In September 2011, the High Court heard the case of Rubenstein v HSBC Bank plc  EWHC 2304 (Comm), which considered whether the claimant could recover loss caused by the run on a fund within the AIG Premier Access Bond in September 2008. A similar case was heard in October 2011 (Zaki and others v Credit Suisse (UK) Ltd  EWHC 2422 (Comm)) which considered whether the defendant was liable for the claimant’s loss following a series of investment recommendations.
In both instances, the claimants sought information regarding investment opportunities and in both cases the defendants denied that the information they provided amounted to “advice”. Both HSBC and Credit Suisse argued that the transactions involved were “execution-only”. As such, they argued, the claimants took sole responsibility for their losses. The court rejected these arguments and both cases provide useful discussion on what constitutes advice. In Rubenstein the fact that HSBC expressly provided their “view” on a particular investment led the court to find that “an impartial observer…would conclude that advice had been given”.
Causation and foreseeability
The court also considered whether the advice given had been negligent for the purposes of the FSA’s Conduct of Business sourcebook (COB). In Rubenstein the financial adviser had stated that “we view this investment as the same as cash deposited in one of our bank accounts”, which the court concluded was in breach of the COB requirements. In Zaki, while the court found that the initial recommendations were not negligent, the recommendations in relation to the final three investments (given as the financial markets deteriorated) had been negligent.
Despite concluding that both claimants had relied on the advice, in both cases, the court decided that the loss was not recoverable. In Rubenstein the court assessed the foreseeability of the loss and found that the prospect of a run on the AIG fund was “so remote” in September 2005 that, while the adviser had provided negligent advice, this advice had not caused the loss. In Zaki, the court had found that the final three recommendations were negligent, but given the claimant’s experience with the previous seven recommendations it could be concluded that he was no longer relying on the advice and would have made the investments anyway; the claim therefore failed through lack of causation.
The cases emphasise the importance of the causation and foreseeability defences available to financial advisers. However, while seemingly providing comfort to the profession, it is important to note that it looks likely that both cases will go to the Court of Appeal.
Financial advice compensation
The Financial Services Compensation Scheme (‘FSCS’) is looking to recover approximately £250m that it paid out to investors in respect of losses suffered when the FSA forced Keydata into administration in June 2009. It has been reported that Herbert Smith has written Letters Before Action to 530 IFAs.
This is likely to be a worrying development for IFAs, and their insurers. It is understood that at least one insurer has refused to indemnify an insured IFA. The insurer is believed to have cited policy exclusions for traded life investments as well as exclusions based on investments in an insolvent product provider. However, this is likely to be a costly exercise for IFAs, even where an insurer eventually provides an indemnity, as excesses (probably on an each and every claimant basis) and legal fees will have to be paid.
With no immediate end to the Keydata litigation in sight and the potential for the FSCS to recover on a similar basis in respect of compensation paid out to investors in Lifemark products (a Keydata trading style), 2012 may be a troubling time for the financial advice sector.
Surveyors' duty of care
Following the Court of Appeal decision in Scullion v Royal Bank of Scotland, the decision in Squirrell v Bradleys Surveyors Ltd (Exeter Combined Court, 25 November 2011, case 8EX03261) provides a reminder about the limited scope of a surveyor’s duty of care to a purchaser.
The claimant, a property developer, exchanged contracts for the purchase of three adjacent properties with the intention of developing the site. The claimant exchanged without first securing funding for the project. Shortly after exchange, the claimant obtained an offer for finance subject to a valuation. The defendant valued all three properties at £1.27m, significantly higher than the £985,000 the claimant was paying. The defendant confirmed that this valuation had been given based on the claimant’s contention that he was paying £1.3m for the properties. The defendant subsequently withdrew the valuation resulting in the claimant being without finance and unable to complete on the transactions.
Proceedings were commenced on the basis that the defendant owed the claimant a duty to provide a valuation. The judge held that no such duty of care existed between the claimant and the defendant and that it would not be fair or reasonable to impose such a duty.
