Was the Credit Crunch Foreseeable?

Professional negligence solicitor Emma Slade ponders the foreseeability of the economic downturn and its legal implications

A recent decision from the Court of Appeal could have serious implications for those who put themselves in a position of advisor prior to the double dip recession that has engulfed the UK economy.

Until the decision in Rubenstein –v- HSBC, it had long been accepted that a Claimant would not be reimbursed for their losses arising out of a recession or a falling market. However, the Rubenstein decision appears to have turned this on its head, with far reaching implications for people making a professional negligence claim.

To review the law as it appeared before the Rubenstein case, we need to consider South Australia Asset Management Corporation –v- York Montague Ltd 1997 AC 191, better known as the SAAMCO case. In fact, SAAMCO was three separate cases involving different parties but, as they all raised similar issues, they were heard together.

In each case, a valuation had been made of premises and on the strength of that valuation, the claimant (a lender) had made a loan. The valuations though were negligent over-valuations. This became apparent when the borrower defaulted and the lender had to recover the property, subsequently selling it at a loss. In each case though, the loss was made greater because of the fall in the property market in the last recession.

In effect, there were two losses: the difference between the over-valuation and the correct valuation and then the further loss arising from the fall in the value of the property. The lenders wished to recover both losses.

Ultimately, the Court of Appeal concluded that whilst the lenders could recover the first loss, they could not recover the second loss as that simply had not been foreseeable at the time the valuation had been undertaken. The court felt that whilst a surveyor could expect a small fluctuation in the market, the recession itself had not been foreseeable.

There was also another distinction made: whether the valuation was considered to be “information” to allow another person to decide upon a course of action; or whether it was “advice” encouraging another person as to what course of action they should take. In SAAMCO, the Court of Appeal considered that a valuation was merely information for the lender to make a decision about what to do; it was not advice about the nature of the property market.

The outcome of Rubenstein –v- HSBC has therefore come as quite a surprise.

In this case, Mr & Mrs Rubenstein had sold their property and wished to invest the proceeds of sale (£1.25m) in a risk free investment. Mr Rubenstein contacted an IFA at HSBC to discuss his options and was provided with a brochure for the AIG Premier Access Bond. In August 2005, Mr Rubenstein emailed the IFA saying:

We can’t afford to accept any risk in the investment of the principal sum. Can you confirm what – if any – risk is associated with this product

The reply came back:

We view this investment …as the same as cash deposited in one of our accounts…[T]he risk of default…is similar to the risk of default of Northern Rock.

A singularly prophetic response given the demise of Northern Rock two years later!

Mr Rubenstein invested his money in the AIG fund where it remained for three years until the crash of Lehman Brothers, swiftly followed by problems at AIG. Like others, Mr Rubenstein tried to extract his money from the ailing company but lost approximately £180,000 from his investment. He brought a claim for compensation for professional negligence.

At first instance, the trial judge concluded HSBC had indeed given negligent advice, that the fund had been totally inappropriate for Mr Rubenstein and that Mr Rubenstein had relied on that advice. However, applying the SAAMCO principles, the Court found that the loss was entirely unforeseen and too remote. The Judge concluded that the loss had not been caused by the bank’s negligence but by the “extraordinary and unprecedented financial turmoil which surrounded the collapse of Lehman Brothers”.

On Appeal, HSBC conceded that, in accordance with SAAMCO, they had provided Mr Rubenstein with “advice” upon which he relied. They also tried three lines of argument to try and show that the loss was not foreseeable.

Firstly, they claimed that the collapse of Lehman Brothers had caused unexpected and unprecedented financial turmoil which could not have been foreseen. The Courts response was that Mr Rubenstein hadn’t invested in Lehman Brothers! Rather, the loss resulted from HSBC advising Mr Rubenstein to invest in a fund that was subject to a market risk, something which he did not want.

Secondly, HSBC pointed out that at the time of the investment, the AIG fund would have been regarded as being risk-free. The Court considered this as irrelevant as the bank had a duty to protect Mr Rubenstein from market risk.

Finally, HSBC argued that the investment had only intended to be for a short period of time but instead, the fund was held open for an additional two years which would have been outside the remit of their original instructions and thus could not have been foreseen. The Court felt that this was a powerful argument but ultimately concluded that the time the monies were to be held in the fund had not been defined in terms of months but rather that it was to be there until Mr Rubenstein purchased a new property.

Mr Rubenstein’s professional negligence claim was successful and HSBC were ordered to pay £113,000 in compensation plus legal costs.

The outcome of this case is quite extraordinary, particularly in light of the cases that arose out of the previous recession. It is not clear whether this will set a new precedent for all professional negligence cases for losses that arise out of a recession or credit crunch, or whether this case is to be distinguished on its own particular facts. If it is to be distinguished, there are good grounds for doing so: in this particular instance HSBC accepted they were giving Mr Rubenstein “advice” rather than merely information. Importantly, Mr Rubenstein had made it unequivocally clear that he did not wish to experience any risk, yet HSBC had misrepresented the nature of the investment to him. On that basis, it would appear that the SAAMCO defence might still be available in a pro neg case if the advice was not part of the express terms of the instructions provided by the client.

Anyone seeking to bring a claim for compensation for professional negligence against a bank, IFA, financial adviser or any other professional person is welcome to use our FREE Professional negligence legal helpline. Call 0808 139 1595.

We deal with professional negligence claims on a no win, no fee basis and offer an out of office hours advice service by email in the evening and at weekends. Just email [email protected]

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