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12 May 2015
The Court of Appeal recently held(1) that an individual investor was too late to bring a claim in negligence and could not take advantage of Section 14A of the Limitation Act 1980, as she had constructive knowledge of relevant facts ascertainable during the primary limitation period.
The claimant was an individual investor, Susan Jacobs, and the defendant was a network of financial advisers, Sesame Ltd. The case concerned an appeal in respect of the application of Section 14A of the Limitation Act, under which the primary limitation period can be extended where facts relating to the cause of action were not known at the date on which the cause of action arose. This secondary limitation period is three years from the date on which the claimant knew or reasonably should have known the material facts about the damage in respect of which the claim was made. The judge at first instance held that the claimant could rely on the secondary limitation period to pursue a claim in negligence against the defendant. However, this was overturned on appeal to the Court of Appeal.
The claimant's case was that when she agreed to invest in a Legal & General investment bond in 2005, she believed that her initial capital investment of £65,000 was secure – that is, that she had a guaranteed return of capital. She stated that the fact that this was not so became apparent to her only when she surrendered the bond in February 2012. The Court of Appeal found that the claimant had sufficient actual knowledge to bring a claim in 2009, when she knew that capital return was not guaranteed, or constructive knowledge from that date when the value had fallen so much that she would have been expected to seek advice (in which the actual position would have been explained to her). Accordingly, her claim was time barred and she could not take advantage of Section 14A of the Limitation Act.
In 2005 Jacobs was advised by Sesame to invest £65,000 in a Legal & General investment bond for five years. Jacobs did so. After making only a couple of withdrawals in the ensuing years, she surrendered the bond in February 2012, at which point she became aware that the bond had experienced a drastic decline in value (to £43,653). Importantly for the matters that were decided in the appeal, Jacobs alleged that it was not until the point at which she surrendered the bond that she knew either that she had suffered a loss or that she might have received inappropriate advice. Her key allegation against Sesame was that it had assured her that, regardless of the performance of the bond over the five-year investment term, she was guaranteed to recoup the initial £65,000. Jacobs further alleged that had she understood that this was not so, she would never have invested in the bond.
Jacobs brought a claim against Sesame alleging negligence. This was denied by Sesame, which pointed to certain events during the period of Jacobs's investment in the bond relevant to the assessment of her knowledge of the material facts relating to her loss. Sesame argued that Jacobs had been supplied with and exposed to enough information to have had sufficient knowledge (whether actual or constructive) to bring her claim earlier and within the primary limitation period.
The events on which Sesame relied included the fact that Jacobs had received four annual statements from June 2006 to July 2009. The final two statements showed a catastrophic loss in the value of the bond (in comparison with the initial increase over the first two years). Sesame also pointed to the fact that Jacobs had received a document entitled "Key Features of the Legal & General Investment Bond" from Sesame, which set out clearly that what the investor would recover from the investment would depend on the investment performance of the fund's assets and warned that each fund had its own level of risk. There were also warnings in the document that the bond could return less than the original investment.
In addition, the court was reminded that following receipt of the July 2009 annual statement, the claimant was sufficiently alarmed by the decreasing value of her bond to seek further advice from Legal & General directly (rather than Sesame). After this phone call, she transferred all of her investment to a new fund. The adviser also suggested to her that the investment strategy employed by Sesame was defective and that Jacobs's fund should not have been invested entirely in commercial property.
At first instance, the judge decided in favour of the claimant on the basis that she had not had enough knowledge to bring her claim, take advice or collect evidence by 2009. The claimant had believed that she would receive the entire £65,000 back at the end of the five years and had only a vague idea that something had gone wrong with the investment by 2009.
An assessment of knowledge for the purpose of Section 14A of the Limitation Act depends on determining whether the claimant might reasonably have been expected to acquire such knowledge from facts observable or ascertainable by him or her, or from facts ascertainable by him or her with the appropriate expert advice which it is reasonable for him or her to seek (Section 14A(10)). Further, the individual must have known that the damage was attributable in whole or in part to the act or omission which is alleged to constitute negligence (Section 14A(8)).
The Court of Appeal concluded that Jacobs's belief that she would always recover £65,000 after five years did not prove that she did not appreciate that she had suffered damage by 2009. The court pointed to an inconsistency in statements relating to the claimant's belief in a capital guarantee, at one point implying that it arose from an assumption based on the historic behaviour of the bond and at another pointing to it as an essential feature of the bond's mechanics. The court concluded that this was a confused rationale.
Significantly, the court noted that Jacobs had at the very least constructive knowledge of both a defect in the defendant's investment method and the volatility of the possible returns to be accrued from the fund by 2009 (as evidenced by her phone call to Legal & General). In the circumstances, it would have been reasonable to expect Jacobs to have asked Sesame for reassurance that she would receive her £65,000 back or to review the investment documentation to reassure herself of this. Unlike the judge at first instance, the Court of Appeal did not envisage that Jacobs would need to have taken further professional financial advice at this point. It would have been possible simply to have asked a couple of basic questions of Sesame. As such, it was beyond doubt that Jacobs had constructive knowledge by July 2009 that the bond was defective in the sense that it would not accrue the capital return that she intended. This was enough information to launch a claim against the defendant or at least to enquire as to further information or evidence.
On this basis, the Court of Appeal held that Jacobs's claim was time barred and Sesame's appeal was upheld.
The case highlights the ways in which the court may deem a claimant to have acquired the requisite constructive knowledge (without having to seek out professional advice, but rather on the basis of facts which are considered to be ascertainable to it). It also highlights principles to bear in mind when assessing whether secondary limitation applies. It is a useful reminder to claimants of the risk inherent in delaying a claim or making further enquiry at the very least once they consider that something may have gone wrong with advice received. The case also reminds prospective claimants that the receipt of valuation statements of investments may be regarded as setting the clock running for assessing the acquisition of sufficient actual or constructive knowledge of the relevant facts.
For further information on this topic please contact Geraldine Elliott or Sarah Shaul at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1)  EWCA Civ 1410.
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