Banking and finance – Legal profession – Restitution – Banks

(1) Haugesund Kommune (2) Narvik Kommune (claimants) v (1) Depfa ACS Bank (defendant/respondent) (2) Wikborg Rein and Co (appellants/part 20 defendants): CA (Civ Div) (Lords Justices Rix, Gross, Mr Justice Peter Smith): 28 January 2011

The appellant Norwegian solicitors (W) appealed against a decision ([2010] EWHC 227 (Comm), [2010] 1 All ER (Comm) 1109) that they were liable to the respondent bank (D) for breach of their contractual duty of care.

Two Norwegian municipalities had entered into swap contracts with D. In relation to the transactions W had advised D that the swap contracts were not loans for the purposes of the relevant Norwegian local government legislation and that the municipalities had full capacity to enter into them. W also advised D that a claim against a Norwegian municipality could not be enforced. The swaps were subject to English law and jurisdiction and the judge held that the swap contracts were invalid but that D was entitled to recover the sums due in restitution. He further held that W was in breach of its contractual duty to exercise reasonable care and skill in failing to advise D that the swaps were prohibited loans; had D been advised that the swaps were or might be prohibited loans it would not have entered into them. The municipalities paid over to D the proceeds of the unsuccessful investments made pursuant to the swap transactions. It appeared that they were unable to make any further payment and D sought to recover from W the balance of the sums advanced under the swaps. In a second judgment the judge held that W were liable for all the consequences of their negligent advice. W submitted that their contractual liability was limited to matters which were within the scope of their duty, which was to give specific advice on the capacity of the municipalities to enter into the swap contracts; although they had erred in their advice, and D would not have entered into the transactions unless it had received the advice it did, W were not responsible for all the consequences of the advice having been relied upon, but only for the consequences of that advice being wrong; D took the risk of the municipalities’ failure to repay so that there was no relevant loss within the scope of W’s duty. D contended that it could rely on the principle in Owners of Steamship Enterprises of Panama Inc v Owners of SS Ousel (The Liverpool) (No2) [1963] P 64 CA to recover in full against W for the loss it had suffered immediately upon entering into the transaction.

Held: The principle in The Liverpool (No.2) was not in doubt but did not answer the question whether D’s loss had been properly established against W, The Liverpool (No.2) considered. But for W’s negligence, the transaction would not have occurred, but that did not mean that all the loss caused by entering into the transaction was within the scope of W’s duty, South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 HL considered. If D’s loss was due to the invalidity of the transactions, then the loss was plainly within the scope of W’s duty. However, it appeared that it was not the invalidity of the transactions, but the impecuniosity of the municipalities that was the real difficulty. If the reason was the municipalities’ impecuniosity, then that was not within the scope of W’s duty. That was a risk which D always shouldered. Similarly, if the municipalities, perhaps in part because of their impecuniosity or the difficulty of raising taxes or cutting expenses, were simply unwilling to shoulder their responsibilities in restitution, relying on the fact that D would ultimately be unable to execute against them, then again that was not within the scope of W’s duty. D had failed to establish that its loss had been suffered by reason of the invalidity of the transaction, as distinct from the enforcement and credit risks. W was not responsible for any loss with respect to its advances which D might ultimately suffer by reason of the municipalities’ impecuniosity or unwillingness to abide by the decision of the English court. Even if D did suffer a complete loss of its advances at the time of their transfer to the municipalities, that loss was not within the scope of W’s duty. The position was a fortiori if there was no complete loss of D’s advances at that time (see paragraphs 40-41, 76-87, 94, 100-104 of judgment).

Appeal allowed.

Gordon Pollock QC, Gregory Mitchell QC, Richard Brent (instructed by Reynolds Porter Chamberlain) for the appellants; David Railton QC, Richard Power (instructed SNR Denton UK) for the respondent.