Recent cases, headline issues and new legislation
Last Updated: 18 March 2012
Article by James Morse and Lindsay Joyce


In this case, heard before the High Court of England and Wales, the claimant alleged that, in and prior to September 2005, he had been wrongly advised by the defendant bank to invest Ł1.25 million into a fund known as the Enhanced Variable Rate Fund (EVRF), part of an investment product known as the Premier Access Bond (PAB). The PAB was issued by AIG Life, which was part of a wholly-owned subsidiary of the American International Group (AIG).

The claimant's investment in the EVRF continued until September 2008. This was the time when the financial position of Lehman Brothers (which had earlier in the year reported huge losses arising from the United States subprime mortgage market crisis), became untenable and clients and shareholders of Lehman Brothers withdrew their money. Other major financial institutions in the United States were coming under similar pressure, including AIG. As stated by The Honourable Mr Justice Jonathan Parker :

[t]he queue of investors in these companies who were heading for the exit increased dramatically when, on 15 September [2008], Lehman Brothers filed for Chapter 11 bankruptcy protection.

Withdrawals from the PAB were subsequently suspended temporarily. When the claimant was eventually able to withdraw his investment, he suffered a loss of capital. The claimant alleged an entitlement to damages, representing such capital loss, on the basis that he was negligently advised by the bank to enter into the investment.

Specifically, the claimant alleged that he had informed the bank that he required an investment that would protect his capital outlay and the fact that he had now suffered a capital loss demonstrated that the advice given by the bank (recommending that the claimant enter into the investment) was negligent.

Following a detailed review of the factual circumstances giving rise to this case, the Court concluded that the advice given to the claimant by the bank was 'negligent'. However, the Court also found that the bank was not liable to the claimant (in terms of substantial damages) given that the 'negligent' advice did not cause the loss suffered by the Claimant.

This was because, in order to demonstrate an entitlement to damages as a result of the provision of 'negligent' advice, the claimant was required to prove that:

  1. The bank owed the claimant a duty of care.
  2. The bank breached the duty of care that it owed to the claimant.
  3. That breach of duty of care by the bank caused the claimant to suffer loss and/or damage of a kind reasonably foreseeable (and therefore not too remote) at the time of the breach.

Whilst the claimant established the first two 'elements' above, the claimant was unable to establish the third element. The Court found that the events of September 2008 and following (now known as the Global Financial Crisis) were not reasonably foreseeable by the bank, or any prudent financial advisor, at the time when the investment was recommended and/or made in or prior to September 2005.

As stated by The Honourable Mr Justice Jonathan Parker :

... the test of what was reasonably foreseeable must be applied as at September 2005: and not at any time thereafter. Since the [Northern Hemisphere] autumn of 2008, we have become accustomed to economic bombshells of a kind not seen since the Great Depression. We are now reconciled to the fact that a sovereign state within the eurozone has defaulted. We have now witnessed the downgrading of the AAA credit rating of the United States. The suggestion that either of these events was going to occur would have been regarded as fanciful in September 2005. ... I find that the loss was not caused by any negligence on the part of [the bank] in making the recommendation [to invest in the EVRF]. I also find that the loss was not reasonably foreseeable by [the bank] and is too remote in law to be recoverable as damages for breach of contract or in tort.

The claimant was therefore only awarded nominal damages.


This case clearly articulates that, in certain circumstances, a professional (such as a valuer) may not be found liable for 'negligent' advice if the actual cause of any loss and/or damage suffered by a claimant is due to the Global Financial Crisis (or some such other unforseen event), which was not reasonably foreseeable at the time that the 'negligent' advice was provided.

This potential defence could therefore be raised in claims against valuers by lenders who have suffered losses as a result of loans entered into prior to the Global Financial Crisis (allegedly in reliance upon a 'negligent' valuation) where the cause of the loss is the significant reduction in the market value of the security property for that loan due to the effects of the Global Financial Crisis.

Although each case will 'rise and fall' on its own facts, including whether the impact of the Global Financial Crisis was reasonably foreseeable at the relevant time (it would seem that such foreseeability would probably increase the closer the relevant acts/omissions were to September 2008), this case represents persuasive international judicial commentary that will no doubt be considered by Australian Courts in due course. It will be interesting to see what impact this case will have, especially in the arena of valuer's liability.

This case also provides guidance as to how the decision of Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 might be interpreted on different facts. Kenny & Good concerned a valuation of a residential property for mortgage purposes which stated that the property was 'suitable security for investment of trust funds to the extent of 65% of our valuation for a term of 3-5 years'. The lender suffered loss and/or damage when the borrower defaulted and the lender was unable to recoup the loan funds via sale of the property due to a fall in the market. The valuer argued that the loss was caused, at least partially, by a fall in the value of the property caused by market fluctuations.

The Court found that the fall in the market was not too remote and, accordingly, the entirety of the lender's loss was caused by the valuer's negligence. The valuer was therefore found liable for the entirety of the loss.

Whilst we consider that the factual circumstances of Kenny & Good made it a problematic case to run in the first place (from the valuer's perspective), the judgment of Rubenstein will hopefully clarify the position that a valuer's duty to exercise reasonable care does not, in our respectful view, extend to an obligation upon the valuer to take into account (or be responsible for loss arising from) unpredictable, far-fetched, fanciful and unforeseeable events such as a catastrophic decline in the property market (or portions of the market) as we have now witnessed due to the Global Financial Crisis.

Whilst the fatal twist for the valuer in Kenny & Good was largely due to the representation that the property was 'suitable security ... for a term of 3-5 years', we understand that such representations are now far less common in the valuation industry and should not be made by valuers.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

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