In 2004 and 2005, Depfa Bank entered into swap contracts with two Norwegian Municipalities (the “Kommunes”) whereby in effect the Kommunes borrowed substantial sums of money from Depfa.
In 2008, the Kommunes commenced proceedings in the Commercial Court for a declaration that the contracts were invalid because they lacked the capacity to enter into those contracts. Depfa counterclaimed to the effect that, if the contracts were invalid, it was nevertheless entitled to restitution of the sums which it had advanced. Depfa also commenced Part 20 proceedings against its Norwegian solicitors, Wikborg Rein, in which it alleged it had entered into the loan transactions in reliance on Wikborg Rein’s advice and that advice had been negligent. Wikborg Rein had advised in unqualified terms that the swaps were not loans for the purposes of Norwegian law and that the Kommunes had full capacity to enter into the swaps. Depfa alleged that it had suffered loss in the amounts advanced by it to the Kommunes although it would give credit for such recovery as it made from the Kommunes in respect of such advances. Depfa’s claim against Wikborg Rein was brought in contract (Norwegian law did not recognise alternative duties in tort). There was no suggestion in the proceedings that Norwegian law differed from English law with regard to a solicitor’s obligations.
The issue for consideration in the appeal was the extent to which Depfa was able to recover from Wikborg Rein the totality of the sums which it had advanced without recourse to the Kommunes (albeit giving credit for any recoveries which had in fact been made from the Kommunes).
The first instance decision
At first instance, Mr Justice Tomlinson (as he then was) determined that the Kommunes were entitled to declaratory relief to the effect that they were not bound by the swap transactions but found that they were liable to make restitution to Depfa and that the Kommunes’ partial defence of change of position failed. These findings were the subject of an, unsuccessful, appeal to the Court of Appeal. Mr Justice Tomlinson also found that Wikborg Rein was in breach of its contractual duty to exercise reasonable skill and care when it had advised Depfa that the Kommunes had the capacity to enter into the swap transactions. Following the trial the parties agreed that matters of quantification of damages and interest should be adjourned. The Kommunes subsequently applied for a stay of execution on the judgment pending their appeal. This resulted in Depfa pursuing an application that it was at liberty to pursue its rights against Wikborg Rein and was not obliged to pursue its rights against the Kommunes. Depfa’s application was successful.
Mr Justice Tomlinson reached this decision based on two principles. The first was the principle set out in Liverpool (Owners) v Ousel (Owners), (The Liverpool No 2)  P 64 (CA), namely that a claimant need not take steps to recover compensation for his loss from parties who, in addition to the defendant, are liable to him. Accordingly, a claimant was free to choose from whom to recover compensation without any regard to the doctrine of mitigation.
Secondly, Mr Justice Tomlinson considered that the claim fell within that category of cases (South Australia Asset Management Corp v York  AC 191 (“SAAMCO”)) where an adviser was responsible for all the consequences of its negligent advice. There was, therefore, no need to apply the SAAMCO exception whereby (a) a valuer is responsible for only the difference between his negligent valuation and the true valuation, and (b) even that difference may be limited by the value of the borrower’s covenant. In any event, Mr Justice Tomlinson considered that Depfa had suffered a total loss at the time of the transfer of its advances which would not have occurred but for Wikborg Rein’s negligent advice.
Court of Appeal decision (Rix LJ)
In the Court of Appeal, Rix LJ made it clear that he considered the principle in The Liverpool was not in doubt. If it were otherwise, Rix LJ said he would be concerned that no claimant with remedies against more than one defendant could ever get judgment against either, for each defendant would be able to play off the claim against him by referring to the claim against the other. However, Rix LJ considered, following a detailed analysis of The Liverpool and subsequent cases, that they all proceeded on the basis that the claimant’s loss had been established. This line of case law did not, therefore, answer what Rix LJ considered to be the real question raised by Wikborg Rein’s appeal, namely whether Depfa’s loss had been properly established against it.
