Author Matthew Bradley
Three years post-Rubenstein: causation
and loss revisited
KEY POINTS
Establishing liability is only the start of a claimant’s problems in a claim for negligently or
––
mis-sold investments or financial products.
What a claimant must prove to establish causation and loss remains largely unchanged
––
post-Rubenstein.
A mastery of the facts may illuminate the path of common sense which judges seek
––
to tread.
In this article, Matthew Bradley considers some of the difficulties and obstacles posed
by the issues of causation and loss which face claims for negligent investment advice
and for mis-sold investments. As is so often the case, a mastery of the individual
facts concerning any given claimant is likely to prove the difference between success
and failure in many such claims.
INTRODUCTION
n
The recent County Court decision
in Anderson v Openwork [2015] EW
Misc B14 (18 June 2015) (Bailii) concerning
advice regarding the purchase of a FTSE
Bond has attracted much comment for
its treatment of the interplay between
regulatory duties and the standard of care
owed in tort. It was also striking on a more
basic level: the Claimant only recovered
£5,459 in damages.
Nearing the three year anniversary of
Rubenstein v HSBC [2012] EWCA Civ
1184 being handed down, it falls to wonder
whether everybody got excited about
not very much. A dissonance between
a claimant’s expectations as to likely
damages and the damages realistically
realisable is perhaps common in litigation,
but it remains a particularly acute feature
of claims for negligently or mis-sold
investments or financial products.
Even if a claimant manages to
establish a breach of a tortious or
statutory duty, he or she then has to
negotiate a minefield in proving causation
and loss. Whether acting for a claimant
or a defendant, attending to these issues
as fully as possible at the outset of
litigation is essential, and may make the
difference between good and bad advice,
contentment or disappointment and,
ultimately, success or failure.
Assuming a claimant obtains a finding
of breach of duty and reliance in his favour,
this article examines the “what next?”
questions and in particular discusses:
the claimant’s potential difficulties
––
establishing causation;
how
–– loss may be proved or disproved;
contributory fault.
––
PROVING CAUSATION
Whether a claim is framed by reference to
breach of contract, a tortious duty of care or
a statutory duty, the duty to prove causation
remains on the claimant at all times.
Most claims involving negligent
investment advice are likely to involve
concurrent claims in tort and contract such
that, assuming breach of duty and reliance
on the wrongful advice or information, the
claimant will have to prove:
Factual causation – “but for” the breach,
––
the loss would not have occurred at all. In
some cases this may represent the end of
the inquiry but in many it will not:
“The law habitually limits the extent of
the damage for which a defendant is held
responsible, even when the damage passes
the threshold ‘but for’ test.”
Butterworths Journal of International Banking and Financial Law
(per Lord Nicholls in Fairchild v Glenhaven
Funeral Services Limited (2002) UK HL 22).
Hence the need to show:
Legal causation – that the breach
––
was the “effective cause” of the loss. In
this enquiry the Court may distinguish between events which cause a
loss to a claimant and events which
merely provide the opportunity for a
claimant to sustain the loss (cf: Galoo
v Bright Grahame Murray [1994] 1
WLR 1360);
That the loss falls within the scope of
––
duty – per Lord Hoffmann in South
Australia Asset Management Corporation
v York Montague Ltd and others [1997]
AC 191 (SAAMCO):
THREE YEARS POST-RUBENSTEIN: CAUSATION AND LOSS REVISITED
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“A plaintiff who sues for breach of a duty
imposed by the law (whether in contract
or tort or under statute) must do more
than prove that the defendant has failed
to comply. He must show that the duty
was owed to him and that it was a duty in
respect of the kind of loss which he has
suffered.”
(NB: this principle may shortly be revisited in the Supreme Court should the
appeal in Gabriel v BPE Solicitors proceed
to a full hearing);
That the loss is not too remote, in
––
that it was a loss of a type that might
reasonably have been foreseen at the
time of entering into the transaction
(Cf: Rubenstein v HSBC Bank plc [2012]
EWCA Civ 1184).
Whilst those familiar concepts may
appear exhausting when so listed, the
reality is that in many cases the genuine
battleground will focus on one or two
disputes of fact which relate to one, perhaps
two, of the above criteria.
September 2015
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THREE YEARS POST-RUBENSTEIN: CAUSATION AND LOSS REVISITED
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It is instructive to consider the different
types of cases by reference to their facts.
Perhaps the easiest claims in which
to prove causation are those in which the
claimant seeks to show that, but for the bad
advice, he simply never would have entered
into any financial transaction at all, or at
least would have entered into a transaction
which amounted to little more than sitting
on his cash.
Rubenstein: a damp squib?
