Court of Appeal
30 October 2014
 EWCA Civ 1410
Subject: Professional Negligence—Financial Advisers—Limitation—Losses to the value of a bond during the ‘credit crunch’—Section 14A of the Limitation Act 1980—Constructive Knowledge under section 14A (10) — “a person’s knowledge includes knowledge which he might reasonably be expected to acquire” —Regard to claimant’s naiveté in deciding what knowledge she might reasonably be expected to acquire
Summary: An investor whose bond had suffered significant losses during the ‘credit crunch’ could not rely upon the provisions of section14A of the Limitation Act 1980 in order to bring a claim against her adviser in time.
On 20 September 2005, the claimant invested £65,000 into a Legal and General Investment Bond (“the Bond”). This was upon the advice of the defendant, a ‘network’ of financial advisers. After making withdrawals from the Bond in 2008, 2011 and 2012, the claimant surrendered the Bond in February 2012. At that time, its value had dropped to £53,152.
Having seen an advert for ‘no win no fee’ legal representation, the claimant consulted solicitors in April 2012. After taking advice, her claim was issued in November 2012. The claimant alleged that the Bond had been unsuitable for her and that the defendant’s investment advice had been negligent.
Her case as to limitation was that it was not until February 2012 that she had the knowledge required for bringing an action for damages, within the provisions of section14 of the Limitation Act 1980 (“the Act”), and that her claim was accordingly brought in time. In particular, she asserted that it was not until February 2012 that she knew either that she had suffered a loss, or that she might have received inappropriate advice.
The defendant countered that the claimant had the knowledge required by July 2009. It relied in part upon the fact that the claimant had had received four annual statements in June 2006, 2007, 2008 and July 2009, the latter two of which showed a catastrophic fall in the value of the Bond, caused by the credit crunch. It also relied on the claimant’s oral evidence (below).
The Bond had no fixed term. The judge found that the understanding between the claimant and the defendant was that the money would remain in the Bond for at least five years. The critical moment was the claimant’s state of mind in July 2009, after receipt of an annual statement showing the Bond had a fund value of only £43,653. This was against a backdrop of previous growth in 2006 and 2007, with the Bond peaking at £78,970.
The claimant gave evidence that when she received the July 2009 statement she was, in her own words, “horrified at the amount of money that was going out of that account“. The loss was “massive“. It was “haemorrhaging money“. Moreover, the claimant contacted another member of the defendant and was told that it might have been better if the investment had been more diversified. Upon advice, she instructed the defendant to transfer her investment to a different fund. Importantly however, the claimant also gave evidence that she was adamant that she had believed throughout that she would receive the whole of the £65,000 of her investment back upon redeeming the Bond.
As to this somewhat confused picture, the Judge found that in July 2009, the claimant:
“… knew that the investment as initially recommended by the defendant had a defect, in that the fund should not all have been put into commercial property. She had some sense that [the defendant] was to blame, rather than purely market conditions, but she did not believe that she could do anything about it and that whatever else happened she would still get her £65,000 back at the end of the five years. There is some inconsistency in her thinking but I do find that she still genuinely believed that by the end of the five years she would receive at least £65,000.”
The Court of Appeal (Tomlinson LJ, with whom Lewison and Sullivan LJJ agreed) held that the claimant’s “irrational belief that she would recover £65,000 after five years” was not sufficient to demonstrate that she had not, in July 2009, actually appreciated that she had suffered damage. She had realised by that point that she had a flawed product; and at the very least knew that it was an intrinsic feature of the Bond that she might at the end of five years recover nothing more than £65,000, whereas had she put her money on deposit she could have expected interest on top.
However, Tomlinson LJ in fact decided the appeal based upon the claimant’s constructive rather than actual state of knowledge. The key decision was what knowledge it was reasonable to expect that the claimant might acquire under section 14A (10) of the Act when she learned of the fall in the Bond. Applying Gravgaard v Aldridge & Brownlee  PNLR 19, the test was to consider the surrounding circumstances so as to decide what a person in the position of the claimant might reasonably have been expected to do, but without regard to special or peculiar characteristics of the particular claimant concerned.
On the evidence, this claimant was particularly naïve. Tomlinson LJ was prepared to assume (though apparently with some doubt) that her naiveté was a relevant surrounding circumstance rather than an irrelevant characteristic peculiar only to her. But even making that allowance, his Lordship found that a reasonable investor would have taken steps from July 2009 onwards such as to investigate the possibility of a claim. The claimant could have asked more searching questions of the adviser whom she contacted when switching her investment, and she could have gone back to the literature that was presented to her when she first placed the Bond. As a result, she was fixed with constructive knowledge and her claim was time barred by July 2012. The defendant’s appeal was therefore allowed and the claim dismissed.
The £65,000 which the claimant decided to invest represented 75% of her and her husband’s life savings. It might therefore be thought that this was a case where the Court would strive to find a route to a remedy. This might be thought all the more likely where the claimant’s evidence showed such evident naiveté.
However, the decision underlines that the claimant’s burden in seeking to invoke section 14A is a high one. Characteristics peculiar to the individual claimant will be disregarded in the constructive knowledge analysis. In reality, the rather wordy formulation that a person’s knowledge includes knowledge which he might reasonably have been expected to acquire is in practice a prescriptive enquiry: what does the Court think the claimant should have done? If when advising a claimant, they have not acted as would a reasonable (and prudent) person, they will have a mountain to climb.
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