In many situations involving the provision of negligent financial advice, the harm suffered will be financial in nature. For a long time courts eschewed permitting actions to be brought in tort where the plaintiff’s only harm was economic (as in, the plaintiff suffered no injury or damage to property but lost money). However, that has changed and the law now recognises that plaintiffs can, in some circumstances, recover for pure economic loss since the case of Hedley Byrne v Heller, which was expanded in Perre v Apand. This article outlines the ability of plaintiffs to recover for negligent financial advice and what courts require for such actions to succeed.
A. The Elements of an Action for Pure Economic Loss
As an action brought in tort, in order to recover for pure economic loss the plaintiff must be able to show that the defendant owed them a duty of care, that the duty of care was breached and the harm that materialised was reasonably foreseeable as a result. Meeting these three elements pose unique issues in actions brought for pure economic loss, due to the common law placing barriers on them for fear of ‘opening the floodgates’ to litigation. However, the closeness of the relationship between financial advisor and client offers some respite.
B. Duty of Care
In determining whether or not the plaintiff was owed a duty of care, it must be shown that there was some relationship or closeness between the parties. There are a number of factors that courts consider in determining the existence of a relationship. These include the plaintiff’s reliance on the defendant, the defendant’s specialised knowledge, whether the plaintiff requested the information from the defendant and any disclaimers given. In situations where a financial advisor is alleged to have given negligent advice to a client, the relationship may be demonstrated by a contract between the parties or by the surrounding circumstances. If the court determines that a relationship has come into existence, the plaintiff can recover for pure economic loss if they meet the other two criteria as well.
C. Standard of Care
The plaintiff must also be able to demonstrate that the conduct of the defendant failed to take reasonable care in the circumstances. The standard of care is determined objectively based on what is reasonable on the facts. For financial advisors, there are legislative standards imposed under the Corporations Act 2001 (NSW) that must be followed in addition to what may be imposed on the facts of the case. In other words, bare compliance with statutory standards may be insufficient to meet the standard of care in some cases. Where the defendant has breached the standard, the plaintiff can then proceed to show that they have sustained damage as a result.
In order for an action in tort to lie, the plaintiff must show damage suffered as a result of the defendant’s negligence. There are two elements required to show damage. Firstly, the damage must have been caused by the defendant. The time-honoured ‘but-for test’ is often used – but for the defendant’s conduct, would the plaintiff have suffered the harm? This is a question answered on the facts of each case. Secondly, the plaintiff must show that the harm was a reasonably foreseeable consequence of the negligent statement. If these elements are satisfied, the claim will succeed.
Clients who have received negligent financial advice have several avenues of recovery and actions in tort are just one of them. In order for a claim to succeed, these elements must all be made out by the plaintiff at court. While claims for pure economic loss can be someone arduous, you can give your claim the best chance of success by speaking to a qualified legal professional, sharing the facts of your case and getting advice on how to proceed.
If you require any advice about any of the issues raised in this article please get in touch today!
This article was authorised by Warwick Heeson.