Civil liability for disclosure violation:
the loss of chance theory 

At this time of financial instability, civil liability for disclosure violation is a much-debated issue. Indeed, with regard to stock markets, the question arises whether investors who acquired shares on the basis of inexact or misleading information disclosed by an issuer may claim compensation to the issuer
that is responsible for the damage he suffers?

To reply to this question, it is necessary to review the three cumulative conditions that must be met for someone’s civil liability to be incurred; the fault, the damage and the causal link. Specifically, the greatest difficulty facing disappointed investors trying to claim compensation for their damages lies more often on the impact of the misleading information rather than on its accuracy or its misleading nature that is relatively easy to gauge. Therefore, it is deliberately that this contribution does not address the issue of the fault of disinformation that we consider as proven for the purpose of this analysis.

For the sake of clarity, let us imagine a case of civil liability incurred due to disinformation regarding public stock. Suppose I purchased stock issued by a company in order to partially finance a capital increase raised to acquire another company. Shortly afterwards, my investment has lost almost half its value because of the subprime crisis resulting in doubts about the issuer’s financial capacity and value.  May I claim compensation from those who are responsible for the content of the prospecus related to the transaction,  for having provided  information deemed unbalanced about the issuer’s exposure to the subprime crisis?

1. In this context, proving the causal link between fault and damage is difficult

Under Belgian civil liability’s law, in addition to the necessity to show that the fault and the damage conditions are met, such action would also require the proof of the causal link between the fault and the damage. In other words, the financial loss incurred by the investor has to be the direct result of the misstatements in the information provided by the issuer.

Yet, as illustrated in the example above nothing is less certain. Indeed, in order to show the existence of a causal link between the fault and the damage, two questions arise. Firstly, would I have bought the shares in the absence of the alleged misstatements in the prospectus. Secondly, are the misstatements in the prospectus the direct cause of the loss of value of my shares or does my damage also result from the overall instability of the financial markets?

Undoubtedly, this dual demonstration is likely to raise difficulties as a share price responds to various variables. First, how can it be sure that the investor took its investment decisions based on the inaccurate or misleading information provided in the prospectus? Maybe did he simply follow the advice of a friend? Secondly, how can it be proven that the shares have seen a drop in their value due to the disclosure of the disputed information? Perhaps the fall in the share price was the result of instability of the financial market as a whole?

The Prospectus Law of 16 June 2006 is responding to the first question by irrebutably presuming that an investor takes his investment decision on the basis of information disclosed by the issuer regardless of whether he had real knowledge of the disputed information or not. In fact, this assumption is nothing more than the application of the efficient market hypothesis that assumes that all information available on the market is instantly reflected  in the stock price. Therefore, regardless of whether or not the investor has taken its investment decision on the basis of the disputed information, the investor will be considered as harmed just because he purchased stock  at a market price above its real value, thereby incurring a loss.

However, the Prospectus Law does not cover the second question raised above. As a matter of fact, the investor who, according to the Prospectus Law, is exempted from showing the decisive influence of the misleading information on its investment decision, must still prove the impact that had the disclosure of the misleading information on the evolution of the stock price. In the context of a civil liability claim brought against an issuer, the investor will not be entitled to compensation for its full loss as long as he cannot prove that the share drop is exclusively due to the disclosure  of the misleading information and not to the instability of the financial market as a whole.

Hence, the issuer does not have to fully compensate an investor for its damages and this, understanding that in some cases, if the investor had not purchased at all the disputed stock, he would not have incurred any loss on its investment (not even losses due to financial market instability). In a nutshell, he would have had the chance no to incur any financial loss at all.

2. Will the loss of chance theory bring a solution?

It is generally in the medical sector that courts have used the loss of chance theory that allows victims to grant fair compensation. Although the medical fault is not the unique reason explaining the health condition of the patient, it has at least contributed to decrease his chances of health improvement.

Can we adopt a similar reasoning in the field of financial markets? Although the misleading information is not the only reason explaining the drop of the stock value, it has in any case compromised  the chances of the investor of not investing, and so, not to run the risk  to incur a loss.

The admission of the loss of chance theory, located at the border between the causal link and the damage, is framed by the Supreme Court’s jurisprudence that is under Belgian law a source of high controversy.

