UK: Caught In The Crossfire?

The current economic climate has led to a substantial rise in claims against solicitors, including circumstances where solicitors are dragged into proceedings between commercial parties when one fails to honour an agreement.

The case of Haugesund v Depfa saw a Norwegian law firm brought into a dispute between counterparties to a cross-border "swap" agreement following the financial crisis. The solicitors had given what would typically be considered a routine opinion about the capacity of one of the parties.

Facts

In 2004 and 2005, two Norwegian municipalities, or Kommunes, entered into swap contracts with Depfa ACS Bank (Depfa) essentially providing a loan to the Kommunes by Depfa. The sums involved were around NOK 400 million. These arrangements were made rather than a loan agreement because section 50 of Norway's Local Government Act 1992 restricted the capacity of the Kommunes to raise loans. Depfa sought advice that the swap agreements were not caught by section 50 from Wikborg Rein, a firm of Norwegian lawyers.

Wikborg Rein advised that the swap contracts would not be caught by section 50 and that the Kommunes had full capacity to enter into such arrangements. For the purposes of the issues before the Court, the validity of the swap agreements was the only issue on which Depfa required Wikborg Rein's advice. However, Wikborg Rein had also advised Depfa that a successful claim against the Kommunes could not be enforced under Norwegian law. As such, it was accepted that Depfa knew and was willing to take the risk that it would not be possible to execute a judgment against the Kommunes and that Depfa bore the sole credit risk of the transaction. The swap contracts were governed by English law and subject to the English courts' jurisdiction.

The Kommunes performed their payment obligations under the contracts for several years. However, following the disastrous performance of investments entered into by the Kommunes with the borrowed funds, questions were raised in Norway as to the validity of this type of transaction. The Kommunes declined to make further payments and commenced proceedings in England for a declaration that the contracts were invalid. Depfa counterclaimed that if the contracts were invalid then it was then entitled to restitution in respect of the sums that it had advanced to the Kommunes. The Kommunes sought to defend the restitutionary claims by the defence of change of position (due to the loss of the funds).

Depfa also brought a claim against Wikborg Rein, alleging that it had entered into the swap contracts in reliance on Wikborg Rein's negligent advice. It was assumed (and was not suggested otherwise) that Norwegian law did not differ from English law in relation to solicitors' obligations to their clients.

At first instance it was held that: (1) the swap contracts were void; (2) the Kommunes were liable to make restitution to Depfa in sums that had been agreed; and (3) Wikborg Rein were liable to Depfa in negligence, with damages to be assessed. On appeal to the Court of Appeal the Kommunes retained their judgment in relation to the invalidity of the contracts based on their lack of capacity, but failed to convince the Court of Appeal in respect of their change of position defence.

The issues in the Part 20 claim against Wikborg Rein

The Court of Appeal was asked to consider the sums that Depfa could recover from Wikborg Rein in respect of its negligent advice.

The question for the Court of Appeal was: where a solicitor has negligently advised a bank that a party to which it proposes to lend money in a banking transaction has sufficient capacity to enter into such transaction, which ultimately turns out to be ultra vires and void, is the solicitor liable to the bank for the whole of the sum transferred by way of the loan arrangement, irrespective of the restitutionary claim the bank has against the counterparty?

Rix LJ's judgment

Rix LJ considered the principles of Liverpool, SAAMCo and Nykredit at length. He held that in this case the question was what the scope of Wikborg Rein's duty had been. In SAAMCo a distinction was drawn between cases where the defendant professional has a duty to provide information (where there is liability only for the consequences of the information being wrong) and where the professional has a duty to advise on what course of action to take (where there is liability for all consequences of that action being taken). Rix LJ considered that this was a SAAMCo "category 1" case, where the duty was to provide information rather than a broader duty to advise. Wikborg Rein had been asked to provide an opinion on a specific point, namely on the validity of the swap contracts, and did not have a general retainer to consider and advise about other problems in relation to the transactions. It was not retained or concerned with the Kommunes' credit worthiness, nor with their willingness to pay judgment debts. The firm explicitly advised Depfa that it could not enforce a judgment against the Kommunes, and so, in one way or another, had advised Depfa that it could not ultimately enforce its contractual rights.

As a result, it was plain that Depfa was relying on the Kommunes' credit worthiness and good faith to honour the swap contract. Rix LJ did not disagree with Depfa's argument that it would not have entered into the transactions at all had it received the correct advice from Wikborg Rein. However, Rix LJ found that that was not a reason for finding that the scope of duty embraced all loss consequential on Depfa entering into the transaction.

Rix LJ then considered whether the full extent of Depfa's loss could fall within the scope of Wikborg Rein's duty. He considered that this must depend on why the loss had been incurred by Depfa. If the loss was solely due to the invalidity of the transactions then such loss would plainly fall within Wikborg Rein's duty. However, in Rix LJ's judgment it was the Kommune's impecuniosity that led to the loss. Wikborg Rein was not liable for any loss that Depfa might ultimately suffer as a result of that impecuniosity or refusal to comply with the English court's decision.

Gross LJ's judgment

Gross LJ agreed with the outcome reached by Rix LJ, although arrived at the conclusion via a different route. He did not agree that there had been no loss on the initial forwarding of the funds to the Kommunes, and could not accept that the claim by Depfa for restitution was close or akin to a claim in contract. As such, Depfa did suffer a substantial loss on the transfer of the sums to the Kommunes. However, it was not necessary to consider these questions further as Gross LJ's judgment turned on the fact that he considered Depfa could not recover from Wikborg Rein for loss for which it could not be held to be responsible. Gross LJ held that no question could arise of pursuing one defendant rather than another until the liability of the defendant in question has first been established.

Wikborg Rein could not be liable for loss relating to enforcement and credit risk as these were never assumed by Wikborg Rein. Gross LJ did not think it mattered whether the case could be categorised as giving information or advice under SAAMCo as losses attributable to enforcement of the judgment and credit risks were plainly outside the scope of Wikborg Rein's duties, and therefore were not recoverable. As Gross LJ put it, Depfa needed the Court to find that this was a "won't pay" case as a result of the invalidity of the contract, as opposed to a "can't pay" case by reason of the Kommunes' impecuniosity. Gross LJ agreed with Rix LJ's view that the Kommunes' failure to honour the judgment flowed from unwillingness to honour it.

Discussion

Undoubtedly, in the current economic climate there is and will continue to be a rise in claims made against solicitors in respect of financial transactions that have gone wrong as a result of one party's impecuniosity and subsequent desire to void the liabilities under financing agreements.

Wikborg Rein had given a "routine" opinion in this case, and subsequently found itself embroiled in a multi-million NOK dispute between cross-border counterparties to a complicated financing agreement, in a different jurisdiction to that in which it gave the advice. If the first instance decision had been allowed to stand it would have meant that the solicitors could face disproportionate and unforeseen liabilities as a result of giving a straightforward opinion. The Court of Appeal decision is therefore to be welcomed.

Of course, in every case, the scope of the solicitors' retainer and whether they are liable for the particular loss in question will be a question of fact. Solicitors might seek to avoid issues arising by making it clear in retainer letters if they are advising only on a particular aspect of a matter or a specific question, and that they are not giving advice generally in relation to the transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.