The High Court has again emphasised that there is no discoverability test in claims for financial loss arising out of alleged mis-selling of financial products. The High Court in the case of Komady Ltd & anor v Ulster Bank  IEHC 325 followed the Supreme Court's decision in Gallagher v ACC  IESC 35 which held that the loss from alleged mis-selling arose on the date the transaction was entered into and the time to issue proceedings ran from that date.
In Komady there were two questions before the court – firstly, whether the proceedings been brought outside the applicable limitation period, and secondly, if so, whether there was concealment by fraud by the bank, within the meaning of Section 71(1)(b) of the Statute of Limitations Act 1957 (the Act) which would allow for an extension of the limitation period.
The issue was dealt with by way of a preliminary application and, for the purposes of the application, the facts as pleaded by the plaintiff were taken as correct.
On 14 July 2006 the parties entered into two swap agreements. The plaintiffs had indicated to the bank that they did not want “high risk, unstable or complex financial products” and the bank advised them to enter into swaps representing that these were consistent with their financial objectives, were necessary and appropriate financial instruments and were required to be entered into as a condition of the loan agreements. The plaintiffs relied upon these advices, however the swaps were not consistent with the plaintiffs’ financial objectives and were not properly explained to them.
The Plaintiffs claimed there was a fiduciary relationship between the bank and the plaintiffs, which, was breached by the bank, including a failure to disclose a commission of €100,000 earned on the sale of these swaps.
The bank had failed to comply with its obligations to the plaintiffs under the Code of Conduct for Investment Business and it had breached its obligations under the Market in Financial Instruments Directive (MiFID).
The plaintiffs did not commence proceedings against the bank until 23 November 2012, which was outside the six year limitation period for breach of contract. The plaintiffs argued that a cause of action in tort did not accrue until there was actual loss and therefore time did not run until such time in 2012 when the plaintiffs sought and were given advice from legal and financial experts, and their damage became manifest or apparent. In this context the plaintiffs also emphasised the fiduciary nature of the relationship between the parties.
The plaintiffs also argued that the failure of the bank to advise them that these swaps were unsuitable for their stated objectives, and the misrepresentation to them as to the suitability of the swaps, amounted to concealment by fraud under Section 71(1)(b) of the Act which deprived them of a fact vital to their ability to know that they had a cause of action against the bank.
The bank argued that the plaintiffs were in effect attempting to apply a discoverability test and submitted that the plaintiffs knew or ought to have known in July 2006 everything they needed to know in order to decide or be advised that they had a cause of action.
The court held that the acts and omissions alleged against the bank were not capable of constituting concealment by fraud on the part of the bank of the plaintiffs’ right of action in the sense of Section 71(1)(b) of the Act.
The Limitation Period
The court pointed out that the difficulty for the plaintiffs was that they were in effect contending for a discoverability test, and that was something which had not been provided for by the Oireachtas except in personal injury actions. In the court's view, the plaintiffs suffered their loss when in July 2006 they entered into the swaps which were negligently mis-sold to them according to the assumed facts. The court cited with approval the decision of Fennelly J. in Gallagher v. ACC:
“It is to my mind inescapable that the plaintiff’s claim as pleaded is that that he suffered damage by the very fact of entering the transaction and purchasing the bond. The cause of action then accrued.”
Concealment by Fraud
The court considered whether the alleged fraudulent concealment could rescue the plaintiffs from the fatal effects of the six year limitation period. The court, in looking at the provisions of Section 71(1)(b), held that the correct interpretation of the section was that where the facts necessary to found a cause of action have been concealed from a plaintiff by the defendant so that it would be unfair for that plaintiff to be held to have had knowledge of them, or to be expected to have made inquiry in that regard, and where it would be unconscionable for the defendant to be permitted to rely upon the plaintiff’s delay in discovering those necessary facts, time will not be considered to have commenced for the purpose of the Statute until the facts become known.
Here, the plaintiffs argued, that the defendant concealed information from them that would have enabled them to know that they had a cause of action against the bank, or at least would have put them on inquiry. They said that the bank knew that the plaintiffs had no separate legal advice and that it, being in a fiduciary relationship, concealed the true nature of the swaps. They said that there was further concealment because the bank did not comply with the MiFID as they failed to reclassify the plaintiffs as retail clients and comply with that Directive after it came into force on the 1 November 2007.
While the court agreed that a fiduciary relationship could impose a greater obligation of disclosure upon the bank, the fact remained that everything that the plaintiffs needed to know in order to get any advice on the swaps was known to them by the 18 July 2006. If the advice was bad advice in August 2012, it was bad in July 2006. That fact was not dependent upon any new fact later discovered that was concealed by the bank. The existence of a fiduciary relationship did not add anything in the plaintiffs’ favour. The fact that the bank received an undisclosed commission when these swaps were entered into did not serve to delay the accrual of a cause of action on the part of the plaintiffs. Even if they had been told about this in July 2006 it would not have added anything to the facts necessary to found a cause of action at that time.
Furthermore, the coming into force of the MiFID in November 2007 added nothing of relevance to those facts. It did not suddenly reveal to the plaintiffs some vital fact that was not available to them from July 2006 and which was essential to their knowledge that they had a cause of action.
It is clear that the decision of the court in the present case, like in the Gallagher case was made on the basis of the particular product sold. The result might well have been different if it had been shown that the product was suitable at the time of sale but that loss had arisen due to some negligence in management or investment.