In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points. A question for potential defendants when it comes to the waves of litigation caused by the GFC is whether claims for GFC losses are now statute barred or whether limitation periods are likely to expire in the near future.
GFC-based litigation remains a risk for the financial services industry
There are indications that many plaintiffs are contemplating bringing further litigation to recover GFC losses. Each case turns on its own facts, however, where a plaintiff claims damages for an investment frozen or wound up before April 2009, few causes of action will be available and the claim may now be time barred completely.
Alternatively, if a plaintiff seeks losses for investments entered into prior to April 2009, any contract causes of action is likely to be statute barred. Negligence, statutory duties and misrepresentation actions may still be available to a plaintiff depending on when actual damage was realised. If only negligence and misrepresentation actions are available, a plaintiff's contributory negligence can be used to reduce any recoverable loss.
Ascertaining whether a claim is statute barred and strategic considerations
To properly ascertain whether a claim is statute barred, defendants must keep in mind that:
- They generally bear the obligation to plead and establish evidence of the limitation. Delay in raising a limitation defence may later prevent them from alleging that a claim is statute barred.
- It is only in the clearest cases that limitation arguments are resolved in interlocutory proceedings. Even where they have a strong limitation argument, liability and quantum issues should be strongly defended until final judgement is given.
- Where loss is an element of the action, defendants will need to quickly identify the true cause of a plaintiff's damage and what factors or contingencies rendered the loss inevitable. This will require examination of each transaction a plaintiff entered into, and why the transaction performed poorly.
Limitation barriers may also encourage plaintiffs to plead more exotic allegations to take advantage of their last accruing cause of action. For example, a plaintiff may cast damages at later points in time or frame their case around failures to warn, as opposed to attacking a defendant's initial conduct when recommending or placing investments.
Plaintiffs are also likely to focus on any instances where information has been concealed or records destroyed, as these events can extend limitation periods otherwise exhausted.
The various limitation issues that defendants must keep in mind are examined below, with a focus on actions commonly brought against financial services professionals and organisations.
The causes of actions
In financial services litigation, the causes of action pleaded are:
- Breach of retainer or express contractual obligations
- Breach of the implied statutory warranties that financial services will be rendered with due skill and care, and be reasonably fit for their purpose
- Statutory misleading and deceptive conduct claims for financial services or financial products under the Corporations Act 2001 (Cth) (Corps Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act)
- Failure to comply with financial services disclosure obligations and best interest obligations
- Common law negligence or negligent misrepresentation claims
A cause of action is every fact which is material to be proved to entitle the plaintiff to succeed. It accrues, and runs from the date when all of the factual elements to satisfy the action have occurred.
In litigation, each pleaded cause of action must be assessed separately because even where they arise from identical facts, they often accrue at different times, and are subject to different limitation periods under legislation.
A claim for breach of contract must generally be brought six years from the date on which the cause of action arises. The action completes at the moment of breach. From this point nominal damage can be awarded for the breach.
While cases will turn on their own facts, financial services claims in contract often stem from:
- a recommendation or advice given to a client to invest in a financial product; or
- steps taken to implement new investments or alter a client's existing investments.
In these examples, causes of actions in contract will accrue from the date financial advice was given or when an adverse investment was made. If these events occurred more than six years ago, a breach of contract action is statute barred.
The statutory warranties imply contractual terms and provide a remedy for damages based on breach of contract. If the events causing the breach of contract occurred more than six years ago, warranty claims are statute barred.
Under the Corps Act and ASIC Act a person who suffers loss or damage by a person's misleading conduct, may recover that loss or damage within six years after the cause of action arises.
Statutory actions accrue based on the specific language used in the legislation. The damage provisions for misleading claims closely resemble s82 of the repealed Trade Practice Act 1974 (Cth) (TPA), and s82 authority is used to determine the limitation periods for claims for misleading conduct.
The leading s82 case is Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 where Mason CJ, Dawson, Gaudron and McHugh JJ found that:
- A plaintiff can only recover compensation for actual loss. For this reason the plaintiff's cause of action does not accrue until actual damage is sustained. Prospective or contingent loss is not enough.
