The Court of Appeal has allowed an appeal and overturned an order against Wikborg Rein & Co (“WR”), a firm of Norwegian solicitors, for negligent advice. WR had incorrectly advised an Irish bank, Depfa ACS Bank (“Depfa”) that two Norwegian municipalities or local authorities (the “Kommunes”) would not be acting beyond their power if they entered into two “zero coupon swaps agreements” (the “swaps”) with the bank. The solicitors were found not to be liable for the losses resulting from the Kommunes inability to repay the £28million the bank had advanced once the void nature of the swaps had come to light. Despite their negligent advice in relation to the ability of the Kommunes to enter into such agreements, the solicitors had taken no responsibility for their creditworthiness, good faith or for the fact that the bank could not lawfully obtain restitution against them when they defaulted on the arrangement.

Background

WR had advised Depfa on the swap transactions, and in particular as to whether the Kommunes had the power and authority to enter into the swaps.  At first instance it was held that the advice WR had given to Depfa was advice that no reasonably competent lawyers would have given and so they were held liable for the losses suffered and to reimburse Depfa for its full loss.

The Appeal

On appeal WR submitted that the principle first set out in the House of Lords authority of South Australia Asset Management v York Montague (SAAMCo) should be applied to this case and thereby limit WR’s responsibility for matters which were within the scope of its duty.  WR believed their duty was to give a specific piece of advice on the capacity of the Kommunes to enter into the swaps, on the basis that they were not loans. Although WR was erroneous in its advice, and it was acknowledged that Depfa would not have entered into the transactions unless it had received the advice it did, WR contended that they were not responsible for all the consequences that flowed from the advice they had given and which had been relied on. Instead, they were only responsible for the consequences of that advice being wrong. Those consequences were that a contractual obligation on the part of the Kommunes to repay the advances some time in the future, at a low rate of interest charged, had become an obligation in restitution to repay the advances at once, and if not so paid they were to incur a higher rate of interest.

In SAAMCO the House of Lords decided that in an ordinary case, a valuer is responsible to a lender for the loss caused by his valuation being wrong, to the extent that is was wrong, but not for any additional loss caused by a fall in the market. Lord Hoffman distinguished between issues of causation, measure of loss and scope of duty. Particular attention was paid to the last concept and the question as to whether the loss suffered was as a result of the duty owed. WR submitted that it was not and by extension they were not responsible for the Kommunes’ loss of the money which had been advanced to them for their disastrous investments. The creditworthiness of the borrower is a risk for the lender, not for the lawyer.

The Court of Appeal decision

Lord Justice Rix said: ‘WR was asked to advise about a specific question, the validity of the proposed swaps. It did not have a general retainer to report or notify problems about the proposed transactions. Depfa knew that it ultimately relied on the creditworthiness and good faith of the Kommunes: and on those qualities Depfa made up its own mind and was wholly confident.” It was thought to be harsh to attribute a loss to a solicitor that had occurred due to a lack of creditworthiness when the scope of the solicitor’s duty was merely to advise on the validity of a transaction.

Lord Justice Gross agreed and added that: “Even if the contract was valid, Depfa had been advised that it could not enforce a claim against the Kommunes. So far as concerns the credit risk, that was for Depfa, not its legal advisers.”

Comment

This Court of Appeal authority applies SAAMCo to the duty of a solicitor.  It endorses the previously held belief that it is not always sufficient to show that the transaction would not have taken place but for the negligent advice. The key to the scope of a solicitor’s duty is their retainer. If of a general nature, the solicitor is at risk of being liable for the whole of the client’s loss if they would not have entered a transaction but for the negligent advice. However, if a solicitor has a restricted form of retainer, they can argue now that they are only liable for that part of their client’s loss which arose from their advice being wrong.

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