TWO IMPORTANT CASES WELLESLEY PARTNERS LLP the test of remoteness. At first sight Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146 is just another slightly dreary solicitors negligence case where attributing fault and assessing damages depended on a combination of close fact-specific analysis and a certain amount of educated guesswork. The words are not mine, they are those of Professor Tettenborn. However, the learned Professor considers that the case gave rise to two interesting points of law, which it did. It is those I wish to look at briefly. As we all know in very many cases the live issues in professional negligence claims are as much involved with causation and damage as they are with breach of duty and this was a case which resolves important issues which have the potential to impact on a number of claims in the area. The facts of Wellesley can be set out very briefly. Wellesley was a successful firm of head-hunters or as they preferred executive placement consultants. It was based in London albeit that one of the founding partners had spun off a business in Hong Kong. In order to facilitate growth it wished to expand the membership of the LLP. One of the new members was to be a middle eastern based bank: ADDAX. The defendant solicitors were engaged to amend the LLP agreement but in doing so, as the trial judge 1
held, mis-drafted the same so that ADDAX could withdraw its money prematurely which, following the Lehman Brothers collapse, it duly did. One of the largest elements of alleged loss related to an allegation that the business had been deprived of the opportunity to open a New York office and to obtain a contract with Nomura which was reconstructing the Lehman Brother business of which it had purchased part. The defendants asserted that this uniquely highly profitable contract was not within the contemplation of the parties at the time of the retainer and was in any event too remote to be recoverable in damages. It was further asserted that, in any event, if damages were recoverable they could only be recovered on a loss of a chance basis. This gave rise to the fundamental question of the test of remoteness of damage in a case in which a claim is brought both in contract and in tort. As long ago as the decision of the House of Lords in Henderson v Merrett [1995] 2 AC 145, it was established that concurrent liability in tort and contract exists in claims arising out of professional negligence. This decision was substantially motivated by the policy desire to mitigate the difficult and harsh limitation issues which in the event were subsequently made good by the passage of the Latent Damage Act 1986. One of the questions which remained uncertain following Henderson was the test of remoteness of damage to be applied where concurrent liability existed. Was it the contractual test; was it the tortious test, which is generally perceived to be more generous, or could the claimant simply choose? Of course this could have significant 2
impact given that the contractual test requires damages to fall within the assumption of responsibility and to be within the reasonable contemplation of the parties, whereas the tortious test only requires that the damages fall within the scope of the duty and that the type of damage was forseeable. At first instance, the trial judge concluded that the claimant could choose which remedy to pursue and would accordingly choose the tortious test on which basis it could recover damages reflecting the chance of the Nomura contract, given that a loss of business opportunities was foreseeable. He went on to comment that he would have preferred to have applied the contractual test had he felt able to do so and gave a very strong indication that, in those circumstances, he would have concluded that the highly profitable Nomura contract was not within the reasonable contemplation of the parties and was therefore irrecoverable on a Victoria Laundries v Newman Industries basis. In a long and detailed judgement the Court of the Appeal concluded that the judge was in error so far as the test of remoteness was concerned but, with a certain degree of violence to the factual findings which the judge made, concluded that the Nomura contract was within the contemplation of the parties. This decision has implications both in respect of the terms in which a prudent solicitor may seek to limit his liabilities when first retained and for the purposes of assessing losses where it is asserted that a highly unusual and profitable opportunity has been lost, which is not in itself an unusual assertion when claims are made against lawyers! 3
A prudent solicitor confronted with a drafting exercise, such as that which confronted the defendants in the Wellesley case, would be well advised to record what he or she understands to be the circumstances in which the need arises and the business opportunity to which it pertains. Had such an opportunity been taken in the case under review it would have recorded that the additional capital was intended to be utilised in London and that there was an outline scheme for the possibility of opening an office in the Middle East, an opportunity which was subsequently abandoned. It would have demonstrated that there was no New York office within contemplation, let alone a contract of the unique character of the Nomura contract. It is noteworthy that the Court of Appeal considered itself able to make findings in respect of the contemplation of that contract. This was probably due to the fact that the trial judge s findings were slightly tentative because he had rejected the relevant test. In a future trial where this issue arises it should be much easier to obtain factual findings which underpin a Victoria Laundries approach. A points which remains open but clearly flagged by the Court of Appeal is whether the contractual remoteness test should also be adopted in a pure tort assumption of responsibility professional negligence claims such as those brought by disappointed beneficiaries. I would suggest that the reasoning of the court suggest that it should be. The second point of interest in Wellesley concerned the nature of the Court s approach to assessment of the loss. The Claimant asserted that it was entitled to the full profit lost from the Nomura contract and not merely the loss of a chance. It relied upon the 4
