Reflective Loss and Strike Out / Summary Judgment: Burnford & Ors v Automobile Association Developments Ltd [2022] EWCA Civ 1943

Dec 2022

The English Court of Appeal has confirmed that cases concerning reflective loss are suitable for strike out / summary judgment. The reflective loss principle has its origins in a principle of company law known as the rule in Foss v Harbottle, or the “proper plaintiff” rule, i.e. the only person who can seek relief for an injury done to a company is the company itself.

The rule against reflective loss is a rule of substantive law (rather than procedural law) which provides that a shareholder cannot claim for losses it has suffered in its capacity as a shareholder (for example a diminution in share value or in distributions). Those are the losses of the company which the law does not regard as separate and distinct from the shareholder’s loss. Were it not for the application of the reflective loss principle, the rule in Foss v Harbottle would be subverted.

Lord Justice Newey in Burnford walked through the key cases concerning reflective loss, the leading case being the Supreme Court decision in Marex Financial Ltd v Sevilleja [2020] UKSC 31, [2021] AC 39. Lord Justice Newey summarised the following points arising out of the leading authorities:

1. 1. The reflective loss principle applies where a shareholder brings a claim in respect of loss which he has suffered in the capacity of a shareholder (for example a diminution in share value or in distributions);
   2. A shareholder cannot escape the reflective loss principle merely by showing that he has an independent cause of action against the defendant. He must also have suffered a loss which is “separate and distinct” from the loss of the company;
   3. There does not need to be exact correlation between the shareholder’s loss and the company’s loss – the reflective loss principle can apply even if recovery by the company does not fully replenish the value of its shares;
   4. The reflective loss principle will not apply unless the company has cause of action against the defendant in respect of its loss;
   5. Nor will the reflective loss principle apply to a claim which is not brought as a shareholder but rather as, say, a creditor or an employee;
   6. The Court has no discretion in the application of the reflective loss principle, which is a rule of substantive law; and
   7. As regards the timing of the applicability of the reflective loss principle, this is to be determined at the time that the shareholder suffered the alleged loss, not at the time when the claim was issued.

The Court of Appeal in Burnford went on to consider the appropriateness of cases concerning reflective loss for summary judgment / strike out. In doing so, the Court of Appeal dismissed the suggestion that such cases are not suitable for strike out / summary judgment because the law on reflective loss is uncertain and developing. It found that provided there is not a factual dispute as to the application of the reflective loss principle, the law is sufficiently certain that strike out / summary judgment is appropriate.