IYIR 2015 | FINANCIAL LINES
Queensland Court of Appeal
endorses the ‘net gains or losses’
approach in no transaction cases
Written by Jonathon Lees and Anita Smith
What you need to know
•
•
The Queensland Court of Appeal has confirmed that a plaintiff’s economic loss in “no transaction” cases
can be assessed at the date of trial, rather than at the date of the transaction.
This approach recognises the effects of general economic downturn during the life of the investment for
those transactions where a plaintiff, as a result of negligent financial advice, has been “locked into” the
transaction.
Implications for insurers
•
This decision is concerning for insurers and financial advisers as it may lead to:
-- On the one hand, larger claims exposure under a financial planners PI policy where a plaintiff in a ‘no
transaction’ case is seeking to recover losses incurred during the life of the investment to the date of
trial.
-- On the other hand, a court will consider whether the plaintiff’s alternative investment (if any) would
have suffered a loss in any event (e.g. due to a GFC) and will reduce damages accordingly.
Introduction
In our 2014 IYIR article “Assessing Damages in a ‘no
transaction’ case’: the ‘net gains or losses’ approach”,
we discussed the Queensland Supreme Court
decision in Jamieson & Ors v Westpac Banking
Corporation [2014] QSC 32.
In that case, the Supreme Court digressed
from the traditional Potts v Miller approach1 to
assessing damages in a no transaction case
(measuring loss at the date of the transaction)
and instead preferred a net gains and losses
approach2 (measuring loss at the date of trial)
in circumstances where a plaintiff is “locked
into” a financial transaction as a result of alleged
negligent financial advice.3
In April 2015, the Queensland Court of Appeal
heard Westpac’s appeal against the application
1.
2.
3.
of the net gains and losses approach. The appeal
was ultimately dismissed, with the Court agreeing
with the Supreme Court ruling and finding that in
the present case the better method of assessing
damages was a net gains and losses approach.
Recap of the facts
In 2007, Mr and Mrs Jamieson (the Jamiesons)
made financial investments based on advice from
Westpac’s financial planner. The investments
were ultimately unsuccessful and the Jamiesons
claimed against Westpac for damages for breach
of contract, negligence and contraventions of
statute in preparing the advice. The allegations
centred on the fact that Westpac’s financial
planner misrepresented the impact of the
financial investments and the level of risk of the
investments.
The rule in Potts v Miller measures the difference between price and value at the date when the plaintiff acquires the
property, acting under influence of the fraudulent inducement. It excludes subsequent or continuing losses, such as a later
fall in general market value.
The net gains or losses approach looks at the plaintiff’s financial position as at the date of the trial and it will not necessarily
pick up gains or losses, irrespective of whether they would otherwise be seen as attributable to the defendant’s wrong.
The Federal Court of Australia also awarded damages assessed on a ‘no transaction basis’ (including compensation for
related losses that flowed from the transaction) to plaintiffs who received negligent financial advice in Wealthsure Pty Ltd v
Selig [2014] FCAFC 64.
W+K Insurance Year in Review 2015
44
The Jamiesons said that had Westpac made the
correct representations, they would not have
entered into the investments and associated loans
(i.e. “no transaction” would have occurred) and
claimed damages to restore them to the position
they would have been in had no borrowing or
investment been made.
•
It is not for a plaintiff in a no
transaction case to prove what
alternative transaction would have
been undertaken in order to prove loss.
It may be sufficient for the plaintiff
to simply prove that he or she would
not have entered into the subject
transaction.
Westpac’s appeal against the ‘net gains
and losses’ assessment of damages
Both in the first instance decision and on appeal,
there were a number of submissions made by
Westpac in its opposition to the application of
a net gains and losses approach to damages.
Namely, Westpac argued that the application of a
net gains and losses approach:
•
•
•
does not reconcile with the traditional Potts v
Miller approach to damages (the Potts v Miller
Issue);
left Westpac liable for supervening causes
of the loss occurring after the date of the
transaction (i.e. the general market decline
caused by the global financial crisis (the GFC))
(the Supervening Causes Issue); and
should require the Jamiesons to prove what
alternative investment they would have
entered into and the likely financial result
in order to prove a loss (the Alternative
Investment Issue).