In a first decision of 2004, the Supreme Court excluded the possibility to claim compensation for a damage that consisted in the loss of chance not to incur a damage that has occurred. The loss of such a chance appeared to be an imagined damage interspersed between the fault and the real damage in order to establish a clear causal link.

The circumstances of the case were sadly tragic, and related to  a woman who had been vitriolized by her husband. She filed complaint against her husband several times before her aggression. According to her, if the prosecutor responded to her complaints she would not have been vitriolized. In other words, she would have had a chance not to be vitriolized.

The Supreme Court rejected her argumentation and stated that the damage to compensate was to have been vitriolized and not to have lost a chance not to be vitriolized. In other words, it condemned the artificial use of the loss of chance theory of not being vitriolized.  According to the Supreme Court, the victim raised the loss of chance theory just because she could not prove that if her husband had been presented to an investigative judge she would not have been vitriolized. Hence, it was not certain that the investigative judge would have decided to arrest her husband.

Actually, the decision makes a distinction  between two hypothesis: the one that are real cases of loss of chance and the one where the victim tries to avoid the application of rules regarding the causal link by using the loss of chance theory.

The case decided by the Supreme Court was one where the victim was trying to avoid proving the causal link by using the loss of chance theory. As a matter of fact, the chance had been enjoyed and the damage occurred. Therefore, according to the Supreme Court, the victim could not invoke the loss of chance theory because that theory would have ended up in creating an imaginary damage distinct from the real damages. And since the Belgian civil liability law system is an indemnities-based law system that compensates the damage, but the whole damage and nothing but the damage, there was no room for an imaginary damage to insert between the fault and the actual damage.  

The Supreme Court highlighted that if the chance had not been enjoyed and the prejudice did not occur, the victim could have invoked the loss of chance theory. Hence, in that case it would not have ended up at the creation of an imaginary damage interposed between the fault and the actual damage. For instance, one can think to the horse that cannot take the start of the race because its carrier is too late. In such a case, the carrier can be held responsible on the basis of the loss of chance theory since the horse owner does not incur other damages than the one to have lost a chance to win the race.  

However, the Flemish chambers of the Supreme Court have not followed this decision. According to them, the loss of chance can be compensated if the fault is the sine qua non condition of the loss of chance. In other words, no matter if the damage has occurred or not, the Flemish chambers of the Supreme Court claim that if the chance was sufficiently serious and there is a certain causal link between the loss of chance and the fault, the victim can claim for a compensation.

Recently, two decisions of the French chambers of Supreme Court of  6 December 2013 confirmed the decision made by the Supreme Court on 1 April 2004 that condemned the concealing over causal uncertainty by the use of the loss of chance theory. These two decisions were about cases where the chance had been enjoyed and the damage occurred. The Supreme Court points out that it is not possible to use the loss of chance theory in order to avoid the requirement of a certain causal link if the chance has been enjoyed, the damage occurred and, in some ways, the misfortune already happened. In contrast, according to the Supreme Court, if the chance has not yet been enjoyed, the victim can claim for compensation using the loss of chance theory.

3. What to think about those decisions?

It is true that technically speaking the loss of chance to avoid a damage that occurred can be seen as a distinct damage that is possible to value independently from the damage itself, since insurance companies calculate insurance premiums every day, the aim of which is to cover damages. In other words, if one investigates the question in terms of damage, it is technically possible to consider that the loss of chance not to incur damage has an independent economic value distinct from the real damage. 

On the other hand, if one investigates the question in terms of the causal link, one must recognize that there is a difficulty to consider the existence of a certain causal link between the loss of chance not to incur a damage that occurred and the fault. There is something problematic from the causal link perspective. In fact, in some ways an artificial damage distinct from the real damage is created,  in order to show the definite causal link.

What about these decisions applied to the civil liability for disclosure violations?

The most recent decision of the French chambers of the Supreme Court confirming the 2004 decision condemns in some ways the use of loss of chance theory to claim compensation for misstatements in a Prospectus. In fact, it is clear that in that case the chance has been enjoyed and the damage occurred.

However, according to the decision of the Flemish chambers of the Supreme Court, an investor will be able to use the loss of chance theory to claim for compensation of its financial loss on the condition that the misstatement is the sine qua non condition of his damage.

11 May 2015

Ionathan Ventura
Leo Peeters - leo.peeters@peeters-law.be


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