Rubenstein v HSBC Bank plc [2012]
EWCA Civ 1184 was such a case. Mr
Rubenstein wanted to invest the proceeds
of a sale property pending the purchase of
a subsequent property. He sought higher
returns than he might receive in a standard
bank account, but wished to face no capital
risk at all. He was led to believe that he was
investing in a product which gave him security
equivalent to a cash deposit. In fact, the
product sold to him was exposed to market
risk and, following the collapse of Lehman
Brothers, it depreciated, leaving him with a
capital loss of some £180k, representing the
depreciation of his investment.
Rubenstein attracted much comment for
Rix LJ’s deconstruction of the barriers erected
by the first instance judge in finding that the
events of Lehman Brothers’ collapse were
unforeseeable at the time of entry into the
investment, so as to render Mr Rubenstein’s
losses too remote.
But Rubenstein is not the claimant’s
panacea that many may wish it to be, and
has not been cited in as many subsequent
cases as one might have expected upon its
first being handed down. At base, once the
obstacle of remoteness was removed on
appeal, the decision was a very simple one on
“but for” causation, to the effect that had Mr
Rubenstein been told that the investment he
was offered was not as safe as a cash deposit,
he never would have entered into it or any
investment like it and so would not have
suffered his capital loss.
Rubenstein is at some remove from the
reality of many cases. Many claimants find
themselves speaking to financial advisors in
the first place because they are looking for
returns at the expense of undertaking some
September 2015
risk. The reality of other claimants’ positions
may be that at the material time of the
transaction they were required to purchase
some financial product in order to access the
financing they required. The run of claimants
are thus potentially exposed to the full
battery of causation arguments.
Defendants can (and rightly do) continue
to avail themselves of remoteness arguments
based on unforeseen market events. Such
arguments, whilst unsuccessful in Rubenstein,
held the day in Camarata Property Inc v Credit
Suisse Securities (Europe) Ltd [2012] EWHC
7 (Comm).
Sophisticats beware
The alternative investment
The more sophisticated the investor, the
more he will face difficulty in demonstrating
that deficient advice was the “but for” cause
of his entry into a transaction. In such
cases, questions of reliance and but for
causation may effectively merge. The first
instance finding of Teare J in Zaki and others
v Credit Suisse (UK) Ltd [2011] EWHC
2422 (Comm), undisturbed on appeal, is an
eloquent demonstration of this:
Even assuming a claimant can clearly
establish that, properly advised, he would
not have made the impugned investment or
purchased the toxic financial product, the
reality of many cases will be that the claimant
would still have entered into some alternative
transaction, on alternative advice.
Such claimants must establish what
advice the fault-free advisor would have
given, and establish that they would have
followed it. The latter is easy enough to
prove since, in all likelihood, the claimant
will have already established his propensity
to follow the relevant advisor’s guidance.
Careful attention needs to be given,
however, to what alternative transaction the
claimant says he would have entered into,
properly advised.
If a claimant can show that at the time
of entering into the impugned transaction,
he entered, on advice, into one or a number
of other investments which have performed
well (or well enough), he may be able to
point to those investments as being of
the type that he would have invested in,
properly advised, and so calculate his losses
by reference to them.
However, the defendant may have
the upper hand here. It may be able to
demonstrate with cogent evidence that at
the relevant time the other investments or
products which it would, non-negligently,
have promoted have performed little better
or indeed worse than the impugned product
or investment.
The defendant may also have recourse to
the more interesting argument that, whilst
the relevant alternative product or investment
may be performing well enough, it is wholly
illiquid such that there is no market in it and
that it will remain so for a number of years
yet, such that the Court should make no
damages award.
“To invest in products linked to equity
markets in May/ June 2008 one had to
have a serious appetite for investing and
to be bullish, brave and confident. Mr
Zeid was, it seems to me, all of those
and was determined to get an enhanced
return on his money. Mr Zaki described
Mr Zeid as having an ‘appetite for
continuing to purchase … He was a pro,
he was bullish about the market and he
wanted to take advantage.’ In deciding
to purchase notes 8–10 it is more likely
than not that Mr Zeid relied on his own
judgment and not on advice from Mr
Zaki. If Mr Zeid had not received advice
on the merits from Mr Zaki he would
have still bought the notes and suffered
loss when they were liquidated.”
The bullish claimant in Bank Leumi (UK)
Ltd v Wachner [2011] EWHC 656 (Comm),
who had an entrenched tendency to seek to
trade out of loss making investments, met
with a similar fate.
The Court of Appeal’s decision in Zaki is
also instructive in signalling that relatively
inconsequential breaches of statutory rules
are unlikely to resonate with any causal
potency. It serves as a reminder to claimants
to step back from what they are alleging
and ask whether, really, all they are doing is
nit-picking.
