In the wake of the global financial crisis, people expected a massive surge in litigation by investors looking for someone to blame for their losses. That surge never happened. Why not? There were many reasons why the anticipated glut of litigation in the years after 2008 did not take place. Of these, we intend to focus in this article on two jurisprudential reasons for the relatively small amount of litigation in this field. One is the concept of contractual estoppel, which has unique repercussions for trustees. The other is the decision of the High Court in the case of Rubenstein v HSBC Bank Plc, now overturned. The reversal of that first instance decision by the Court of Appeal potentially opens up a finite window for claims based upon losses relating to the global financial crisis. Given that these claims are likely to date back to 2008, or even 2007, limitation periods may be well advanced and urgent action needed (see point 1).

Trustees are unusual among litigants. Individuals and businesses can make their own choices as to whether to initiate litigation: they can pursue a claim because it makes sound financial sense, or as a ‘matter of principle’, or for a variety of other reasons good and bad. Trustees cannot approach the matter in this way: they need advice on their duties and obligations as trustees before embarking on litigation – and also before deciding not to litigate when there is a claim that might succeed. The natural response of many trustees and their advisers is to be extremely reluctant to litigate, but trustees may not simply reject that route out of timorousness or, for example, because it may be awkward due to the relationships involved. The 19th century decision in Re Brogden established that trustees should commence proceedings for losses suffered by the trust so long as the claim is sufficiently good and provided there are sufficient funds to do so (albeit that in almost all cases a Beddoe application would be an essential first step – see point 2).

Many trustees will already have sought advice on the merits of bringing claims for losses suffered during the global financial crisis and been advised not to proceed with them. In some instances, the basis of that advice will have been that any claims arising for losses suffered during the global financial crisis were not recoverable as a result of the first instance decision in Rubenstein. That decision has now been overturned and as a result trustees need to consider whether to take further advice in respect of any claims for such losses. Similarly, lawyers need to consider whether to inform their clients of this development and the possibility that a claim should at least be reconsidered.

Contractual estoppel – the first hurdle?

An initial difficulty for trustees considering whether they should litigate is to know whether their agreement with their financial advisers says what they have been assuming it says – that they were indeed to receive financial advice.

In the years before the global financial crisis, the English courts developed a doctrine of contractual estoppel. Most lawyers will be familiar with the general concept of estoppel, a defence based on the argument that in certain circumstances a party cannot change its position, to its advantage, from an earlier one. For example, they might have behaved in a particular fashion for a sufficiently long period of time, or in sufficiently serious circumstances, which gave rise to certainty in the mind of the other party. The simplest form of estoppel is res judicata which provides that once the court has determined the matter in dispute the parties cannot then litigate the same matter in further proceedings. The case of estoppel most familiar to readers of Trusts and Estates Law & Tax Journal will come in the form of an assertion, after a death, that the deceased had made a promise to leave assets to the claimant, a promise it would not be fair for their personal representatives to fail to honour, and that this should take precedence over the terms of the Will or intestacy.

Contractual estoppel is a relatively recent (perhaps strained) development in estoppel, and provides that where parties have agreed as to the nature of their relationship, they cannot subsequently argue that their relationship was formed on another basis, even where the parties' behaviour would otherwise be consistent with that other basis. Indeed contractual estoppel is arguably the opposite of more traditional forms of estoppel: the claimant in JP Morgan Chase Bank (discussed immediately below) might well have expected the court to hold that the Defendant was estopped by its conduct from arguing it could rely on its contractual language that it was not providing advice.

Contractual estoppel in this field was largely developed by the Court of Appeal’s decision in JP Morgan Chase Bank v Springwell Navigation Corp. In that decision, the ‘financial adviser’ was successful in arguing that boilerplate language within their standard terms and conditions (that their service was ‘execution only’ and - crucially – that they did not provide advice) was sufficient to preclude any liability in either tort or contract for losses caused to an investment portfolio as a result of negligent investment advice. It did not matter that, for all intents and purposes, advice may have been provided in fact; the important reality was that the parties had agreed that this was not an advisory relationship. Accordingly, the investors were precluded from proceeding with any claim for negligent financial advice. In effect this approach sees the court give absolute primacy to the terms of the contract dealing with such matters, rather than the background and the realities of the dealings between the parties.

The concept of contractual estoppel is a recent one, founded on Court of Appeal decisions, so it may yet be overturned by the Supreme Court; but for now it remains a potential obstacle to trustees seeking to pursue advisers in claims for professional negligence. Lawyers may do well to review the terms and conditions their trustee clients have signed up to with their financial advisers, in order to advise their clients of whether or not they might in future be contractually estopped from a claim.

