Giles v Rhind

The reflective loss principle does not necessarily bar a shareholder’s personal claim where the defendant’s wrongdoing itself prevented the company from pursuing its remedy. A shareholder with an independent cause of action may pursue otherwise reflective loss if that causal connection is established. The company’s mere failure to pursue its claim is insufficient.

Loss of expected future employment benefits following destruction of the company’s business may be separate from the company’s loss. It differs from accrued remuneration which the company could pay if its assets were restored. A diminution in share value may also contain a distinct personal element which corporate recovery would not restore. Where those matters require evidence, the relevant heads of damage should proceed to assessment, subject to proof of causation, remoteness and quantum.

Edward Giles and Roderick Rhind were directors and shareholders of Surrey Hills Foods Limited. Giles was also its managing director and a holder of convertible unsecured loan stock. Under a subscription and shareholders’ agreement, Rhind owed confidentiality obligations independently to Giles and to the company.

An earlier liability trial established that Rhind had breached those obligations by using confidential information to divert an important supply contract from the company. The company entered administrative receivership. Its proceedings against Rhind and others were discontinued on terms preventing further claims after its receivers faced an application for security for costs which they could not provide.

Giles claimed damages for lost share and loan-stock value, accrued payments and future employment benefits. Blackburne J determined a preliminary issue against him, holding that every head was barred by the reflective loss principle in Johnson v Gore Wood & Co [2002] 2 AC 1. Giles appealed with permission. The central issues were whether that principle applied where the alleged wrongdoing itself prevented corporate recovery, and whether the claimed losses were all reflective.

1. The appeal was allowed unanimously. All the disputed heads of damage could proceed to assessment. The court determined their potential recoverability, rather than establishing the facts necessary to quantify or award damages.

2. Per Waller and Chadwick LJJ, with whose judgments Keene LJ expressly agreed, Johnson v Gore Wood & Co [2002] 2 AC 1 did not require rejection of a shareholder’s claim where the wrong itself had prevented the company from pursuing its remedy. That situation differed from a company’s voluntary decision to abandon or compromise an enforceable claim. The policy protecting corporate settlements did not require a wrongdoer to escape liability where his own conduct had made corporate proceedings impossible.

   Giles therefore had to establish that Rhind’s wrongdoing caused the company’s inability to continue its action. Whether the loss of the supply contract made discontinuance inevitable when security for costs was sought required a trial. If established, the receivers’ decision to discontinue would not constitute an independent intervening cause. Chadwick LJ considered that permission to amend should be given if the pleadings did not squarely raise that question.

3. The ordinary rule remained that a shareholder could not recover loss which merely reflected a recoverable corporate loss. An independent duty to the shareholder alone did not remove that restriction. A shareholder could, however, recover separate personal loss caused by breach of an independently owed duty. The recognised ability to recover on a personal cause of action where the company had no cause of action supported the distinction drawn in this appeal.

4. Per Waller LJ, expressly agreed by Keene LJ, part of the alleged loss of investment was arguably distinct from the company’s loss. Destruction of the business and its prospects could diminish share value in a way which corporate damages for the diverted contract would not fully restore. That argument provided an additional basis for allowing the share-value claim to proceed.

5. Per Chadwick LJ, expressly agreed by Keene LJ, accrued remuneration differed from expected future employment benefits. Accrued debts were reflective because corporate recovery could provide funds to pay them. Future benefits lost through termination of employment following destruction of the business were not necessarily restored by corporate recovery. That distinction independently justified allowing the future-benefits claim to proceed.

6. Causation, remoteness and quantum remained for assessment. Continued employment, future profitability and an eventual sale required evidence; loss of a chance might be relevant. Chadwick LJ provisionally identified reasonable contemplation of loss as a serious possibility as the contractual remoteness inquiry. Appropriate credits and consistent assumptions about employment and share disposal were necessary to avoid excessive recovery.

• Court of Appeal: In [2002] EWCA Civ 1428 , unanimously allowed Giles’s appeal and permitted the disputed heads of damage to proceed to assessment.
• High Court, Chancery Division: On 24 July 2001, Blackburne J determined the preliminary issue against Giles, holding that all claimed heads of loss were irrecoverable under the reflective loss principle. He granted permission to appeal.
• High Court: On 20 February 2001, Deputy Master Teverson ordered a preliminary hearing concerning recoverability following Johnson v Gore Wood [2001] 2 WLR 74.
• High Court: In 2000, Michel Kallipetis QC, sitting as a deputy judge, determined liability in Giles’s favour and directed a trial of damages. That liability determination was not appealed.