The high cost of mis-selling in the DIFC: the Bank Sarasin case (Part Two) and the first DIFC award of (US-style) multiple or punitive damages

Introduction

On 7 October 2015, the DIFC Court of First Instance issued its judgment on quantum issues in the latest instalment of the Bank Sarasin case.  The decision is important for a number of reasons, not least because:

  1. it is one of the largest successful mis-selling claims seen in the region with the DIFC Court determining quantum and ordering the combined payment of damages of US$59,611,899 (in addition to previous interim payments of circa US$11.5m) by Bank Sarasin-Alpen in the DIFC and its Swiss parent entity; and
  2. for the first time the DIFC Court awarded multiple (or punitive) damages based on the deliberate conduct of Sarasin-Alpen and confirmed that in applying DIFC Law it will follow the US approach to such damages, rather than the more conservative principles under English law.  In effect, this doubled Sarasin-Alpen's liability for certain heads of compensation awarded.

In this article, we look at the broader impact of this judgment, the reasoning behind it and the likely consequences for DIFC financial institutions and their insurers.

A reminder of Bank Sarasin (Part One) – the Liability Judgment

The issues of the liability of the DIFC entity, Sarasin-Alpen, and its Swiss parent, Bank Sarasin, had been dealt with in the first judgment in August 2014 (“the Liability Judgment”), which held them to be jointly liable for regulatory breaches and breaches of duty.

Background to the case

  • Sarasin-Alpen and Bank Sarasin advised individuals from a wealthy Kuwaiti family (the "Claimants") on their investments.
  • The recommended investments were structured financial products, including real estate investment trusts, and totalled around US$200m ("the Investments").
  • The Claimants were also advised to take out loans to finance and leverage some of the Investments.
  • Following the onset of the global financial crisis, the value of the Investments dropped dramatically resulting in margin calls for extra capital to be provided to prop up the Investments.
  • When the Claimants were unable to meet those margin calls, Bank Sarasin liquidated the Investments causing huge losses for the Claimants.

Liability

The Liability Judgment made the following findings:

  • Sarasin-Alpen had wrongly categorised the Claimants as "Professional Clients" (i.e. experienced investors based on a test of available assets and financial sophistication); instead, they should have been categorised as "Retail Customers".
  • The Claimants' investment objectives were to obtain 100% capital protection so that they could be sure of being in a position to pay off the borrowing by means of which the Investments were funded.  The Investments were not suitable investments for borrowed money.
  • This was: "a clear case of mis-selling unsuitable investments to an unsophisticated investor…"
  • Bank Sarasin had carried out financial services in or from the DIFC (as a result of its own activities as well as insufficient delineation from the activities of its subsidiary Sarasin-Alpen) and was therefore in breach of the general prohibition under the Regulatory Law.

The Liability Judgment is still subject to a pending appeal by both Defendants, but in the meantime the case came back before the Court of First Instance for a further hearing on quantum issues (the "Quantum Judgment"), which are discussed below.

Part Two - The Quantum Judgment

The proportion of the Claimants' losses that related to their losses on the sale of the Investments had already been quantified and awarded as part of the Liability Judgment.  The Claimants sought to recover further losses, which arose from fees and interest charged to them by Bank Sarasin and the banks that had financed the Investments.  The Defendants argued these losses had zero value and put forward a number of legal arguments to support that position:

  1. Scope of Duty and remoteness of loss - The Defendants sought to invoke a long line of authority under English Law (beginning with the well-known decision in SAAMCO) (1) to support the contention that the losses claimed fell outside the scope of the Defendants' duties or were too remote (i.e. not foreseeable).  These arguments were dismissed, largely because Bank Sarasin knew the Claimants were taking out the financing for the Investments "for the specific purpose of making those purchases".
  2. Mitigating their losses/Chain of causation - The Court also rejected claims that the Claimants had failed to mitigate their losses, as alleged, by failing to repay the loans or meet the margin calls made by Bank Sarasin.  The Court found there was no evidence the Claimants were in a position to do so. For similar reasons, the Court rejected claims that those failures (and taking out a further loan) could amount to a break in the chain of causation between the Defendants' breaches and losses suffered.
  3. Nil transaction basis - The DIFC also rejected the Defendants' arguments that quantum could be challenged by seeking to revisit the "nil transaction basis" of the Claimants' case for recoverable losses, namely that, rather than assuming the Claimants would not have invested at all, it was necessary to undertake a counter-factual analysis of what alternative investments they would have made (if properly advised) and measure the financial consequences of that.  The Court found this point had already been decided in the Liability Judgment and noted it was actually part of the pending appeal so could not be revisited at the Quantum Judgment stage.  Deputy Chief Justice Sir John Chadwick reiterated that "the only proper conclusion (given the Claimants' investment criteria and my finding that an investment which satisfied those criteria was not available) was that there was no question of the Claimants ever proposing to invest in some other product; they should have been advised that a product having the characteristics they required was not one which could be obtained".