Following the decision in Scullion v Royal Bank of Scotland, a distinction can be drawn in whether a duty of care is owed based on whether the purchaser is an ordinary domestic purchaser or an investment purchaser. This case reaffirms the Scullion distinction in that it is unlikely that any duty of care will be owed to an investment purchaser. A duty may be owed, however, in circumstances where the purchaser is an ordinary domestic householder.
The importance of following the rules
The recent decision in the appeal of Bethell Construction Ltd v Deloitte and Touche  EWCA Civ 1321, serves as a poignant reminder to solicitors of the importance of complying with CPR r.6.16.
In March 2007 solicitors for Bethell wrote to Deloitte claiming that advice of the latter was negligent. The letter enclosed a copy of a claim form which had been issued so as to protect Bethell’s position in light of the upcoming expiry of the limitation period. The letter confirmed that the claim form was enclosed ‘but not by way of service’.
The parties agreed to extend the time for service of the claim form and particulars of claim terminable on 14 days’ notice so as to allow the parties to explore resolution. After two failed mediations, Bethell’s solicitors wrote to Deloitte in October 2010 enclosing by way of service Bethell’s particulars of claim. Deloitte wrote to Bethell giving the requisite 14 days notice to terminate the agreed stay. There was no further contact between the parties until, on 16 November 2010, Deloitte’s solicitors wrote to Bethell stating that ‘the period for service of the 2007 claim form has expired’. Accordingly, Bethell sought an order in the High Court that the original claim form had been validly served. The judge held that the claim form had not been “constructively” served. Bethell appealed the decision in the Court of Appeal.
In November 2011 the Court of Appeal agreed with the judge at first instance that the claim form had not been properly served in accordance with the CPR.
The decision highlights the importance of complying with the rules on service of the claim form. Further, the Court of Appeal found that Deloitte’s solicitors were under no obligation to point out Bethell’s error in failing to serve the claim form even though they were well aware of the omission.
Scope of retainer
In Farnon v Devonshires Solicitors  EWHC 3167 (QB) the claimant consulted the defendant solicitors for advice relating to her notice period and restrictive covenants contained in a partnership agreement. The court was asked to determine whether the solicitor’s advice given on sex discrimination, a compromise agreement and the company’s ability to recover overpaid tax was negligent.
The case pivoted on the scope of the solicitors’ retainer. The claimant argued that advice regarding sex discrimination fell within its confines. Mr Justice Owen found in favour of the defendant’s evidence, determining that the scope was to advise solely on the claimant’s exit from the company to enable her to take a position with a direct competitor and that there was no mandatory advice to be given otherwise.
Giving reference to the ruling in Lyonnais SA v Russell Jones & Walker  EWHC 1310 (Ch), it was highlighted that issues outside the retainer must be relayed to the client where they could form a potential risk or problem that could hinder the argument of the client as a result. The decision upholds the fact that a professional has an obligation to exercise reasonable skill and care, yet reiterates the distinction made in Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp  Ch 384 between the solicitor who is consulted on a multitude of factors and thus owes this duty in many areas of advice, and the solicitor who has strict limitations but nevertheless considers various aspects in the client’s general interests.
A similar ruling was given in Cherney v Neuman  EWHC 2156 where the claimant sued solicitors for negligence in various property transactions. Henderson J ruled that the scope of the defendant’s duty to the claimant was confined to advice on conveyancing and corporate aspects, not the commercial merits of a transaction. Had such advice been required, the claimant could have instructed specialist valuers.
A crucial factor for Henderson J was the business acumen and experience the claimant held personally in the commercial merits of a property.
Both Farnon and Cherney are important decisions following the principle in Pickersgill v Riley  UKPC 14 to consider particular circumstantial evidence and client characteristics in each individual case. With the diverse range of advice available to clients, it is crucial that the courts continue to limit the scope of obligatory duties that solicitors may face.
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