Haugesund Kommune v Depfa ACS Bank (No 2)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rix,Lord Justice Gross,Mr Justice Peter Smith |
| Judgment Date | 28 January 2011 |
| Neutral Citation | [2011] EWCA Civ 33 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2010/0651 |
| Date | 28 January 2011 |
[2011] EWCA Civ 33
The Hon. Mr Justice Tomlinson
Before: Lord Justice Rix
Lord Justice Gross
and
Mr Justice Peter Smith
Case No: A3/2010/0651
2008. Folio 1320
IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Mr Gordon Pollock QC, Mr Gregory Mitchell QC and Mr Richard Brent (instructed by Reynolds Porter Chamberlain LLP) for the Appellants
Mr David Railton QC and Mr Richard Power (instructed by SNR Denton UK LLP) for the Respondent
Hearing dates: Tuesday 13, Wednesday 14 and Friday 16 July 2010
Lord Justice Rix:
The issue
A solicitor wrongly and negligently advises a bank that its prospective counterparty to a banking transaction has capacity to enter into the proposed transaction, which is in fact ultra vires and void. The counterparty is nevertheless liable to repay the bank in restitution. Is the solicitor liable to the bank for the whole of the sum transferred to the counterparty irrespective of every other consideration, save only to the extent that the bank succeeds in making an actual recovery from its counterparty? That is the essential question asked on this appeal. If the answer to the question is, Yes, then it would seem, and the bank submits, that even if, immediately after the transfer, the counterparty offered to return the sum transferred, the bank could refuse the offer and sue the solicitor to recover the sum as damages for his breach: see Liverpool (Owners) v. Ousel (Owners), (The Liverpool No 2) [1963] P 64 (CA).
The solicitor submits that the answer to the question depends on the scope of the solicitor's duty and therefore the proper assessment of the bank's loss arising from the breach, and that it cannot be presumed that the mere transfer of money under a transaction whose failure involves a restitutionary remedy involves a loss then and there in the total amount transferred. Instead, he submits, the court has to ask whether any loss falls within the scope of the duty to advise: see South Australia Asset Management Corp v. York [1997] AC 191 ( "Saamco") and Nykredit Mortgage Bank plc v. Edward Erdman Group Ltd (No 2) [1997] 1 WLR 162 (HL). If the failure to repay is in fact due, for instance, to the counterparty's credit risk, when the bank made it clear that it took that risk upon itself, then, the solicitor submits, there is no relevant loss, and the rule in The Liverpool does not operate.
The bank rejoins that where the solicitor's advice is as to the viability of the transaction as a whole, his negligence leads to liability for all the consequences of the transaction because there is no relevant limitation on the scope of the solicitor's duty: see two cases concerned with solicitors' advice decided in the aftermath of the Saamco and Nykredit decisions, viz Bristol & West Building Society v. Fancy & Jackson [1997] 4 All ER 582 (Chadwick J) and Portman Building Society v. Bevan Ashford (a firm) [2000] PNLR 354 (CA).
The judge below, Tomlinson J as he then was, agreed with the bank. It was not the intuitive understanding with which he approached the issue at the time of his first judgment, which was concerned with the liability of the counterparty rather than of the solicitor. The latter liability was dealt with in a second judgment, after a separate hearing. In the course of argument at that second hearing, the judge said:
"I have to tell you it never crossed my mind when I was preparing my judgment that this was a situation in which Depfa [the bank] could simply look to Wikborg Rein [the solicitor] for a full and immediate indemnity in respect of its loss without, if it chose, looking to the municipalities [the counterparty] to see what it could recover from them. Rightly or wrongly I saw it in terms of what one sometimes calls a claim over, ie to mop up what is left. You would say that I am wrong about that."
Mr David Railton QC, leading counsel for the bank replied:
"The way the litigation started, of course, is a dispute between us and the municipalities, but we have our claim against Wikborg Rein. If, of course, the municipalities pay and pay quickly and willingly, then in practice the point does not arise. But as a matter of legal right, and indeed as we have pleaded, our loss is the loss that we suffer when we pay out. On the authorities, and for sensible reason we would suggest, we are entitled to recover in full against Wikborg Rein."
