In the recent case of Haugesund Kommune, Narvik Kommune v Depfa ACS Bank, Wikborg Rein & Co [2011] EWCA Civ 33, the Court of Appeal overturned the first instance judgment against a firm of solicitors for breach of its contractual duty of care, holding that the negligent advice given by the solicitors had to be the direct cause of loss which, in turn, had to be within the scope of the solicitors’ duty.

Wikborg Rein (Wikborg), a firm of Norwegian solicitors, appealed against a decision that it was  liable to Depfa ACS Bank (Depfa) for breach of its contractual duty of care. Two Norwegian municipalities had entered into swap contracts with Depfa which were subject to English law and the jurisdiction of the English courts. Wikborg advised Depfa that the contracts were not loans for the purposes of relevant Norwegian local government legislation, that the municipalities had full capacity to enter into them and also that a claim against a Norwegian municipality could not be enforced.

At first instance, the municipalities sought a declaration of non-liability to Depfa on the grounds that the swap contracts were void. The High Court agreed that the contracts were void but held that Depfa was entitled to recover the sums due in restitution from the municipalities. Unfortunately, however, the municipalities had since made unwise investments and lost the money.

The High Court also held that Wikborg was in breach of its contractual duty to exercise reasonable skill and care by failing to advise Depfa that the swap contracts were prohibited loans under Norwegian local government legislation. It was held that Depfa would not have entered into the swap contracts had it known that they were, or might have been, prohibited loans. In a second judgment, Wikborg was held to be liable for all the consequences of its negligent advice.

Wikborg appealed the decision, submitting that the scope of its duty was to give specific advice on the capacity of the municipalities and it was only responsible for the consequences of that information being wrong. It argued that Depfa took the risk of the municipalities’ failure to repay and, as such, there was no relevant loss within the scope of Wikborg’s duty.

The Court of Appeal unanimously agreed with Wikborg, overturning the High Court judgment. Lord Justice Rix, giving the lead judgment, questioned whether Depfa’s loss had been properly established against the solicitors. He agreed that Wikborg’s duty was specific rather than general and that Wikborg had no general duty to advise the bank whether to proceed with the loan. As it was not the invalidity of the swap contracts but the impecuniosity of the municipalities that was the real reason for Depfa’s loss, this was not within the scope of Wikborg’s duty: Depfa had always shouldered the credit risk of the municipalities. Similarly, Wikborg would not have been responsible for any loss Depfa suffered by reason of the municipalities’ unwillingness to abide by the decision of the English court (relying on the fact that Depfa would ultimately be unable to execute against them).

This ruling will come as good news to law firms (and their insurers) that advised lenders on complex financial transactions with local authorities which later faltered because of the financial crisis.