The Supreme Court’s judgment in Cantrell v AIB

The Supreme Court recently held that, in claims for negligent mis-selling based on the level of risk of a financial product, the limitation period only begins to run when the risk renders the product less valuable.

Introduction

The duration of potential liability for investment products is a key consideration for financial service providers. It informs the risk profile of selling the product. It will have a bearing on document retention policies. It can even be a factor in whether a product will make it to market or not.

Clarity on the duration of that potential liability is critical to informed decision-making. Unfortunately for financial service providers, questions on when limitation periods begin to run for investment mis-selling claims have rarely prompted simple answers.

A 2012 decision of the Supreme Court (Gallagher v ACC) was interpreted by many as reflecting a trend towards bright-line rules in this area. The decision was often cited as authority to the effect that the six-year limitation period for such claims started to run from the date of investment.

In its judgment in Cantrell v AIB, delivered on 10 December 2020, the Supreme Court made clear that no such bright-line rules apply and endorsed instead a flexible and "pragmatic" approach. The judgment has happy implications for aggrieved investors. However it has inevitably made assessment of the duration of potential liability for mis-selling more complicated.

Background

The plaintiffs were investors in the 'Belfry' property funds. The Belfry funds were arranged and promoted by the defendants, some of whom were also directors of the fund companies. The investors had made their investments on various dates between 2002 and 2006.

The Belfry funds were all similarly structured. Investors purchased shares in an Irish company, a subsidiary of which would acquire and hold commercial properties in the UK. The acquisitions were funded in part by borrowings negotiated by the fund directors and secured on the funds' real property. The relevant loan agreements, concluded shortly after the funds closed, contained a loan-to-value (LTV) covenant entitling the lender to dispose of the charged assets if the value of the properties fell below 80% of their initial value or the amount of the loan.

The funds issued annual reports to investors containing the accounts as at 31 March of the relevant year, the valuation of the fund properties, and the Net Asset Value (NAV) of the investor's individual investment at that point. For a time those reports showed positive returns on the investments. The situation changed markedly in 2008, however, when all of the funds experienced a "calamitous fall" in value as a consequence of the global financial crisis. Each of the investors was notified in 2009 that the the value of their investment had been written down to nil.

Proceedings

Approximately 300 Belfry investors issued proceedings in August 2014 alleging that the investments were mis-sold. Specifically, they alleged that the investments transpired to be much riskier than they were led to believe by the defendants (the mis-selling claims), and that they were never informed of the LTV covenants or their implications before entering into the investments (the LTV claims). They also claimed that the investments had been mismanaged (the mismanagement claims).

From amongst those 300 cases, eight 'pathfinder' actions were chosen. At an early stage in the pathfinder actions, the High Court was asked to determine as a preliminary issue whether or not the investors' claims were time-barred.

High Court judgment

The Court held that the investors' claims for breach of contract were statute-barred as they had all accrued on the date the investment contracts were entered into. The focus of the High Court judgment and the subsequent appellate judgments was on the tort claims.

The Statute of Limitations 1957 provides that claims in tort are barred six years after the date on which the cause of action accrued. A cause of action accrues when all elements necessary to prove the claim are in existence. For tort claims, that means that there must be both a wrongful act and actual damage. Determining the point in time at which actual damage is first suffered can be challenging where a plaintiff sues for financial loss which is sustained years after alleged mis-selling. This is particularly so where, as in the present case, the value of the investments rises and falls over time.

Insofar as the three categories of claims were concerned, the Court held as follows:

Mis-selling claims

The mis-selling claims accrued when the investment value fell below the amount invested (and not the date of investment as contended for by the defendants). In this regard, the damage occurred when the accounts and valuations showing a sub-parity NAV were finalised.

LTV claims

The investors suffered actual damage on their LTV claims when the investments were written down to nil. The relevant date of accrual was the earlier of the sign-off date of the accounts showing a nil value or the date on which investors were notified by letter that their investment had been written down to nil.

Mismanagement claims

The mismanagement claims were out of time because all damage said to have been caused by the 'churning' strategy occurred more than six years before the commencement of proceedings.

Court of Appeal judgment

The High Court's judgment was appealed by the defendants insofar as that Court had determined that any parts of the investors' claims in tort were not statute-barred. It allowed the appeal. In the view of the Court of Appeal, the alleged torts were completed at the latest when the LTV covenants were agreed, not when those covenants were triggered.

Supreme Court judgment

The Supreme Court set aside the decision of the Court of Appeal and restored the order of the High Court. The Supreme Court preferred the "sensible pragmatism" of the trial judge's approach over the "relentless logic" of the Court of Appeal. Damage for the accrual of a cause of action, the Supreme Court concluded, must "bear a close relationship to the layperson's understanding of that term. That is real actual damage, which a person would consider commencing proceedings for". 

The Court found that, to determine the existence of actual damage on the pragmatic approach, required a "basic comparison" between a plaintiff's position under the transaction and their position if they had never entered into it in the first place. It is only when the burdens of the investment outweigh its benefits that actual damage can be said to have occurred and a cause of action accrued. Where the adverse balance of burdens and benefits turns on a contingency—here, the triggering of the LTV covenants—it is only when "that contingency occurs, and affects the value, or the possibility of it occurring affects that value, such as to create a loss, that a cause of action accrues".

The Court concluded that the investors did not suffer actual damage simply by holding investment products that were riskier than they bargained for. It was only when those risks affected the value of their investments that their claims in tort accrued.

Mis-selling claims

The Supreme Court therefore agreed with the trial judge that the mis-selling claims accrued when the investments first fell below parity.

LTV claims

The Court observed that these claims were premised on damage said to be attributable to the defendants' negligence in negotiating the LTV covenants. That alleged damage was only suffered at the point where it could be established that the LTV covenant had a negative impact on the valuation. On that analysis, the investors felt the impact of the LTV covenants when the valuation of the real property dropped close to 80%, the covenants became relevant, and had the effect of reducing the valuation of their investments to zero. The decline in the valuation of the investment in each case occurred less than six years prior to the commencement of the proceedings.

The Supreme Court's judgment means that certain aspects of the pathfinder claims in tort are not statute-barred. Those aspects of the claims can now proceed to trial.

Commentary

In concluding its judgment, the Supreme Court conceded that the "difficulty and consequent uncertainty in resolving issues of this type is undesirable". The Court observed that the Irish law as to the date of accrual for negligence claims is "inherently unsatisfactory" and "incapable" of solving the problems raised in cases of latent damage.

The Court was surely correct in those observations. Nevertheless, the "pragmatic" approach of the Supreme Court is likely to produce a host of practical difficulties. Following Cantrell, it will be far more difficult for parties confidently to predict when financial loss claims will run out of time. The consequences of this uncertainty are likely to include a proliferation of protective writs and trials of preliminary issues under the Statute of Limitations.

In Cantrell, the Supreme Court repeated its appeal for legislative reform of the law governing accrual of claims and civil limitation periods. It is to be hoped that the Oireachtas will take up the Supreme Court's invitation without delay.

For further information on this topic please contact Enda Hurley, Partner, Nicholas Cole, Associate or Conor Doyle, Lawyer.

Date published: 17 December 2020