The Supreme Court has today handed down judgment in the landmark case of Marex Financial Ltd v Sevilleja  UKSC 31. The decision significantly narrows the scope of the principle that “reflective loss” cannot be recovered. The principle is now limited to claims by shareholders that, by reason of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished (§89).
The judgment of the Court of Appeal  QB 173 was the first case in this jurisdiction in which the reflective loss principle was applied to a claimant which was purely a creditor of a company. The extension of the principle to such cases, the Supreme Court held, “has the potential to have a significant impact on the law and on commercial life” (§77). The rule had become “difficult to confine”. Indeed, in the phrase of one academic commentator (Professor Andrew Tettenborn), the rule was likened to “some ghastly legal Japanese knotweed” (§121). The Supreme Court was unanimous in deciding that the Court of Appeal’s decision should be reversed. The reflective loss principle no longer applies at all to claims by creditors (whether they are also shareholders or not).
However, although there was unanimity that Marex’s appeal should be allowed, there was no consensus on the question of how far the Court should go in clipping the wings of the reflective loss principle. This led to a 4:3 split. The majority (led by Lord Reed) decided to retain the reflective loss principle as a bright line legal rule, albeit it should be confined to the narrow ambit established in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)  Ch 204 (§§89, 92, 109). The minority (led by Lord Sales) would have been more radical and, in effect, abolished the rule entirely (§§194-197).
Following the Supreme Court’s judgment, large swathes of authority will fall away, including Giles v Rhind  Ch 618, Perry v Day  2 BCLC 405 and Gardner v Parker  2 BCLC 554, all of which were wrongly decided (§89). The speeches in Johnson v Gore Wood & Co  2 AC 1, apart from Lord Bingham’s, should also no longer be followed insofar as they relate to the reflective loss principle and are inconsistent with the majority’s decision (§§67, 89). This is true of Lord Millett’s speech in particular. It was Lord Millett who “paved the way” for the expansion of the reflective loss principle beyond the narrow ambit of the rule in Prudential (§51). The Supreme Court has reversed that expansion in very clear terms.
David Lewis QC and Richard Greenberg appeared for the Respondent.
Thursday 23 July 2020 | 11:00 – 11:40 (BST)