Court of Appeal upholds the ‘net gains
and losses’ approach
The Court of Appeal upheld the Supreme Court
decision to apply the net gains and losses
approach in assessing damages and in doing so
made the following findings in response to
Westpac’s key submissions outlined above.
Potts v Miller Issue
The Court agreed with the Supreme Court that the
Potts v Miller assessment of damages is not a ‘one
size fits all’ solution in no transaction cases.
Instead, the Court endorsed the application of the
net gains and losses approach in circumstances
where:
•
4.
the asset is not a readily marketable asset
because:
-- …the misrepresentation continues to
operate after the date of the acquisition so
as to induce the plaintiff to retain the asset;
Where a plaintiff was induced by negligent advice to
buy shares in Company A and, absent that advice, the
plaintiff would have bought shares in Company B.
W+K Insurance Year in Review 2015
or
…the plaintiff is “locked into the property”;
and
there is a lack of available market information
to assess the asset’s value at the date of the
wrong.
--
Supervening causes issue
The Court considered that the fact that the market
fell (crystallising the loss) well after the transaction
was entered into does not mean that the GFC was
a “supervening” or “erroneous” event causing the
loss. Supervening or erroneous events were only
those that were too remote in point of time or in
their nature from the defendant’s conduct for a
court to then hold the defendant responsible. In
this case, the Court held that the GFC was not a
supervening event because:
•
•
the losses flowing from a decline in the
market were losses foreseeable if the
investments performed badly; and
both parties had specifically contemplated
these losses in agreeing that the investment
would not expose more than 10% of the
Jamiesons’ net overall wealth.
Alternative investment issue
The Court agreed with the Supreme Court in
finding that:
It is not for a plaintiff in a no transaction case to
prove what alternative transaction would have
been undertaken in order to prove loss. It may be
sufficient for the plaintiff to simply prove that he
or she would not have entered into the subject
transaction.
•
In the case where an alternative investment is
established on the facts4, the:
-- plaintiff is entitled to prove that the
alternative investment would have made
a profit in order to recover a ‘loss of the
opportunity’ (i.e. recover the profit that
he or she would have otherwise made);
and
-- equally, the defendant is entitled to prove
45
that the alternative investment would
have made a loss in any event in order to
reduce the damages claimed. However,
unlike the plaintiff, the defendant does
not have the benefit of a presumption in
its favour in this regard and will have to
discharge the requisite evidential burden.
On appeal, the Jamiesons also cross-appealed the
Supreme Court’s decision to discount the damages
awarded based on its finding that:
•
•
but for the negligent advice, it was “more likely
than not” that Mr Jamieson would have made
investments in agribusiness products in order
to reduce his income tax payable; and
those investments would also have been
unsuccessful due to the GFC.
Ultimately, the Court agreed with the findings of
the Supreme Court on the evidence before it. That
Westpac had discharged its evidential burden
in proving that but for the negligent advice, the
Jamiesons’ likely alternative investment would
have also made a loss and that damages should be
reduced accordingly.
Conclusion
Following the Court of Appeal decision and
the recent Federal Court decision of Wealthsure
v Selig,5 things are looking even better for
plaintiffs who have suffered from a combination
of negligent financial advice and the effects of
the GFC and who seek to apply a net gains and
losses approach to the assessment of damages. As
5.
highlighted in our earlier article:
• on one hand, for financial advisers and their
insurers this should raise an alert to the
potential for larger exposure in no transaction
claims; and
• on the other hand, the judgment confirms
that the Court will consider whether the
Plaintiff’s alternative investment would have
suffered a loss in any event (e.g. due to a GFC)
and will reduce damages accordingly.
www.wottonkearney.com.au/IYIR2015
Jonathon Lees
Special Counsel | Sydney
T: + 61 2 8273 9942
[email protected]
Anita Smith
Senior Associate | Sydney
T: + 61 2 8273 9957
[email protected]
[2014] FCAFC 64.
This publication is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be
sought in particular transactions or on matters of interest arising from this publication. Persons listed may not be admitted in all states and territories.
© Wotton + Kearney 2016
46