UK: Can I Sue – Or Be Sued – For Losses Suffered In The Global Financial Crisis?

Last Updated: 30 October 2012
Article by Nicholas Holland and James Ratcliffe

You may have asked yourself or your advisers that question. If so, then the recent Court of Appeal decision in Rubenstein v HSBC may have changed the answer.

The key headline here is that if you were advised that losses 'caused' by the global financial crisis in the years around 2008 could not be recovered, you now need to know whether that advice still holds good. The Court of Appeal in Rubenstein has reversed the decision of the judge in the High Court, so it can no longer be reckoned that it is automatically the case that these losses were 'unforeseeable' and therefore irrecoverable.

This change affects those who might sue (or be sued) for losses which they believe were caused by negligent advice. Examples include individuals, trustees, or beneficiaries of trusts. However the devil is, as always, in the detail and it is important to read with caution some media reports which tend to overstate the effect of the Court of Appeal's reversal of the decision in Rubenstein.

First, the Court of Appeal certainly did not say that the global downturn was foreseeable. Rather, it rejected the black and white picture in the High Court that the losses were irrecoverable because 'the extraordinary and unprecedented financial turmoil which surrounded the collapse of Lehman Brothers' was unforeseeable, making the losses too remote. Second, Rubenstein was very much a decision on its own particular facts, and the important point for those who might want to sue, or who might want to resist a claim, is to know the implications of that case in their own particular circumstances.

So trustees and others who have been advised that it was not worth considering further the possibility of recovering losses sustained in the financial crisis because of the decision of the High Court in Rubenstein may need to seek a review of that advice on their own specific facts: the Court of Appeal decision shows that there is no such blanket prohibition. By the same token, those who might be sued can no longer assume that the worry is completely behind them; the specific facts of their cases will be equally important.

Time is running out

The availability of an action to claim loss, or concerns about being sued, do not continue indefinitely, and the limitation period for any such actions may be fast running out. Proceedings in Court have to be brought within certain strict time limits, known as limitation periods. The limitation periods for litigation relating to professional negligence are notoriously complex, but under the law of England and Wales six years from the date of the advice is a good starting point. In some case the limitation period may be longer, or it may have started later – for example when any losses were actually 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.

So the key point to be aware of on timing is that in any case where a six year limitation period applies, the period will be coming towards its end. Some will start to expire as we head towards the latter part of 2013. Once the relevant limitation period has expired, no matter how good a claim is, it will not found a case in law. If hope of success had been abandoned on the basis of the High Court judgment in Rubenstein, those who feel that they may have a claim need to act expeditiously to take advice.

A very specific decision

Before hopes (or fears) are raised too far that the reversal of the High Court decision in Rubenstein will enable the recovery of a swathe of financial losses previously thought to be gone for good, it is important to notice exactly what that case did and did not decide.

The Court of Appeal judgment has sometimes been shorthanded as that the Court said it was wrong to say that the risk of loss resulting from exposure to market forces was unexpected, and that therefore the Court of Appeal decision means that losses arising out of the financial crisis will no longer automatically be deemed unforeseeable or too remote.

This is accurate so far as it goes, but is potentially misleading. The important change between the High Court judgment and the Court of Appeal decision is that losses from the global financial crash can no longer automatically be regarded as too remote. In other words, there is no longer that impossible automatic hurdle of unforeseeability to overcome for those who wish to litigate (or that very great comfort for those who wish to defend themselves from claims).

But the fact that there is no longer an automatic bar does not mean that claims will all be easy. The facts of Rubenstein make it immediately apparent why this is the case: Mr Rubenstein was an investor who stated his needs very clearly, and who did not receive what he asked for.

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. He told the bank he could accept no financial risk at all, and wanted no market exposure.

To give a better rate of return than a deposit account, the financial adviser at HSBC suggested an AIG bond. He told Mr Rubenstein that it 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. (Indeed with terrible prescience, when explaining how safe the investment was, the financial adviser wrote, in 2005: 'the risk of default of one of the accounts is similar to the risk of default of Northern Rock'. Then unthinkable, but not two years later.)

What the bank did not tell Mr Rubenstein was that the bond was not a cash deposit but was actually invested in the market – in other words, that it had exactly the market exposure that Mr Rubenstein had said he wanted to avoid. When Lehmans collapsed and the run on AIG followed, the bond was closed and Mr Rubenstein suffered his losses.

The nub of the distinction between the decisions of the High Court and the Court of Appeal

One key point is that the Court of Appeal was very conscious that Mr Rubenstein, though a solicitor, could not count as anything other than a 'retail' investor in the context of statutory consumer protection. On remoteness and foreseeability, the Court of Appeal saw a connection between the negligent advice and the loss because the advice misled Mr Rubenstein into thinking that his investment was the equivalent of a cash deposit and was not exposed to the market at all. In other words, on Mr Rubenstein's facts, the crucial connection was made one step earlier than it will be in some other cases. Here the question was not whether the apocalyptic degree of financial chaos and confusion could have been foreseen. Rather, it was whether it was foreseeable that loss could accrue from being exposed to market forces (when the investor had specifically said he did not want to be in the market).

The SAAM CO case

Having heard the basis of the Court of Appeal decision, the High Court judgment may seem surprising in retrospect, but in evaluating potential claims in this area it is important to be aware that the High Court judge was seeking to follow the decision in SAAMCO v York Montague [1977] AC 191. In that case it was held that losses attributable to unforeseeable market falls were not recoverable against the negligent third party professional. The High Court judge in Rubenstein concluded that the events of 2008 were unforeseeable, and so gave no relief. By contrast, the Court of Appeal was not prepared to see SAAMCO used as a defence where the question was not whether that degree of a fall in the market was foreseeable but whether, having put the investor into the market, it was foreseeable that losses could occur.

Where next?

Those who suffered financial losses in the economic downturn, and especially trustees who may be dealing with dissatisfaction from beneficiaries, would be glad of a way to recover those losses. It is important to remember that, to be successful in suing those who gave the financial advice, it is first necessary to show negligence in the advice, and then to prove loss flowing from that negligence.

The good news for those who believe that they may indeed have a claim but who have been deterred by the High Court decision in Rubenstein, is that there now remains a window of opportunity in which to review the strength of their case and to decide whether to proceed.

Individuals considering whether to start litigation can follow their own preferences, guided by their advisers. Trustees will know that they should not be quick to litigate, but that equally they are under a duty to pursue a claim that has a sufficiently good prospect of success. Trustees will mostly need and want the protection of applying to the Court for approval to litigate before they actually embark on a claim for losses. The time needed for this extra step means that, for trustees in particular, the remaining window is not over-large.

The full text of the Court of Appeal judgment in Rubenstein can be accessed at:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Nicholas Holland
James Ratcliffe
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