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2 0 1 4

Constructive Knowledge
and Unsophisticated
Investors - A Matter of
Common Sense?

Arvin Lee
& Denise Teo

A claimant does not have all the time in the world to bring a civil claim. Statutory
rules restrict the time period for commencing a legal action, which varies with the
nature of the claim. One reason for imposing such limitation periods is that
prospective claimants should act vigorously to enforce their legal rights, as it is
unfair to potential defendants to have the threat of litigation hanging over them
indefinitely.
In Singapore and the United Kingdom, the time to bring a claim in negligence starts
to run from the date on which the cause of action (negligence) accrued, and expires
6 years from that date. But where the claimant is unable to discover the cause of
action promptly, the law in Singapore and the United Kingdom allows the claimant
to re-start the clock from the time that the cause of action is discoverable, unless
the claimant had sufficient knowledge before then to bring the claim.
For an investor who intends to re-start the clock for a time-barred claim in
negligence against a financial advisor, under what circumstances would the investor
be found to have prior sufficient knowledge to bring the claim earlier? This issue
was recently considered by the English Court of Appeal in Susan Jacobs v Sesame
Limited [2014] EWCA Civ 1410 (Jacobs) decided on 30 October 2014. The Court
did not allow the financially unsophisticated claimant to re-start the clock and
adopted a common sense approach in finding that she had constructive knowledge
of matters relevant to bringing her claim in a timely manner. This article examines
the concept of constructive knowledge in Jacobs, and how financial institutions can
take steps to place themselves within the protection afforded by the holding.

Facts
In 2005, the claimant, then a warden in a block of residential flats, was advised by a
member of the Defendant, which was a network of financial advisors, to invest in a
Legal and General Investment Bond (the Bond) for at least five years. The
claimant decided to invest 65,000, which represented 75% of the life savings of her
and her husband.

Note: This article is only intended for general reading. Under no circumstances is it to be relied
upon in substitution for specific advice on any issue(s) that may arise relating to its subject matter.

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Between 2008 and 2011, the claimant made a few withdrawals and eventually
surrendered the Bond in February 2012 at a value of 53,152.32. The claimant
consulted solicitors on her alleged loss of about 7,968.32 and commenced legal
action against the Defendant in November 2012. She claimed that the Defendants
advice was negligent and that the Bond was unsuitable for her requirements, as she
was an inexperienced investor who had never held any form of non-deposit
investment previously.
Moreover, the claimant asserted that the Defendant ought not to have
recommended anything other than an interest bearing deposit as she had an
extremely cautious attitude towards risk and could not afford to lose any part of her
investment. Although her claim was time-barred under the default limitation period
of 6 years, she claimed that it was not until February 2012 that she knew either that
she had suffered a loss or that she might have received inappropriate advice.
In this regard, the claimant relied on the special time limit under s 14A of the UK
Limitation Act 1980 which provided that where a claim was time-barred, the period
of limitation would be extended by 3 years from the date that the claimant had
both the knowledge required for bringing an action for damages in respect of the
relevant damage and a right to bring such an action. Specifically, s 14A(6)(a)
provides that the knowledge required for bringing an action for damages in respect
of the relevant damage includes knowledge of the material facts about the
damage in respect of which damages are claimed.
The claimant argued that the starting date for reckoning the period of limitation in
her case should be postponed to February 2012 when she first had sufficient
knowledge of the material facts to bring a claim against the Defendant. If the special
time limit applied, the claimant would be permitted under s 14A(4)(b) to sue the
Defendant for negligence within 3 years from February 2012. As the claimant
commenced proceedings in November 2012, her action would therefore not be
time-barred.
The Defendant denied that it had been negligent but asserted, in any event, that the
claimant possessed sufficient knowledge of the material facts to bring a claim
against the Defendant not in February 2012, but in July 2009 as by then she had
received four annual statements, two of which showed a catastrophic fall in the
value of the Bond. Following a telephone conversation with the Defendants
representative in July 2009, the claimant decided to transfer her investment, which
had been all placed in one market sector, to a more diverse portfolio.
However, the trial judge decided against the Defendant as he found that in July
2009, although the claimant knew that the investment as initially recommended by
the Defendant had been defective in that it was concentrated in one market sector,
she had genuinely believed the Defendants alleged guarantee that she would be
returned her initial investment of 65,000 at the end of the five-year period,
whether or not any profits were made.

