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The bank and its solicitor – who picks up the bill if the deal turns bad?

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In times of recession the scenario where a solicitor, or other professional such as an accountant, advises on a transaction which later turns bad is unfortunately a common one.  If the professional has been negligent in his advice about the transaction, what losses is the professional liable for? 

The facts

In the case of Haugesund Kommune and Another v Depfa ACS Bank and Another [2011] EWCA Civ 33 the Claimants were two Norwegian municipalities, Haugesund Kommune and Narvik Kommune (“the Kommunes”).  The bank, DEPFA asked Norwegian lawyers, Wikborg Rein to advise whether the Kommunes had legal capacity to enter into certain swap contracts.  Wikborg Rein advised that they did. Although the transactions concerned Norwegian municipalities and a Norwegian firm of solicitors, the case was to be decided by the English Courts under English Law. Later it became apparent that Wikborg Rein’s advice was incorrect and negligent – the Kommunes did not have capacity to enter into the swap contracts. 

Although the contracts were invalid (because the Kommunes did not have the capacity to enter into them), the Kommunes were nonetheless obliged in equity to repay the money they had received from the bank.  However, the Kommunes’ subsequent investments with the money advanced by the bank had been risky and the financial position of the Kommunes was such that they were now unable and refusing to pay. 

It was common ground that at the time when Wikborg Rein were asked to advise, the bank knew there was no practical way to enforce the debt against the Kommunes.  It was akin to a sovereign debt – it was never envisaged that the Kommunes would default.  The Kommunes’ refusal to pay (even if ordered by the Court to do so) was a development which was not foreseen even at the start of the Court proceedings. 

The decision

As the bank would not have entered into the swap contracts if Wikborg Rein had advised (as it should have done) that the Kommunes did not have capacity to enter into the swap contracts, surely Wikborg Rein were liable to the bank for the losses it had incurred as a consequence of entering into the transaction (the loss of the money it advanced)? The Court of Appeal said no.  The real problem was not the invalidity of the transactions, but the position of the municipalities.  That was a risk which the bank always shouldered, not the solicitors. 

Conclusion

This was a decision of the Court of Appeal reversing the High Court’s decision.  This shows it can be difficult, even for Judges, to identify the scope of a professional’s duty and which losses the professional is liable for if the duty is breached.  Specialist advice at an early stage is advisable in any claim against a professional.

If you have any questions about professional negligence claims or other commercial dispute resolution issues please contact John Mackle who is a senior associate in the dispute resolution team on 0113 336 3336 or at john.mackle@clarionsolicitors.com

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