As 2015 draws to a close, financial services professionals and their insurers begin to breathe a collective sigh of relief. The flood of litigation that followed the massive losses suffered during, and in the aftermath of, the global financial crisis of 2008 (GFC), has slowed to a trickle. As old notifications and complaints are brought up, and reserves reviewed, the question arises: now, 6 years on from the end of 2009, can it be assumed that any further GFC claims are statute-barred?
How does a claim become statute-barred?
Limitation periods apply to different types of actions, after the expiry of which plaintiffs are unable to successfully pursue a claim. While exceptions apply in particular circumstances, limitation periods for actions commonly brought against financial services professionals include:
- Claims for breach of retainer or breach of express contractual obligations must be brought within 6 years from the date of the breach, for example, the date that financial advice was provided or when an adverse investment was made. Accordingly, contractual claims for pre-GFC advice and investments will generally now be statute barred.
- Similarly, claims for breaches of implied statutory warranties that financial services will be rendered with due skill and care, and be reasonably fit for their purpose, must be brought within 6 years of the date of the breach of these implied terms. Again, such claims relating to financial services provided pre-GFC are now, generally speaking, statute barred.
- Claims in negligence and negligent misstatement must be brought within 6 years of the date that the cause of action arises. A cause of action does not arise until actual or ascertainable loss is suffered, or becomes inevitable. We discuss the timing of the suffering of loss further below.
- Statutory misleading and deceptive conduct claims under the Corporations Act 2001 (Cth) (Corps Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) similarly must be brought within 6 years from the date of loss, as discussed below.
- For actions arising from alleged failure to comply with statutory disclosure obligations and best interest obligations under the Corps ACt, different limitation periods are likely to apply for:
- Civil penalty breaches, where limitation periods run for 6 years from the date of the contravention; and
- Provisions which involve a right to recover the loss or damage caused by the contravention, where limitation periods run 6 years from the date of loss, as discussed below.
In this context, the key issue for financial service professionals facing potential claims in negligence, negligent misstatement or under the relevant provisions of the Corps Act or ASIC Act, will be identifying when loss was first suffered. Importantly, it is not necessary for all loss to have crystallised before the clock starts to tick – a defendant simply needs to show that some actual damage has been sustained. Other prospective losses can be calculated and claimed as time passes.
When does the loss clock start to run?
It seems straightforward: everybody suffered loss during the GFC and its immediate aftermath, and by late 2009 even those with their heads planted firmly in the sand must have known about the GFC and its impacts. But is it always that simple? In fact, the question of when actual loss is sustained has confounded the courts for some time. A substantial body of case law had been generated both here in Australia and in the United Kingdom, with the weight of authority often conflicting between the two jurisdictions. The answer will depend upon:
- The actual economic interest of the plaintiff that has been infringed by the defendant’s conduct (for example, the capacity to achieve a financial goal or an interest in recouping monies); and
- The chain of events causing the loss, including any relevant contingencies, and the point in time at which actual damage was first sustained or became inevitable (for example, when the achievement of the goal or the recoupment of monies became impossible).
Those seeking certainty in the case law will be disappointed. Outcomes have varied, including:
- In relation to agribusiness schemes which subsequently failed, loss was not ascertained or ascertainable upon entry into the scheme but at some later time, as the schemes were never intended to realise immediate benefits;
- Actual loss from misleading and deceptive conduct was not suffered at the time of granting an indemnity in favour of the bank, but subsequently when the grantor was first called upon to make a payment under the indemnity;
- Misrepresentations as to the outgoings under a lease of a unit in a retirement village only caused actual loss once the higher outgoings were charged, not at the time of entry into the lease;
- The purchaser of a shopping plaza, whose valuer failed to advise regarding the impact on market value of nearby construction, suffered loss immediately upon entering into the contract, as the purchaser could have found out at once that it had bought something that was worth less than the purchase price;
- A plaintiff that entered into a mining lease on advice from its solicitors, who failed to advise that a mining licence was required, suffered loss when it entered into the lease and received a bundle of rights inferior to what it should have if not for the solicitors’ negligence.
Courts are reluctant to decide the question ahead of trial
In addition, obtaining a favourable judgment on a limitation defence in a summary fashion is difficult, and it seems that most defendants with arguable limitation defences will have to await a full trial in order to have the matter decided. This can, of course, be expensive. The High Court in 1992 pronounced, with some emphasis, that these types of limitation questions should not be decided in interlocutory proceedings in advance of a trial, except in “the clearest of cases”. Defendants seeking early answers on limitation issues in relation to representations leading to a foreign currency loan and defective disclosure inducing entry into agribusiness investments have been effectively sent away by the courts, and told to await trial.
What does this mean for financial professionals and their insurers post GFC?
In terms of GFC related claims commonly faced by financial advisers, it seems arguable in some situations that financial losses became inevitable once the adverse market conditions of the GFC impacted on a client’s financial position. This argument will be stronger in situations of short term investment timeframes, investments in entities that failed or entered into administration or liquidation, investments with sub-prime or CDO exposure, or where significant margin calls or forced sales of investments occurred at the low point of the market. In these situations, actual loss was arguably sustained during the GFC, and the limitation periods have now expired.
However, where a plaintiff retains an investment and there are prospects of recovery, loss may remain speculative, and only crystallise when the investment is exited. If so, a plaintiff may have 6 years from exiting the strategy to bring their claim.
It is also worth noting that where advice is provided in the context of an ongoing relationship there is scope for further exposure, particularly in negligence, as subsequent actions of the adviser can give rise to new breaches of duty. For example, an adviser whose client’s financial position was adversely impacted by GFC losses might subsequently incur further liability for failing to review the appropriateness of the existing strategy in light of the changed circumstances. These new breaches may accrue separate causes of action, effectively resetting limitation periods.
Defendants also have to contend with the courts’ general reluctance to exclude plaintiffs’ claims on limitation grounds, which means that if an argument can reasonably be mounted in favour of allowing a claim, it will often be preferred. Further, there is the practical consideration of the costs involved in preparing for and running a trial, which may also involve contesting liability and quantum. In this context, commercial imperatives may mean that a limitation defence, like other potential defences, ultimately becomes just another factor taken into account when negotiating a settlement.
As a final caution, it is important to remember that defendants bear the onus of raising and leading evidence to support a limitation defence. This should be done as early as possible.