A law firm that gave negligent advice to a bank before the bank lost £28m in loans advanced to two local authorities does not have to reimburse those losses, the Court of Appeal ruled last week.

Overturning a High Court decision, the appeal court ruled in Haugesund Kommune and Narvik Kommune v Depfa and Wikborg Rein that Norwegian law firm Wikborg Rein did not have to cover Irish bank Depfa’s losses, after two Norwegian municipalities refused to repay Depfa’s advances.

Lord Justice Rix said it would be ‘harsh doctrine’ to force upon solicitors a general duty to advise on the creditworthiness of borrowers while advising on the validity of a transaction.

The ruling will come as good news to firms that advised lenders on complex financial transactions with local authorities which later faltered because of the financial crisis.

Depfa had alleged that Wikborg Rein failed to advise it that swaps contracts it entered into with two Norwegian local authorities fell outside these authorities’ powers, and were unenforceable. The contracts were governed under English law. Depfa advanced money to the municipalities, which they lost after their investments went badly wrong. The municipalities then claimed that they lacked the capacity ever to have entered into the transactions with Depfa under laws that restrict their borrowing powers, and refused to repay the loans.

Lord Justice Rix said: ‘Wikborg Rein was asked to advise about a specific question, the validity of the proposed swap contracts. 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 [municipalities]: and on those qualities Depfa made up its own mind and was wholly confident.

‘It seems to me to be harsh doctrine to visit a loss in fact due to lack of creditworthiness on a solicitor as being within the scope of his duty to advise as to the validity of a transaction, when that creditworthiness has been entirely within the province of the lender and outside the scope of the solicitor’s duty.’

Lord Justice Gross said: ‘Even if the contract was valid, Depfa had been advised that it could not enforce a claim against the [municipalities]. So far as concerns the credit risk, that was for [Depfa], not its legal advisers.’

Depfa’s solicitors SNR Denton said the bank may appeal.

City firm Reynolds Porter Chamberlain advised Wikborg Rein.