SUSAN FIELD v. BARBER ASIA LTD

CACV 194/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 194 OF 2003

(ON APPEAL FROM HCA NO. 7119 OF 2000)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2. This is an appeal from the judgment of the Deputy High Court Judge Barma SC (as he then was) dated 17 June 2003 whereby damages of GBP219,890.25 together with interest were awarded to the plaintiff. At the conclusion of the hearing, the appeal was dismissed with costs with written reasons to be handed down later. This we now do.

Background

3. The plaintiff ("Ms Field") brought an action against Barber Asia Ltd ("Barber Asia") for damages in respect of negligent financial advice rendered to her. Ms Field sought to recover losses sustained as a result of relying on such advice. Her claim was based in contract and, in the alternative, in tort.

4. The judge summarised the parties' respective cases in the following terms:

"4. In essence, Ms Field's complaint is that she was an inexperienced investor, and from the outset made it clear to Mr Barber that she wanted to invest her savings, which represented substantially all of her capital, in a conservative way. She says that she did not change these guidelines at any material time. Notwithstanding this, Mr Barber advised her to enter into an investment structure which was unsuitable for her and inconsistent with her objectives, in that it involved risk of a significant loss of her capital, without explaining to her the nature of the risk involved.

5. Barber Asia's position was that Ms Field was a fairly sophisticated investor, who wished to retain control of her investments, and chose not to enter into any formal contractual relationship with Barber Asia, but simply wished to obtain from Barber Asia information as to investment opportunities which might suit her needs, and to make her own decisions as to such investments. While accepting that Ms Field's initial request had been for a conservative investment strategy, Barber Asia claimed that this had changed over time, and that by the time that the investment now complained of was entered into, Ms Field wanted (or at least was prepared to accept) a strategy that was much riskier in order to obtain the prospect of better returns.

6. Barber Asia was of the view that it had complied with all relevant regulatory requirements and codes of practice, and owed Ms Field no further duties. In any event, Barber Asia denied having acted negligently, whether as alleged in Ms Field's Amended Statement of Claim or at all. Barber Asia further emphasised the fact that Ms Field entered into direct contractual relationships only with the financial institutions from which she acquired investment products or loans. Its position was that any losses which Ms Field suffered were caused (wholly, or at least in part) by her own acts and decisions, in particular her decision not to continue with the investment and loan arrangement at the time of the second demand for further security, and not by any default on its part."

The judgment below

5. The judge dealt meticulously with the evidence and the submissions of the parties in his very comprehensive judgment of over 90 pages. Whilst Ms Field was legally represented, Mr Barber conducted the defence for Barber Asia. The judge remarked that he had had the opportunity of observing the principal protagonists in the action give evidence during the course of the trial and had concluded that to the extent that Ms Field's evidence conflicted with that of Mr Barber, he generally had little hesitation in preferring Ms Field's evidence to that of Mr Barber.

6. The judge made a large number of factual findings. For the purposes of this appeal, it is only necessary to refer to the following. Ms Field first met Mr Barber, the principal of Barber Asia, in June 1997. She told him that she wanted to invest her money conservatively, with the objective of doing better than placing money on deposit in a bank. The money represented many years of hard work and Mr Barber knew that Ms Field did not want to lose any of her savings. Mr Barber's contemporaneous notes and memo recorded that a "conservative risk" strategy was to be adopted. The judge found that Ms Field was not a sophisticated investor and had never had any other form of investment. She trusted and relied implicitly on the advice that she was given, without questioning. Whilst Mr Barber did explain to Ms Field the discretionary investment service and the advisory investment service offered by Barber Asia which entailed a formal written contract and the payment of a fee charged by reference to the value of the client's portfolio, Barber Asia also acted on an execution basis and in this case it would be remunerated not by the client but the organizations in which the assets were invested. Ms Field never entered into an agreement with Barber Asia and never paid them any fees. Nevertheless Mr Barber proffered advice from time to time which Ms Field accepted and Barber Asia received commissions or fees from the organizations into whose products Ms Field invested.

7. Some 9 months after the first meeting, in March 1998, Ms Field followed Mr Barber's recommendation and invested substantially the whole of her savings of approximately US$300,000 into an insurance product offered by Old Mutual International ("Old Mutual"). The funds were allocated between different investment sectors and invested into professionally managed investment funds. Barber Asia stood to earn GBP9,127 over 5 years as a result.

