Summary

A bank owed a duty to an investment fund to exercise reasonable care to ensure that the advice it gave was sound and the nature and terms of the contracts governing the parties' relationships were not inconsistent with an assumption of responsibility by the bank to the fund for the quality of the advice it provided.

Facts

The claimants sought to recover damages from the defendant (U) for negligent misstatement and breach of contract in connection with the premature termination of an investment fund. The claimant banks (R) had set up an investment fund (F) complying with Islamic principles using U's Islamic Investment Banking Unit as its technical adviser. F took the form of an Irish-domiciled variable capital company which invested in operating leases of equipment used by large commercial organisations in the US. R repurchased the shares in the fund at par when it became apparent that the assets of the fund were likely to be worth less than that amount. Among U's functions under the technical services agreement between R and U relating to the operation of F were the evaluation and proposal of leases for acquisition by F. The claimants' case was that U failed to exercise the appropriate degree of skill and care in analysing and evaluating the information which it received from the asset managers from which F acquired leases, failed to notice that the renewal assumptions and estimated residual values put forward by the asset managers were over-optimistic, with the result that the leases would not provide the suggested return, and that it gave bad advice to F by recommending that it purchased unsuitable leases and paid more for them than they were really worth. F claimed against U in tort for negligent misstatement and, if U owed no duty of care to F, R claimed against U for breach of contract and to recover some of the fees paid to U for acting as technical services consultant. U submitted that (1) U owed no duty of care to F because the parties had deliberately structured their relationship in a way that isolated U from F, thereby making clear their intention that there should be no direct legal relationship between them, and because the duties that U owed to R under the technical services agreement were much more limited than those that it would owe to F under the general law if liability were to be imposed under tort principles; (2) in order for U to discharge any duty of care it was sufficient for U to carry out a limited review of the estimated residual values and renewal assumptions put forward by the asset managers and it did not have to carry out an analysis sufficient to enable it to satisfy itself independently that the information was reliable; (3) if U was liable to F for giving bad advice about the characteristics of any particular lease, F was entitled to recover the difference, if any, between the amount it paid for that lease and its actual value on the date it was purchased but F could not recover in addition damages in respect of overpayment of dividends and R could not recover in respect of management fees paid.

Held

(1) On the facts U did profess to have a certain expertise which it offered to make available to F in the form of advice on the acceptability of residual values and renewals, and thus rates of return, put forward by the asset managers and the suitability of leases offered as investments to F. U was well aware that even if that advice was provided to the second claimant as F's general investment manager, the latter would be likely to pass it on to F without qualification since it did not consider itself competent to form an independent judgment. U did undertake responsibility to F to take reasonable care to ensure that the advice it gave on those matters was sound, and the nature and terms of the contracts governing the parties' relationships were not inconsistent with an assumption of responsibility by U to F for the quality of the advice it provided. Moreover the manner in which much of that advice was expected to be and was given in fact reinforced the conclusion that U did in fact assume such a responsibility, Henderson v Merrett Syndicates Ltd (1994) CLC 918 applied. (2) Although U was not expected or required to duplicate in its entirety the work of the asset managers, it was obliged to analyse the figures it received from them in sufficient depth and with sufficient care to enable it to satisfy itself independently that they fell within an acceptable range for information of that kind. On the expert evidence the calculation of residual values called for the exercise of a high degree of skill and judgment based on familiarity with market and trade information and no one at U possessed a sufficient degree of expertise to carry out that task. U should have been aware that the asset managers had a conflict of interest and should have taken that into account when reviewing the asset managers' estimates and projected rates of return. U did not do so. U failed to carry out independent analyses of the asset managers' estimated residual values or renewal assumptions and failed to evaluate the leases by reference to information derived from an independent review. Had it done so, it was likely that its attention would have been drawn to any estimate that fell outside the permissible range and that in such cases it would not have advised F that the lease was suitable for acquisition. F would have rejected any lease that was over-priced or which was not calculated to give a rate of return consistent with its target yield. It followed that insofar as it was shown that the information provided by U was wrong in those respects F was entitled to recover its loss from U. (3) U was right that to allow F to recover damages in respect of dividends paid to shareholders would enable the investors to obtain the same benefit twice over and that the same logic applied to R's claim for management fees and that the most that U could be required to pay in respect of any breach of duty was the difference between the price paid for the assets in question and their value at the date of acquisition. (4) (Obiter) R's alternative claim to recover the loss which it said it had suffered in mitigating the damage that would otherwise have been caused to its commercial reputation by U's breach of the technical services agreement would have failed because the court could not conclude on the evidence that R's decision to repurchase F's shares at par was reasonable having regard to the damage that it was otherwise likely to suffer.

Judgment accordingly.