Michael Axe reports on a recent Court of Appeal decision that reinforces how difficult it can be to prove that the negligent advice provided was the actual cause of the losses suffered. This follows on from our earlier article Cause and effect – establishing the true cause of damage in professional negligence claims.
In order to successfully bring a claim for professional negligence, it is not enough for a claimant to merely show that their professional advisor provided negligent advice, they must also prove that the negligent advice was the true cause of any losses which the claimant suffered. However, the line between those losses which were caused by the negligent advice and those losses which were not is a fine one.
This was illustrated in our original article, where in one recent case the claimants were successful because the court was satisfied that the claimants would have been able to avoid their losses by following the professional advice given had it been given correctly, whereas in another recent case the claimants were unsuccessful because the Court concluded that the losses would have been suffered even if the professionals had properly advised the claimants, because it was unlikely that the third party would have agreed to the cooperate.
The question of cause of loss was considered further in:
Haugesunde Kommune v Depfa ACS Bank
In this recent case, the Court of Appeal had to decide whether a firm of Norwegian solicitors was liable for significant losses suffered by an Irish bank arising from a transaction it entered into with two Norwegian local authorities (“the municipalities”). The bank had obtained advice from the solicitors on the question of whether or not the municipalities had the necessary authority under the relevant Norwegian law to enter into the proposed contracts. The solicitors advised the bank that the contracts were not “loans” within the definition of the applicable Norwegian law, and therefore the municipalities had the authority to enter into the agreements.
Under the terms of the contracts lump sums were paid by the bank to the municipalities, who in turn invested these sums. However, the investments were ultimately unsuccessful, and the municipalities defaulted on their repayments to the bank. When the dispute between the bank and the municipalities reached court, it became apparent that the contracts had been invalid as the municipalities did not have authority under Norwegian law to enter into them. The bank therefore brought the solicitors into the proceedings, on the basis that the advice they provided had been negligent.
At the original trial, the solicitors were found liable to the bank on the basis that the bank would not have advanced the money to the municipalities if the solicitors had advised it correctly. The solicitors were ordered to pay millions of pounds in damages to the bank, and so (perhaps unsurprisingly) appealed the decision to the Court of Appeal.
Invalid transaction or credit risk?
As if to demonstrate just how complicated this area of law is, although all three judges in the Court of Appeal agreed to overturn the original judgment against the solicitors, they each arrived at the same decision but for slightly different reasons.
Lord Justice Rix relied on the scope of the solicitors’ duty, noting that the solicitors had only been instructed to advise on the validity of the contracts under Norwegian law, not on the creditworthiness of the municipalities. The solicitors had, however, warned the bank that it could not execute a judgment against the municipalities, and that therefore repayment was dependant on the creditworthiness and good faith of the municipalities.
Lord Justice Rix ruled that the bank’s losses had actually been caused by the municipalities’ financial difficulties, on the basis that if the municipalities had not suffered losses of their own as a result of their disastrous investments, then they would have repaid the money owed to the bank. On this basis, Lord Justice Rix ruled that the bank’s losses were caused by matters outside the scope of the solicitors’ duty (i.e. the creditworthiness of the municipalities).
Lord Justice Gross disagreed with Lord Justice Rix in relation to some of his conclusions, but agreed that a key issue was that the solicitors had advised the bank that it would not be able to enforce a judgment against the municipalities, and therefore the responsibility for the credit risk lay with the bank, not the solicitors.
Crucially, Lord Justice Gross stated that:
“merely because in one sense it can be said that the transaction would not have taken place but for [the solicitors’] negligence … it does not follow that [the solicitor] is liable for the whole of [the bank’s] loss.”
Lord Justice Gross went on to say that for the bank to be able to recover damages from the solicitors, it would have had to show that the losses were caused by the invalidity of the transaction, not by the enforcement/credit risks which had been accepted by the bank. Crucially, in this case, he ruled that there was no evidence that the municipalities’ failure to repay the money was a result of their unwillingness to honour their obligations due to the invalidity of the contracts, and therefore the solicitors were not liable for the bank’s losses.
No Simple Answers…
The judgment in this case highlights how difficult it can be to establish the true cause of the losses suffered. It may seem illogical to some for the Court of Appeal to agree that the transaction would not have taken place at all but for the solicitors’ negligence, but to then decide that the solicitors’ negligence was not the actual cause of the losses. And whilst the simplistic approach would be to assume that if there had been no negligence, there would have been no transaction, and if there had been no transaction, there would have been no loss, this decision illustrates that things are rarely that straightforward in professional negligence claims.
It remains to be seen whether this case will be appealed further, but if it is, it will be no easy task to predict the outcome, or equally the reasons underpinning it.
Click here to read our earlier article Cause and effect – establishing the true cause of damage in professional negligence claims.
Click here to view our Professional Negligence page.
For further information on this or any other professional negligence issues, please contact Michael Axe by emailing Michael or by calling him on 08450 990045, or speak to your usual contact in the Commercial Disputes Team.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.