Negligent Financial Advice Claim: “Bolam Test” Abandoned

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Professional Negligence

In O’Hare and another v Coutts & Co [2016] EWHC 2224 (QB) (9 September 2016) the High Court held that the defendant bank had not breached its duty (in contract and in tort) to exercise reasonable skill and care when advising the claimants on making certain investments. Kerr J dismissed the claim in its entirety, although not without considerable sympathy for the claimants, considering that he preferred their evidence where it conflicted with Coutts’.

The judge decided that Coutts had not breached its duty (in contract and in tort) to ascertain the claimants’ requirements and objectives and to advise, explain and inform the claimants about investments that were suitable.

The decision is of particular interest regarding the judge’s approach to

  • Professional negligence / breach of duty
  • Damages in contract and tort
  • Evidence of the professionals involved – including attendance notes

Duty of Care

The judge held that the Bolam test did not apply to the issue of whether the defendant had breached its duty of care when advising the claimants about the investments. Instead, he preferred the approach of the Supreme Court in the Scottish medical negligence case of Montgomery v Lanarkshire Health Board [2015] UKSC 11. The judge focused on what the claimant, as an informed investor would expect to be told.

The judge did not adopt the common Bolam Test (see below) i.e. whether the defendant had advised in accordance with a practice accepted as proper by a responsible body of persons skilled in the giving of financial advice. The judge was influenced in his decision by the fact that the expert evidence indicated that there was little consensus in the industry about how to manage the risk appetite of clients. The decision suggests that the giving of investment advice is not simply an exercise of professional skill; an informed investor, like a medical patient, is entitled to decide the risks that he is willing to take and has to take responsibility for his own mistakes.

The Bolam test

The Bolam test derives from the decision in Bolam v Friern Hospital Management Committee [1957] 2 All ER 118 ( www.practicallaw.com/D-016-0979) . In that case it was held that a doctor was not necessarily negligent if he conformed to a practice accepted as proper by some responsible members of his profession, even if other members would have taken a different view. Evidence of an accepted practice must be responsible and reasonable. In other words, provided the doctor explained the risks of a given treatment, to the extent that it accorded with a responsible body of medical opinion, liability would not attach. The Bolam test applies to all professional liability cases.

The Bolam test was approved by the House of Lords in Sidaway v Board of Governors of the Bethlem Royal Hospital and the Maudsley Hospital [1985] AC 871.

The Montgomery Test

In Montogmery v Lanarkshire Health Board [2015] UKSC 11, the Supreme Court held that Sidaway (and, therefore, the Bolam test) did not reflect the reality and complexity of the way in which healthcare services were provided. It held that an adult person of sound mind was entitled to decide which, if any, of the available forms of treatment to undergo, and her consent had to be obtained before treatment interfering with her bodily integrity was undertaken. Doctors were under a duty to take reasonable care to ensure that patients were aware of any material risks involved in any recommended treatment, and of any reasonable alternative or variant treatments. The court defined materiality as:

“…whether, in the circumstances of the particular case, a reasonable person in the patient’s position would be likely to attach significance to the risk, or the doctor is or should be aware that the particular patient would be likely to attach significance to it…”

This is only when the medical professional has taken reasonable care to ensure that the patient was aware of the material risks involved in any recommended treatment, and of any reasonable alternative or variant treatments.

Decision in O’Hare

In the O’Hare’s negligent financial advice claim against Coutts, Kerr J preferred and applied the approach taken in the case of Montgomery, namely the onus is on the patient or client, as an adult with sound mind, to make their own decision about the risks involved. The O’Hares, as informed investors, were entitled to decide the risks that they were prepared to take and accept responsibility if those risks did not pay off. This standard is now likely apply more generally in financial advice claims.

The judge referred to the FCA’s Conduct of Business Sourcebook (COBS rules) which do not rule out the use of persuasion. The need for full information to be given is emphasised, and conflicts of interest to be properly managed:

“…As I read the authorities and the COBS regulatory scheme, there is nothing intrinsically wrong with a private banker using persuasive techniques to induce a client to take risks the client would not take but for the banker’s powers of persuasion, provided the client can afford to take the risks and shows himself willing to take them, and provided the risks are not – avoiding the temptation to use hindsight – so high as to be foolhardy. The authorities include mention of the adviser sometimes having to save the client from himself, but also of the principle that investors take responsibility for their investment decisions including mistaken ones. The duty of care must reflect a balance between those two propositions, which pull in opposite directions…”

Damages in contract and tort

A duty can be owed both in contract and in tort and concurrent duties of care are routinely owed by professionals (Henderson v Merrett Syndicates Ltd [1994] UKHL 5 ( www.practicallaw.com/D-000-1263) ). Accordingly, a financial advisor, who fails to exercise reasonable care in providing services to the client who retains him, can render himself liable in contract and in tort, unless tort liability is specifically excluded.

The general aim of an award of damages in tort is to put the injured party in the same position as he would have been in if the tort had not occurred. Damages in tort aim to restore the claimant to his pre-incident position. Generally, the purpose of an award of damages for breach of contract is to compensate the injured party. The general rule is that damages are meant to place the claimant in the same position as if the contract had been performed. Damages are usually awarded for expectation loss (loss of a bargain) or reliance loss (wasted expenditure).