Good for financial advisers; bad for trustees?

In practice, the choice of an ‘execution only’ contract for a trust portfolio is relatively rare, because as a generality trustees are required, both in the jurisprudence and by statute (section 5 of the Trustee Act 2000), to take investment advice from a person reasonably believed by the trustees ‘to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment’.

However, what if the trustees’ contract with their financial advisers included a clause explicitly stating that they provided execution only services and were not providing advice, even if only ‘lost’ in the boilerplate provisions? Does JP Morgan Chase Bank v Springwell Navigation Corp, in protecting the financial adviser from liability, expose the trustees to a claim that they failed to take advice in accordance with their duty?

There is no current answer to these questions but any consideration of these issues must begin with an analysis of the jurisprudential and statutory intent behind the requirement for trustees to take advice. Is it simply to ensure that the trustee is in a position to take what it is hoped will be good investment decisions, or is it to ensure that the trust has a good cause of action against a financial adviser should anything be negligent about the advice which has been given?

The question of whether, in cases where advice is in fact necessary and appropriate, executing a standard form agreement containing a boilerplate ‘execution only’ clause is negligent is yet to be decided but undoubtedly will come before the court in future. Trustees need to be aware of the need to take care in accepting such boilerplate language, and their lawyers should be conscious of this risk if they are asked to review contracts for their trustee clients. This risk would be even greater if the financial adviser is a party linked or related to the trustees in some way, because of the conflict of interest inherent in a trustee’s attempt to immunise itself from liability by taking advice and then immunise its related adviser by confirming, in agreeing that the adviser is not providing advice, that they are not liable for whatever advice has been provided.

Forseeability of the global financial crisis – the Rubenstein decision

The decision at first instance in Rubenstein v HSBC Bank Plc was, for many, shocking in that it precluded anyone making a claim in negligence or breach of contract (though not necessarily for equitable causes of action) for losses suffered during the global financial crisis. This was on the basis that the crisis was unforeseeable and too remote and, as a result, no damages could be awarded for losses suffered during it. Following the events of 2008, many investors sought legal advice as to the merits of claims for losses suffered during the crisis and were advised that the Rubenstein decision meant that such losses were simply not recoverable no matter how negligent the advice which they had received had been.

Those investors now need to consider the impact of the recent overturning of the first instance decision in Rubenstein and, depending on the facts of any particular case, it may be possible for some litigants to recover damages for losses suffered during the global financial crisis.

It is important to note however, that the decision in the Rubenstein appeal was not a complete volte face. The financial advice was only found to be negligent, and the losses foreseeable, on the particular facts of that case (see point 3 for details of these). The crucial point in Rubenstein was that Mr Rubenstein had specifically requested that his funds should not be exposed to any risk in the market: his financial adviser then told him that the recommended investment was as safe as holding the funds on deposit; and the investment was then made. It is yet to be seen if the judiciary will expand this interpretation in future cases. A decision on facts that involved a client who said he could accept no risk at all from the financial markets (the only point to which his attention was drawn was the different risk relating to the solvency of the banks involved, between an AA and an A rating) may impose a curb on claims: there were no grey areas in Rubenstein about degrees of risk.

Nonetheless, there are a variety of circumstances where trustees do seek to hold funds with no exposure to the risks of the financial markets and thus might, if they were negligently advised, fall within even the constrained facts of Rubenstein. One obvious example is funds held from the sale of one asset for the purchase of another, as in Rubenstein itself; another would be where funds were held to meet a future liability, for example taxes; alternatively funds might have been being held to support an indemnity which might need to be met in future. Doubtless practitioners will be able to think of further examples peculiar to trusts with which they have dealt. In such circumstances, if losses have been suffered as a result of negligent advice, then the possibility of action should be given serious consideration.


It has already been said that trustees are unusual as litigants. They are not allowed to make the business-like decisions that most litigants make when it comes to determining whether or not to pursue proceedings; nor can they litigate weak cases, which is the doubtful privilege of those who are spending their own money. Trustees are obliged to pursue good claims where there are sufficient funds to do so, and cannot decide not to do so simply because the proposed defendant is a beneficiary, a related party to a trustee, a related party to a beneficiary or any of the other such rationales which might motivate typical litigants. The problem for a trustee will be to know when a ‘good’ claim is good enough, and in most cases they should expect that the first stage will be to seek the court’s directions in a Beddoe application.

