In this article, we review case law from South Australia Asset Management Company Ltd v York Montague Ltd [1997] to Rubenstein v HSBC Bank Plc [2011] to examine the current approach to assessing loss in economically volatile times.
Assessing recoverable loss in tort claims is sometimes a knotty problem. Breach of a duty of care can cause a spiral of dramatic consequences. It may seem unfair for a duty-breaker to be liable for events clearly caused by this breach but attributable to economic forces beyond their control.
In resolving such disputes, judges have two purposes. The first is to draw the dividing line on the facts; and the second to establish a workable principle for future cases. Whether addressing this in terms of duty of care, causation, remoteness or contributory negligence, drawing the dividing line on recoverability is difficult.
The main issue is whether, if some loss is clearly down to market forces, is the victim precluded from recovering that part?
EXTENT OF DUTY ASSUMED
SAAMCO will be known to most lawyers, particularly those handling professional negligence claims. It was a negligent valuation case decided against the backcloth of the last UK recession. The House of Lords sought to draw a realistic dividing line when assessing loss in a volatile market where property prices were falling. The line was drawn in the context of the scope of the duty of care.
The House of Lords decided that valuers were not liable for all the foreseeable consequences of their negligence, but only for the consequences of the breach of the duty which they had assumed. In that case, the valuer’s duty was to provide information about the value of a property. Recoverable loss was limited to the difference between the amount lent based on the negligently made valuation and the amount that would have been lent if the correct value had been provided to the lender.
The choice was between deciding whether the valuer had assumed:
- a duty to provide information for the purposes of enabling someone else to decide upon a course of action; or
- a duty to advise someone as to what course of action they should take.
While easy to state, the refinement is more difficult to apply, as recognised in the recent case of Haugesunde Kommune & anor v Depfa ACS Bank [2011].
A firm of solicitors had negligently advised their client (a bank) that a Norwegian local authority had legal capacity to enter into a contract. Following that advice, the bank lent money. The local authority defaulted on its repayments. The Court of Appeal held that the solicitors were not liable for losses suffered. The solicitors had assumed a duty to advise on the validity of the transaction, but their negligence in doing that was not the cause of the loss. Even with an invalid transaction, the cause of loss was the local authority’s impecuniosity. It would have been unjust for the solicitors to shoulder the responsibility for that factor. They had not warranted it.
CAUSATION/FORESEEABILITY OF LOSS
What happens if an adviser has assumed a duty to advise on a course of action? That was the setting in Rubenstein, the consequences of which played out in the financial markets’ ‘crash’ in late 2008.
Mr Rubenstein wished to invest £1.25m. He was told by the bank that an alternative to placing the money on deposit was to invest it in the AIG Premier Bond (PAB). Within the PAB there was a choice of fourteen different funds. He was told about one of those funds, the Enhanced Variable Rate Fund (EVRF) and informed that the risk to the capital was the same as for cash in a deposit account. He invested in the EVRF.
In the week of 15 September 2008 there was serious turmoil in the financial markets after the collapse of Lehman Brothers. During this time, Mr Rubenstein sought to withdraw his money. So, too, did many other investors who feared that AIG was going to go bankrupt. The claimant eventually received less than his initial capital investment.
The High Court held that, as an advisor employed by the bank had assumed responsibility for advising Mr Rubenstein on a suitable investment, the bank’s duty required it to consider all the potential consequences of the suggested investment. The bank was liable for all the foreseeable loss caused by the investor making that investment. But, in circumstances of extreme market volatility, where does the court draw the line as to which losses were foreseeable?
Revisiting first principles, Mr Justice Jonathan Parker used the well-known definition of foreseeability from The Heron II [1969]:
‘Loss which is reasonably foreseeable and not too remote to be recoverable is loss of a kind which the defendant… ought to have realised was not unlikely to result from the breach – the words “not unlikely” denoting a degree of probability considerably less than an even chance, but nevertheless not very unusual and easily foreseeable.’
The judge added that Lord Reid in The Heron was dealing with damages in contract and that:
‘… reasonable foreseeability of loss in tort might impose a much wider liability by requiring a defendant to pay for something, which, although reasonably foreseeable, was very unusual and not likely to occur’.
The crucial period for determining foreseeability is the time when the advice is given (unless there is a continuing duty). Looking back, with the benefit of hindsight, is not permitted. In theRubenstein case, the advice was given in September 2005. Back then, the world was a different place. The US had an AAA credit rating and the Eurozone was relatively buoyant.
As the judge commented in Rubenstein, in September 2005, it was unthinkable that one of the world’s largest insurers could go bankrupt. He held that what happened in September 2008 was wholly unforeseeable. The loss was not caused by any negligence by the adviser, nor was it reasonably foreseeable by HSBC. It was caused by market conditions. Therefore, Mr Rubenstein’s loss was too remote to be recoverable as damages in tort. The court drew a realistic dividing line, this time in the context of causation and foreseeability.
Hot on the heels of Rubenstein came the case of Zaki & ors v Credit Suisse (UK) Ltd [2011]. Again, the bank was held to have made recommendations as to the suitability of a number of investments. This time, however, advice was given in 2008, at a time when the markets were already starting to look unpredictable. Again, the court held that the bank did not cause the loss. The claimant was described as ‘bullish, brave and confident’, ‘he was a man with his own views on the markets and what was an appropriate investment’. In those circumstances, the claimant would have gone ahead with the investment anyway.