The background facts
The claimants in this litigation are two Norwegian municipalities, Haugesund Kommune and Narvik Kommune (the "Kommunes"). There are 430 such municipalities in Norway. They are autonomous bodies although their powers are limited by legislation. They are not directly involved in this appeal.
In 2004 (in the case of Haugesund) and 2005 (in the case of Narvik), the Kommunes entered into swap contracts with Depfa ACS Bank, who is the defendant in these proceedings and in this court the respondent ("Depfa"). Depfa is an Irish bank, a subsidiary of Depfa Bank plc, which is in turn owned by a German company. Depfa specialises in public sector lending outside Germany. The sums involved exceeded NOK 200 million in the case of Haugesund and approached NOK 200 million in the case of Narvik.
The nature of swap contracts has been described by Lord Goff in Westdeutsche Landesbank Girozentrale v. Islington London BC [1996] AC 669 at 680. As Lord Goff there stated, the practical effect of the transaction is to achieve a form of borrowing by the bank's counterparty. In the same way, the effect is to achieve a form of lending by the bank. However, section 50 of Norway's Local Government Act 1992 restricts the capacity for a municipality to raise loans, for instance to loans intended for limited purposes and in respect of measures that have been included in the annual budget. It was therefore important for Depfa and the Kommunes to be advised that the swap contracts were not loans caught by section 50.
The Kommunes were advised by Norwegian financial advisers Terra Fonds AS, subsequently Terra Securities ASA ("Terra"). Terra also advised the Kommunes as to disastrous investments made by them with the proceeds of the swap contracts.
Depfa in turn sought the advice of a well-known and highly respected firm of lawyers in Norway, Wikborg Rein & Co ("Wikborg Rein"). Wikborg Rein is the third party in this litigation, and the appellant in this appeal. Wikborg Rein advised in unqualified terms that the swap contracts were not loans for the purposes of section 50 and that the Kommunes had full capacity to enter into them. It should be said that the validity of the swap agreements was for these purposes the only issue on which Depfa sought Wikborg Rein's advice. It was common ground that Depfa knew, and was willing to take the risk, that it was not possible to obtain execution against the Kommunes, should there be any need to do so. Wikborg Rein had advised Depfa that –
"A claim against a Norwegian municipality cannot be enforced, no distress or seizure may be obtained of any of its assets and no bankruptcy or debt settlement proceedings may be initiated against it."
It was also common ground that Depfa bore the sole credit risk of the transaction. The Kommunes' obligation was in fact regarded as a form of sovereign debt. They were undoubtedly seen by Depfa as honourable, respectable and creditworthy counterparties.
The swap contracts were expressly stated to be governed by English law and to be subject to the jurisdiction of the English courts.
The Kommunes performed their payment obligations under the swap contracts for a number of years, until questions were raised in Norway as to the validity of this type of transaction. In 2008, the Kommunes asserted that the swap contracts were invalid and declined to make any further payments under them. Then in December of that year they commenced these proceedings in the commercial court in London for a declaration that the contracts were invalid because they lacked capacity to enter into them and that they were under no liability in respect of them. Depfa counterclaimed to the effect that, if the contracts were invalid, it was nevertheless entitled to restitution of the sums which it had advanced. It observed in its pleadings that the Kommunes never understood or believed that they were free to use such sums as their own "without any obligation to repay". If they were correct to say that the swap contracts were invalid, "the only change in this respect has been the basis on which [they are] liable to make such repayment." The Kommunes rejoined that they had a defence to any liability in restitution to repay the amounts advanced, in so far as they had changed their position by using the funds to make the investments which had turned out so disastrously for them. They also disputed any obligation to make restitution at all on the basis that Depfa entered the transactions without an ignorance in good faith of the Kommunes' lack of capacity. Importantly for present purposes, however, the Kommunes pleaded and accepted that, if Depfa had acted in good faith and in ignorance, "Depfa would have been entitled to restitution" of the sums advanced, less any recoveries from the Kommunes, and subject to their change of position. On the basis that Depfa acted in good faith and restitution was due, the Kommunes' "liability…to make restitution is limited to those net proceeds of sale" of...
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