The Court of Appeal has handed down an important judgment holding that complainants who had accepted a Financial Ombudsman Service ("FOS") determination were barred from bringing court proceedings in relation to the same cause of action under the legal principle of res judicata.

In doing so, the Court of Appeal overruled a High Court decision that complainants to the FOS would be able to accept a determination awarding them the statutory maximum award (now £150,000) and then subsequently claim for damages above that amount through the courts.

Clark v In Focus Asset Management & Tax Solutions Ltd [2014] EWCA Civ 118

The High Court decision in Clark v In Focus Asset Management & Tax Solutions Ltd [2012] EWHC 3669 (QB) ("Clark") (please see our earlier e-bulletin here) had caused concern in the financial services industry as it had seemingly allowed complainants the opportunity to accept a FOS award in order to build a "war chest" with which to bring litigation proceedings through the courts.

The Court of Appeal decision will be welcomed by the financial services industry because it prevents complainants who accept FOS awards from having "two bites of the same cherry".  The decision also removes the uncertainty as to the finality of FOS determinations which has existed since the High Court decision in Clark was handed down because it was in direct conflict with a previous High Court decision on the issue.

The Court of Appeal's decision leaves open the possibility that, where a complainant has two distinct causes of action, they may be able to submit one to the FOS, while bringing concurrent or subsequent court proceedings in relation to the other.  Such examples are likely to be relatively rare and would in any event have already entitled parties to bring two separate sets of litigation proceedings on the established principles.  In such cases, to have the court proceedings struck out, the burden of proof will lie with the respondent firm to demonstrate to the court that the causes of action of the FOS complaint and the litigation proceedings are the same.  However, even if a party with two separate causes of action did bring legal proceedings after having accepted a FOS award, they would not be entitled to double recovery of the same losses.

  1. Conflicting High Court decisions

In December 2012, the High Court in Clark decided that a party who had accepted an award of compensation pursuant to a determination of the FOS and had been paid the statutory maximum award (then £100,000, now £150,000) by the firm, could subsequently bring a damages claim through the courts to recover the full loss they had suffered over and above the FOS award.

In the earlier case of Andrews v SBJ Benefit Consultants Ltd [2010] EWHC 2875 (Ch) ("Andrews") (which was decided on very similar facts to Clark), the High Court decided that once a complainant had accepted an award pursuant to a FOS decision, the doctrine of merger applied.  This doctrine provides that once a decision has been given by a judicial body on a cause of action, that cause of action is extinguished and a second set of court proceedings for losses incurred under the same cause of action but not yet claimed cannot then be brought.

The conflict in these judgments of the High Court hinged on the finding that a decision of the FOS was a decision of a judicial body, such that the doctrine of merger would apply to its decisions. In Andrews, HHJ Barratt QC determined that the FOS was such a judicial body; in Clark, Cranston J held that it was not.  The reasoning relied on by Cranston J in the High Court was that the FOS was not a judicial body because it dealt with complaints, which were distinct from legal causes of action. Accordingly, the FOS complaint had not merged into the court proceedings as they did not both concern legal causes of action to be determined by a judicial body.

The High Court's decision was appealed to the Court of Appeal.

  1. Decision of the Court of Appeal

Summary

Concluding in favour of the appellant financial adviser in the case, the Court of Appeal applied the doctrine of res judicata to rule that acceptance of a FOS award, for whatever amount, precludes a complainant from then bringing legal proceedings to pursue a claim based on the same cause of action.

Critical to the Court of Appeal reaching this decision were its findings that: (i) a FOS determination is judicial in nature such that the doctrine of res judicata applies to it; and (ii) Parliament's intentions in establishing the FOS scheme under the Financial Services and Markets Act 2000 ("FSMA") were that it should be an expeditious and cost-free means of dispute resolution for consumers and, as such, its decisions should be final. Importantly, the Court of Appeal held that nothing in the FSMA prevented the doctrine of res judicata applying to FOS determinations.

Identifying same cause of action crucial to establishing res judicata

In order for res judicata to apply, the action brought before the court must be based on the same cause of action as the complaint brought before the FOS. In the case before the Court of Appeal, this presented no problems.  However, the Court of Appeal noted that there may be situations where a complainant who has accepted a FOS award might nevertheless be able to bring legal proceedings because the cause of action (or, perhaps, the type of loss) in the legal proceedings differs from that which had been considered by the FOS (even though the causes of action might arise from substantially the same facts).

In particular, the Court of Appeal noted that a complaint to the FOS might not always appear to equate directly with a cause of action where a complaint is not very well particularised by the complainant (for example, because they do not have legal advice and have simply set out facts as they see them).  In such circumstances, because the FOS must give reasons for its decision, it should nevertheless be able to discern what cause of action a complaint is in fact based on, or, if not, it should investigate to establish this and formulate its decision accordingly.

Further, where res judicata is put forward to strike out court proceedings, the burden of proof in establishing that the FOS decision and the court proceedings are based on the same cause of action will lie with the financial services provider. Accordingly, the complainant will have the benefit of any doubt.

FOS as a judicial body

The Court of Appeal held that the FOS was a judicial body for the purposes of the doctrine of res judicata. In reaching that conclusion, the Court noted, among other things, that the FOS must reach its decisions on the basis of what is fair and reasonable, rather than on strict legal principles.  However, the Court did not consider that this precluded the FOS from being a judicial body for the purposes of res judicata, particularly because, to be valid, a FOS decision must not be perverse or irrational, and must take (proper) account of the law.

The FOS intervened in the proceedings in order to clarify that it considered itself to be a judicial body for the purposes of the application of the doctrine of merger or res judicata.

Court proceedings only precluded once FOS determination is accepted

A FOS decision is only binding on the parties once it is accepted by the complainant. However, a decision of the FOS which is not accepted by the complainant is not binding and so the doctrine of res judicata cannot apply to it.  This means that a complainant may well still seek to obtain a FOS determination in its favour, decline to accept it, and then seek to use it as

evidence in its favour in court proceedings. The courts are not likely to consider determinations of the FOS persuasive, but an adverse FOS decision (and any accompanying recommendation to pay a higher amount of compensation than the statutory maximum) may encourage firms to enter into settlements with their customers.

  1. Comment

The Court of Appeal's decision brings a welcome degree of certainty back to the finality of FOS determinations.

While there is still scope for a complainant to accept an award and then bring legal proceedings if the causes of action and/or  the types of loss are different, such circumstances are likely to be limited.  Financial firms may be able to take steps to avoid this occurrence by ensuring that, in their response to a complaint, all causes of action arising from the particular set of facts on  which a complaint is based are very clearly identified so as to maximise the prospects of demonstrating that the FOS has taken them into account when reaching its decision.

The decision also increases certainty for firms in that, once a FOS award has been accepted, complainants cannot take the same matter to court, even if the FOS has made a recommendation to pay compensation above the statutory maximum.

Equally, this may force some complainants with high value claims to consider at the outset whether a FOS complaint is worth pursuing (notwithstanding the costs involved and the perception of the FOS as a more consumer-friendly forum) or whether litigation is the only viable option.