8. Mr Barber introduced Ms Field to a scheme offered by N M Rothschild & Sons (C.I.) Ltd ("Rothschilds") on 10 July 1998. They met over lunch and, by that afternoon, Ms Field had entered into the scheme by signing the relevant forms. The strategy involved gearing up Ms Field's existing investments which she had acquired earlier on Mr Barber's advice. Under the strategy, the initial investments were to be used as collateral for a loan in Japanese Yen being the equivalent of GBP468,000 for acquiring a product from Scottish Life International Insurance Company ("Scottish Life") which would also be pledged as security for the loan. On Barber Asia's recommendation, Ms Field switched her Old Mutual funds to a sterling money market fund. Whilst the assets securing the loan would be denominated in sterling, the loan itself would be in Japanese Yen, a low-interest rate currency. An important aspect of the strategy was the expectation that the sterling assets would produce a return higher than the rate of interest payable on the Japanese Yen. It was envisaged that this, coupled with gearing at a ratio of 2.5 times, would significantly enhance the rate of return on Ms Field's initial investment. Barber Asia stood to gain GBP28,000 by way of commission from Rothschilds.

9. The judge found that Ms Field had not been provided with the introductory brochure to the scheme which had outlined the features of the scheme. The judge found that the combination of gearing, interest risk, the possibility of premature crystallisation of the loss and mismatch between currencies meant that the scheme recommended to Ms Field was an investment with a high level of risk which did not conform to the type of investment Ms Field wanted.

10. On the question whether the risks had been explained to Ms Field, the judge found that Mr Barber had not supplied Ms Field with the Rothschilds documents which introduced the scheme and the concept of gearing which contained clear references to risk. So despite some references to risks on the application form itself, the judge concluded that it was unlikely that a detailed explanation of the various risks involved was provided at the time Mr Barber was with Ms Field in her office completing the forms with her. He accepted Ms Field's evidence that whilst she understood that there might be some risks involved in the investment, she believed that any risks that there might be would be in line with her stated desire for the conservative investment strategy. As there was no requirement to provide projections showing a negative outcome even in relation to matters covered by the Securities and Futures Commission's Code of Conduct, Mr Barber did not consider that investors should be provided by way of illustration of the possible outcomes of a given investment strategy. The judge made the following findings:

"112. Given this approach, I conclude that it is more likely than not that Mr Barber did not explain to Ms Field the possibility that the investment strategy which he was proposing carried with it the risk of a loss of a significant part of her capital, or the reasons for this.

113. Ms Field said that had it been explained to her that the investment strategy being recommended carried such a risk of loss of capital, she would not have entered into. Having regard to the fact that her investments represented the fruits of many years of hard work, I accept that evidence."

11. On 2 December 1998, Barber Asia provided Ms Field with information regarding her investment in the scheme. The judge found that this information was far from accurate. In claiming a net return of 7.7% on the initial investment with Old Mutual, it had failed to factor in the strengthening of the Japanese Yen and the corresponding increase in liability under the Yen loan. Had this been done, in arriving at the net assets, it would have been necessary to deduct approximately GBP90,000. A further memo from Barber Asia dated 4 February 1999 adopted a similar approach. By this time, despite Barber Asia's claim of net return of 6.2%, the reality was that Ms Field had already lost more than half of her original investment.

12. Rothschilds made a first margin call on 26 February 1999. The judge found that Barber Asia's recommendation to Ms Field was to maintain the loan in Yen and provide Rothschilds with the security. They even introduced Ms Field to a banker with HSBC who arranged a loan of HK$650,000 at 11.75%. Apart from this loan, Ms Field also borrowed from another source. The total amount borrowed to meet the first margin call was GBP76,000. Over the next few months, Ms Field sought reassurance from Barber Asia that the strategy was the right one for her. In response, in July 1998, Barber Asia reiterated the low risk level attached to the security and suggested that a gearing of 2.5 times was not unreasonable and explained that the problem lay with the appreciation of the Yen against sterling.

