Causation and effect
In September this year, Judge Havelock-Allen, who sits in the Bristol Mercantile Court, gave judgment in a case in which a customer of HSBC sued the bank for the losses he had suffered as a result of its negligence and breach of statutory duty.
The judge found the bank had been negligent in the advice it had given and was in breach of the rules in the conduct of business chapter of the FSA handbook.
But in the end, he decided the losses the customer had suffered were not caused by the bank’s negligence or breach of statutory duty and the claim failed.
In his judgment, the judge canvassed a number of issues that are of interest to all advisers of retail clients.
In 2005, the customer, a Mr Rubenstein, was selling his house for £1.25m. He and his wife had decided not to buy another house immediately and intended to move into rented accommodation while they looked for the ideal home.
The judge said: “In the meantime, they wanted to deposit their money somewhere where it would earn a good rate of interest, to help them pay the rent, and where it would be readily accessible if they found the home they were looking for.”
They thought it likely they would need access to their money within a year. Mr Rubenstein did some internet research on interest rates and approached the bank for advice. He was looking for a better rate than those he had found in his research.
The bank had a list of approved products its staff were encouraged to recommend. The AIG premier access bond was listed as suitable for a client looking for a safe haven for cash. It was a single-premium bond issued by AIG Life.
The bank recommended that product, linked to a fund called the enhanced variable rate fund. The underlying assets were a wide range of money market instruments. The fund was said to offer a high degree of safety.
As things turned out, the Rubensteins had not bought a house by the time Lehman Brothers collapsed in September 2008. As soon as he heard about the trouble besetting the company, Mr Rubenstein looked to surrender his bond. But because of the market turbulence, AIG was unable to value the assets in the fund and suspended withdrawals. The fund was closed three months later.
capital loss of about £186,000. He claimed his loss from the bank, saying he was wrongly advised to invest in the bond.
At the trial, the bank argued it had not given any advice but had merely provided information and that the transaction was execution-only.
In the course of considering this, the judge said: “The key to giving advice is that the information is either accompanied by a comment or value judgement on the relevance of that information to the client’s investment decision, or is itself the product of a process of selection involving a value judgement so the information will tend to influence the decision of the recipient. In both these scenarios, the information acquires the character of a recommendation.
“Mr Rubenstein began by asking for a recommendation. He wanted to know what the bank could suggest as a short-term home for his money, involving no risk to the capital and providing a better rate of return than he had seen on the internet.”
The judge decided the bank did give advice. He also decided this advice was negligent, that is, given without reasonable care.
There were two reasons: first, it was wrong to suggest the fund to which the bond was linked was the same as a cash deposit; second, the bank failed to consider if any of the other funds to which the bond could be linked were possible alternatives.
The bank was also in breach of the FSA rule on suitability. It was under a duty to recommend not only a suitable product but also the most suitable from those available, and there was at least one other AIG fund less risky than the one recommended. It also failed to explain adequately that Mr Rubenstein could get back less than he had invested, even if the prospect of that happening was low.
Mr Rubenstein must have thought he would win his case by this point of the judgment b ut the judge then went on to consider whether the loss had been caused by the negligence or breach of statutory duty. Generally speaking, the question is - was the damage or loss a reasonably foreseeable consequence of the negligence? The answer is often self-evident.
Situations arise, however, in which the question of causation becomes difficult. It is necessary in those situations to tie a wet towel around one’s head, take a deep breath and read on very slowly.
The problem was addressed in the House of Lords by Lord Hoffmann in 1996, in a case called SAAMCO. He was concerned with what the limit of liability should be for a wrongful act. He said: “There is no reason in principle why the law should not penalise wrongful conduct by shifting on to the wrongdoer the whole risk of the consequences that would not have happened but for the wrongful conduct.”
However, he said: “Rules that make the wrongdoer liable for all the consequences of his wrongful conduct are exceptional and need to be justified by some special policy. Normally, the law limits liability to those consequences that are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate.”
He then gave an example: “A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury that is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee.
“On the Court of Appeal’s principle, against which the appeal was being brought, the doctor is responsible for the injury suffered by the mountaineer because the damage would not have occurred if he had been given correct information about his knee. He would not have gone on the expedition and would have suffered no injury.
“On what I have suggested is the more usual principle, the doctor is not liable. The injury has not been caused by the doctor’s bad advice because it would have occurred even if the advice had been correct.”
In Mr Rubenstein’s case, the judge concluded that the losses were caused not by the negligent advice to invest in the AIG bond, even though there would have been no loss if Mr Rubenstein had put his money into some form of deposit account with the bank. The loss was caused by “the extraordinary and unprecedented financial turmoil that surrounded the collapse of Lehman Brothers” and was not reasonably foreseeable by the bank. It was therefore not liable.
Mr Rubenstein is taking his case to the Court of Appeal.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court