Featured case: Negligence; banking and finance; contracts

Having found that a bank had given an investor negligent investment advice that he had relied on, a judge had erred in concluding that the loss suffered by the investor on his capital was not caused by that negligence but by unprecedented market turmoil, and therefore unforeseeable and too remote to award more than nominal damages in contract.

Rubenstein v HSBC Bank. [2012] EWCA Civ 1184. Lloyd LJ; Moore-Bick LJ; Rix LJ. 12 September 2012

The investor’s loss of capital from market movements was foreseeable, and a danger he had specifically wanted to guard against.

Appeal allowed in part

The appellant investor Rubenstein appealed against a decision awarding him only nominal damages on his claim for breach of contract and negligence arising out of investment advice given by the respondent bank, HSBC, and that an ex gratia payment made to him by the company which controlled the fund in which he had invested should be treated as a credit against any damages due.

Rubenstein had wished to invest the proceeds of sale of his home while he searched for a new property to purchase. In August 2005 he told a financial adviser employed by the bank that he wanted ready access to his money. The financial adviser gave Rubenstein details of a fund in an insurance-based bond with HSBC.

Rubenstein indicated that he could not accept any risk to the capital and the financial adviser confirmed that the risk associated with the fund was the same as that for cash in a deposit account. He placed the sale proceeds in the fund but failed to find a property to purchase within a year, as he had intended.

In September 2008 there was serious turmoil in the financial markets and Rubenstein withdrew his money.

He received less than his capital investment and sought to recover his loss from the bank on the basis that he had been wrongly advised to invest in the fund.

In April 2011 HSBC paid Rubenstein £7,195 on an ex gratia basis after distributing assets held in the fund when it closed.

The judge found that although the bank had given Rubenstein negligent advice which he had relied on, the loss he suffered was caused not by that negligence, but unprecedented market turmoil that was unforeseeable and too remote. He therefore awarded Rubenstein only nominal damages in contract.

In case he was wrong about liability, the judge indicated that Rubenstein’s loss should be calculated as if the bank had succeeded in recommending the most suitable investment.

The judge also held that HSBC’s ex gratia payment should be treated as a credit against damages.

Rubenstein contended that the loss of capital from market movements was foreseeable, and a danger he had specifically wanted to guard against.

Appeal allowed in part

(1) The judge was implicitly selecting, for the purpose of giving effect to the law on remoteness, one of a number of possible causal factors as the essential cause of Rubenstein’s loss, namely a run on HSBC in response to volatile market conditions.

However, that was not the right selection.

(2) Although expressed as an ex gratia payment, HSBC’s payment to Rubenstein was not made out of pure benevolence. The judge had correctly viewed the payment as part of a continuous transaction and Rubenstein’s appeal on that point failed.

(3) Rubenstein was, accordingly, entitled to recover damages in accordance with the judge’s obiter findings as to quantum, giving credit for the ex gratia payment.

For the appellant/claimant Rubenstein
Adrian Palmer QC, Guildhall Chambers

John Virgo, Guildhall Chambers

Robert Morfee, partner, Clarke Willmott

For the respondent/defendant HSBC
Stephen Cogley QC, Quadrant Chambers

Claudia Wilmot-Smith, Quadrant Chambers

Mike Weygang, partner, DG Solicitors

Commentary

Daniel Saoul, barrister, 4 New Square

There is always a danger in these situations of predicting a flurry of new claims. Similar forecasts were made incorrectly when directors’ duties and derivative actions were codified: the much-anticipated opening of the floodgates was followed by a trickle rather than a tide. One big difference now is that time is of the essence: with the expiry of the limitation period for credit crunch-related losses looming the prophecy may, for once, come true.

Of course, claims of this kind are inevitably fact-dependent. Mr Rubenstein was a consumer, gave clear instructions and had the benefit of an email from HSBC expressly – and negligently – confirming the limited nature of the risk he believed he was taking. From a claimant’s point of view these facts are invaluable: they provide momentum, create reputational risks for the defendant and frame the ‘scope of duty’ debate, since they identify what the defendant was required to do.

But the court’s decision is also of more general relevance: in particular, it confirms the importance of carefully, though not too restrictively, identifying the cause of a loss, in particular in investment scenarios. The operative risk in this case – which HSBC was considered responsible for guarding against – was market forces causing fluctuations in the value of the underlying asset. Importantly, the timing and scale of those forces, which HSBC argued broke the chain of causation, were deemed irrelevant.

Subject to what the Supreme Court may say (HSBC has not yet said if it will appeal), this surely leaves advisers potentially in the firing line feeling uncomfortable. For credit crunch victims who have yet to throw their hat into the ring, things are looking up as they approach make-your-mind-up time.