Damages – Remoteness of damage – Foreseeability – Parties appealing
Rubenstein v HSBC Bank plc: Court of Appeal, Civil Division (Lord Justices Rix, Lloyd and Moore-Bick): 12 September 2012
In August/September 2005, the claimant investor wanted to find a safe place for the proceeds of the sale of his home pending the purchase of another property. The defendant bank introduced the claimant to its financial adviser (the adviser). The claimant told the adviser that he could not afford to risk his capital at all and that the prospective time scale was unlikely to be longer than a year. The adviser recommended investment in a company’s (the company) fund, and persuaded the claimant that the investment recommended was the same as an instant access deposit account and that the only risk was the ultimate risk of default, which was no risk at all.
The adviser omitted to explain that the essential risk of the investment was that it was an investment in the market and subject to market fluctuations. After the recommendation of the investment, the claimant entered a contract document with the bank providing, inter alia, for its fees. The claimant's funds had remained invested three years later. In September 2008, the claimant decided to withdraw his investment. Late on the following Monday, the day of Lehman Brothers’ failure, the company told the claimant that withdrawals from the fund had been temporarily suspended.
The claimant suffered a capital loss of £179,530.17. The company subsequently made an ex gratia payment to the claimant after recovering three assets held within the fund. The claimant commenced proceedings against the bank for breach of statutory duty under the Financial Services Authority’s Conduct of Business Rules (the COB rules), and in contract and tort. The judge found that the bank was negligent in the advice which it gave, in breach of various statutory duties and in breach of contract, and that the claimant had relied on the bank’s advice (see  EWHC 2304 (QB)).
However, the judge further found that the loss suffered by the claimant was not caused by the bank’s negligence or breach of duties: it was, rather, caused by unprecedented market turmoil, and was unforeseeable and too remote. He further found that the ex gratia payment was made as a continuation of the original transaction, not as a matter entirely collateral to it, and should be treated as a credit against any damages due to the claimant.
The claimant was therefore awarded merely nominal damages in contract. The claimant appealed on the basis that the judge was wrong to hold that no loss flowed from the established breaches. The bank cross-appealed on the basis that the judge had been wrong to rule that the adviser had failed to recommend the most suitable investment. It further contended that it had no duty which extended beyond the claimant’s own projection that he would be unlikely to need the investment for more than a year.
It fell to be determined: (i) whether the bank was negligent and in breach of its statutory duties; (ii) whether the scope of the bank’s duty was set by the claimant’s time scale of up to one year; (iii) whether the claimant’s loss was too remote; (iv) whether the parties’ contract came into existence after the investment recommendation; and (v) whether the ex gratia payment was collateral to the original transaction.
The court ruled: (1) The judge had been correct, essentially for the reasons which he had given, to reject the bank’s submission that the advice had been correct at the time it had been given, and that, with hindsight, it held good for the period of time that it had been anticipated that the investment would be held. The judge had correctly held that the adviser had been negligent and in breach of substantive COB rules in advising the claimant (see , ,  of the judgment).
(2) In the context of statutory protection for the consumer, it seemed that a bank should reasonably contemplate that, if it misled its client in respect of the nature of its recommended investment, and thereby put its client into an investment which was unsuitable for them, when it could just as easily have recommended something more suitable which would have avoided the loss in question, then it might be liable for that loss. In effect the obligation of explaining matters properly to its clients was put by statute on the adviser. If the bank was to be protected by some relevant, albeit indefinite, time limit for its advice, then perhaps the obligation of making that limitation clear would rest on the recommending expert, not on the misled consumer (see  of the judgment). Koufos v C Czarnikow Ltd, The Heron II  3 All ER 686 applied.
(3) Having regard to previous authority, in the instant case, where the obligation of a defendant was not merely to avoid injuring the claimant but to protect him from the very kind of misfortune which had come about, it was not helpful to make fine distinctions between foreseeable events which were unusual, most unusual or of negligible account. It should not be said that the loss which the claimant had suffered by reason of the bank’s breach was too remote, whether the test of remoteness: (i) was expressed in the classic terms found in the leading authorities; (ii) had to reflect that sense of balance (an exercise in judgment); or (iii) had to take account of the manner in which the scope of the duty might extend responsibility for even unusual events (see  of the judgment). The judge had come to the wrong conclusion on questions of remoteness and the appeal would be allowed (see  of the judgment).
Hughes v Lord Advocate  1 All ER 705 considered; South Australia Asset Management Corp v York Montague Ltd (sub nom Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd)  3 All ER 365 considered; Siemens Building Technologies FE Ltd v Supershield Ltd  2 All ER (Comm) 1185 considered.
(4) When the advice had been given, it was on the basis that it would be paid for in accordance with the bank’s scheme for fees. The giving and taking of advice for a fee had been a matter of contract (see  of the judgment).
(5) Applying settled principles, although expressed as an ex gratia payment, the payment had not been made out of pure benevolence. It had represented the fund in which the claimant had been invested and the assets to which he had been entitled by way of aliquot share. It had only been because of a delay in recovery on some of those assets that the payment had not rolled into the money which the claimant had previously received (see ,  of the judgment).
The claimant’s appeal on the ex gratia issue would be dismissed (see  of the judgment). Needler Financial Services v Taber  3 All ER 501 applied. Decision of Judge Havelock-Allan QC  EWHC 2304 (QB) reversed In part.
Adrian Palmer QC and John Virgo (instructed by Clarke Willmott LLP) for the claimant; Stephen Cogley QC and Claudia Wilmot-Smith (instructed by DG Solicitors) for the bank.