Executive Summary

The Supreme Court's unanimous ruling in Gallagher v ACC Bank [2012] IESC 35 delivered by Fennelly J (the "Gallagher Case") has to some extent clarified the rules governing the time within which claimants must institute negligence proceedings in respect of financial loss. Broadly speaking, the claim must be brought within 6 years of the date on which the alleged loss occurred. Time may not begin to run however where there is only a "mere possibility" of loss in a case until such time as that loss materialises.

In the Gallagher Case, the Supreme Court held there was an "immediate loss" upon entering the particular investment which was alleged to be inappropriate from the outset and consequently time began to run from that point. However, it acknowledged that this would not necessarily be the case in respect of different types of investment product where mismanagement or deviation from investment strategies is alleged. In such cases, the cause of action may accrue and time may begin to run subsequent to entering into the investment.

Background to the Gallagher Case

Mr. Gallagher (the "Plaintiff") sued ACC Bank plc ("ACC")in June 2010,more than 6 years after he invested €500,000 in a 5-year 11- month capital-guaranteed investment, namely the Solid World Bond 4 (the "Bond"), which was marketed and financed by ACC in October 2003. The Bond guaranteed a 100% return of the amount invested linked to 80% of any net increase in the value of a pre- selected basket of shares. The Bond could not be encashed during the term and no withdrawals were permitted until maturity.

The Plaintiff contended that he was induced by the negligence of ACC to invest in this "borrow to invest" product which was wholly unsuitable for him or any other investor as it was unlikely from the outset that the Bond would sufficiently outperform the market as required to offset the cost of the loan transaction. The Plaintiff claimed he would not have entered the transaction but for the alleged negligence and misrepresentations of ACC and accordingly claimed loss in the amount of the interest paid by him on the loan transaction (some €41,000) as the performance of the basket of shares over the term of Bond was ultimately insufficient to pay same.

ACC denied wrongdoing but also argued the Plaintiff's claim in tort could not proceed on the basis it was statute-barred as it had been brought more than 6 years after the investment was made.1 In the Commercial Court, Gallagher v ACC Bank [2011] IEHC 367,Charleton J decided the claim was not statute-barred. He held that the Plaintiff, assuming his claim to be a valid one, did not suffer any immediate loss when he purchased the Bond, but faced only a contingent loss as quantification of the damages was impossible at the time of purchase or over the lifetime of the Bond and if there was misrepresentation, the tort could only have become complete when a financial loss crystallised. The issue of whether the Plaintiff's claim against ACC was statute-barred was appealed to the Supreme Court.

Determination by the Supreme Court

The Supreme Court considered that the Plaintiff's claim related to the "inherent features of the [B]ond" in that he suffered damage by the very fact of investing in the allegedly inappropriate and unsuitable transaction, rather than to a complaint that his investment was mismanaged. Accordingly, it ruled that the Plaintiff suffered an immediate loss – and therefore the cause of action accrued – on the date he entered into the contractual relationship with ACC i.e. on the date he purchased the Bond. Since that was more than 6 years before the Plaintiff commenced the proceedings, his claim was statute-bared by section 11(2)(a) of the Statute of Limitations, 1957. Accordingly it reversed the decision of the High Court.

The Gallagher Case and Cases Involving Other Types of Investment Product Distinguished

The particular features of the investment involved in the Gallagher Case were central to the Supreme Court's determination in that there was an immediate loss at the time of entry into the transaction, albeit with "difficulties of quantification and uncertainties and contingencies...... [which] do not in themselves prevent the early accrual of the cause of action". Accordingly, in such cases the limitation period would run from the date of the relevant transaction.

The Supreme Court acknowledged however that in some transactions where there is only a "mere possibility of a loss" at the outset – where for instance a person has been led by allegedly negligent advice or other negligent action to enter into a transaction – a contingent loss is involved and the cause of action may not accrue and the limitation period will not begin to run until such time as the loss arises, which will not necessarily be on the date of the relevant contract. Thus, Fennelly J acknowledged that an alternative date of accrual – namely at the end of the investment period, when it could be seen whether loss was suffered by measuring any gains in the shares against the interest paid on the loan – might be correct "in the cases of a different kind of investment, especially one where obligations of management and investment were undertaken".

The Gallagher Case and English Cases Distinguished

The Supreme Court's ruling in the Gallagher Case is considered more flexible than English case law on the issue of the accrual of causes of action. Broadly speaking the English cases establish that once a party relies on advice to his detriment by entering into a transaction whereby he fails to get that to which he was entitled, the cause of action is complete and damage occurs upon entering the transaction/executing the relevant document, notwithstanding the fact that quantification of the loss might be difficult. The Supreme Court judgment in the Gallagher Case however evidenced a willingness to consider a cause of action as accruing at a later time where the possibility (but not the value) of loss is uncertain at an early stage in certain cases.

Conclusion

The Supreme Court emphasised that the Gallagher Casewas determined on its "own particular pleaded facts" and focused on the particular features of the specialised investment product at issue. As such, it does not necessarily establish generally applicable principles in terms of limitation periods for financial loss claims based on negligence arising out of all types of investment product. It nonetheless represents a welcome clarification of and guidance on the law in this area and is also considered as highlighting the desirability of legislative intervention.

In this regard, the Law Reform Commission (the "LRC") has recommended the introduction of a basic limitation period of 2 years for contract and tort claims, running from the date of knowledge of the plaintiff i.e. the date on which the plaintiff first knew or ought reasonably to have known, that the injury, loss, or damage occurred, is attributable to the conduct of the defendant (and warrants bringing proceedings, assuming liability on the part of the defendant.2 This would however be subject to an ultimate limitation period ("long stop") of 15 years, running from the date of the act or omission giving rise to the cause of action (meaning most claims would be statute-barred after 15 years). The LRC also recommends however a judicial discretion to extend the 15 year time limit in exceptional cases, for instance where there is fraud or concealment by the defendant (for example, in a case involving financial loss).

If such proposals were implemented, they could provide some comfort to investors who only discover that potential losses have in fact materialised some time after the conduct complained of occurs (subject however to them acting promptly and reasonably once they discover facts giving rise to their claim). However, there is no indication that the LRC proposals are likely to be implemented in the foreseeable future and as such, we must continue to rely on judicial pronouncements such as those in the Gallagher Case for guidance.

Footnotes

1.The Plaintiff had also claimed damages for breach of contract but both parties agreed this claim was statute barred.

2.Currently in relation to personal injury cases only, the limitation period runs from the date of knowledge of the plaintiff rather than the accrual of the cause of action - section 11(2)(a) of the Statute of Limitations Act 1957 as amended by section 3(2) of the Statute of Limitations (Amendment) Act 1991.

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