The Court of Appeal has recently considered recoverability of loss and the application of the principles set out by the House of Lords in South Australia Asset Management Corporation v York Montague Ltd (“SAAMCO”) in the context of a claim against solicitors.

The case concerned swap contracts entered into by a Bank with two Norwegian municipalities. The Bank’s Norwegian solicitors advised – incorrectly and negligently - that the swap contracts were permissible under Norwegian law and that the municipalities had capacity to enter into them. When the municipalities subsequently brought proceedings seeking a declaration that the swap contracts were invalid and that they had no liability under them, the Bank counterclaimed in restitution and also joined the solicitors to the action, alleging that it had entered into the contracts in reliance upon the firm’s negligent advice.

Applying SAAMCO principles, the Court of Appeal found that the solicitors were retained to advise on a specific question, the validity of the proposed swap contracts. They had no general responsibility to advise their client on whether to proceed with the transaction or not. The reason for the Bank’s loss was not the invalidity of the transactions, but the impecuniousity of the Norwegian municipalities or their unwillingness to abide by the court’s decision. This did not fall within the scope of the duty assumed by the solicitors and accordingly they were not liable for the losses suffered by the Bank.

The Court of Appeal’s decision represents a fairly strict application of SAAMCO and illustrates the willingness of the courts to limit recoverable losses in appropriate cases. It is a favourable one for law firms and their insurers and underscores the need to consider whether there is a sufficient causative link between the actual or alleged breach of duty and the loss. Whilst it may appear, at first blush, to be counter-intuitive, the decision will emphasise to claimants and their lawyers that it is simply not enough, without more, to show that the transaction would not have taken place but for the negligent advice; only if the loss (or part of it) falls within the scope of the solicitor’s duty will damages be recoverable.