Responsibilities Beyond Regulations: Mis-selling: Civil Liability for Negligence and for giving Negligent Advice

A talk presented to the Hong Kong Confederation of Insurance Brokers Annual Conference 2008.

I am going to start with a discussion of the basic principles involved in the tort of negligence and go on to discuss how the law of negligence has been applied to professionals. The principles discussed will generally also apply to negligent misrepresentations. Most of the cases that I will refer to relate to the duty of care arising as a result of giving advice in the capacity of an advisor, including brokers.

Tort of Negligence – Basic Principles

The tort of negligence can loosely be described as legal liability imposed on a person for careless acts which cause damage to persons or property.

Liability for negligence is not imposed for every wrongful or careless act committed. In order to establish a claim for negligence, a claimant has to be able to show that the defendant owed the claimant a duty to take care in the circumstances, that the defendant breached that duty and that the claimant suffered loss as a result.

The existence of a duty of care is fundamental to any claim for negligence. As one judge said, well over 100 years ago, “a man is entitled to be as negligent as he pleases towards the whole world if he owes no duty to them.”1 If he owes a duty of care, however, and breaches that duty, legal liability may be imposed on him for any losses which result.

There are three criteria considered by the Courts when determining if a duty of care arises in a given situation:

First, whether it was foreseeable that a failure by the defendant to take care could result in harm being suffered by the claimant.

Secondly, whether the relationship between the claimant and defendant was sufficiently close or “proximate” that the defendant should be held responsible for the damage caused.

And thirdly, whether it is reasonable to impose a duty in the circumstances. This is often referred to as a policy factor – is there any reason why a duty of care should not be imposed?

Special Duty of Care owed by Professionals

In the case of professionals, the Courts readily accept that a duty of care arises whenever a professional undertakes to provide a service for another knowing that the recipient reasonably relies on his professional competence and judgment. The key concepts are that the person who performs the act or gives the advice is a professional, and that the claimant has relied on that person’s professional competence and judgment.

The duty of care owed by a professional to his client is a duty to exercise reasonable skill and care. This is not a quest for perfection and does not require that the professional guarantee a particular result.

This duty of care may arise between a professional and client even if there is no contractual relationship between them, and even if the advice or acts are undertaken free of charge. The Court recognises that it is precisely because a professional has, or professes to have, special skills or expertise in a particular area that people seeking those skills are more likely to rely and act on any advice given by that professional.

Generally the claimant must show that advice was given in circumstances in which it was reasonable to rely on that advice, such as in the context of a professional relationship: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.

Standard of Care of Professionals

How does the Court determine whether a professional has exercised reasonable care and skill? A classic statement relating to liability for professional advice is that made by Lord Bridge of Harwich in Caparo Industries PLC v Dickman [1990] 1 All ER 568 575:

In advising the client who employs him, a professional man owes a duty to exercise that standard of skill and care appropriate to his professional status and will be liable in contract and in tort for all losses which his client may suffer by reason of any breach of that duty.

The standard of skill and care is determined by reference to members of that profession and the professional status of the professional. Two different “reasonableness” standards have been applied by the Courts in the past. The first seeks to determine the standard of care which members of that profession would achieve ordinarily. The second seeks to determine the standard of care which the Court considers members of the profession ought to achieve. This is not to say that the Courts will set the standard arbitrarily. If, however, the Court determines that the standards which the profession has set for itself are too lax or too low or do not provide sufficient protection for clients, then it may hold a professional liable in negligence even if he has complied with his own professional guidelines. The current trend is for the Courts to apply this second standard and to critically assess whether the usual practice of the profession is sufficient to negate liability for negligence.

The Court is not on a quest for perfection and recognises that the nature of advice given by many professionals does not enable them to warrant that a certain result will be achieved. A litigator is generally unable to guarantee that you will win a Court case. Similarly an advisor is often unable to guarantee that a client will receive a particular return on any investment. The fact that they are unable to do so does not mean that they have failed to exercise reasonable care and skill.

Similarly, the fact that the professional may have made a mistake does not necessarily equal negligence or mean that the professional has failed to exercise reasonable care and skill. If a mistake has been made, the Courts will go on to consider whether it is within the boundaries of current and accepted practice.

Factors considered by the Courts

So what factors are considered by the Courts when determining what standard of care applies to a professional?

The standard that the professional is measured against is the standard which a reasonably competent member of that profession, with the same status or position, ought to achieve. In practice the Courts recognise that it is unrealistic to expect the same standard of competence from, for example, a junior doctor as a senior consultant, and will take into account the status of the professional concerned. If the professional has undertaken work beyond their competence, however, they may still be held liable for negligence.

If a professional’s actions have strayed outside their area of expertise, then the standard of care which they are expected to meet will be the standard of care applicable to the profession into which they have strayed. Industry standards and codes of conduct will be relevant factors taken into account. The Courts will use these as an indication of what would be expected of “reasonably competent” members of the profession. However, they are not conclusive and the Courts will not always accept industry practice as the benchmark for reasonable conduct. The Courts will not necessarily find a professional liable in negligence for failing to comply with unduly high standards set by their profession. This is realistic given that while some codes of conduct set out minimum requirements a member is expected to achieve, others may be more of a “best practice” manual.

And of course standards may change over time along with expectations and as such the standard of care is never fixed in stone. What would have been expected of reasonably competent doctors 50 years ago is not the same as it is today.

