Trusts, financial advisers and exclusion clauses

Today’s article concerns the liability of financial advisers to Trusts.

Mr Armitage, a retired Vet, established a Trust.  He heard a woman speak at an investment seminar and, impressed with her presentation, arranged for her Company to provide the Trust with investment advice.

Her Company’s advice was bad.  A significant portion of the Trust’s wealth was lost and Mr Armitage sued her in negligence:  Armitage & Anor v Church and Anor CIV-2009-485-1952, 27 May 2011.

Dobson J held that competent financial planners have an obligation to positively assess the risks that may arise in relation to an investment and to form an independent view about them. [110]

The financial adviser was held to be negligent for not “identifying at any stage the much wider range of options for fixed interest investments that were available to Mr Armitage and the Trust.”[150].

A point of particular interest in this case is the Court’s decision to ignore various exclusion clauses which were included in the financial adviser’s contract.

There were a variety of disclaimers and exclusions [38].  It was held they were “ineffective to nullify the reasonable reliance Mr Armitage was entitled to place on” representations that the adviser had made about the probable levels of income. [190].

This decision can be contrasted with the Court of Appeal’s decision in David v TFAC [2009] 3 NZLR 239, a franchising case, which although it was decided under the Fair Trading Act and not the contractual law of negligence, bears close similarities to the Armitage decision.

Arnold J, in delivering Judgment for a unanimous Court, said that “the Courts have long held that it is not possible to contract out of the FTA,”  but he then went on to say:

“While that justification has force in relation to consumer transactions, it has less force in the context of commercial transactions involving substantial independently advised parties negotiating from positions of equality.  In the latter case, any resulting contract can be expected to reflect the parties’ wishes as to the allocation of risk and it is difficult to see why they should not be permitted to allocate risks between them by contracting out of the FTA.”

In saying this, he appeared to say that the Fair Trading Act can be cast aside in the case of franchising contracts because franchisees are people who negotiate “from positions of equality” with franchisors.  This statement was made in the context of a dispute where a franchisee was supposed to seek independent legal advice and had not done so. 

The notion that franchisors and franchisees are commercial equals is – to use polite language – most surprising, and many practitioners in this area of law consider the Court’s statement to be deeply flawed.  I have acted in many franchising disputes and in my experience it is common for franchisees to pledge the modest equity in their homes to buy a franchise.  As a result of the decision in David v TFAC they are left without remedy when the deceptions that were practised upon them  are revealed.  I am aware of people whose lives have been ruined as a consequence of this decision. 

These are the “little people” whom the Fair Trading Act was designed to protect.  Their lawyers will seldom have sufficient knowledge of the franchise to be able to advise them adequately on the accuracy of a franchisor’s financial modelling.  And if the lawyers ask for a contract to be modified, few franchisors will agree to significant changes being made as it is important for the integrity of a franchise that all participants should be subject to the same terms.

If the Court of Appeal says that exclusion clauses can be disregarded in the context of franchise agreements because the parties are both commercial “equals,” what about investment advisers?

The Financial Advisers Act 2008 provides that “the provisions of this Act have effect no matter what any agreement may say”:  s.156.  As with the Fair Trading Act, Parliament says that financial advisers “must not engage in misleading or deceptive conduct”: s34.

If the Court of Appeal says that exclusion clauses in franchising agreements can override the fundamental requirements of the FTA, why should the same not apply to people who give advice under the Financial Advisers Act?  There will be many Trustees who have more commercial knowledge and experience than many franchisees and if franchisees are people who “negotiate from positions of equality” so also will many Trustees.

Although the decision in Armitage was concerned with contractual negligence and not with claims under the Fair Trading Act, it would be anomalous if exclusion clauses are held to be ineffective for the purposes of contractual negligence but fully effective for the purposes of the Fair Trading Act.

It is hard to conceive that Parliament intended to allow financial advisers who act in a misleading and deceptive way, to be able to escape liability by relying on a comprehensive array of exclusion clauses.  But the Court of Appeal’s decision in David v TFAC may allow this outcome?

To avoid this risk Trustees who engage the services of financial advisers should try to ensure that their contracts do not contain exclusion clauses.

                             Anthony Grant