The Court of Appeal has overturned a first instance judgment that a customer’s loss on his investment was too remote to be recoverable. It said the judge had been wrong to conclude that, although the bank had negligently advised the customer to invest in an AIG enhanced variable rate fund (EVRF), his loss was not caused by the bank’s negligence but by the “unthinkable” market turmoil in September 2008, and was therefore unforeseeable and hence too remote to be recoverable. The Court of Appeal found that the loss was caused by the collapse in the value of the assets held within the unsuitable investment (i.e. the EVRF) and that loss was not only foreseeable but had also been foreseen: Rubenstein v HSBC Bank Plc [2012] EWCA Civ 1184.

The facts

Mr Rubenstein (R) had sold his home and was looking to put the proceeds of sale into a “safe place” whilst he searched for a new property to buy within the next year. A financial adviser (M) employed by the defendant bank gave R details of a fund in an insurance-based product with AIG Life. R informed M that he could not accept any risk to the capital and, in response, M confirmed that the risk associated with the fund was the same as cash in a deposit account and the only risk was the ultimate risk of default. R duly invested the sale proceeds in the EVRF but failed to find a property to purchase within a year, as he had intended.

On the weekend immediately before the collapse of Lehman Brothers (and at a time when AIG Life’s parent, AIG, was considered another possible victim of the market difficulties), R attempted to withdraw his money. Due to the high demand in redemption requests, R did not receive his capital for some time and he ultimately received less than his original investment. R sought to recover his loss from the bank on the basis that he had been wrongly advised to invest in the fund. R sued for damages in negligence, breach of contract, and breach of statutory duty (in particular for breach of the FSA’s applicable Conduct of Business Rules (COB)) pursuant to section 150 of the Financial Services and Markets Act 2000.

The first instance judgement

At first instance the judge found that although the bank had given negligent advice, which R had relied on, the loss he suffered was caused not by that negligence but by unprecedented market turmoil at the time, which was unforeseeable and too remote. The same analysis was applied to the bank’s breaches of COB. R therefore recovered only nominal damages at first instance.

The appeal

R appealed on the basis that the judge had been wrong to hold that no loss flowed from the established breaches. He had been told that the recommended investment carried no risk of capital loss but he had suffered a loss of capital because the product did carry such a risk. He therefore suffered loss of a type which should have been foreseen, and was in fact foreseen (but not explained). The fact that the size of the loss may have been greater than could have been expected was beside the point.

In resisting the appeal, the bank argued in support of the judge’s finding that the loss was caused by “extraordinary and unprecedented financial turmoil” rather than its own negligence. It also  argued that it had no duty extending beyond the investor’s own projection that he would be unlikely to need the investment for more than a year. No loss was suffered within that year, and there could be no liability for any loss which occurred three years later.

Negligence, breach of contract, and breach of statutory duty

The Court of Appeal noted that the judge had generally made no distinction between any of R’s three causes of action for the purposes of causation, foreseeability and/or remoteness of damage. However, as Lord Hoffmann pointed out in SAAMCO v. York Montague Ltd [1996] UKHL 10, in a case of statutory duty the scope of the duty is determined by reference to the statute itself, i.e. by deducing the purpose of the duty from the language and context of the statute. The Court of Appeal said that the position in negligence and contract would fall in behind the statutorily discerned purpose and that the statutory rule may be more focused than the general law of tort and contract.

In the present case, the statutory purpose of the COB regime was to provide a measure of carefully balanced consumer protection when investment advice is provided to a “private person”, and the applicable principles in contract and/or tort should be guided by that focus and purpose. In the context of the regulatory objective of protecting customers, the Court of Appeal considered there to be something counter-intuitive about the judge’s finding on the one hand that there was negligence and significant breach of the COB rules in giving the wrong advice and yet concluding that any loss was too remote to be recovered in law, while on the other hand being in a position to find how much loss R had suffered by comparison with what would have happened if care had been taken to give him the right advice. This predominance of the statutory rules had a significant impact on the court’s findings in relation to the issue of the remoteness of the damage suffered by R.

Causation and remoteness

In reaching its decision, the Court of Appeal considered a number of key authorities on the issues of scope of duty, reasonable foreseeability and the assumption of responsibility. In particular, the bank relied heavily on Lord Hoffmann’s example of the mountaineer in his judgment in SAAMCO, which illustrates the significance of the scope of a defendant’s duty for the purpose of questions of causation and remoteness. A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently pronounces the knee fit. The climber goes on the expedition and suffers an injury which has nothing to do with his knee. In Lord Hoffmann’s view, the doctor is not liable, even though the mountaineer would not have gone climbing, and therefore the injury would not have occurred, but for the doctor’s negligence. The negligent advice would not be seen as the cause of the injury unless the unfitness of the knee contributed materially to the accident.

The Court of Appeal considered how the mountaineer example applied to the present case. The bank had negligently advised R to invest in a fund which was exposed to market risk and the adviser had failed to undertake standard statutory procedures designed to (a) protect customers and (b) assist the adviser make the most suitable recommendation. The Court of Appeal considered this an “unpromising context” in which to find that a loss suffered as a result of following a recommendation to enter into an unsuitable investment, when that loss came about because of the very factor which made the investment unsuitable (namely its inherent susceptibility to risk from market movements), was too remote to be recovered from the defaulting advising bank. It followed that the mountaineer’s example (where the injury was caused by an event entirely separate from the negligent medical advice) was wholly unlike the present case.

The Court of Appeal analysed the judge’s findings as to the cause of R’s losses, which cited both the collapse of Lehman Brothers and the run on AIG. The Court considered that the judge had failed to designate which event caused the loss and rejected the proposition that either had caused the loss. The Court noted that the insolvency of Lehman Brothers may have been unforeseeable, but R was not invested in Lehman Brothers. As to the run on AIG, this was deemed to be both foreseeable and foreseen, for its brochure discussed the need, in circumstances of high demand for withdrawals, for a three month moratorium. In any event, AIG had not in fact defaulted but was rescued by the US government. Therefore the judge had erred in finding either of these events to be the cause of R’s loss. According to the Court of Appeal, it was the collapse in the value of the market securities in which the EVRF was invested which caused the loss. Again, this loss was both foreseeable and foreseen, because AIG Life’s brochure referred to the “costs” which might accompany “selling assets prior to their intended maturity date“. Those losses or “costs” may have been unforeseeably high, but that is the nature of markets at a time of stress, and in any event this merely represented an unforeseeable extent of loss of a kind or type which was foreseeable.

Time limit on the bank’s advice

As noted above, a major factor relied on by the bank was that it had no duty extending beyond the investor’s own projection that he would be unlikely to need the investment for more than a year. No loss was suffered within that year, or for well beyond it. Therefore, whether viewed as a matter of scope of duty (SAAMCO) or the reasonable contemplation of the parties (The Achilleas [2008] UKHL 48), or in terms of causation, foreseeability or remoteness, there could be no liability for any loss which occurred three years later, even putting aside the extraordinary events of that latter time, but especially in the light of them.

The Court of Appeal considered this a powerful but unpersuasive submission. Although R thought he would find a new home within a year in fact he would hold the investment until he found a new home. That time period was indefinite. The Court said that, if the bank wanted to put a time limit on its advice, “then perhaps the obligation of making the limitation clear rested on the recommending expert, not the misled customer”.

The Court of Appeal therefore allowed R’s appeal and awarded him damages accordingly.