Market Turmoil Does Not Mean Negligence Claim Avoidable

Investment advice that turns out to be bad has always been a fruitful area for argument in the courts and numerous cases have arisen over the years.

In a recent case, an investor whose bank gave him advice, as a result of which he invested and suffered a loss, was given short shrift by the judge in the lower court, who ruled that the loss suffered was the result of ‘turmoil in the market’ – and therefore not foreseeable – rather than the result of negligence by the bank. He was therefore awarded only nominal damages. Unhappy with this decision, he appealed to the Court of Appeal.

The man had sold his house for more than £1.2 million and wished to invest the proceeds in a fund which would give him ready access to the money while he found a new home to buy. He therefore needed rapid access to the money and wanted a risk-free investment. He told the bank that he was unlikely to need the money to be invested for more than a year.

The bank recommended an insurance-based bond in which he invested in August 2005. His search for a new property took longer than expected and, when the financial markets became unstable in September 2008, he withdrew his investment, which was then standing at a considerable loss. The bank argued that it had no duty of care to him which extended beyond his own projection that he would be unlikely to need the investment for more than a year. No loss was suffered within that year and the bank claimed it had no responsibility beyond that point.

He claimed that he had been negligently advised by the bank because the investment was not risk-free, and that the bank’s liability was not limited to the outcome of the investment over the first year. The bank paid him more than £7,000 as an ex-gratia payment.

In the original judgment, the judge concluded that the risk attaching to the investment made was only slightly higher than investing in a deposit account and that the losses were caused by the hysteria in the market. He said, “The damage which eventuated, namely, the closure of the fund and a substantial loss of investors’ original capital, was triggered by subsequent events. If those were not events of a kind which were foreseeable when the investment was made, I do not think that it can be said that the structure of the product truly caused the loss.” He concluded that the loss was not caused by any negligence on the part of the bank’s financial adviser in making the recommendation, was not reasonably foreseeable and was too remote in law to be recoverable as damages for breach of contract or in tort.

Accordingly, only nominal damages were awarded. The investor appealed.

The Court of Appeal took a different view. It concluded that the losses were the result both of the upheaval in the market and the incorrect advice, which left the man’s investment subject to market forces. The market movements which affected his investment were exactly the thing the man had wished to ensure he was protected against.

Accordingly, the man was entitled to be recompensed for the full value of his loss, less the amount of his ex-gratia payment.