UK: Caught In The Crossfire?

Last Updated: 20 April 2011
Article by Richard Harrison and Amanda Voss

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.