Solicitors Risks In Brief February 2016
Limitation Act 1980 Ombudsman update: ADR Directive Consultation One strike and out - should claims be dismissed summarily for underpayment of court fees? Any litigator must…
Published 20 June 2016
The Court of Appeal has recently confirmed in Wellesley Partners LLP v Withers LLP (2015) EWCA that, where concurrent duties are owed in contract and tort, the remoteness test that applies to both duties is the more restrictive, contractual "reasonable contemplation" test rather than the tortious "reasonable foreseeability" test.
Concurrent duties of care are invariably owed by professionals to their clients. Thus, a solicitor who fails to exercise reasonable care in the performance of his retainer will be liable in contract and in tort, unless tortious liability has been expressly excluded.
Remoteness of damage is one of the legal principles that the courts apply to determine whether a claimant's losses are the defendant's responsibility and should be brought into account. There is a difference between the tests of remoteness in contract and in tort. In contract, a loss will only be recoverable if it was in the contemplation of the parties at the time the contract was made. In tort, the wrongdoer will be liable for loss that is reasonably foreseeable as liable to happen, even in the most unusual case.
The rationale for the broader test of remoteness in tort is that there is no opportunity for the injured party to protect himself by pointing out in advance a risk that may appear unusual to the wrongdoer. The parties to a contract, on the other hand, have the opportunity to draw to each other's attention any unusual areas of risk at the time of contracting and to take any necessary protective measures.
Wellesley Partners was an executive headhunting firm that specialised in the investment banking sector. In 2008 Wellesley retained Withers to draft a limited liability partnership agreement following the admission of new partners to the business. These included a Bahraini bank, Addax, which had agreed to invest $5 million in exchange for a 25% stake in the partnership. At the time, Wellesley was wholly owned by a Mr Channing, who was described by the court as a “star in his particular firmament”.
The parties had agreed that Addax would have an option to withdraw half its capital contribution. As the court subsequently found, Mr Channing's instructions were that the option should only be exercisable 42 months after the date of LLP agreement. The agreement did not reflect these instructions and provided that the option was exercisable at any time within the first 41 months.
Addax exercised its option twelve months into the agreement and Wellesley argued that the lost capital had prevented it from expanding its operation in New York. One of the opportunities Wellesley claimed to have lost was a lucrative contract with Nomura, which had £6 million to spend on recruitment. This opportunity had arisen through Mr Channing’s connections and was a very valuable one compared to the other opportunities alleged to have been lost.
At first instance, Withers argued that the Nomura loss would be irrecoverable if the contractual test for remoteness applied. The judge was inclined to agree but did not decide the point, as he felt constrained by authority to apply the more generous, tortious test of remoteness. Withers appealed this ruling.
Floyd LJ gave the lead judgment in the Court of Appeal. On the principal issue of the remoteness of the Nomura loss, he concluded that, "where, as in the present case...contractual and tortious duties to take care in carrying out instructions exist side by side, the test for recoverability of damage for economic loss should be the same, and should be the contractual one."
On the facts, however, the court held that the Nomura loss was not too remote, despite applying the more restrictive, contractual “reasonable contemplation” test. Although the Nomura contract was particularly lucrative and could be distinguished from the other contracts that had been lost (because it arose through Mr Channing’s connections), the distinction was one of degree rather than substance.
It is not uncommon for claimants to argue that their solicitor's negligence has caused the loss of an unusual and lucrative business opportunity. The Court of Appeal's decision that the contractual remoteness test will apply in cases of concurrent liability should afford greater protection to solicitors and their insurers against claims of this nature. However, Wellesley also demonstrates that it will not always be easy to identify whether particular losses are genuinely outside the reasonable contemplation of the parties. Solicitors drafting commercial contracts should seek to protect themselves by recording in writing their clients' business objectives and limiting liability if the transaction has unusual areas of risk.