Multiple Damages

Without doubt, the most significant part of the Quantum Judgment is the judge's findings on multiple (also known as exemplary or punitive) damages.

The Claimants sought an award of multiple damages under Article 40(2) DIFC Law of Damages and Remedies (DIFC Law No 7 of 2005) which grants the judge in the DIFC Court a discretion to…

“where warranted in the circumstances, award damages to an aggrieved party in an amount no greater than three (3) times the actual damages where it appears to the Court that the defendant’s conduct producing actual damages was deliberate and particularly egregious or offensive”.

The scope of Article 40(2)

The Court found that, contrary to the Defendants’ submissions, Article 40(2) applies not only to damages claims for breaches of the DIFC Laws of Contract and Obligations, but also to claims for breaches of the Regulatory Law, as was relevant in this case.

Deliberate, particularly egregious or offensive conduct

The DIFC Court noted the following findings that triggered the scope of Article 40(2) multiple damages:

The Court found that, contrary to the Defendants’ submissions, Article 40(2) applies not only to damages claims for breaches of the DIFC Laws of Contract and Obligations, but also to claims for breaches of the Regulatory Law, as was relevant in this case.

  1. “….a finding that Sarasin-Alpen acted in deliberate breach of the Financial Services Prohibition in treating (and dealing with) the Claimants, (and each of them) as “Clients” rather than as “Retail Customers”.
  2. At least one employee of Sarasin-Alpen was “motivated….by a personal interest in the fees that would be generated by the exercise….”.
  3. Sarasin-Alpen had “deliberately falsified documents …..to make them appear as if they had been completed by the Claimants in their own hands…”.
  4. The Court had marked its disapproval of the above conduct by awarding costs on an indemnity basis following the Liability Judgment.

English or US approach?

The Quantum Judgment is replete with detailed references to and citations from, English case law on various principles of damages that apply in the case.  However, notably, the Court expressly rejected Sarasin-Alpen's suggestion that it should look to the (more conservative) English law principles when deciding whether to award multiple damages under Article 40(2).  Justice Chadwick’s findings on this point are clear:

“Nor do I think that Sarasin-Alpen obtains assistance from the principles which would guide a court in England or Wales when deciding whether or not to award exemplary damages.  Article 40(2) is not derived from the Law of England and Wales: rather, it reflects an intention to depart from that law in favour of the law in the United States of America.  The law making authority in this jurisdiction has given the DIFC Courts power to award multiple damages in appropriate cases; and this Court should not decline to exercise that power – when circumstances require – on the ground that a Court of England and Wales would not make such an order.”

Justice Chadwick went on to find that the damages claimed against Sarasin-Alpen should be doubled as a result of its conduct.

Commentary

This is the first case in the DIFC Courts and, indeed, the entire region in which multiple or punitive damages have been awarded.  The Court was unequivocal in its interpretation of the relevant provision of DIFC Law which permits the award of such relief.

Although both the Liability and Quantum Judgments are now being appealed by the Defendants, the Quantum Judgment will remain helpful in demonstrating the approach of the DIFC Court when determining the circumstances in which multiple damages will be awarded.

The claim was originally backed by professional litigation funders and the prospect of multiple damages awards may lead to an increased willingness by third party funders to  fund such claims and result in an increase in negligent advice/mis-selling claims in the DIFC.

Given the DIFC Court’s clear findings about the nature of the  Sarasin-Alpen's deliberate conduct and breaches, it would be surprising if the DFSA did not also see fit to take action against those entities and individuals involved.

Commentary for Insurers

There has historically been a low frequency of claims in the Middle East region for mis-selling and negligence against financial institutions and professionals. However, in recent years, we have seen an increase in claims for negligent advice/ negligent mis-selling of investments, as well as an increase in negligence claims against professionals generally.

It has been mandatory for certain categories of DIFC licensed institutions to have professional liability cover since 2012.  Insurers of financial institutions in the DIFC may, however, wish to revisit and check policy wordings to ensure that multiple (or punitive) damages awards  are expressly excluded from cover.

The DIFC reinsurance community will also be watching the development of US-style multiple damages awards carefully, noting that this same principle forms the foundation of the “bad faith” or extra-contractual damages regime that overshadows the decisions and practice of most US insurers.  It could, in due course, be extended to the conduct of DIFC insurers in their handling of claims.