Wikborg Rein submitted that the SAAMCO principle applied so as to limit responsibility for its negligence to matters which fell within the scope of its duty. Wikborg Rein contended that it was not responsible for all the consequences of its advice having been relied upon but only for the consequences of that advice being wrong. It contended that those consequences were that a contractual obligation to repay the advances some time in the future, at a low rate of interest charged, became an obligation in restitution to repay the advances at once, and if not so paid, to incur a higher rate of interest.
In SAAMCO the House of Lords decided that, in the ordinary case, a valuer was responsible for the loss caused by his valuation being wrong, to the extent that it was wrong, but not for any additional loss caused by a fall in the market. In the SAAMCO case the House of Lords had distinguished between circumstances where a duty existed to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty was only to supply information and the person was negligent, they would be responsible for all the foreseeable consequences of that information being wrong (a “Category 1” case). If, however, the duty was to advise someone what course of action to take, they would be responsible for all the foreseeable loss which was a consequence of that course of action having been taken (a “Category 2” case).
Rix LJ referred to the House of Lords speeches in Nykredit Mortgage Bank plc v Edward Erdman Group Limited (No 2)  1 WLR 162 (HL) in which the SAAMCO principles had been clarified. Nykredit clarified that, in the case of a negligent valuer, the issue was not one of causation or foreseeability of loss. The primary question was to determine the scope of the valuer’s duty. In assessing the extent of any loss which had arisen, Rix LJ did not consider Nykredit precluded an assessment of the value of the lender’s restitutionary rights against the borrower in addition to the value of contractual rights.
It was accepted by the parties that Depfa’s restitutionary claim was a claim in debt and not in damages. It was also accepted that it was not founded upon any wrong by the defendant and did not depend upon an exercise of discretion but was a matter of right. Depfa contended that a claimant in restitution must by definition have suffered loss in order to found the restitutionary claim. However, Rix LJ did not consider it followed that any sense in which the claimant’s “expense” or “loss” was used in the context of its restitutionary claim amounted to established loss for the purposes of its claim in contract or tort against another party. Rix LJ considered that in the case of an ultra vires transaction a claim in restitution which rose up in place of the invalid contract was sufficiently close to the claim in contract even though its theoretical basis was totally different.
Rix LJ determined that this was a Category 1 case as he considered it was difficult to see Wikborg Rein’s duty as being that of a general, as distinct from a specific, kind. Wikborg Rein had been asked to advise about a specific question, namely the validity of the proposed swap contract. It did not have a general retainer to report or notify problems about the proposed transactions and it was not concerned with the creditworthiness of the Kommunes. Wikborg Rein had in fact advised Depfa that it could not execute a judgment against the Kommunes, so that in that different sense its contractual rights could not ultimately be enforced in any event. In those circumstances Rix LJ considered Depfa knew that it ultimately relied on the creditworthiness and good faith of the Kommunes and on those matters Depfa had made up its own mind and was wholly confident. Rix LJ accepted that Depfa would not have entered into the transactions at all unless it could be advised that the contracts were valid and within the Kommunes’ capacity but did not consider this meant all of the loss which flowed from the transaction was recoverable from Wikborg Rein. Rix LJ considered that Wikborg Rein had no general responsibility to advise Depfa on whether to proceed with the transaction or not and it was instead giving a specific piece of legal advice.
Rix LJ then considered the extent to which Depfa’s loss had fallen within the scope of Wikborg Rein’s duty. If the loss was due to the invalidity of the transactions, then it would plainly be within the scope of Wikborg Rein’s duties. However, Rix LJ considered the facts of the case demonstrated that it was not the invalidity of the transactions which was the real difficulty; rather, it was the impecuniosity of the Kommunes. Rix LJ considered it would be harsh to visit a loss which had arisen due to lack of creditworthiness on a solicitor as being within the scope of his duty to advise as to the validity of the transaction, when considerations of creditworthiness had been entirely a matter for the lender and outside the scope of the solicitor’s duty. Rix LJ considered that the loss which had arisen arose due to disastrous investment decisions taken by the Kommunes without which the sums transferred would have been repaid to Depfa. Rix LJ considered it difficult to understand why that loss (like the loss caused by the fall in the property market in SAAMCO) should be visited on Wikborg Rein.
