The Courts in England have ruled that accepting an award from the Financial Ombudsman Service can be a bar to any further proceedings in England & Wales. We examine whether the same principles apply in Scotland.
In its recent judgment in Clark v In Focus Asset Management ( EWCA Civ 118), the Court of Appeal in England & Wales ruled that an award by the Financial Ombudsman Service (FOS) to a consumer in a dispute with a service provider can act as a bar to future litigation on the same subject matter.
Scots law recognises a similar principle (known as res judicata), so the question may arise as to whether the Court of Appeals' reasoning would apply in similar circumstances in Scotland.
Facts of the Clark case
In Clark, the customers claimed to have lost more than £300,000 due to negligent investment advice by their financial advisers. They took a complaint to FOS, who adjudicated in their favour.
At the time, FOS could award compensation of no more than £100,000. The limit is now £150,000. FOS awarded the sum of £100,000 but made a recommendation that the financial advisers should pay the full compensation of £300,000.
The customers had the right to reject the award, but in this case they chose to accept it, whilst purporting to specifically reserve their right to litigate for the balance in future court proceedings. The financial advisers paid £100,000 but did not pay the balance and court proceedings were raised.
Following conflicting decisions in the High Court, the issues before the Court of Appeal were:
- Whether acceptance of an award would preclude a complainant from starting legal proceedings to pursue complaints which he had already submitted to FOS and which had been decided by FOS.
- Whether the relevant legislation operated to exclude a plea of res judicata.
In relation to both questions, the court held that res judicata could apply in England & Wales and that in the circumstances of this case the customers were barred from bringing a claim in the courts after accepting the FOS award. In her leading judgment Lady Justice Arden said:
"I am satisfied that the ombudsman's award is a judicial decision for the purposes of the requirements of res judicata .The fact that the ombudsman has to reach a conclusion on the basis of what in his opinion is fair and reasonable does not in my judgment exclude the application of res judicata."
How does it work in Scotland?
The concept of res judicata is similar in Scotland, but not wholly the same. In order for it to operate, five criteria are laid down which can be summarised as follows:
- That there is a judicial decree pronounced by a competent tribunal.
- In a contested action, without fraud or collusion.
- Between the same parties or their representatives.
- Relating to the same subject matter.
- Proceeding on the same grounds.
Underpinning those five criteria, the courts will generally examine the two cases being taken with a view to answering the question "what was litigated and what was decided?".
It has been held that the "competent tribunal" can be a statutory tribunal or an arbiter, and may also be a foreign tribunal. So far as we are aware, the question has never arisen in Scotland as to whether FOS is a "competent tribunal", however it has been held in England that the FOS was a tribunal for the purposes of Article 6 of the ECHR. A subsequent case extended this to its role adjudicating disputes, and that approach was approved in Clark. Given its role as an adjudicator and resolver of disputes it seems likely that the same reasoning would be followed in Scotland, but what of the other criteria?
Whether the complaint is contested is a matter of fact - if the financial adviser had made no attempt to answer the complaint against him, it might be argued that it was not contested and therefore avoid the plea, however it seems unlikely that the courts would allow a party's failure to appear in earlier proceedings to be used against them to obtain further damages. It is probable, therefore that this requirement would be satisfied in most cases.
Likewise in most cases the proceedings will be between the same parties as entered the FOS process, and will relate to the same subject matter. This will also be a question of fact in each case.
The difficulty might relate to the fifth criterion. It can readily be envisaged that a complaint based on inadequate service might well end up being litigated on the basis of negligence or breach of contract. The court will then be asked to decide whether the court action proceeds on the same grounds as the FOS complaint. Matters will be rendered more difficult by the fact that FOS are not bound by precedent nor by the strict legal position (although they must take account of both). Rather FOS is concerned with what is fair and reasonable.
It would seem likely, therefore that some debate is likely to ensue as to whether the court action and the FOS claim proceeded on the same grounds. The outcome will depend upon the particular facts in each case. In a case such as Clark, where the complaint to FOS focussed on losses caused by negligent advice, it seems unlikely that a subsequent court action based on negligence could proceed. There will, however, be cases where the issues are less clear cut and we envisage that this is where any future litigation in Scotland will focus.
Given that the over-arching consideration of the Scottish Court in a plea of res judicata is to determine "what was litigated and what was decided", we consider that a careful examination of the facts and circumstances of each case will be required in order to determine whether a claimant is barred from raising court proceedings. In appropriate cases, however, we expect the English approach in Clark would be followed in Scotland.