Application in Financial Industry

These same principles apply equally to advisors and brokers in Hong Kong, and any advice given by them in a professional context. This was confirmed by Deputy High Court Judge Barma in the Barber Asia case, where the Court held that: “The principle on which liability in tort in respect of advice given, whether by an investment adviser or some other professional, is now quite well established. In general, where a defendant assumes the responsibility of providing advice to a plaintiff, and knows or ought to know that the plaintiff is likely to rely on that advice, a duty of care is likely to arise…”

Application in Financial Industry – English Case

In the English case of Martin v Britannia Life Ltd (2000), Mr and Mrs Martin had sought financial advice from an insurance group, which later became Britannia. They were advised to enter into a package of transactions which consisted of remortgaging their home, surrendering a number of life policies which were security for an existing mortgage and taking out an endowment policy and pension policy with Britannia, which were then used as security for the second mortgage. Mr and Mrs Martin brought a claim in negligence against Britannia on the basis that the adviser had failed to advise them of the full extent of the financial commitments they were signing up for, or advise them of the disadvantages of surrendering the existing life policies. He had also failed to take in to account their financial circumstances and recommended to them a package of transactions which were beyond their means. The Court upheld those claims and found that the adviser had been negligent. That said, the Court also found that they had brought their claim too late (by a mere few weeks) and it was time-barred.

Application in Financial Industry – Australian Case

A recent Australian decision also provides some useful indicators of when an advisor is likely to be found liable in negligence. Essentially, Newman v Financial Wisdom Ltd (2004) was a case in which claims were brought by a number of investors against companies who had agreed to provide them with a “one-stop shop” of financial and investment advice, including tax planning, in exchange for an annual fee.

Financial Wisdom conducted Financial planning business and was a licensed securities dealer. The investors had all sought conservative investments and many were investing money which was to be used for their retirement.

As part of the service, investors were from time to time advised to enter into different investment schemes, including investing in various film and theatrical productions in and around Australia. The case involved complaints in relation to 17 investments in total. This included schemes such as the “Lucky Country Film Fund”, an investment in a film about an outlaw during the Ballarat gold rush, which was never actually made. The “Bolshoi Ballet Scheme”, which invested unsurprisingly in a Bolshoi Ballet tour of Australia. There was an Ostrich breeding scheme. There was the “Copperfield Investment”, which invested in a fund for the production and marketing of an Australian and South East Asian tour by David Copperfield. There was a book publishing scheme for “coffee table” reference books and a video documentary scheme investing in a series of video documentaries about minority groups and peoples of Asia.

These schemes were all recommended to the investors as being sound, profitable, low-risk investments. Many were also said to be 100% capital guaranteed and to offer attractive tax advantages.

Suffice it to say the reality failed to live up to the investors’ expectations.

The Court found that the financial advisers concerned had accepted what they had been told about the schemes by the scheme promoters at face value and had not done any due diligence or any independent investigation into the schemes or the people involved.

Application in Financial Industry – Canadian Case

A Canadian decision last year provides some indication as to when an investor himself is found to have contributed to the negligence. In Newman v T.D. Securities Inc. (2007)2, Mr and Mrs Newman were advised to buy shares in high technology companies to meet their capital gains investment objectives and they followed such advice. At one point in time they were advised to sell some of their current shares in high technology companies and diversify into other sectors but they did not do so. Shortly after, it was recommended that they purchase additional shares in high technology companies and they followed such recommendation, and incurred losses.

The Newmans alleged that the adviser failed to meet the required standard of care by recommending that they buy additional shares in high technology companies when they had already exceeded their investment objectives of 80% long-term capital gains, and had no investments in income-generating securities which were part of their stated investment objectives.

Indeed, the Court held that the adviser had been negligent in failing to recommend the purchase of income-generating investments. However, he was not negligent in recommending the purchase of additional shares in high technology companies as the Court found that the Newmans should bear 50% of the responsibility for their own losses on the basis that had the Newmans followed the advice (to sell), the later purchase of additional shares in high technology companies may have been suitable, and their capital gains producing investment would not have exceeded the target of 80%. Also, at the time when the additional purchases were made they were well aware that the value of their capital gains investments had already exceeded 80%.

The Court also took into consideration their personal circumstances. The Newmans were found to be comfortable with making high technology investments as Mr Newman worked in the high technology field, held a Master’s Degree in Electrical Engineering and his investment knowledge was on the high side of average.

Application in Financial Industry – Hong Kong Case

Turning to Hong Kong, Barber Asia, a financial advisory firm, was held liable in negligence for breaching a duty of care owed to Ms Field when it recommended she invest in a geared investment scheme inconsistent with her investment objectives. It is still the leading decision in Hong Kong in this area.

The Court found that a duty of care arose because Barber Asia had voluntarily assumed responsibility to provide Ms Field with financial advice and, because it was also clear that she would rely on that advice, Barber Asia had a duty to exercise reasonable care and skill when giving that advice. The Court highlighted the same factors I have already discussed in relation to professional negligence generally.

The Court took into account Ms Field’s personal circumstances, investor experience and her financial position. These factors will differ for every individual investor and as such no two negligence complaints are ever likely to be the same.

So, is there a conclusion to all this? Well, all I would say is that so long as you accept that you are all professionals, and act as such, then there is nothing to worry about.

1. Le Lievre v Gould [1893] 1QB 491 per Esher MR
2. [2007] O.J. No. 139