Monthly Archives: January 2016

English Court of Appeal establishes remoteness of damage test

A recent professional liability decision delivered by the English Court of Appeal should interest anyone in New Zealand concerned with professional indemnity insurance: Wellesley Partners Limited v Withers LLP [2015] EWCA Civ 1146. The decision makes a significant finding regarding the approach to be taken when assessing the remoteness of damage where there is liability in both tort and contract. The Court found that the contractual, and not the tortious, test should apply. This is the first time the issue has been addressed in an English appellate Court. It is likely to be taken into account by New Zealand Courts in relevant cases. In practical terms, this holding tends to have the effect of limiting the extent of damage; it is generally considered that the contractual test is more restrictive that the tortious one.

The law firm Withers was instructed by its client Wellesley Partners, a recruitment company, to draft an agreement documenting an investment in Wellesley Partners by a third party, Addax. Withers negligently amended the wording of a provision in the agreement to permit Addax to withdraw its investment earlier than otherwise would have been possible. Following the 2008 financial collapse, Addax relied on this provision to withdraw its investment. The unavailability of this capital to WP meant that WP was not in a position to open a New York office, as it had intended at the time Withers was instructed in relation to the drafting of the agreement.

WP commenced proceedings against Withers claiming, amongst other things, damages for the profits it said it would have made from the intended New York office. The trial judge found that Withers was negligent. It fell to be decided therefore whether damages for the profits from the overseas office were too remote.

At trial Withers contended that, where there is concurrent liability in contract and tort, the contractual test for remoteness of damage applies. The judge considered himself constrained by authority for the proposition that a professional retained by a client has a concurrent liability in tort as well as contract, and that the client is usually permitted to take enjoy the benefit of more advantageous rules permitted by the tort cause of action (such as longer limitation periods). Accordingly, he determined that WP was entitled to take advantage of the more generous tortious test for remoteness.

On appeal to the Court of Appeal Withers maintained that the contractual test for remoteness should apply. WP disagreed. In the alternative WP contended that even if the contractual standard applied, the result should be the same in this particular case.

The Court of Appeal noted that a solicitor who fails to exercise reasonable care in providing services to the client who retains him can render himself liable both in contract and in tort unless tortious liability is validly excluded: Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, a case followed in New Zealand decisions.

The Court noted that while causes of action in tort and contract are independent, it was material that tort liability usually arose at the same time due to the voluntary assumption of responsibility. In a case such as this:

it would be anomalous, to say the least, if the party pursuing the remedy in tort in these circumstances were able to assert that the other party had assumed a responsibility for a wider range of damage than he would be taken to have assumed under the contract (at [68]).

It remains the basic rule that a contract breaker is liable for damage resulting from his or her breach if, at the time of making the contract, a reasonable person in his or her shoes would have had damage of that kind in mind as not unlikely to result from a breach. The rationale is that the parties, in the absence of in the contract would normally expect a contract breaker to be assuming responsibility for damage which would reasonably be contemplated to result from a breach.

In negligence, the defendant is liable for any type of damage which is the reasonably foreseeable consequence of its wrongdoing. This is assessed at the time of the breach.

So, for contract remoteness of damage is assessed at the time the contract is entered into (in the case of solicitors at the time of the engagement, generally recorded in an engagement letter) whereas in tort and negligence specifically, remoteness of damage is assessed at the time of the breach. In the case of professional liability, it is supposed that any breach of duty will generally occur after the parties enter into a contract, sometimes much later in time – potentially years later. It follows from this potential time lag that what is within the parties’ reasonable contemplation on the one hand, and what is reasonably foreseeable on the other, at these different times, may itself be quite different. So, the different tests are potentially quite meaningful.

The Court’s holding for this issue is in paragraph [80] of the decision:

I am persuaded that where, as in 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. The basis for the formulation of the remoteness test adopted in contract is that the parties have the opportunity to draw special circumstances to each other’s attention at the time of formation of the contract. Whether or not one calls it an implied term of the contract, there exists the opportunity for consensus between the parties, as to the type of damage (both in terms of its likelihood and type) for which it will be able to hold the other responsible. The parties are assumed to be contracting the basis that liability will be confined to damage of the kind which is in their reasonable contemplation. It makes no sense at all for the existence of the concurrent duty in tort to upset this consensus, particularly given that the tortious duty arises out of the same assumption of responsibility as exists under the contract.

On the facts of this case, the Court of Appeal determined that the damage was not too remote for the purposes of the contractual test in any event. The Court held that, in its view, it was clear that the damage must be taken to be a kind for which Withers had assumed responsibility under their contract.

The UK Supreme Court website does not reflect any application for permission to appeal having been lodged, although it is possible an extension of time has been sought but not recorded on the website.

Steve Keall
Barrister
30 January 2016