Rubenstein v HSBC Bank
Whether losses following the sub-prime crisis were foreseeable/issues of remoteness
The first instance decision in this case was reported in Weekly Update 34/11. In 2005, the claimant invested the proceeds of his house sale in an AIG bond. This bond had two variable rate interest funds and the claimant's money was put into the enhanced fund, rather than the standard one. Following the collapse of Lehman Brothers in 2008, withdrawals from the AIG bond were temporarily suspended and and when the claimant was eventually able to cash in his investment, he suffered a large loss of capital. At first instance, the judge found that the defendant bank's independent financial adviser ("IFA") had been negligent and, in breach of the FSA's Conduct of Business ("COB") rules, in recommending the AIG investment. However, the judge found that the loss was too remote to be recoverable because the events of 2008 (and, in particular, the idea that one of the world's largest insurance companies might go bankrupt) were unthinkable in 2005. Both sides appealed and the Court of Appeal has now held as follows:
1) The judge was correct to find that the IFA had been negligent and breached COB.
2) After conducting a detailed review of relevant caselaw, the Court of Appeal concluded that the loss was not too remote to be foreseeable. The starting point was that the statutory purpose of COB is to protect consumers. Here, the claimant consumer had been advised to invest in an unsuitable investment and his loss came about because of the very factor which made the investment unsuitable (ie its inherent susceptibility to risk from market movements). Although the collapse of Lehman Brothers may have been unforeseeable, the claimant had not invested in Lehman and the run on AIG did not ultimately cause the loss. Instead, it was a collapse in the value of the market securities in which the enhanced fund (but not the standard fund) invested which caused the loss and that was a foreseeable loss: "the underlying causes of that turmoil went infinitely beyond Lehman Brothers' difficulties. It stretched to a failure of confidence in marketable securities in which there had previously been greater confidence. And what is new about that?" (as per Rix LJ, delivering the leading judgment).
Nor did it matter that the enhanced fund was regarded as without risk in 2005: "So it might, but then nearly all the greatest losses come out of a cloudless sky". The standard fund should have been recommended to an investor who did not want any risk to his capital and, had the claimant's money been invested in that fund, he would not have suffered any loss.
The Court of Appeal also rejected the argument that, because the claimant had told the IFA that he would be unlikely to need the investment for more than a year, it should not be held liable for losses occurring three years later. The claimant had intended to use the money to buy another house but the achievement of that goal did not lie entirely within his hands and so the possibility had existed that the timescale would be exceeded. If the defendant wanted to be protected from an indefinite time limit for its advice "then perhaps the obligation of making that limitation clear rests on the recommending expert, not on the misled consumer".
3) The bank did, however, succeed in its argument that an ex gratia payment made by AIG to the claimant should be taken into account when deciding the amount of damages due to the claimant. In general, benefits conferred on claimants by third parties are left out of account. However, the Court of Appeal found that, here, the payment had not been made out of "pure benevolence" - it had been made as a continuation of the original transaction and was not collateral to it.
Brit Inns & Anor v BDW Trading
Judge decides various costs issues and effect of Part 36 offer
Coulson J described this case as one in which the "litigation has gone wrong for everybody". Although the claimants recovered a certain amount from the defendant, their claim had been exaggerated and so they recovered far less than they had sought. However, the defendant had failed to beat a Part 36 offer which it had made. Various costs issues arose from the case, including the following:
1) The effect of the Part 36 offer. Since the defendant failed to beat this offer, the ordinary rule is that the costs consequences of Part 36 do not apply (although the offer will be a relevant element of conduct under Part 44). The defendant sought to argue that this result should not apply here because it was the claimants' fault that it failed to beat its Part 36 offer (because, it was argued, the claimants had failed to provide the necessary information to allow the defendant to assess the merits of the claim at an earlier stage). This argument was rejected on the facts - there was no evidence to support the argument that a higher offer would have been made had better information been supplied.
In any event, the judge said that if the defendant had been unable to protect itself by making a Part 36 offer "then applications should have been made to the court at an early stage setting out precisely what was missing and why it mattered". Although the defendant had clearly believed the claim was exaggerated "nothing was deemed so insuperable that it warranted specific applications to the Court".
2) The effect of a Part 44 offer. Coulson J noted the recent Court of Appeal decision in F&C Alternative Investments v Barthelemy (see Weekly Update 23/12) in which it was held that an offer which is expressly made under Part 44 should not be treated as having the same effect as offers under Part 36. However, he said that the Part 44 offer in this case had "fundamentally changed the costs position" - not least because the defendant did beat this offer. The claimants became liable to pay the defendant's costs from the time that the date for acceptance of the offer expired because from this point on "only the claimants' unreasonable conduct and unrealistic expectations could explain their decision to go ahead to a trial".
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