Court of Appeal decisions in Parabola Investments Ltd v Browallia Cal Ltd (2010) EWCA Civ 486 and Vasiliou v Hajigeorgiou (2010) EWCA Civ 1475. The Court in Wellesley made it clear that it is essential to distinguish between loss of profit claims where the Claimant can prove a prior course of dealing, in which circumstance the Court determines the loss of profit without consideration of individual contracts, and specific contract loss claims where the Court determines the value of that loss on a loss of a chance basis employing a Allied Maples Group Ltd v Simmons & Simmons [1995] 1 All ER 1602 approach. It is also worth having a glance at the Court s subsidiary finding in respect of a professional s obligation to disclose errors of which he becomes aware during the course of his retainer. AIG AND AGGREGATION The much awaited decision in AIG v OC 320301 LLP [2016] EWCA Civ 367 arrived last week. The appeal had been expedited by reason of the impact the decision of Teare J might have upon the solicitors professional indemnity market at renewal. In the event, the Court of Appeal has remitted the matter for a retrial so a significant measure of uncertainty will continue for some time. As you will be aware this is the first time the High Court has had to consider the 10 year old revised aggregation provisions of the solicitors Minimum Terms & Conditions. 5
In particular, the Court was considering the aggregating provision which depends upon similar acts or omissions in a series of related matters or transactions. This was believed to be potentially the broadest of the aggregating provisions. It was a matter of general surprise therefore when Teare J held that claims arising out of a number of transactions would only aggregate if the transactions were dependent upon each other. This could clearly only apply in a very small number of cases and would seemingly never apply in respect of claims arising out of for example the same mistake being made in the context of a number of litigation claims. What is clear from the Court of Appeal s decision is that the court was satisfied that Teare J s interpretation was too restrictive and wrong. However, the interpretation which they have adopted, which they clearly believe to be less restrictive, is far from straightforward to apply and may well require a number of decisions to establish confidence in the interpretation, a problem compounded by the frequency with which these issues are arbitrated rather than litigated. The Court s starting point was obviously that it was considering the nature of the required connection in order to found aggregation of claims. It rejected the insurer s submissions that the relationship or connection could be relatively remote and expressly distinguished the clause under consideration from provisions in the class of familiar aggregating clauses based upon originating causes which the Court considered to be clearly a much broader aggregating provision. 6
Somewhat surprisingly, the Court, having reviewed the earlier decisions, concluded that the word related in the phrase in a series of related matters or transactions did not have the same connotation as it did in the phrase related series of acts or omissions. In the event the Court accepted the submissions of the intervening SRA that the transactions had to have an intrinsic relationship with each other not an extrinsic relationship with a third factor. For my part I find that a less than straightforward test to apply and the Court was unwilling to apply it to the facts which were before it. It therefore remitted the matter for a retrial. Very limited guidance was given to the eventual trial Judge. The Court was clear that dependence was not required but that it might be sufficient if transactions referred to or envisaged each other. In the particular facts of the claims before it which concerned misdirection of funds from an escrow account the court considered that what would be intrinsic will depend on the circumstances of that payment. The court also considered that the details of the contracts with the investors in the underlying schemes and the terms on which the escrow accounts were established might be of relevance to the decision. Given that the Court stated that, if the funds were held in separate designated accounts, that might militate against an intrinsic relationship, it might be suggested that if the funds were pooled that might militate in favour of an intrinsic relationship, but this is not clear. 7
It should be noted that the Court, in remitting the matter, has permitted the losers to reopen the argument as to whether there were similar acts or omissions. Accordingly the whole clause is once again up for grabs. Doing the best that I can it seems to me that one can hazard that, where confronted with a typical mortgage fraud scenario, one would be looking for as much continuity between the other parties to the fraud as possible to establish an intrinsic relationship between the transactions. Applying the test to a long term probate fraud might be more difficult although a teeming and lading process might be relevant. The uncertainty which seems likely to continue for some months at least is very unfortunate. I believe that a number of insurers considered that the decision of Teare J substantially altered the nature of the risk which the Minimum Terms & Conditions imposed on the primary market and it now seems likely that we are an extended period away from any degree of certainty in this area, not least because it was widely considered that the parties were disposed to take the matter to the Supreme Court if they could in any event, and such an eventuality would now appear to be all but impossible within the next period of cover. Whether the market seeks to negotiate a revision of the Minimum Terms before the next renewal remains to be seen. Given the LSB oversight time is very short. The SRA has previously expressed an interest in aggregate limits but it is very doubtful whether, in the absence of the clearest evidence of the necessity therefore, the LSB would consider such a fundamental change in cover to be acceptable. Watch this space. 8