Not all losses caused (in the factual/ “but for” sense) by a breach of contract or breach of duty are recoverable by the innocent party from the party in breach. Remoteness of damage refers to the principle by which the law determines which consequences caused by the defendant’s breach are within the scope of the defendant’s responsibility and should be brought into account.

There is a difference between the principle of remoteness in contract and in tort. In contract, generally, all foreseeable but not unlikely losses are recoverable. In tort, all losses that are reasonably foreseeable as liable to happen, even in the most unusual case, are recoverable. In Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146 ( www.practicallaw.com/D-035-2377) , the Court of Appeal held that in cases of concurrent liability in contract and in tort, the narrower principle of remoteness of damage in contract applies.

Witness evidence

The Civil Evidence Act 1995 (CEA 1995) effectively abolished the rule against hearsay evidence in civil proceedings. In assessing the weight to be given to any hearsay evidence, the court is to have regard to any circumstances from which any inference can reasonably be drawn as to the reliability or otherwise of the evidence. The general rule is that any fact which needs to be proved by the evidence of a witness is proved by either:

  1. Written evidence at an interim application.
  2. Oral evidence at trial.

In Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm), Leggatt J analysed the approach that a judge should take when faced with evidential discrepancies between recent and sworn witness statements prepared with the help of lawyers and evidence in the form of contemporaneous electronic stored information. After emphasising the unreliability of human memory, he said that the best approach for a judge to adopt was:

“…to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events…”

Absence of key defence witness

Mr Shone, the O’Hares’ main contact and relationship manager did not provide evidence in court. Instead, Coutts relied upon the contemporaneous (attendance) notes written by Mr Shone. Given that Mr Shone was alleged to have persuaded the O’Hares to take a higher risk than they would otherwise have done, the judge had expected to hear direct evidence from the advisor.

Although Coutts provided hearsay evidence from other witnesses, which was accepted, the judge concluded that Mr Shone’s testimony was necessary for Coutts to prove its defence. Coutts explained that the reason for Mr Shone’s absence was that he was no longer employed by them and had told the defendant that he was too preoccupied with other business responsibilities to devote time to the current proceedings. Why the witness summons procedure to secure his attendance at trial was not adopted is not examined.

The judge devoted a significant part of his judgment to address the difference between the parties about whether the claimants had been led and persuaded by Mr Shone to take a higher risk than they would otherwise have done. It was significant that Coutts did not adduce any direct evidence from Shone. If he was not called at trial, “…he would plainly be the Banquo’s ghost at the feast…”

Mr Shone’s hearsay evidence was derived from his contemporary notes of various meetings and conversations with the claimants. This evidence was recited in the statements of witnesses called to give oral testimony at trial. The judge held that the hearsay evidence was admissible and that by setting it out in the statements of its witnesses, the defendant had complied with the requirement in CPR 33.2, that hearsay evidence is to be served in a written statement. It was for the claimants to apply under CPR 33.4 to call Mr Shone for the purpose of cross-examining him on his notes of the various meetings and telephone calls, but they did not do so. Instead, the claimants relied on the fact that Mr O’Hare gave oral evidence at trial and his evidence was in many cases uncontradicted by any other witness at trial.

The judge assessed the weight to be given to the evidence by reference to the factors in section 4(1) of the CEA 1995. He concluded that the defendant needed Mr Shone’s testimony to assist its defence and without him, significant parts of the claimants’ account remained uncontradicted, except by notes that were disputed and not defended by their maker. In the circumstances, the judge was not prepared to accept that the notes were to be preferred, or that Mr O’Hare’s evidence contradicting them was to be rejected.

In this case Mr O’Hare’s oral evidence at trial, that Mr Shone had used persuasion on the claimants to induce them to take higher risks /that than they otherwise would have done, was accepted by the judge over and above the documentary evidence. He asserted that the judge in Gestmin had not suggested that oral testimony served no purpose. He remained of the view that the general rule (that any fact which needs to be proved by the evidence of witnesses is to be proved at trial, by their oral evidence) still applies.

Comment

  • The decision emphasises that undocumented witness evidence can be important. The reliability of contemporaneous documents is generally preferred to uncorroborated recollections, but there are occasions where oral testimony is required to support such documents.
  • The decision is of particular interest because of the approach of the judge to breach of duty. He held that the Bolam test did not apply to the issue of whether the defendant had breached its duty of care when advising the claimants about the investments. Instead, the judge preferred the approach of the Supreme Court in the Scottish medical negligence case of Montgomery v Lanarkshire Health Board [2015] UKSC 11. The judge focused on what the claimant, as an “informed investor”, would expect to be told and not on whether the defendant had advised in accordance with a practice accepted as proper by a responsible body of persons skilled in the giving of financial advice.
  • The judge was clearly influenced in his decision by the fact that the expert evidence in the case indicated that there was little consensus in the industry about how to manage the risk appetite of clients.
  • The decision suggests that the giving of investment advice is not simply an exercise of professional skill; an informed investor, like a medical patient, is entitled to decide the risks that he is willing to take and has to take responsibility for his own mistakes.
  • Finally, the judge’s obiter (non binding) comments are also of interest: that, if the negligence claim had succeeded, he would not have allowed the claimants to benefit from the more generous measure of damages in tort, in circumstances where their concurrent claim in contract was statute-barred.

First Published 20 September 2016 – http://social.luptonfawcett.com/blog/negligent-financial-advice-claim-bolam-test-abandoned

 

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