimant.
- Remoteness – the courts will not allow damages to be recovered where they are too remote. The courts will seek to ensure that the loss suffered was one which was in contemplation of the parties and a foreseeable consequence in the event of a breach of contract or tort occurring.
- Mitigation – the claimant has a duty to mitigate its losses and the courts will reduce the amount of damages recoverable if the claimant has not taken reasonable steps to mitigate its loss.
Given the range of factors involved and the complexity of each, expert evidence is almost always required when calculating damages.
Are damages capped?
Are punitive damages allowed?
Punitive damages are permissible, but it is extremely rare for them to be awarded. In the limited cases where they are awarded, it is typically because the courts have found that the defendant is guilty of particularly insidious behaviour or committed its wrongdoing knowing that the benefit from doing so would exceed any damages following from it.
Are any other remedies available?
In certain circumstances, the courts may order rescission (ie, the setting aside of a contract) in successful misrepresentation claims, so as to return the claimant to the position it was in prior to being induced to enter into the contract.
Who bears the costs of proceedings? Can this burden be shifted in any way?
Typically, the losing party pays the other party's costs.
However, the courts have the discretion to make other orders. For example, where one party has acted unreasonably in relation to a particular issue, the courts may order it to pay the other party's costs in relation to that issue, even where the party ordered to make the payment has won the issue in question.
Part 36 of the Civil Procedure Rules allows a party to make a special type of settlement offer without prejudice except as to costs to the other party. If such an offer is rejected, it can have significant cost implications for the party that rejected the offer in the event that the offering party equals or beats the offer that it made at trial. Among other things, the courts can order costs to be paid on an indemnity basis and interest paid at a higher rate than would have been payable otherwise.
How are costs calculated? Does interest accrue on costs?
Costs are assessed on either a standard or an indemnity basis.
The default position is for costs to be assessed on a standard basis; here, the courts will only order costs that are proportionate and have been reasonably incurred to be paid by the other side. Where there is any doubt about this, the courts will side with the party ordered to pay the costs.
In certain circumstances, the courts may assess costs on an indemnity basis, for example where a party has acted improperly. Where this occurs, the courts will deem costs recoverable if they are either reasonably incurred or reasonable in amount. Any doubt will be resolved in favour of the receiving party.
In broad terms, a successful party will expect to recover 60% to 80% of its costs.
Interest is awarded on costs from the date of the costs order. The current rate is 8%, pursuant to the Judgment Debts (Rate of Interest) Order 1993 (SI 1993/564).
What rules and procedures apply to the provision of security for costs?
An application for security for costs can be made only once litigation has commenced, but should be made as soon as possible thereafter.
The application is usually made by a defendant against a claimant, but can also be made by:
- a defendant against a third party (eg, the claimant's litigation funder);
- a claimant against a defendant where the latter has issued a counterclaim; and
- a respondent against an appellant.
Security for costs is rarely awarded as the courts are reluctant to stifle a claim. In order to obtain security for costs, a defendant must show that the claimant falls into at least one of a number of categories. Two of the most commonly used categories are:
- the claimant is a company and there is reason to believe that it will be unable to pay the defendant's costs; and
- the claimant has taken steps in relation to its assets which would make it difficult to enforce an order for costs against it.
Are class actions or any other collective proceedings available for securities claims in your jurisdiction? If so, what is the procedure for their formation and what benefits do they afford claimants? Are class actions formed on an opt-in or opt-out basis?
There is no formal class action system in England and Wales. However, there are ways in which collective proceedings can be brought in the courts.
In some circumstances it may be appropriate for the court to impose a group litigation order (GLO). The purpose of the GLO mechanism is to identify claimants whose claims give rise to common or related issues and for the court to produce findings that are binding on those common or related issues. There are requirements that any proposed GLO be advertised, typically for a period of approximately six months. Any claimants who wish to join the action are entered on a group register and ‘test’ claimants are generally selected, whose claims are tried out on behalf of the wider group. A GLO operates purely on an opt-in basis.
GLOs are typically suitable for cases where every individual's cause of action is the same but where it would be uneconomic for a claimant to pursue its case individually. Historically they have often been used in personal injury cases, although there have been more complex financial markets claims brought via a GLO in recent times.
Outside the GLO mechanism, the courts have very broad case management powers. Where multiple claims give rise to related issues, the court may simply manage the claims alongside one another and hear the claims together in order to manage them as efficiently and cost-effectively as possible.
Representative actions are another form of collective proceeding, although they are rarely brought in practice. Representative actions allow a party to bring a claim on its own behalf and on behalf of others with the same interest. Only the party bringing the claim is a party to the proceedings; however, the court's judgment in the claim is binding on all of the parties with the same interest.
There is also a formal collective proceedings regime in the Competition Appeal Tribunal (which can be either opt-in or opt-out depending on the domicile of the claimant), but that is limited to claims relating to infringements of competition law.
Is public or third-party litigation funding available in your jurisdiction? If so, what rules, standards and procedures apply?
Litigation funding is permissible and there are a significant number of commercial funders in the market. Prohibitions against champerty and maintenance still exist, so in determining whether litigation funding is legitimate, the courts will consider factors that include:
- the amount of profit the funder stands to make in the event of a successful claim or settlement, relative to the total award;
- the amount of control the litigation funder has over the litigation;
- whether the litigation funder is regulated; and
- how much communication there is between the litigation funder and the funded party's legal representative.
Third-party litigation funding is not regulated, but a number of funders follow the voluntary Code of Conduct for Litigation Funders, which was drafted by the Association of Litigation Funders.
It should also be noted that lawyers can operate on a contingency fee basis, whereby they do not charge fees to their client but obtain a percentage of any successful claim or settlement.
Is insurance available to cover the costs of litigation?
Yes, after-the-event insurance is typically used to cover the costs of litigation. After-the-event insurance is purchased after the event that led to the claim, but before litigation costs are incurred; it typically covers the legal costs payable to the other party if the claim is unsuccessful. Both claimants and defendants can obtain after-the-event insurance, although claimants are usually the purchasers. After-the-event insurance is often packaged as part of a litigation funding arrangement.
Rules and procedure
What rules and procedures govern the settlement of securities litigation?
There are no set rules or procedures. Most settlement offers will be made without prejudice; this prevents any statements made with a genuine attempt at settling the claim from being put before the court. This form of privilege exists to encourage parties to reach settlement without fearing that their statements in attempting to do so will subsequently be used against them.
In securities litigation concerning a large number of claimants, a key stumbling block in reaching a settlement is the difficulty in obtaining the agreement of the claimants, who will often have competing interests.
Where a settlement is agreed, it will be documented in a settlement agreement – that is, a contract upon which any subsequent governance will be based.
How common are settlements in securities-related cases?
Given the limited number of securities-related cases to date, it is not yet possible to identify a discernible pattern in settlements.