The 2012 case of Tomasetti v Brailey in the New South Wales Supreme Court examined a wide range of issues including negligence, misleading or deceptive conduct, breach of contract, and a breach of the Corporations Act.
In this case, the plaintiff (Tomasetti) was a lawyer and the defendant (Brailey) was his accountant and financial planner.
The decision handed down was in favour of defendant, however, many advisers are still grappling with complaints where the client claims they did not have a full appreciation of what they were doing, or that the adviser did not place them into a fully-informed position.
The Plaintiff
The plaintiff was admitted to practice as a barrister in 1979 and was appointed senior counsel in 2007. The Plaintiff described himself as a specialist environmental lawyer and compulsory acquisition lawyer. From 2000 to 2005 he averaged $954,000 in professional fees per year. As a result of the arrangement of his financial affairs, he paid an average of $91,000 in tax (and the Medicare levy) per year.
The defendant was the plaintiff’s accountant who worked in an accountancy firm that set up a financial planning business.
Background to the Dispute
The plaintiff and the defendant met in 1998 and during this meeting, the plaintiff explained that after his divorce he had been left with debt. He wanted to improve his position over time. At their meeting, it was revealed that the plaintiff wanted to invest in things that give modest capital growth, were tax-effective and secure.
A fact find was completed and in response to a question about what types of investments the plaintiff wished to avoid, the response provided was, “nothing speculative”. From 2000 to 2005 the plaintiff invested a total of $1,333,568 in various agricultural investments. Of these investments, between 75 per cent and 100 per cent of the initial investment costs were borrowed.
The plaintiff’s claim for past losses exceeded $4 million.
When making these investments, the plaintiff conceded that he did not read all the application forms before investing and he was not prepared to swear that he did not scan documents before he signed them. The plaintiff stated that he did not want to read all the documents provided to him as he was paying the defendant to provide him with advice.
The Arguments Raised
One of the arguments raised by the plaintiff was that although he was aware he would have to pay maintenance costs on these investments, he thought they would be, “trivial” and the defendant did not discuss maintenance costs with him.
The plaintiff’s discretionary spending was considered during the hearing and it was revealed that he and his wife had a mortgage of $1.7 million or $1.8 million with monthly interest charges of around $10,000. The plaintiff’s wife also gave evidence that it was not unusual to spend $10,000 per month on a credit card on discretionary spending. The plaintiff’s wife stated they would always have to borrow to pay the invoices for the agricultural investments.
The court accepted that the defendant spoke to the plaintiff about the need to reduce his spending however, this was something the plaintiff “appeared reticent to address”. It was not clear what sort of records the defendant could produce to satisfy the court that this took place.
The court found that the plaintiff could not establish that the defendant failed in its duty of care owed to him. The court did not accept the opinions of the plaintiff’s expert witness and stated that the expert did not establish what the defendant failed to do. It appears that the plaintiff should have been more precise with regards to what the defendant should have done in meeting its duty of care to him.
An allegation was also made that the defendant did not properly assess the suitability or appropriateness of the investments that he recommended. The court dealt with this issue by stating that the evidence provided by the plaintiff’s expert was inadmissible as it was premised upon material in the plaintiff’s affidavit.
In handing down its decision in favour of the defendant, the court stated that even if it had found in favour of the plaintiff, there would have been a very real question about contributory negligence which was described as, “manifest”. The plaintiff was an “intelligent man with significant experience in commercial and financial matters; yet he was reckless to an extreme degree”. The court found his “claim to have made substantial financial commitments by signing documents with a mental blindfold on is astounding”.
The Lesson for Financial Advisers
There are many lessons for financial advisers in this decision.
Informed Consent
A fully informed client is less likely to complain or lodge a complaint.
Some may argue that the defendant was not without fault in this dispute, although the court found the defendant did not breach his duty of care owed to the plaintiff. Informed consent was definitely an issue and it appears the defendant did not do enough to test the plaintiff’s knowledge about the decision he was about to make.
Had the defendant properly tested the plaintiff’s knowledge of the investments and kept records of his enquires, this matter may have resolved before it went to court.
The Court’s Approach
The approach taken by the court was that the plaintiff should have convinced the court regarding what the defendant should have done.
Perhaps the outcome may have been different had the plaintiff mounted a better argument about what the defendant should have done such as providing the plaintiff with advice documents on budgeting or debt reduction strategies rather than providing the plaintiff with more prospectuses however, it was noted that the plaintiff appeared reticent to address his discretionary spending.
It is worth considering if the outcome would have been different had the matter been dealt with at FOS. According to the FOS Terms of Reference, FOS can have regard to a number of factors such as legal principals and good industry practice, FOS is not bound by any legal rules of evidence. It is questionable what regard, if any would FOS or would have had to the expert report which the court found was largely inadmissible.
Some of the issues raised concerned the appropriateness of the fact finding and the faults with advice documents. The court formed the view that despite any problems with the advice documents, the plaintiff would have proceeded with the investments and any issues with the advice documents did not contribute to the plaintiff’s loss, despite the fact find recording that the plaintiff did not want to invest in anything speculative.
It seems the court’s decision to find in favour of the defendant may have been influenced by the plaintiff’s motivation to reduce his income tax combined with his significant experience in commercial matters despite the plaintiff claiming he had no idea about the products into which he was investing.
In this instance it appears the plaintiff was the sort of candidate for whom tax effective investments were suitable based on his circumstances which may have also impacted on the Court’s decision. Given the plaintiff’s large income and discretionary spending it is also worth considering if FOS would have arrived at the same conclusion as the court if it had dealt with this dispute.
