The GFC, financial advice and limitation periods
Apr 2017 |I
ntroduction
The 2008 global financial crisis resulted in countless claims and litigated proceedings against financial advisors and their financial services licensees for losses associated with pre-GFC financial advice. With the effluxion of time, those claims have started to dry up, but for proceedings commenced in the last few years, plaintiffs and defendants are starting to turn their minds to whether the claims brought in litigated proceedings are statute barred.
Surprisingly, for such a widespread financial disaster that spawned so many claims and litigation, case law which considers when a claim associated with losses suffered around the time of the GFC is statute barred, is scant. The County Court of Victoria in the matter of Darren Hewitt v Count Financial Limited [2017] VCC 236 has recently turned its mind to that question, making it a noteworthy development in this area.
The proceedings
Background
The plaintiff, Darren Hewitt (Mr Hewitt) is a courier who alleged he sought financial advice from Count Financial Limited (Count) in relation to his ongoing investment in the Mariner Pipeline Income Trust (MIT).
In late June 2007, Mr Hewitt made a telephone call to arrange an initial meeting with John Pollock (Mr Pollock), a financial adviser who provided financial advice on behalf of Count. On 28 June 2007, Mr Hewitt met Mr Pollock at his office (meeting).
According to Mr Hewitt, at the meeting he was given advice by Mr Pollock to obtain a margin loan to purchase more MIT units (Mr Hewitt already held around 37,000 at the time of the meeting. Mr Pollock denied he provided that advice (or any financial advice) to Mr Hewitt at the meeting.
Following the meeting, Mr Hewitt and Mr Pollock exchanged intermittent email correspondence between 6 July 2007 and 9 November 2007. On 11 September 2007, Mr Hewitt applied to CommSec for a margin loan with a credit limit of $52,000. CommSec approved a margin loan of $60,000. Mr Hewitt then successfully applied to increase the margin loan’s credit limit to $100,000 on 21 September 2007 and then again on 22 October 2007 to $150,000. Mr Hewitt used some of the borrowed funds to increase his holding of MIT units to 91,359 units.
The claim
Mr Hewitt commenced the proceedings seeking damages for the advice he alleged he received from Mr Pollock at the meeting to obtain a margin loan to purchase more MIT units. He alleged that advice was negligent and given in breach of Count’s retainer and statutory obligations.
The decision
In finding in Count’s favour, the court considered a number of matters, including whether:
- Mr Hewitt retained Count to provide him financial advice;
- Count owed Mr Hewitt a duty of care to avoid pure economic loss;
- Mr Pollock advised Mr Hewitt to use a margin loan to purchase more MIT units; and
- If any of Mr Pollock’s conduct constitutes a breach of:
- retainer;
- any duty of care owed to Mr Hewitt; or
- any statutory duty owed to Mr Hewitt under the Corporations Act 2001 (Cth) (Corporations Act) or the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
Given the paucity of relevant documents, an important factor in the case was the credit of Mr Hewitt and Mr Pollock. For various reasons, the court expressed the view that it had ‘grave reservations’ about the credit of Mr Hewitt. On the other hand, the court found Mr Pollock to be a ‘consistent and credible’ witness and stated that it would prefer Mr Pollock’s evidence to Mr Hewitt’s to the extent their evidence conflicted.
In summary, the court found:
- Mr Hewitt did not enter into a formal retainer with Count to provide him financial advice. Although at the meeting Mr Pollock gave Mr Hewitt a copy of Count’s Terms of Engagement, Mr Hewitt did not ask Mr Pollock to provide any of the services set out in the Terms of Engagement and Mr Pollock did not agree to provide any such services;
- Mr Hewitt had not established that the allegedly negligent advice was ever given. The court reached the conclusion because (among other things):
- the meeting was a ‘getting to know you’ session to determine whether a client/advisor relationship would be established;
- Mr Hewitt rejected Mr Pollock’s offers to provide him financial advice;
- Mr Hewitt chose not to become a client of Count;
- Count required that its advisers not provide any advice during an initial meeting with a prospective client; and
- Mr Pollock was not authorised to provide the alleged advice as the MIT units and the margin loan were not on the list of products approved by Count to be recommended to clients.
- As there was no provision of advice, no duty of care could be established to have been owed to Mr Hewitt; and
- In circumstances where there was no retainer between Mr Hewitt and Count and no duty of care owed, Count did not breach any retainer, duty of care or statutory duty arising under the Corporations Act or ASIC Act.
Were the claims statute barred?
Although the claims against Count were dismissed, the court went on to consider whether Mr Hewitt’s claim would have been found to have been brought out of time even if he was able to establish the existence and breach of retainer, duty and statutory duty.
Relevant to the court’s findings on this point was the nature of the loss alleged to have been suffered by Mr Hewitt. Mr Hewitt claimed he received negligent advice at the meeting on 28 June 2007. He alleged that, as a result of that advice, he entered into the margin loan to increase his holding of MIT units. Importantly, he also contended that, had he not received the advice, he would have sold his MIT units in September 2007 and invested the proceeds to purchase a property for approximately $300,000.
Count submitted that because the meeting took place almost seven years before proceedings were issued in May 2014, Mr Hewitt’s claims were statute barred.
Turning first to Mr Hewitt’s claim in contract, section 5(1)(a) of the Limitations of Actions Act 1958 (Vic) (Limitations of Actions Act) provides for a limitation period of 6 years from the date the cause of action accrues, namely, the date of the breach of contractual term. Even if Mr Hewitt had been able to establish a formal contract between himself and Mr Pollock, the alleged breach (advising Mr Hewitt to obtain a margin loan to increase his holding of MIT units) occurred in 2007. As proceedings were issued in May 2014, the court found any claim in contract would be statute barred.
Secondly, with respect to the negligence claim, as with the contract claim, s 5(1)(a) of the Limitations of Actions Act provides for a limitation period of 6 years from the date when the cause of action accrues. The court confirmed that the cause of action in negligence is complete when a plaintiff suffers damage. It is not enough that the negligent advice be communicated. A plaintiff must suffer loss as a result of acting on the allegedly negligent advice.
Mr Hewitt’s claim in the proceedings was that he suffered loss when he acted upon the alleged advice to obtain a margin loan to increase his holding of MIT units. The court found that this was the time at which Mr Hewitt’s alternatives in relation to his investment, such as selling his MIT units and investing in property, were effectively ‘cut off’. The court therefore found that Mr Hewitt’s alleged loss was sustained on no later than 22 October 2007, when he increased the credit limit of his margin loan to $150,000 in order to buy more MIT units. Therefore, any claim in negligence was statute barred.
The court similarly found that the causes of action for the claims being made under the Corporations Act and the ASIC Act accrued no earlier than the provision of the alleged advice and no later than when Mr Hewitt increased the credit limit of his margin loan to $150,000 in order to buy more MIT units on 22 October 2007, and were statute barred.
Conclusion
In cases concerning pure economic loss arising out of financial advice, the date that the loss is ascertainable can be the missing link in a limitation defence. There is still a lack of case law in this narrow area, but there is an increasing body of obiter which provides some assistance. The obiter in the Hewitt case reinforces that in calculating the date at which the cause of action accrued, it is important to identify the precise nature of the interest infringed.
