Dont make promises you cant keep

Monday, 01 July 2002


    Awarding punitive damages in cases of gross negligence

    In the Victorian Supreme Court case – Digital Pulse Pty Ltd v Harris & Ors ((2002) 40 ACSR 487) [Law Reporter, May] it was ruled that in certain cases courts would award punitive or exemplary damages against a person who had acted in breach of a fiduciary duty. Now, in an interesting case involving negligence on the part of a stockbroker or a stockbroking firm, the Victorian Supreme Court has once again agreed to award exemplary damages because of the nature of the activities that were involved. The case Ali v Hartley Poynton Ltd ((2002) 20 ACLC 1006) is noted in a review in CCH Corporate News, upon which this item is based. The first thing to note is that the conduct of the broker being sued was highly questionable. The person had apparently ignored both legal and ethical requirements without too much compunction. There had been representations made to the relevant client about achievable results in relation to certain of his investments and what if any risks arose in relation to those investments. Secondly, it was alleged that the stockbroking firm did little to supervise the conduct of the relevant broker and finally all of these factors pointed to the need for the court to make an order as to damages.

    The facts of the case are reasonably complex. Suffice it to say that a broker had made a number of representations as to returns that could be obtained by the client in relation to an investment of assets the client left in the control of the broker. Returns of between 15 and 20 per cent per week compound interest on an initial investment rising to 25 to 30 per cent over a 12 month period had been promised. The broker was given an unfettered discretion in carrying out the investments which were based to a large extent on the acquisition and investment in Telstra shares. Apart from making a number of representations as to the achievable returns the broker also represented that the proposed trading involved no risk. He supported his statements about the lack of risk by referring to his own skill and expertise, his access to privileged information and his ability to minimise the risk with various techniques that were administered by the firm. Unfortunately, these promises turned out to be both inappropriate and quite misleading. The broker had a long history of problems with a committee of the firm that looked at the oversight of debtors etc. The broker apparently sold the Telstra shares contrary to instructions and then used the proceeds, contrary to instructions, to trade in other securities. The firm for its part allegedly did nothing to alert the client about the broker's deception about credit limits; and there were certain other unfortunate events that pointed to a lack of supervision and a lack of discipline on the part of the broker.

    In the CCH note on this case the findings on liability were described in these words. The common law duty to exercise reasonable care and the contractual obligation to exercise reasonable care applied to each of the professional activities undertaken by the broker for the client and extended to advice and recommendations for buying and selling stock on the share market and any decisions by the broker himself to buy and sell stock on the share market for the client in the exercise of his discretion. The broker was reckless in making the representations about achievable returns and risk. All brokers would, or should know the equation between risk and return. To combine the representations compounded the recklessness. Those representations were also false and misleading and amounted to misleading and deceptive conduct for the purposes of section 52 of the Trade Practices Act. The stockbroking firm could not discharge the obligation to exercise reasonable care without taking reasonable steps to ensure that its client was aware, or informed, of the relevant risks before using credit or embarking on any particular form of trading, particularly trading in derivatives (such as warrants) and short selling.

    The broker had an obligation to exercise reasonable care by taking reasonable steps to have all necessary information about the client's financial position before embarking on a trading or investment program. The broker should have employed techniques to minimise loss, maximise profit and manage risk and he was negligent in not doing so. The court accepted expert evidence as to the techniques which should have been employed. Where a stockbroker was an organisation employing a large number of brokers, it could not discharge its duty to exercise reasonable care, without exercising reasonable care in the supervision and control of its brokers. The stockbroking firm had arguably breached its obligations to supervise and control the brokers' trading with reasonable care. There was arguably no adequate system in place to monitor the way brokers carried out their trading activities. More particularly, there was no supervision or control of the way the broker carried out his trading activities. The incidents involving the broker, of which the firm was aware, separately and in combination, put the firm on notice that the broker was someone requiring close supervision and control. The broker's conduct should have raised concerns about whether he was conducting himself with integrity and reasonable care in his dealings with the firm's clients.

    The claim made by the client was for damages arising from the loss of commercial opportunity. This arose both from negligent misrepresentation and as a result of negligence on the part of the broker. But, the client also suggested that the court should recognise that this was a proper case for a claim in exemplary damages. The court agreed and assessed those damages in the amount of $260,000 which was substantially more than the findings based on negligence and false and misleading conduct. It is useful to set out the statement in the CCH note dealing with this aspect of the case. "The nature of the relationship between the broker and the client and the rights and duties attaching to the relationship were critical in assessing whether there had been a contumelious disregard of a plaintiff's rights. Here, the relationship was defined by an agreement which included obligations that placed the firm in a category of a 'fiduciary agent'. The relationship was also a fiduciary one for the purposes of the laws of equity.

    The firm was vicariously liable for the misconduct of the broker who had shown a conscious contumelious disregard for the client's rights. The officers of the firm had also shown a conscious contumelious disregard for its client's rights. Nothing effective had been done to enforce the firm's own compliance policies in circumstances where it recognised the need for such policies to protect the rights and interests of its clients and where it had publicly promoted that it would enforce them. It had ignored the rights ad interests of its client during the retainer and, at the end, merely went through the motions of discussion with him. Its sole focus throughout was on the debt in the accounts operated by the broker and the protection of its own interests to the exclusion of its clients' rights and interests." Despite the fact the brokers were responsible for causing considerable loss to the plaintiff, the court nevertheless did reduce the damages awarded because the plaintiff had apparently allowed his own son to be involved in the decision making and had not taken appropriate care to review the actions of his son which in part lead to some of the losses sustained.

    The decision is quite likely to be appealed, but as it currently stands, the decision sends out a very clear warning about the need for professional people and those in a fiduciary relationship to pay particular care to the way in which they deal with the funds and securities of those who put their trust in them.


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