Trustees who have taken legal advice about potential claims are likely to have been advised that any claims for losses suffered during the global financial crisis could not be pursued. It turns out that that advice, although it reflected the position at the time, may not now hold good. As a result of the recent Court of Appeal decision in Rubenstein, some litigants may now be able to pursue claims for losses arising during the global financial crisis. Affected trustees need to review carefully whatever advice they have received about pursuing these claims, with an eye both to pursuing claims on behalf of the trust and to the risk to themselves if they do not do so. Frustratingly for trustees, the combination of the decision of the Court of Appeal in Rubenstein and the doctrine of contractual estoppel is such that they face great uncertainty in assessing whether or not to pursue claims against financial advisers. They also face uncertainty about whether they themselves might be on the receiving end of claims from beneficiaries, in a situation where time may be running out (see point 1 on Limitation). A detailed analysis of the advice they were given, of the contractual basis for the relationship with the adviser, and of any statements made as to the risk they were prepared to face, is recommended if there are any circumstances that might give rise to a claim.

Point 1 – Limitation Periods

The limitation periods for litigation relating to professional negligence are notoriously complex and would constitute an article in themselves, but under the law of England and Wales six years from the date of the advice is a good starting point. In some cases the limitation period may be longer, or it may have started later, for example when any losses were suffered rather than when the advice was given.

Losses as a result of the global financial crisis may only have begun to accrue in 2008, with the collapse of Lehman Brothers, but some may have been earlier, for example when Bear Stearns called in the Federal Reserve in 2007. The investor in Rubenstein had placed his money in the investment in 2005.

In any case where the six year period applies, the period will be coming towards its end. It will be immediately apparent that trustees who consider that they may have a good claim need to act expeditiously.

Point 2 - Beddoe Applications

A trustee’s right to indemnity from the trust fund in respect of the costs of third party litigation turns upon the issue of whether or not he has acted properly in bringing or defending the claim. A trustee is not protected merely because he acts on legal advice (even of Counsel) in bringing or defending a claim, unless his rights under the general law are expressly extended in this way by the trust instrument.

In the absence of an express authorisation in the trust instrument, or express authorisation and indemnity from the adult beneficiaries who are alone interested in the trust fund, a trustee may protect himself in regard to litigation costs as against the beneficiaries, and so secure his right to indemnity from the trust fund, by making an application to the court for directions as to whether or not to litigate. Since he can do so, he is in a vulnerable position if he does not.

This application, colloquially known as a Beddoe application, is made by a trustee to the court for directions under Part 64 of the Civil Procedure Rules. The court can then approve steps that the trustee has taken, or intends to take. This might be so straightforward as to include a direction that the trustee should or should not pursue or defend a claim. It can include protection on costs, including any costs the trustee might be ordered to pay to another party in the proceedings. By obtaining the court’s approval for his actions the trustee is then able to demonstrate at a later date that he has acted properly. If no application is made then the trustee risks personal liability for the costs of the litigation (potentially on both their own side and, if unsuccessful, the other party’s too).

Litigation following the decision in Rubenstein (for example if trustees believe there is reason to pursue advisers for losses to the trust arising out of negligent advice) would be a classic example of a scenario in which a trustee might properly make a Beddoe application.

Point 3 – The facts of Rubenstein

In 2005 Mr Rubenstein wanted to invest the £1.25 million proceeds of sale of his house until he could find another property to purchase. He told his bank he could accept no financial risk at all, and wanted no market exposure.

The financial adviser at HSBC then suggested an AIG bond to Mr Rubenstein as it gave a better rate of return than simply holding the cash on a deposit account. He told Mr Rubenstein that the bond was as safe as a cash deposit at HSBC, the only difference being that it had an ‘A’ rating, where HSBC had an ‘AA’ rating. The financial adviser’s statement that ‘the risk of default of one of the accounts is similar to the risk of default of Northern Rock’, may have seemed sound to him at the time (2005), but was proven with hindsight to have been terribly prescient.

What the bank’s adviser did not tell Mr Rubenstein was that the bond was not in fact a cash deposit, but was invested in the financial markets – in other words, that it had exactly the market exposure that Mr Rubenstein had said he could not accept. When Lehman collapsed and the run on AIG then followed, the bond was closed and Mr Rubenstein suffered his losses - losses which arose out of the placing of his funds in the market.

This article was originally produced for the 'Trusts and Estates Law & Tax Journal' in March 2013