Clark v In Focus Asset Management and Tax Solutions Ltd

The Court of Appeal held that acceptance of an award of the Financial Ombudsman Service can, in principle, preclude a complainant from bringing subsequent court proceedings on the same cause of action because the common law doctrines of res judicata (cause of action estoppel) and merger operate to give finality to judicially determined disputes. The court analysed the requirements of cause of action estoppel (judicial decision, finality, jurisdiction, determination on the merits, identity of issues and parties) and concluded they can be satisfied by an ombudsman determination. The court further held that section 228(5) of the Financial Services and Markets Act 2000 (which makes an accepted ombudsman determination "binding . . . and final") does not exclude the operation of res judicata: Parliament legislated against the background of the common law and did not expressly or impliedly displace these doctrines.

Key legal principles applied: (i) res judicata and merger bar re-litigation of the same cause of action once a judicial decision has been given; (ii) an ombudsman determination may be "judicial" for these purposes even if the ombudsman decides by reference to what is "fair and reasonable" rather than strictly by legal principles; and (iii) statutory silence as to res judicata does not displace the common law presumption that ancillary rules of law apply unless expressly or impliedly excluded.

Background and parties:

• The respondents, Mr and Mrs Clark, claimed loss of over £300,000 from negligent investment advice. They complained to the Financial Ombudsman Service; the ombudsman awarded the available limit (£100,000) and recommended further compensation. The Clarks accepted the award but expressly sought to reserve a right to pursue additional legal remedies. The adviser paid the award but not the recommended balance. The Clarks then issued proceedings in the county court for breach of contract, negligence, breach of fiduciary duty and statutory duty, crediting the ombudsman payment.

Procedural posture:

• HHJ Barratt QC dismissed the court claim on merger grounds (relying on Andrews v SBJ Benefit Consultants). On appeal Cranston J held the causes of action did not merge and allowed the claim to proceed. The adviser appealed to the Court of Appeal. The Financial Ombudsman Service intervened.

Nature of the legal questions:

1. Whether an accepted ombudsman determination is a "judicial" decision for the purposes of cause of action estoppel and merger; and
2. Whether section 228(5) FSMA (making an accepted determination "binding . . . and final") excludes the common law doctrines of res judicata and merger so as to permit subsequent court proceedings on the same complaint.

Issues framed and court reasoning:

• The court set out the elements of cause of action estoppel (drawing on Spencer Bower & Handley and R (Coke-Wallis)). It held that an ombudsman determination can satisfy the judiciality, finality and identity requirements because: the ombudsman process gives both parties the chance to present their cases; the ombudsman decides disputes independently; article 6 Strasbourg authority and domestic authorities treated the ombudsman as a "court or tribunal" for some purposes; and ombudsman awards can be enforced as county court judgments. Therefore an accepted award can extinguish the underlying cause of action and operate as res judicata.
• On statutory interpretation the court applied the presumption that Parliament legislates against the background of the common law. Section 228(5) was read as not displacing res judicata: the statutory purpose of an efficient, informal and consumer-facing dispute resolution scheme did not demonstrate an intention to allow double recovery or permit accepted awards to be used as a litigation funding device to pursue the same cause of action in court. If Parliament had intended complainants to be free to litigate after acceptance of an award it would have said so.
• The court emphasised practical safeguards: the adviser bears the burden of proving identity of subject-matter; in borderline or unclear cases the complainant benefits from doubt; and where acceptance is unwise the complainant retains the ability to reject the award and proceed to court.

Relief sought: The appellant sought to restore the dismissal of the court claim on the basis that the ombudsman award merged with the causes of action or gave rise to res judicata.

Appeal allowed. The Court of Appeal held that an accepted Financial Ombudsman Service award can, in principle, give rise to res judicata (cause of action estoppel) and so preclude subsequent court proceedings on the same cause of action; and that section 228(5) FSMA does not exclude the operation of the common law doctrines of res judicata and merger. The court reasoned that ombudsman determinations may satisfy the requirements for res judicata and that Parliament did not expressly or by implication displace those common law rules in FSMA.

Appeal to the Court of Appeal from the High Court (Queen's Bench Division), Cranston J [2012] EWHC 3669 (QB). At first instance claim commenced in the District Registry of the High Court in Chichester, transferred to Chichester County Court where HHJ Barratt QC dismissed the claim. Andrews v SBJ Benefit Consultants [2011] PNLR 577 was a key prior High Court decision discussed in the litigation.