- When a plaintiff induced by a misrepresentation enters into an agreement or performs a transaction, the plaintiff can sustain a detriment in a general sense on entry however detriment is often not sufficient to invoke the legal concept of “loss or damage.”
- The disadvantageous character of the detriment will not generally be ascertained until a future date when its impact becomes apparent. It is only at this point that the "loss or damage" accrues and the action begins to run.
Actions will run from the date when actual damage is sustained or becomes inevitable. In Wardley, the majority adopted Gaudron J's statement in Hawkins v Clayton that the date actual damage is sustained depends on:
- the precise interest of the plaintiff that has been infringed by the contravening conduct; and
- the nature of the interference and the chain of events causing loss. Where contingencies are a pre-condition of the loss, the loss will be prospective until the contingencies are satisfied and actual damage occurs.
An important caveat is that it is not necessary for all loss to have crystallised. All that is required is for some actual damage to be sustained.
In financial services claims, the interest of a plaintiff that has been infringed is often:
- a right to derive financial benefit from an investment or transaction; or
- the capacity to achieve a financial goal, which the investment or transaction was intended to realise.
When the plaintiff's interest cannot be achieved, the loss is no longer prospective. This will depend on the specific facts that caused each individual transaction to perform poorly. By way of example:
- Damage can occur immediately upon entry into a transaction if the transaction does not have the represented qualities, and is from the outset less valuable than it should have been. Actual damage could occur this early in financial services claims if a defendant's conduct distorts the initial market value of an investment. This will rarely be the case however, as often a plaintiff's complaint is not with the initial state of the investment, but with how the investment performed over a number of years and any failure to deliver expected returns.
- From 2007 to 2010, the poor performance of many investments funds and products was tied to the credit and liquidity crunch caused by the GFC. It can be argued that in some instances financial losses became inevitable once the adverse market conditions impacted on the fund or product. This argument will be stronger where investments had sub-prime exposure, CDO exposure, or involved entities that failed during the GFC.
- Actual loss is likely to be sustained when an investment entity is placed in administration or liquidation. If the entity cannot meet its creditor liability, it has no credible capacity to deliver returns to investors.
- Where an investment continued to trade and reasonable prospects of recovery remained, a plaintiff's loss is likely to have remained speculative. In these instances, actual damage may not arise until the investment is exited and loss crystallised.
- In other instances, a plaintiff's damage may have been dependant on a chain of contingencies, such as steps taken by a third party, or a subsequent business decision which impacted on the transaction. Until these preconditions occur, no damage arises.
As misrepresentation actions run from the date of actual damage, each case will turn on the individual facts that caused an investment's poor performance. If a defendant proves a plaintiff suffered some actual damage more than six years ago, a misrepresentation claim will be statute barred.
Statutory duties claims
The Corps Act imposes various duties on financial services licensees including to:
- Provide appropriate financial services guides to clients
- Prepare appropriate statements of advice for retail clients for any financial product recommendations
- Comply with client best interest and remuneration obligations
- Prepare product disclosure statements for financial products
- Ensure disclosure documents are provided to clients
Contraventions of the statutory duties will often arise before damage occurs, possibly when financial disclosure was due, or when an investment was placed. Breaches of statutory duties may trigger different remedy provision under the Corps Act for:
- Compensation orders where there is a breach of a civil penalty. Causes of action for civil penalty breaches run for six years from the date of the contravention.
- In other instances, a right to recover the loss or damage caused by the contravention. These provisions require actual damage, and limitations run six years from the date damage is sustained.
Compensation order claims will likely be barred if the contravention of the statutory duty occurred more than six years ago. Where damage is an element of the action, the limitation period will be more difficult to assess and will turn on when actual damage was sustained.
The tort of negligence is not complete until actual or ascertainable damage occurs. The general requirement is for actions to be brought within six years after the action arises. Many of the same considerations for assessing limitation periods for misrepresentation claims also apply to negligence actions.
In negligence claims, subsequent acts taken by a defendant (for example, where information is concealed, an omission occurs or where the relationship is ongoing) can give rise to new breaches of the defendant's duty, and accrue separate causes of action resetting limitation periods. Often legislation also extends causes of action for negligence and breach of contract where the cause of action was concealed by fraud. For these reasons a negligence claim can often be a plaintiff's last cause of action to expire.