Dixon v Jefferson Seal Ltd [Royal Ct]

CourtRoyal Court
JudgeHamon, Deputy Bailiff and Jurats Bonn and Gruchy:,Le Marquand, Judicial Greffier),
Judgment Date30 July 1997
Date30 July 1997
Hamon, Deputy Bailiff and Jurats Bonn and Gruchy:

M. St.J. O'Connell for the first and second plaintiffs;

N.M.C. Santos-Costa for the third plaintiff;

A.D. Hoy for the defendant.

Cases cited:

(1) Alchemy (Intl.) Ltd. v. Tattersalls Ltd., [1985] 2 E.G.L.R. 17; (1985), 276 E.G. 675.

(2) Bolam v. Friern Hospital Management Cttee., [1957] 1 W.L.R. 582; [1957] 2 All E.R. 118; (1957), 101 Sol. Jo. 357, applied.

(3) Eckersley v. Binnie (1988), 18 ConLR 1, applied.

(4) Hedley Byrne & Co. Ltd. v. Heller & Partners, [1964] A.C. 465; [1963] 2 All E.R. 575; [1963] 1 Lloyd's Rep. 485; (1963), 107 Sol. Jo. 454, considered.

(5) Maynard v. West Midlands Regional Health Auth., [1984] 1 W.L.R. 634; [1985] 1 All E.R. 635; (1983), 128 Sol. Jo. 317, dictum of Lord Scarman applied.

(6) Wilsher v. Essex A.H.A., [1987] Q.B. 730; [1986] 3 All E.R. 801; (1986), 130 Sol. Jo. 749; on appeal, [1988] A.C. 1074; [1988] 1 All E.R. 871; (1988), 132 Sol. Jo. 418, dicta of Mustill, J. considered.

Additional cases cited by counsel:

Bristol & West Bldg. Socy. v. Mothew, [1977] P.N.L.R. 11.

Mortgage Express Ltd. v. Bowerman & Partners, [1996] 2 All E.R. 836.

Public Servs. Cttee. v. Maynard, 1996 JLR 343.

Saif Ali v. Sidney Mitchell & Co., [1980] A.C. 198.

South Australia Asset Management Corp. v. York Montague Ltd., [1996] 3 All E.R. 365.

Text cited:

Charlesworth & Percy on Negligence, 9th ed., para. 8-209, at 635-636 (1997).

Financial Services—investment consultant—duty of care—stockbroker has duty to exercise skill and care of reasonably competent and careful stockbroker—highest expertise unnecessary—not liable merely because loss results from investment advice, if judgment exercised with due care

Financial Services—investment consultant—duty of care—stockbroker has duty to (a) ascertain client's financial requirements (e.g. earning income or capital growth, level of financial risk); (b) recommend suitable investments; (c) review client's portfolio to ensure remains suitable; (d) analyse relevant market information; and (e) inform client of material developments—preferable that proper records kept of conversations with client

Financial Services—investment consultant—duty of care—disagreement between experts—stockbroker not necessarily negligent merely because conduct fails to meet criteria of exacting body of professional opinion—disagreement between experts no bar to finding of negligence

Financial Services—investment consultant—damages for negligent investment advice—stockbroker giving negligent investment advice to repay to client loss suffered as result, offset against profits made from investment

The plaintiffs brought an action against the defendant stockbrokers' firm for damages for negligent investment advice.

The plaintiffs, who were private investors, invested their money in various bonds on the advice of their stockbrokers, the defendant. It appeared that under the agreements between the defendant and each of the plaintiffs, the defendant was not only to undertake particular transactions at their request, but was also to provide them with advice as to which investments were appropriate to their individual circumstances. It also appeared that the defendant's employees kept no records of the conversations with its clients. The defendant was, however, aware that each of the plaintiffs, who themselves had little knowledge of the stock market, was interested not in high capital growth but in earning interest from investments with a low degree of financial risk.

The defendant advised a number of its clients, including the plaintiffs, to invest in bonds issued by a mutual insurance company, which at the time apparently had large assets and a high credit rating. These bonds gave a relatively high return, which apparently led the defendant to recommend them to the plaintiffs. It later appeared, however, that in fact the company's assets were less than it had seemed and its financial performance soon deteriorated. The defendant was aware of this situation, and of the consequent reduction of the company's credit rating, but it did not pass on any information to the plaintiffs, who did not know that the risk to their investments was increasing and had no reason to doubt that their bonds met their investment criteria. The defendant did not recommend that the bonds be sold at any time. The company subsequently became insolvent, causing the plaintiffs to lose those investments entirely.

