1. What can an aggrieved investor do? Is it possible for them to get back the principal sum that they invested?
An investor could pursue legal action in tort [a wrong that involves a breach of a duty of care owed to someone else] and/or under contract law, as the facts suit. He could sue for damages in tort, or claim for damages for breach of contract and/or could also ask the court to rescind the contract so that he can get back what he paid.
The bank or financial institution would be pursued as the principal of the particular bank officer or broker in question who sold the “minibonds”. It would be difficult to pursue legal action against the issuers since the investor would normally have no direct dealings with them.
Moreover, the issuers of the products are most likely companies registered overseas with limited liability and limited financial resources. It would be fruitless to engage in legal action against the issuers directly.
A principal is liable for the negligence of his agent whilst acting in the course of his authority, as joint tortfeasors [persons who commit a tort] they are jointly and severally liable. If the principal gave the agent express or implied authority to commit an act which is wrongful under the law of tort, the principal will be liable, even though he may be the employer of an independent contractor.
Liability of the principal may also be founded under the doctrine of ratification. If one person commits a tort whilst acting on behalf of another person, albeit without his authority, and that other person later ratifies the act, he becomes just as responsible for the wrong as if he had authorised it initially, before its commission.
A bank, as the principal, would be vicariously liable for the actions of its employees who are acting in the course of their employment.
In order to determine whether or not a bank was negligent in selling the “minibonds”, the first thing to decide is whether or not a duty of care was owed to the investor.
Whilst a banker must exercise due care and skill in the business of banking, it is not part of his ordinary business to give advice regarding investments. In the normal course of events a bank does not owe a duty of care, whether in tort or in contract, to give any explanation or to advise the taking of independent advice, to a customer who comes to its premises in order to sign securities. However, if giving investment advice forms part of the ordinary business of a bank, the bank has a duty not to act negligently or fraudulently in giving such advice.
The manager of a finance company owes a duty of care to prospective investors where he claims skill and competence in investment, especially when he himself will benefit from the brokerage of an investment. The standard of care is that of an ordinary prudent and skilful financial adviser.
In other words, if a bank officer or broker professes himself to have skill and competence in investing in “minibonds”, a duty of care [a duty of care arises when one person undertakes an activity which could harm another person physically, mentally or economically] will be owed to the prospective investor.
If the bank assumed liability for the accuracy of the advice given and the customer relied on that advice, the bank will be liable to the customer under the tort of negligent misstatement.
If the investor relied on the bank officer’s words that the products were “just like a time deposit” or “100% principal-protected” (which in fact they were not), the bank would be liable (as the employer of the officer).
When an agent makes a contract on behalf of his principal with a third party, the transaction gives rise to legal effects between principal and third party, between agent and third party, and between principal and agent.
The general rule is that a principal, whether disclosed or undisclosed, is liable to the third party. An agent is neither liable under nor entitled to enforce a contract he makes on behalf of his principal. So if a bank officer or broker makes a contract on behalf of the bank or the financial institution with an investor, the bank or the financial institution will be liable to the investor under the contract.
There are 3 legal aspects an investor has to examine before taking legal action against the bank or financial institution involved: misrepresentation, undue influence and non est factum [not my deed]. These three terms are explained below.
A person is guilty of fraudulent misrepresentation if he makes an ambiguous statement intending it to bear a meaning which is to his knowledge untrue, and if the statement is reasonably understood in that sense by the other party. In such a case it is no defence for the person making the representation to show that, on its true construction, the statement bore a meaning that was in fact true.
A misrepresentation is negligent if it is made carelessly and in breach of a duty owed by the representor [the person making the representation] to the representee to take reasonable care that the representation is accurate.
A misrepresentation generally has no effect unless it is material. That is, it must be one which would affect the judgment of a reasonable person in deciding whether or not, or on what terms, to enter into the contract; or one that would induce him to enter into the contract without making such inquiries as he would otherwise make.
There are two exceptions to the requirement of materiality. First, a person who has successfully perpetrated a fraud cannot be heard to say that the representation which he used to achieve this end was immaterial. Secondly, every representation is material if the contract so provides.
The person to whom the misrepresentation was made must have relied on it. He therefore cannot rescind, or claim damages, for misrepresentation if the representation did not come to his notice, if he knew the truth, if he took a deliberate risk as to the truth of the matter stated, if he would have entered into the transaction even though he had known the truth, or if he relied on his own information.
To give an example, if the customer would have purchased the products anyway no matter what the broker or bank officer told him, the broker or the bank officer could not be held liable as there was no reliance on them by the customer.
Under common law a person who suffers loss as a result of acting in reliance on a fraudulent statement can recover damages in court. He can generally do this whether he rescinds the contract or not, though he cannot pursue both remedies if this results in his recovering twice over for the same loss.
The general rule is that misrepresentation makes the contract voidable at the option of the representee.
Undue influence :
The law of equity [legal principles which reflect fairness when the strict application of law would give rise to harsh results] gives relief on the ground of undue influence where an agreement has been obtained by certain kinds of improper pressure exercised by one contracting party on the other party.
In a number of situations the relationship between the parties involved in the contract is such as to give rise to a presumption of undue influence; and in these situations there is no need to show that undue influence existed and had been exercised.
The relationship between a banker and a customer will not normally give rise to a presumption of undue influence; but it can do so in exceptional cases if the customer has placed himself entirely in the hands of the bank and has not been given any opportunity to seek independent advice. For instance, if a customer and his banker have a long standing relationship and he placed himself entirely in the hands of his banker when purchasing “minibonds” without having the opportunity to seek independent advice, a presumption of undue influence could be inferred.
Non est factum (“Not my deed”) :
As a general rule, a person is bound by his signature to a document whether he reads it or understands it, or not.
So an investor who singed a document or contract to buy “minibonds” is bound by it and the terms therein. The terms would inevitably include the “risk disclosure clause” (see above) and a clause limiting or excluding the bank’s liability when the investment falters. However, the law recognises that if a person who could not read executed a deed after it had been incorrectly read to him, he is not bound by it. He could plead non est factum (i.e. not my deed).
Non est factum can only be pleaded where the mistake of the signer was a serious one. The difference between the document as it was and the document as it was believed to be must be radical or substantial or fundamental. The plea of non est factum is not normally open to a person who is merely ignorant of (as opposed to mistaken about) what he is signing.
Carelessness of the signer excludes the doctrine of non est factum. The signer can not rely on the doctrine if he or she has been careless in signing the document without reading it. For the same reason, a person cannot rely on the doctrine if he signs a document containing blank spaces, and these blank spaces are filled in later by another party otherwise than in accordance with the signer’s instructions.
In order to succeed, an investor would have to show that he did not know what he was signing or that the document/contract was incorrectly explained to him.