English damages for economic loss: what is too remote?

Negligent drafting by law firm

Wellesley Partners LLP (WP), a recruitment firm specialising in the investment banking sector, retained Withers LLP (Withers) to amend WP's partnership agreement following an investment from Addax Bank BSC (Addax). The amended partnership agreement was executed in May 2008. It contained an option for Addax to withdraw half of its capital contribution at any time within the first 41 months of the agreement. Just one year later, in May 2009, Addax exercised that option. WP claimed damages for negligence and breach of contract from Withers, alleging that the firm failed to carry out WP's instructions that Addax should have a right to withdraw capital only after 42 months from the execution of the agreement (not within 41 months). At first instance, the judge upheld WP's claim. The appeal focused primarily on issues relevant to the assessment of damages.

WP claimed that, but for the withdrawal of Addax's capital, it would have gained a profitable mandate from Nomura to "build out" Nomura's U.S. presence following its acquisition of the Lehman business during the financial crisis. WP presented evidence that the principal of WP had a close relationship with Lehman and that Nomura was about to award WP the mandate. However, the exercise of Addax's option left WP with insufficient capital to expand into the U.S. Such expansion (which had been part of WP's business plan since before Addax invested) was crucial to securing the Nomura mandate. In the event, WP did not get the Nomura mandate.

What is test of remoteness in cases of concurrent liability?

At first instance, Withers argued that the Nomura losses would be irrecoverable if the contractual test for remoteness was to apply. The judge was inclined to agree (although he did not decide the issue), but  held that he was constrained by authority to apply the tortious test for remoteness because a claimant is normally allowed to take advantage of more generous rules of a tortious cause of action (for example longer limitation periods) in cases of concurrent liability. Withers appealed this finding.

Contractual test for remoteness – damage of that kind "not unlikely"

Citing Hadley v Baxendale¹, Victoria Laundry² and The Achilleas³, Floyd LJ summarised the basic rule that a contract breaker is liable for damage resulting from his breach if, at the time of making the contract, a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach. The principle is based on the idea that the parties, in the absence of special provision in the contract, would normally expect a contract breaker to be assuming responsibility for the damage which would reasonably be contemplated to result from the breach (but not for unusual circumstances particular to the injured party about which the contract breaker had no knowledge at the time of contracting).

Without expressing a view on the potential inconsistencies between the different speeches in The Achilleas, he added that that case shows that some foreseeable losses may not be recoverable because they are not losses for which the contract breaker could be taken to have assumed responsibility (in that case, the general understanding of the market was that the claimed loss was not recoverable).

Wider tortious test for remoteness – reasonable foreseeability

Floyd LJ reflected that in tort, the primary rule determining recoverability of loss is that of reasonable foreseeability, a wider test than the contractual one as damage may be of a kind which is reasonably foreseeable (and therefore recoverable in tort) yet highly unusual or unlikely (and therefore irrecoverable in contract).

Court of Appeal: apply contractual test where there is concurrent liability

The Court of Appeal found that the contractual test for remoteness of damage should be adopted in cases of concurrent liability as in those cases the duty of care in tort arises out of the same assumption of responsibility as exists under the contract. The rationale for the broader principle of remoteness in tort (ie that there is no opportunity in tort for the injured party to protect himself by pointing out in advance a risk which may appear unusual to the other party) does not exist in cases of concurrent liability. The parties have had 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. This conclusion was not affected by the fact that a claimant is entitled to take the benefit of more favourable limitation periods in tort in cases of concurrent liability.

Even using contractual test – damages not allowed

The Court of Appeal, although agreeing with WP on the proper remoteness test to apply, found that the loss of the Nomura mandates was a type of damage for which Withers had assumed responsibility under its contract with WP. The loss was therefore recoverable regardless of which test of remoteness was applied. Unlike the position in Victoria Laundry (where loss of a particular high value dyeing contract unknown to the defendant was loss of a different kind from losses of the ordinary business of a laundry), the Nomura contract was exactly the sort of business Withers would have expected WP to engage in, albeit a particularly lucrative example of that business. Nor could there be any analogy with The Achilleas in which the general understanding of restrictions on liability in the shipping market meant that any departure from that rule would give rise to a risk of commercial uncertainty in the industry.

The loss of a chance issue

COMMENT

This decision will be relevant in any context where duties to exercise reasonable care and skill can potentially co-exist with contractual duties, including in the case of duties owed by financial institutions in relation to the sale of financial products. The decision to apply the contractual test for remoteness of damage in cases of concurrent liability gives precedence to the intentions of the contracting parties. Defendants should welcome the greater protection the decision will provide against having to compensate claimants for unusual (and potentially open-ended) types of loss. However, it also demonstrates that it will not always be straightforward to work out whether particular losses are recoverable or too remote even applying the contractual test, and that the end result may be the same regardless of which test for remoteness applies. Indeed, the mere fact that it has taken so long for the court to be called on to resolve the issue itself illustrates this point.

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.