13. The Yen continued to strengthen and by late August 1999 Ms Field was again in breach of the minimum collateral cover requirements. On 2 September 1999, Rothschilds warned that it might take steps to switch the currency of the loan to sterling if the breach was not rectified. The switch occurred on 15 September 1995 and the effect was that the loan then stood at about GBP210,000 more than its value at the date of the drawdown. Mr Barber suggested that Ms Field should continue to service the loan rather than cashing out and crystallising her losses. In early December 1999, Ms Field closed out her whole position. The policies were surrendered, attracting penalties. The Rothschilds loan was to be paid out of the proceeds. What was left for Ms Field was some GBP44,000.

14. The judge found that Barber Asia owed Ms Field a duty of care in tort based on a voluntary assumption of responsibility by Barber Asia. In short, the judge found that the investment was unsuitable for Ms Field and should not have been recommended to her. He concluded that Barber Asia fell short of the standard of care to be expected of them in a number of significant respects.

15. The judge rejected Barber Asia's defence that the losses were caused, not by their negligence, but by Ms Field's decision to close out her investments in December 1999. The judge found that Ms Field had acted reasonably in closing out her investments and her decision was one that was reasonably made in the light of adverse circumstances then prevailing such that it did not sever the causal connection between Barber Asia's negligence and her losses.

16. The judge also rejected any suggestion of contributory negligence on the part of Ms Field. Mr Barber had argued that Ms Field had failed to take legal advice and had failed to pay sufficient regard to the acknowledgements of risk she made when signing the Rothschilds loan application form.

This appeal

Causation

17. At the outset of his submissions, Mr Clifford Smith SC informed the court that he was not challenging the primary findings of fact made by the judge. The main thrust of his attack was that the judge had applied the wrong test on the issue of causation. He submitted that the correct test was whether Ms Field would still have gone ahead with the scheme had the right advice been given and that the burden was on Ms Field to show that she would not have entered into the transaction had the nature of the scheme been made clear.

18. In support of the test put forward, reference was made to Allied Maples Group Ltd v Simmons & Simmons (a firm) [1995] 4 All ER 907 where, at page 915c-d, Stuart-Smith LJ observed that:

" (2) If the defendant's negligence consists of an omission, for example ... to give proper instructions or advice, causation depends, not upon a question of historical fact, but on the answer to the hypothetical question, what would the plaintiff have done if the equipment had been provided or the instruction or advice given. This can only be a matter of inference to be determined from all the circumstances. The plaintiff's own evidence that he would have acted to obtain the benefit or avoid the risk, while important, may not be believed by the judge, especially if there is compelling evidence that he would not..."

19. Mr Smith also relied on NMFM Property Pty Ltd and Others v Citibank Ltd (No. 10) 186 ALR 442. At [454-455], it was stated that:

"[454] The investors did not testify, either on affidavit or orally, as to what he or she would have done if the required warnings had been given, or if some had been given but not others, or if the investors had not been told that the package was 'risk free'...

[455] The investors did testify in general terms that they decided to invest 'as a result of' the representations made to them by the advisers, and would not, but for these representations, have taken out a Mortgage Power loan or purchased units. But in my view it does not necessarily follow that they would not have invested in the package if the required warnings had been given or the 'risk free' representation not been made..."

20. It is clear from the passage cited from Allied Maples that whether or not Ms Field would have invested in the scheme had the right advice been given "can only be a matter of inference to be determined from all the circumstances". Ms Field gave evidence to the effect that she would not have invested in the scheme had she appreciated that she risked losing a significant part of her capital which the judge accepted. See paragraph 113 of his judgment quoted in paragraph 10 above. It was also entirely consistent with her conservative low risk investment strategy made clear to Mr Barber from the start. Whilst an appellate court might more readily interfere with a judge's findings where it is a matter of inference than one of primary fact, nevertheless the finding in question "depends to a considerable extent on the judge's assessment of [Ms Field and Mr Barber], both of whom he saw and heard give evidence for a considerable time." See per Stuart-Smith LJ at 915j. As noted above, the judge had little hesitation in preferring Ms Field's evidence to that of Mr Barber. Further, there was no evidence, much less compelling evidence, to support any inference that Ms Field would have found the level of risk acceptable.

