Remoteness of loss: caps and collars

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The Court of Appeal’s decision in Wellesley Partners v Withers overturns Nugee J’s decision that remoteness of loss may be dealt with on tortious principles and reviews other aspects of the case, including loss of chance. We consider the implications.

The Court of Appeal’s decision in Wellesley Partners v Withers overturns Nugee J’s decision that remoteness of loss may be dealt with on tortious principles and reviews other aspects of the case, including loss of chance. We consider the implications.

Wellesley Partners, a specialist banking recruitment agency, complained that Withers had negligently drafted a partnership agreement with a middle eastern bank, Addax, which permitted the bank to withdraw its investment in Wellesley within 41 months from May 2008 (when the agreement was executed). The agreement should have permitted Addax to withdraw its investment only 42 months after execution.

Addax took advantage of the error and withdrew its investment in May 2009, just after the financial crisis. Wellesley complained that this had hampered their attempts to expand in the US following the collapse of Lehman Brothers in September 2008. Wellesley had a long standing relationship with Lehman. Wellesley asserted it was well positioned to secure a lucrative engagement by Nomura which took over the Lehman’s non-US investment business.

Wellesley also complained that, when the drafting error in the partnership agreement became apparent in February 2009, Withers failed to advise Wellesley that the error was not attributable to Addax. The error originated from Withers’ amendments at an early stage in the drafting process. Wellesley asserted that this had led to lengthy and acrimonious litigation with Addax which could have been avoided had they been properly advised.

The issues in the Court of Appeal

Briefly, three main issues were raised in appeals by both Withers and Wellesley against Nugee J’s award of damages (see our earlier note on Nugee’s decision here):

  • The remoteness issue: whether Nugee J had been correct to permit the recovery of Wellesley’s losses on the tortious basis (what was reasonably foreseeable at the date of the loss in May 2009) or on the contractual basis (what type of loss was in the reasonable contemplation of the parties in January 2008 when Wellesley engaged Withers).
  • The loss of chance issue: whether Nugee J had correctly permitted recovery of Wellesley’s loss of the possible Nomura retainer on the “loss of chance” basis. Nugee J had based his award on his finding that Wellesley stood a 60 per cent chance of securing a retainer from Nomura coupled with a 25 per cent chance of securing a sole retainer (ie a 15 per cent chance overall) or a 75 per cent chance of securing a joint retainer (ie a 45 per cent chance overall).
  • The February 2009 issue: whether Withers’ failure to advise on the origin of the error in February 2009 was negligent. Nugee J had concluded that it was not.

Taking these issues in turn:

  1. The remoteness issue
    Withers argued that the correct approach was the contractual basis and that the loss of the Nomura retainer could not possibly have been in the reasonable contemplation of the parties when Withers were retained in January 2008. The Lehman collapse did not occur until September 2008 and the opportunity to secure Nomura’s retainer only arose later still.

    The Court of Appeal agreed the contractual approach was appropriate (overturning Nugee J’s decision) but held that Withers were aware in January 2008 that one of the purposes of the Addax investment was to permit overseas expansion by Wellesley. That was sufficient to make the loss of the Nomura retainer something that was within Withers’ reasonable contemplation when they were retained. In practical terms, therefore, the Court of Appeal’s decision did not affect the outcome.

  2. The loss of chance issue
    Wellesley argued that Nugee J should have assessed the loss of chance at a higher percentage but this led to argument over the applicable principles. Interestingly, Floyd LJ concluded that while generic loss of profits should be proved on the conventional basis of probability, the loss of the Nomura retainer depended specifically on the actions of an identifiable third party (Nomura) and should be approached on a loss of profit basis. The Court of Appeal did not disturb Nugee J’s award.

  3. The February 2009 issue
    The majority of the Court of Appeal (Floyd LJ and Roth J) reversed Nugee J’s finding that Withers were not instructed to advise on the cause of the drafting error when it came to light in February 2009. Interestingly, though, Longmore LJ was unable to accept that Withers were under any continuing duty to advise once the partnership agreement was executed and in the absence of further specific instructions. That said, even Longmore LJ seems to have accepted that Withers should have disabused Wellesley of the idea that Addax were responsible for the drafting error.

Implications

Again, taking these issues in turn:

  1. The contractual approach to remoteness (the reasonable contemplation of the parties at the date of the contract) seems to be more restrictive than the tortious approach (what was reasonably foreseeable at the date of the breach). However, the courts seem to be prepared to approach the “reasonable contemplation” in a relatively loose manner as the Court of Appeal did in this case. In practical terms, that meant the outcome was the same whichever approach was adopted. The position may however be different where the loss is of a type outside the parties’ reasonable contemplation: losses resulting from a market collapse (as in Saamco) may be an example.

    In summary, the contractual “collar” may be so loose as to make little difference from the tortious approach but the applicable “cap” may be significant. The Court of Appeal was clear, however, that its decision does not re-open earlier decisions concerning, for example, the limitation period in tort (which runs from the date of the claimant’s loss not the defendant’s breach of duty).

  2. The consideration of loss of chance is interesting. The position seems to be that where a claimant claims a generic loss of profits it will have to prove that loss on the balance of probabilities. By contrast, if the claimant claims the loss of a specific chance (in this case the Nomura retainer) the loss will be assessed on a loss of chance basis. The outcome may be capricious: as the court observed, if the lost chance is assessed at a 30 per cent chance the claimant is advantaged by the loss of chance approach but if the chance is assessed at 70 per cent the claimant is disadvantaged as he would then have recovered 100 per cent on the balance of probability basis.

  3. The Court of Appeal’s findings on the February 2009 issue may have risk management implications. When a client seeks clarification of earlier advice, it may be sensible for the solicitor to establish exactly what the client wants the solicitor to do. That said, in most cases the client will probably want further advice (whether it is prepared to pay may be more contentious) but at least the position will be clear.
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