Butterworths Journal of International Banking and Financial Law
PROVING LOSS
Such arguments may face some difficulty in
the face of the obiter observations of Leggatt
J in Gestmin SGPS SA v Credit Suisse
(UK) Ltd [2013] EWHC 3560 (Comm).
Beginning by observing that the general
rule in contract and in tort is that damages
are assessed as at the date of breach, he
noted that damages may nonetheless be
assessed by reference to another date if the
court considers that to do so would more
fairly give effect to the basic compensatory
principle of putting the Claimant in the
same financial position as if the wrong had
not occurred.
He went on to express the view that if
at the date of acquisition or at any other
particular date, there is no market where the
asset in question can readily be traded then it
is unlikely to be fair to value the asset at the
date of acquisition.
Leggatt J eventually concluded that there
was no time at which the relevant shares could
have been sold at a price which fairly reflected
their value and so decided that, had he upheld
the claim in that case, he would have assessed
the loss as at the date of trial.
The judgment in Gestmin nonetheless
may be helpful to defendants who seek to
cap the losses of a claimant to some date in
time earlier than trial or whichever date is
relied upon by the claimant, in that Leggatt
J found that the appropriate date at which to
assess the Claimant’s loss will generally be the
earliest date at which:
the Claimant was aware of the facts
––
giving rise to the claim;
the Claimant could readily have sold
––
the property acquired as a result of the
Defendant’s wrong at a price which fairly
reflected the value of the property; and
it
–– would not have been unreasonable for
the Claimant to sell the property.
There may of course be cases in which the
claimant simply cannot credibly point to any
specific alternative investment or product,
and where reliance on damages assessed on
a loss of a chance basis, without reference to
any one or two “most probable” alternative
investments, is his only option.
Damages on a loss of chance basis are
likely to be pleaded in the alternative in
any event. However, where such damages
really are a claimant’s best chance of some
recovery, the authorities are, from a claimant’s
perspective, somewhat tepid to say the least.
The more vague a claimant is as to the precise
alternative investment chance relied upon, the
worse his prospects will be.
The evidence necessary in any loss of
chance claim for proving “a real or substantial
chance” was fairly wanting in cases such as
Bailey v Balholm Securities [1973] 2 Lloyd’s
Rep and Ata v American Express Bank Ltd
(Unreported) June 17, 1998 CA. However,
such damages are at least theoretically
available (Parabola Investments Ltd v Browallia
Cal Ltd [2009] EWHC 901 (Comm).
Wachner succeeded in achieving a damages
award, she would have found it reduced by
75% for her contributory fault.
CONCLUSION
Whilst any claim involving negligent advice
and guidance is complicated in terms of loss
and causation, this is particularly so in the
context of negligently or mis-sold investments
and financial products.
As in so many areas of the law, a mastery
of the facts of a claimant’s case so as to
ascertain what is truly likely to have occurred
in the event of blameless conduct is likely
to be the key determinant in convincing
a judge of the merits of one’s argument,
or alternatively in giving advice so as to
ensure the case never gets near one. A keen
understanding of a judge’s conception of
“common sense” is also critical. In practice the
various rarefied legal criteria for establishing
causation are determined by the judge’s
instinct for what common sense dictates in
any given case. For claimants, establishing
liability is only the first step up the mountain
path, and recent mis-selling scandals and
case law have not altered that fundamental
position. n
CONTRIBUTORY FAULT
Further Reading
Of course, even if loss can be shown, there
remains a real risk that a claimant’s damages
will be reduced for contributory fault.
Realistically this is a far more likely outcome
in the case of a relatively sophisticated
investor than it is in the case of the financial
ingénue. By way of example, had the bullish
Ms Wachner in Bank Leumi (UK) Ltd v
Market turmoil and investment loss
––
[2012] 2 JIBFL 88.
When is a loss regarded as too remote
––
under English law [2012] 10 JIBFL
618.
LexisNexis Dispute Resolution:
––
Proving causation: Material
contribution.
Butterworths Journal of International Banking and Financial Law
September 2015
THREE YEARS POST-RUBENSTEIN: CAUSATION AND LOSS REVISITED
Feature
Biog box
Matthew Bradley is a barrister at Henderson Chambers specialising in commercial,
banking and finance, professional negligence and product liability work. Mis-selling claims
and claims involving negligent investment advice are a particular interest. “His High Court
practice is especially strong. His preparation is meticulous and he has a really smart way
of approaching things in terms of his legal arguments.” (Chambers & Partners UK, 2015)
Email: [email protected]
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