Note: This article is only intended for general reading. Under no circumstances is it to be relied
upon in substitution for specific advice on any issue(s) that may arise relating to its subject matter.

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Decision
The English Court of Appeal allowed the Defendants appeal, holding that the
claimant could not take advantage of the special time limit in s 14A. The Court held
that it was not necessary to decide whether the claimant actually knew in July 2009
that she could bring a claim against the Defendant. It was beyond sensible
argument that [the claimant] had in July 2009 acquired relevant constructive
knowledge, in the sense that she might then reasonably have been expected to
learn that she had suffered damage because the return of the amount invested was
not guaranteed so that the product was from her perspective defective in that
regard also [emphasis added].
Even though the Court took into account the claimants navet as an investor, it
observed that the legal test of constructive knowledge under s 14A is an objective
one. In particular, s 14A(10) provides that the constructive knowledge required
included knowledge which [a claimant] might reasonably have been expected to
acquire
(a)

from facts observable or ascertainable by him; or

(b)

from facts ascertainable by him with the help of appropriate expert

advice which it is reasonable for him to seek.

However, s 14A(10) contained a proviso that a claimant would not be taken to

have knowledge of a fact ascertainable only with the help of expert advice so long
as he has taken all reasonable steps to obtain (and, where appropriate, to act on)
that advice.
Based on s 14A(10), the Court found that in July 2009, the claimant might
reasonably have been expected to do two things. Firstly, she should have asked the
Defendants representative whether she was guaranteed to recover her investment
despite the catastrophic fall in value of the Bond. Even if seeking advice from the
Defendants representative constituted appropriate expert advice under s 14A(10)
(b), it was advice which was both easy to obtain and free, which would not trigger
the proviso.
Secondly, the claimant should have reviewed the product literature that was given
to her at the outset, as she would then realize that the return of her initial
investment of 65,000 was not guaranteed.

Comment
The effect of Jacobs is that, applying a common sense or sensible approach, an
inexperienced or unsophisticated investor may be presumed, under section 14A(10)
of the UK Limitation Act 1980, to have knowledge of the material facts to bring a
claim in negligence against a financial adviser, even if the investor did not actually
know the relevant facts. As pointed out in Jacobs, the proper test for determining
constructive knowledge is not what a reasonable inexperienced investor with the
characteristics of the claimant might have been expected to do, but what facts
might have been reasonably ascertainable by the claimant herself in the
circumstances of the case.

Note: This article is only intended for general reading. Under no circumstances is it to be relied
upon in substitution for specific advice on any issue(s) that may arise relating to its subject matter.

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The decision in Jacobs is relevant to Singapore, as our Limitation Act contains a

similar provision to s 14A(10) of the UK Limitation Act 1980. Whether the Singapore
courts will take a similar approach in assessing constructive knowledge remains to
be seen. Nevertheless, one lesson that financial institutions can draw from Jacobs is
the importance of documenting financial advice given to the customer, as it is likely
to assist in, when a dispute arises, reconstructing the latters state of mind
concerning, and knowledge (actual or constructive) of, the financial product in
question at the material time. The difficulty in Jacobs regarding whether the
Defendant had guaranteed the return of the claimants basic investment could
have been avoided if the Defendant had, with appropriate legal advice, created a
checklist to incorporate an acknowledgement by the claimant of the information
received from the Defendant at appropriate junctures.
For more information, please contact:

Arvin Lee
Partner, Litigation and Dispute Resolution
(65) 6381 6756
arvin.lee@rhtlawtaylorwessing.com

Denise Teo
Associate, Litigation and Dispute Resolution
(65) 6381 6923
denise.teo@rhtlawtaylorwessing.com

RHTLaw Taylor Wessing LLP 2014

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Note: This article is only intended for general reading. Under no circumstances is it to be relied
upon in substitution for specific advice on any issue(s) that may arise relating to its subject matter.

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