SPL Private Finance (PF1) IC Ltd & Ors v Arch Financial Products LLP & Ors

An investment manager with discretionary control over a client’s assets owes contractual and fiduciary duties, subject to any valid contractual modification. A conflict provision permitting self-dealing does not give unrestricted freedom: the manager must manage conflicts fairly and have due regard to the client’s interests. Reasonable care requires proper due diligence, assessment of risk and reward, and attention to funding requirements before committing substantial client capital. Dishonest assistance is established objectively where the defendant consciously participates in conduct that falls below ordinary standards of honesty, including where suspicion is deliberately not investigated. A release is construed as a whole and will not extend beyond the claims identified by its wording.

Six investment cells brought claims against their investment manager, Arch Financial Products LLP, concerning investments connected with the acquisition and operation of a student-accommodation business. They alleged breach of contract, negligence, breach of fiduciary duty and unauthorised investment activity. Claims were also brought against Arch’s chief executive, Robin Farrell, for dishonest assistance and inducing breaches of contract.

The investment manager contended that its contractual terms permitted the relevant conflicts and that a later release barred the claims. The central issues were whether the investments and related payments were made with reasonable care, whether conflicts were fairly managed, whether Mr Farrell was personally liable, and what remedies followed.

1. Contractual and fiduciary duties. The investment management agreements gave Arch FP broad discretionary powers, but those powers remained subject to the applicable investment objectives and restrictions. The agreements modified the usual fiduciary duties only to the extent necessary to permit transactions involving potential conflicts. The overriding obligation was to manage conflicts fairly.
2. October 2007 investments. Arch FP acted negligently by relying on property valuations as a proxy for the value of the business, ignoring reservations about those valuations, committing the cells when a substantial capital injection was necessary but not secured, and failing to conduct a proper risk/reward analysis. No reasonable investment manager could have regarded the investments as being in the cells’ best interests.
3. Fiduciary breaches. Arch FP had a substantial financial interest in procuring the investments and receiving a £3m payment funded almost entirely by the cells. The payment was not adequately disclosed. The contractual conflict provisions did not assist Arch FP because the conflict had not been managed fairly.
4. Subsequent investments. Investments made before March 2009 were also made without adequate consideration of the cells’ interests. Later investments were not negligent when considered independently, but were recoverable to the extent they resulted from the earlier breaches.
5. Mr Farrell. The objective test for dishonest assistance was satisfied. Mr Farrell knowingly assisted the breaches, or at least suspected the relevant features and consciously failed to enquire. He also induced Arch FP’s contractual breaches because he knew of the contracts, intended the breaches and did not act in good faith.
6. Release and mandate. The later release was confined to claims concerning cross-investment fees. The mandate claims failed because an investment objective of capital appreciation did not impose an unworkable requirement that every investment be objectively likely to produce that result.
7. Outcome and remedies. The claims against Arch FP and Mr Farrell succeeded. The cells were entitled to recover their losses, subject to the court’s findings on causation, mitigation and election between alternative equitable remedies. The parties were directed to seek agreement on consequential orders.