The plaintiffs brought the present proceedings for damages, alleging that the defendant had been negligent in the conduct of its business. Expert evidence was adduced by both parties; however, there were conflicts between the views of the expert witnesses as to whether it was necessary for a stockbroker to keep records of its clients' requirements and to keep them informed of all changes in the market which might have a bearing on the risks involved in the investment.

The plaintiff submitted that the defendant had been under a duty to conduct its business with reasonable care, in particular (a) it had a duty to ascertain its clients' investment requirements, e.g. the level of income expected, the acceptable level of financial risk, and to ensure that any investments it recommended met those requirements, which it had clearly failed to do in the present case: the information available prior to the company's insolvency made it plain that it had not been a suitably low-risk investment; (b) the defendant had also failed in its duty to inform them of these material developments, thereby depriving them of the opportunity to sell the bonds when it became clear that they were subject to a high degree of financial risk; and (c) there was expert evidence that the defendant's business practices were inefficient, e.g. its failure to keep records, and the mere fact that other experts did not agree did not prevent the court from finding that the plaintiff's losses were attributable to the defendant's negligent conduct.

The defendant submitted in reply that (a) the mere fact that with hindsight the investments it recommended were unsuccessful did not per se render it liable, since its recommendation had been made with the reasonable care and skill to be expected of a stockbroker and, in any case, the decision to invest had been taken by the plaintiffs, in full knowledge of the state of the bonds at that time; (b) it had been under no duty to keep the plaintiffs informed of every change in the stock market affecting their bonds, as long as those bonds remained suitable investments for the plaintiffs' needs, which these had been (indeed, the plaintiffs had agreed to these investment decisions on the basis of the high rate of return on the bonds): this was in no way vitiated by the company's subsequent unpredicted failure; and (c) because there was disagreement between the expert witnesses as to the exact level of care to be expected of an average stockbroker (and it was unnecessary that the defendant perform at a high level of expertise), it would be wrong for the court to find it liable merely because it failed to meet the standards of a particularly exacting body of opinion within the profession.

Held, giving judgment for the plaintiffs:

(1) The defendant owed a duty of care to the plaintiffs to exercise that skill and diligence which a reasonably competent and careful stockbroker would use. It was unnecessary that the investment advisers it employed possessed the highest degree of expertise possible and liability would not be imposed merely because loss resulted from what turned out to have been errors of judgment, so long as that judgment had been exercised according to the standard of care set out above (page 209, line 30 - page 210, line 29).

(2) Specifically, unless the stockbroker had agreed only to undertake individual investment transactions as and when instructed to do so by his client and not to offer any advice, which was not the situation here, the stockbroker had the following duties: (a) to ascertain the client's investment requirements (for this purpose, it was preferable to keep records of conversations with the client, although failure to do so was not in itself fatal); this required that the broker discover the client's objectives (e.g. whether to earn income or achieve capital growth), the duration of his proposed investments and his attitude to financial risk, and it might also be necessary to ascertain what other investments he might have; (b) to ensure that his recommendations of investment opportunities were suited to the client's needs; (c) continually to review the client's range of investments in the light of those requirements; (d) to analyse all available information relevant to the investments; and (e) to inform the client of any material developments where necessary to allow him to decide whether they continued to meet his needs (page 214, line 41 - page 216, line 17).

(3) For the purpose of establishing whether that level of care had been exercised, it was merely necessary that a number of experts in the field of giving investment advice could testify to the existence of an accepted standard of conduct. Where, as here, the experts disagreed, although negligence was not established merely by the defendant's failure to meet the standard of a particular body of opinion within its profession, the disagreement of the experts did not prevent the court analysing the conflicting evidence and reaching a conclusion on it (page 236, line 4 - page 237, line 8).

(4) On the evidence, the defendant had failed to meet the requisite standard of care. It had clearly suggested an inappropriate investment to the plaintiffs, exposing them to a high level of risk, of which the defendant had been aware, and had given the plaintiffs no opportunity to decide whether to accept that risk, when in the light of their investment requirements, they would clearly not have been willing to accept...

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