Rix LJ disagreed with Tomlinson J’s assessment that Depfa had lost the money advanced the moment it had paid it over and acquired no right to its recovery. Rix LJ considered that while Depfa had acquired no contractual right for the money’s repayment, it did acquire a restitutionary right and it acquired it at the very moment of the money’s transfer and by right of the very reason that its contractual remedy failed with the invalidity of the transaction. Rix LJ distinguished that position from the position in The Liverpool where the loss had plainly been incurred at all relevant times. Rix LJ considered that the reasons why the Kommunes had not paid was relevant. If it was due to their impecuniosity, he did not consider that this fell within the scope of Wikborg Rein’s duty. If the Kommunes were prevented from repaying what they owed to Depfa by something which arose from their legal incapacity to enter into the swap contracts, then it could be said that the loss of a contractual right for repayment had established the loss in question. However, there was no evidence that this was the case.
Therefore, Rix LJ concluded that Wikborg Rein was not responsible for any loss with respect to the advances which Depfa might ultimately suffer by reason of the Kommunes’ impecuniosity or unwillingness to abide by the decision of the English Court.
Court of Appeal decision (Gross LJ)
Gross LJ agreed with Rix LJ’s judgment although followed a slightly different route. Gross LJ wanted to highlight that prior to Depfa entering into the transactions, Wikborg Rein had advised it that a claim against a Norwegian municipality could not be enforced and that it was common ground that Depfa bore the sole credit risk of the transaction.
In contrast to Rix LJ, Gross LJ indicated that he was far from persuaded by Wikborg Rein’s arguments that Depfa had suffered no loss; he did not consider that Depfa’s claim in restitution was close or akin to a claim in contract. He also thought that Depfa did suffer substantial loss on the transfer of the sum to the Kommunes although thought it unnecessary to decide whether the whole of Depfa’s loss was then suffered or not.
However, Gross LJ decided it was not necessary for him to decide this as the fundamental question on appeal was whether Wikborg Rein’s liability had been properly established. Gross LJ was unable to accept that Wikborg Rein could be liable for loss relating to enforcement and credit risks which had never been assumed by it merely because it could be said that the transaction would not have taken place but for Wikborg Rein’s negligence. It did not follow that Wikborg Rein was liable for the whole of Depfa’s loss. Gross LJ said he did not find the distinction between the Category 1 or Category 2 cases as discussed in SAAMCO to be particularly helpful. In either event, he considered that losses attributable to enforcement and credit risks were outside the scope of Wikborg Rein’s duty. On the factual information before the court, Gross LJ did not consider that Depfa was entitled to a finding that its loss was attributable to the invalidity of the contract as distinct from the enforcement and credit risks.
These proceedings obviously turned on their own particular facts and should not be viewed as a precedent which will necessarily come to the aid of advisers in every case. Rix LJ was at pains to point out that the “existence of loss and its allocation as being within the scope of a defendant’s duty will always be fact sensitive”. In each case, the court will need to undertake a detailed assessment of the scope of an adviser’s role for the purposes of determining the extent to which an adviser is responsible for losses. From the perspective of financial institutions, the fact that they would not have entered into the underlying transaction in the first place had they received correct advice will not in every case enable them to fully recover from the adviser the losses they may incur in respect of that transaction.
Unfortunately, the Court of Appeal’s judgment does not resolve the interesting issue of whether a loss has been incurred where contractual rights are found not to have existed and are instead replaced by restitutionary rights.
Given the scope for uncertainty, advisers should give careful thought to the terms of their retainer and how their role and responsibilities are defined in engagement letters, in addition to the need to put in place appropriate exclusion and limitation of liability clauses.