Carr v Formation Group Plc & Ors

Market practice cannot determine the objective standard of honesty. The court applies the standards of ordinary honest and reasonable people.

Evidence of market practice is therefore inadmissible to show that conduct was honest merely because it conformed to an established industry practice. It may, however, be relevant to a defendant’s actual belief that conduct was lawful or to the defendant’s state of mind in relation to an honest-belief defence to unlawful-means conspiracy. It may also be relevant to deliberate wrongdoing for limitation purposes where the relevant cause of action does not depend on fraud in the strict sense.

Seventeen claimants brought claims arising from undisclosed commission payments made by a financial adviser to sports agents who had introduced claimants to the adviser. The claims included breach of fiduciary duty, dishonest assistance, conspiracy and deceit or fraud.

At a case management conference, certain defendants sought permission to adduce expert evidence about historical market practice and the regulatory environment. The claimants opposed the application, principally on the basis that dishonesty is assessed objectively by the court and not by industry practice.

The central issues were whether such evidence was admissible on dishonesty, unlawful-means conspiracy and the limitation arguments under section 32 of the Limitation Act 1980.

1. Permission granted in part. The parties generally were permitted to call expert evidence about the alleged market practice, but not to establish that defendants were honest merely because they followed that practice.
2. The applicable test for dishonesty is objective. The fact-finder first ascertains the defendant’s actual state of knowledge or belief as to the facts. It then applies the standards of ordinary decent people. The defendant need not appreciate that the conduct was dishonest. Evidence of market practice cannot alter the objective standard or establish compliance with it.
3. The regulatory position did not require expert opinion. Relevant regulatory documents could be adduced, and disputes about their meaning could be addressed by legal submissions.
4. The alleged market practice was not a defence to the claim that Formation AM had committed a tort by paying undisclosed commission to fiduciary agents. It was also not admissible as a general justification for dishonesty. The approach in Secretary of State for Justice v Topland Group plc was not adopted because the pleadings in the present case did not make market practice relevant in the same way.
5. For the unlawful-means conspiracy claim, the court proceeded on the basis that a defendant could rely on an honest belief that the conduct was lawful. Evidence of market practice could therefore bear on the defendant’s state of mind and could be given by an independent person with relevant market experience.
6. The same reasoning applied to the limitation issue under section 32(2). Where the claim depended on deliberate wrongdoing and the defendants’ knowledge that their conduct was unlawful was relevant, market-practice evidence could be admissible on that issue.
7. At least one fiduciary-duty claim was not an action based upon fraud in the strict sense for section 32(1)(a) purposes. The claimants would therefore need to establish deliberate wrongdoing to avoid limitation on that claim.