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Counter-factuals and financial advisors: what can Trump and Mourinho learn about Alternative Facts?

News | Fri 27th Jan, 2017

After Manchester United’s 2-1 defeat to Hull City last night, the manager of the losing side maintained that the score was actually 1-1 as he had only seen two goals scored. It seems he was simply offering some “alternative facts” in the manner of the White House Press Secretary’s when speaking about the size of the crowd for President Trumps’s inauguration.

Professional negligence lawyers have long known about such counter-factuals: the alternative realities that occur if defendants are not negligent.  These alternative facts are important because the amount of damages a claimant receives depends on the court accepting its version of what would have happened.

Counter-factuals are particularly important in claims against financial advisors: if properly advised would the claimant have (a) only avoided the transaction actually entered into, (b) invested in an alternative profitable scheme, or (c) invested in an alternative, equally ruinous enterprise?

Credible counter-factuals were always going to be important in the recent case of Harlequin Property (SVG) Ltd v Wilkins Kennedy. The claimant was involved in a Caribbean luxury resort development using a business model that had elements that resembled a ‘ponzi’ scheme. Amongst the allegations established against its financial advisor was that they negligently told the claimant not to have a contract with the main contractor. The counter-factual, that the claimant would have entered into a formal, detailed contract and been fully protected from the main contractor’s failure and frauds, was not made out. If given the advice to have a contract the claimant would not have taken it. By contrast the advice that should have been given at a late date, that there should be a formal valuation process, would have been taken and the claimant would not have overpaid the contractor around US$25m.

Early thought needs to be given to counter-factuals in claims against financial advisors. If a new counter-factual is introduced after the limitation period has expired the court may refuse permission if the counter-factual is a new claim that does not arise out of the same facts or substantially the same facts as an existing claim (see CPR 17.4). Thus in J J Coughlan Ltd v Charterhouse (Accountants) LLP (20 December 2016) a deputy High Court judge refused permission to an amendment to allege that an alternative tax planning method should have been recommended to the claimant.

Unfortunately for Mr Mourinho, referees as decision makers “liable to be shot from both sides” (per Lord Simon in Arenson v Arenson), do not owe a duty of care when awarding penalties and we are unlikely to see a league table revised to take account of counter-factuals anytime soon.

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