21. Mr Smith's complaint that the judge had applied the wrong test in that he failed to appreciate that it was Ms Field who had the burden of proving that she would not have entered into the scheme had Mr Barber properly advised her flies in the face of the judge's finding in paragraph 113 of his judgment cited in paragraph 10 above. In my view, what Mr Smith was seeking to do was to reopen the judge's factual findings despite his initial protestations that that was not what this appeal was about. This was apparent from the way the matter was put. Mr Smith referred to the adequacy of the cushion built into the scheme, in particular, to the fact that the judge had found that there was a margin of GBP57,000. Mr Smith also referred to the volatility of the underlying currency as being no more than 5.7%. Thus, it was said that there had to be an appreciation of 23% in the Yen before there would be any loss, suggesting that the investment was not as risky as the judge said it was and that Ms Field would not necessarily have found that level of risk unacceptable. But that submission overlooked the judge's acceptance of the evidence of Ms Field's expert (at paragraph 106 of his judgment) whose assessment was that the strategy

"carried at least a high level of risk of loss, and could not be described as conservative, and did not, therefore, comply with the type of investment strategy requested by Ms Field."

22. Mr Smith then complained that Ms Field had not been tackled on the basis of actual risk. His submissions came to this: had Mr Barber been more astute or had the defendant had legal representation, Ms Field might have been asked different questions and the judge might have reached a different conclusion. In essence, all his arguments on causation were veiled attempts at circumventing the judge's findings of fact. It should be borne in mind that from the outset of Ms Field's relationship with Barber Asia, she had made it clear that her investment strategy had to be a conservative low risk strategy. She should never have been offered the scheme which Mr Smith initially readily acknowledged was a "high risk" investment. In the course of the hearing, he attempted to resile from that by suggesting that had the true nature of the risk been explained in full terms, Ms Field might have found that level of risk acceptable because of the potential upside, and that, therefore, the "high risk" investment was in fact not that risky. Without overturning the judge's factual findings, that contention could not possibly succeed and no case has been made out to displace the findings made.

23. I will now refer briefly to the other subsidiary points raised in the appeal.

Contributory negligence

24. The point here was no different from that argued before the judge. In essence, it was submitted that by the time of the first margin call, Ms Field was fully aware of the volatility of the Yen. Nevertheless, she was willing to invest in investments that required the taking of a view on future currency movement. It was suggested that the fact that Ms Field carried on with the scheme after the full nature of the risk had been brought home to her indicated that she was not adverse to the level of risk involved in the scheme, a point also relevant to the causation issue. By not cutting her losses and electing to "gamble" on the future movement of the Yen at the time of the first margin call, Ms Field should be held liable for contributory negligence and/or a failure to mitigate her losses.

25. Mr Smith acknowledged that Barber Asia did advise Ms Field to meet the first margin call. In those circumstances, Barber Asia can hardly complain about Ms Field's decision to meet the margin call. The fact that she chose to stay invested does not assist Mr Smith's arguments on causation since the circumstances prevailing at the time of the first margin call were very different from those that pertained on 10 July 1998 when she entered into the scheme. By the date of the margin call, she had been locked into this investment. The options then open to her were limited. Unless her decision was not one that a reasonable person would have taken, she cannot be faulted for it. The arguments based on contributory negligence and/or failure to mitigate were accordingly misconceived.

Scope of duty

26. Mr Smith approached this point with diffidence. He made no oral submissions on this point and chose to rely on his written submissions. In brief, it was said that as the level of service selected by Ms Field was the execution basis service, Barber Asia had discharged its duty by ensuring that Ms Field was aware of the overall nature of the scheme. Reliance was also placed on the warning notice which recommended that she seek independent legal advice.

27. The basis of Barber Asia's liability was the voluntary assumption of responsibility which gave rise to a duty of care to Ms Field. It is a question of fact in each case whether there was such a voluntary assumption of responsibility. The different services offered by Barber Asia were irrelevant. What mattered was whether irrespective of the level chosen, it proferred investment advice which gave rise to a duty of care. Indisputably the advice rendered did not conform to the client's request. In my view, there is no reason for interfering with the judge's finding of a duty of care and its breach by Barber Asia.

Hon Sakhrani J:

28. I agree with the reasons given by Le Pichon JA.