Illustration 1
Investor asks adviser to advise on investing £1m. Adviser recommends The Varna Fund, a portfolio of equity stakes in Eastern European property, showing high capital growth. Investor is not told the fund is under regulatory investigation. Three weeks later it is shut down. Investor recoups only half the investment, claiming £500,000 from adviser. Adviser admits it should have known about the investigation and told investor, but denies it caused the loss. As no other similar fund has ever been shut down, adviser argues the loss of half the investment was not foreseeable as unlikely to result from its breach. We would expect adviser’s argument to fail as a) they assumed a duty to advise on a course of action, and b) it is (arguably) not unlikely that a regulatory investigation may trigger the collapse of the entire fund. The loss is caused by, and inextricably linked to, the breach of duty and not too remote.
RECOVERY UNDER CONTRACT
Neither the Rubenstein nor the Zaki judgment refer to the 2008 case of Transfield Shipping Inc v Mercator Shipping Inc [2008], a breach of contract case set against the backdrop of a volatile shipping market. The House of Lords restricted the liability of the defaulting ship hirer’s late return of the vessel to losses based on market conditions at the time of the original hire. Losses due to subsequent sharp upswings in market prices were outside the reasonable contemplation of the parties as the probable consequence of breach at the time they entered into the contract, unless special circumstances had been made known.
That case truly set the foreseeability cat among the contractual pigeons. It was unclear if the House of Lords had intended to introduce a new test of foreseeability in contract: the necessity for a contract breaker to have assumed responsibility for a particular type of loss resulting from market volatility.
In a subsequent case (Supershield Ltd v Siemens Building Technologies FE Ltd [2010]) the Court of Appeal interpreted Transfield as introducing a subjective element to foreseeability in contract. That is, it is necessary to look at the intention reasonably to be imputed to the parties in a particular case, and not what a reasonable person would have contemplated. There will be limits to this: even if parties could have anticipated some form of economic downturn, the events of the past few years may well be judged to be the stuff of nightmares and wholly unforeseeable.
Illustration 2
Bank 1 informs borrower that they may open a Swiss Eurobond account, which they do with money lent by bank 2. The information was given negligently. As a Serbian national, borrower is legally unable to control any Swiss account. When borrower finds that out, they rush to shut the Eurobond account, but is told that no repayment is possible. The Eurobond market has been suspended following EU political in-fighting. Borrower sues bank 1 to cover their debt to bank 2. Bank 1 argues that the loss results not from its breach of duty, but from unforeseeable economic factors. We would expect borrower to have problems recovering from bank 1 because loss appears too remote a consequence of bank 1’s breach.
THE IMPACT OF CONTRIBUTORY NEGLIGENCE
Back to tort, where the victim has caused part of their own loss, how is their contribution to be assessed? That was a question considered in Platform Home Loans v Oyston Shipways Ltd [2000], another negligent valuation case that followed SAAMCO.
The lender’s full loss was £612,000 (rounded). But the lender’s capped loss was £500,000 once the impact in fall of market prices was taken out of consideration under the SAAMCO ruling. If the contribution of the lender to its own loss was assessed at 20%, to which figure would that be applied: the full loss or the capped loss?
According to the majority of the House of Lords in Platform Home Loans, the 20% reduction was to be applied to the full loss and then reviewed against the capped figure. If the reduced full loss is in excess of the capped figure, the recovery would be further reduced to the level of the cap. If it were not above the cap, the arithmetical answer would be the recoverable loss.
In assessing the contribution under s1(1) of the Law Reform (Contributory Negligence) Act 1945, Lord Hobhouse underlined that the court has to achieve a result that is just and equitable. To reduce the damages by starting from the level of the capped loss would in effect create a double reduction, which would be unfair to the lender.
Lord Hobhouse explained that Lord Hoffmann’s approach in SAAMCO, while focusing on analysis of the scope of the duty of care, established the dividing line on recoverability. He cited Lord Oliver in Caparo v Dickman [1990], who said:
‘… the duty of care is inseparable from the damage… It is not a duty to take care in the abstract but a duty to avoid causing to the particular plaintiff damage of the particular kind which he has in fact sustained.’
That is very close to the reasoning in the Transfield case.
CONSUMERS
The conclusion from the cases above is that courts are reluctant to hold financial advisors liable for detrimental shifts in market conditions. This may be viewed as fair. But the Financial Services Authority (FSA) and the Financial Ombudsman Service (FOS) may not share that approach. The FOS is not bound by the law of causation. Instead of pursuing their claim through the courts, consumers can opt to complain to FOS, the maximum compensatory award being £100,000. In its memorandum to the Joint Committee on the Draft Financial Services Bill dated 5 September 2011, the FSA urged Parliament to enable the regulator to provide effective redress for consumers, referring to the current constraints of the general law on causation. It remains to be seen if this will lead to an amendment to s150 of Financial Services and Markets Act 2000 (which gives individuals the power to claim damages for breach of statutory duty).
CONCLUDING THOUGHTS
An appeal against the Rubenstein decision seems likely as the case appears in the Court of Appeal’s case tracker, which lists a provisional hearing date in May 2012 Whether the foreseeability aspects will be considered remains to be seen.
Determining the recovery of losses is clearly affected by price falls that occur in economic downturns. Ultimately, the decisions discussed above demonstrate that foreseeability of loss is a somewhat elastic concept, used to do justice in the particular circumstances of tort claims. This may make legal advisers’ jobs more difficult, but their clients will surely conclude that’s a price worth paying.