The case of Swan & Baker Pty Ltd v Marando  NSWCA 233 provides a reminder that an advisor’s duty of care does not always cease immediately after services have been provided and clients can expect more from their advisors.
Swan & Baker, an incorporated firm of accountants, and Mr Legat, a director of the firm appealed against a District Court judgment awarding damages of $377,390.00 to the Marando’s, who were clients of the firm.
On 27 February 2008, the Marando’s invested $500,000.00 in a Mortgage Fund on the advice of Mr Legat. The investment was for a term of 90 days. Mr Legat provided the Marando’s with a copy of the Fund’s Product Disclosure Statement (PDS) which stipulated a cooling off period of 14 days for new investments, however, Mr Legat did not point this out.
Shortly after the investment, the Marando’s told Mr Legat that they were going away on vacation and would be contactable via mobile. On 3 March 2008, the Mortgage Fund announced that the redemption period for investments in the Fund had been extended from 90 to 180 days. This was a consequence of investors lodging withdrawal requests totaling $10 million after publications suggesting the Mortgage Fund was in urgent need of funds and would soon collapse.
Upon the return of the Marando’s, they became aware of a letter addressed to them from the Mortgage Fund on 3 March 2008 advising them of the extended redemption period. The letter also reminded them of the 14 day cooling off period, which was due to expire on 18 March 2008. The Marando’s immediately contacted Mr Legat and he informed them that there was nothing that could be done since the cooling off period had now ended.
At the time of retrieval, the mortgage fund had significantly decreased and they were offered only 30% of the original investment.
The District Court found that Mr Legat owed a duty of care to the Marando’s to take positive steps to warn and advise them during the cooling off period of their entitlement under the PDS to withdraw their money from the fund. This was part of his duty to “avoid a real and foreseeable risk of economic loss”.
The Court of Appeal upheld the judgment and the notion that Mr Legat’s duty extended to exercising reasonable care to avoid exposing or continuing the exposure of the Marando’s to the risk of financial loss, even after the investment. Further, the duty required Mr Legat to take affirmative action to eliminate the additional risk the respondents faced after the announcement of the freeze. Mr Legat had breached this duty since he took no action, despite knowing the Marando’s were on vacation and the announcement carried with it a significant risk of financial loss.
Importantly, the Court noted that Mr Legat may have discharged his duty of reasonable care had he orally communicated to the Marando’s at the beginning that they were entitled to a cooling off period.
The Court of Appeal noted that the consequence of this decision is not that professionals will come under a non-contractual duty to monitor their clients’ investments and take positive steps to alert clients to additional risks. However, there are particular circumstances when an advisor’s common law duty to take reasonable care can incorporate a requirement to take positive steps to alert clients to events that have exposed that client to an additional, but avoidable risk of financial loss.