Background

This case provides a useful analysis of the duty owed by financial planners to exercise reasonable care and skill in providing financial advice to clients.

From the time the plaintiff (Dennis) first consulted Mr Takla (Takla) of Chambers Investment Planners Pty Ltd (Chambers) in 1999 until the global financial crisis (GFC) arose in 2008, Chambers and Takla advised Dennis to make a number of investments that were substantially financed by debt.

Dennis claimed that Chambers and Takla were liable to him for investment losses he suffered following the GFC. Dennis alleged that Takla took instructions on his investment objectives and he gave instructions to Chambers and Mr Takla to build an investment portfolio to supplement his retirement resources in a way that reasonably preserved the investments, but also provided growth for them. Dennis says that did not occur by reason of breaches of contractual and other duties owed to him by Chambers and Takla.

Was there a contractual requirement to Provide financial advice as to ‘the most suitable financial investments’?

Chambers and Takla submitted that they owed Dennis a duty to exercise reasonable care and skill in the provision of financial advice under contract and at common law, but no more.

Dennis alleged that it was an implied term of the contract that, in providing advice, Chambers would advise him not just as to suitable investments for him, but ‘as to the most suitable financial investments’.

His Honour Justice Barker  rejected Dennis’ submission.  Barker J found that Chambers and Takla did not owe Dennis any implied contractual duty to provide advice as to the most suitable financial investments because:

  • no term, other than the duty implied as a legal incident of this class of contract – to exercise due care and skill when advising – is required to make the contract effectual; and
  • no such level of obligation was evident in the materials that Dennis relied upon.

Barker J concluded that ‘[t]he concept of “professionalism” does not… at least in the circumstances of this case, create some higher duty than the agreed duty to exercise due care and skill’.

Did the Respondents breach their duty to exercise reasonable care and skill in providing financial advice?

Dennis alleged that Chambers and Takla breached their duty to exercise reasonable care and skill in providing financial advice on the basis that (among other things) they failed to complete a sufficient Fact Find and failed adequately to take account of Dennis’ objectives.

Barker J found that Dennis’ goals and objectives and the financial situation particular to his needs were reasonably conveyed by the Fact Find form. Barker J concluded that, through the Fact Find and information gathered in conversation, Takla had reasonable basis on which to give advice and to make recommendations of appropriate products to meet the goals or objectives of Mr Dennis.

Further, Barker J held that:

  • Dennis had received all relevant information concerning the investments before he entered into them, including details of their speculative nature;
  • from his discussions with Takla, Dennis appreciated how the investments would impact on his objectives;
  • Dennis was aware of the risks associated with the investments, the forecast returns, the associated fees and the commissions that the Respondents would receive;
  • Takla took into account Dennis’ changing financial circumstances, income, ability to carry the expenses associated with the MISs and cashflow when making the recommendations, and factored them into the advice he provided;
  • although the Respondents did not perform an analysis of cashflow in order to make their recommendation, cashflow had nonetheless been addressed by consulting Dennis’ bank statements and investments that were ready to be liquidated at the time; and
  • the Respondents had a reasonable basis for the advice provided, given the growth-oriented and moderately aggressive nature of Dennis’ investment strategy.

Overall, Barker J concluded that Takla had a reasonable basis for the advice he provided to Dennis.

Further Findings

Barker J also held that:

  • in light of his findings (above) that Chambers had not breached its duty under contract or at common law to exercise reasonable care and skill in providing financial advice to Dennis:
    • Chambers did not breach s 851 of the Corporations Law (in the pre-financial services reform period) or ss 945A and 945B of the Corporations Act 2001 (Cth), which prohibit the giving of advice that lacks a reasonable basis; and
    • Chambers did not make misleading or deceptive representations to Dennis concerning the appropriateness of the advice given and recommendations made;
    • even though Chambers had made errors in relation to finance applications, Chambers did not make misleading or deceptive representations to Dennis concerning the accuracy of finance applications. Barker J considered that the errors were not material and that there was no evidence that any of the errors misled or deceived anyone.
  • Takla did not obtain any unauthorised benefit from his relationship with Dennis. Barker J therefore considered it unnecessary to determine whether this relationship was of a fiduciary nature.
  • Chambers and Takla did not breach any contractual, tortious or equitable duty in connection with Dennis’ purchase of property. This is because:
    • Takla’s encouragement, advice and assistance in relation to Dennis’ purchase was a combination of personal advice and financial planning advice;
    • the advice cannot be said to have lacked a reasonable basis;
    • Takla did not mislead Dennis in relation to the property purchase; and
    • Takla did not breach any fiduciary duty he may have owed to Dennis.

Barker J dismissed Dennis’ claim.

The Insurers appealed against the first instance decision.

Is the Response a “Claim”?

Gleeson J wrote the unanimous judgment of the Court of Appeal and held that the Response was not a counter-claim within the meaning of paragraph (b) of the definition of “Claim”.  The Court accepted that in certain circumstances damages claimed by way of set-off might constitute a counter-claim for the purpose of the policies. However, the Response only raised certain defences to the Insured’s action on the guarantee and did not allege any liability or claim any relief. Consequently the Response did not satisfy the definition of “Claim”.

Gleeson J further observed that “the inclusion of “counter-claim” in the definition of “Claim” is directed to the possibility that the insured may suffer a liability to a third party by reason of a counter-claim. The language of the definition of “Claim” does not require the artificial construction suggested by the Insurers.”

In addition paragraph (b) used the words “brought against”. In order to satisfy the relevant definition the Claim must be “brought against” the Insured. The Court determined that the words entailed proceedings involving a claim for relied or for the enforcement of any right and that the Response did not satisfy these requirements.

Was the Response a Claim “for any civil liability”?

The Insurers also needed to show that the Response was a claim “for any civil liability” in order to fall within the insuring clause. The Insurers argued that the Response included a claim for civil liability because it asserted a liability against the Insured which was a civil liability, namely the liability to account to Bellpac.

The Court rejected the Insurers’ arguments in this regard. Referring to various authorities, the Court concluded that in the context of these proceedings a claim for civil liability must seek “the establishment by judgment of responsibility in law”.

Here, to the extent that the Response did assert a liability on the part of the Insured to Bellpac, that assertion was made in support of an equitable defence and did not involve or require the establishment by judgment of the Insured’s responsibility in law to Bellpac.

The Full Court dismissed the Insurers’ appeal and affirmed the decision of the Judge at first instance that the Response was not a “Claim” for the purpose of the policies.

Key points to note

The Court was determining a preliminary issue, namely, whether the Insured’s alleged liability to Austcorp and Compromise arose from a Claim made against the Insured prior to the inception of the policies. It is understood that the insurers intend  to rely on other defences (presumably material non-disclosure) which may also found a legitimate denial of indemnity.

The decision is a useful reminder of the way in which the Court approaches issues of policy construction.  When considering the application of the operative clause any words of limitation used in the drafting of the insuring clause (such as those in this case, being “for any civil liability” and “brought against”), are critically important and must be carefully considered in the context of the relevant fact scenario, whenever Insurers determine whether cover is triggered. 

In cases such as this, particularly where there is a background of multiple sets of proceedings between multiple parties, careful consideration of the nature of the court process will be relevant to the court’s consideration of whether a defined “Claim” has been made.