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Insurance Update - ‘No Transaction’ Damages in Professional Negligence Cases

AUTHOR(S): Sharon Daly, Darren Maher
PRACTICE AREA GROUP: Insurance and Reinsurance, Commercial Litigation and Dispute Resolution
DATE: 15.01.2013

Introduction

A number of recent High Court decisions have involved cases in which lenders have taken action against their former legal advisors for negligence.

These 'no transaction' cases involve lenders claiming that deals would not have proceeded except for the professional advice given.

The Irish courts, following a similar line to UK authorities, have confirmed that the correct approach to assessment of damages in these cases is to determine whether the negligent act resulted in the transaction occurring.  If it did, then all loss associated with entering into the transaction will be recoverable; if it did not, then it is only the loss arising from the negligent act itself that will be recoverable. 

ACC Bank v Johnston and Others

This case suggests that, even in a ‘no transaction’ case, for the loss suffered in going ahead with the transaction to be fully recoverable, that loss must also be causatively linked to the actual breach of duty on the part of the solicitor.

ACC instructed its solicitor, Mr Johnston, to transfer loan monies to a borrower, but only after a legal charge over the property being purchased had been obtained in favour of ACC.  Mr Johnston negligently allowed the loan monies to be released before ensuring security was in place.  The Court found that had Mr Johnston not been negligent, ACC would not have entered into the transaction at all.  However, Clarke J did not confine his assessment of damages only to an analysis of what ACC’s position would have been had it not loaned the monies at all.  Instead he found that, even in ‘no transaction’ cases, not all losses arising from the transaction going ahead will necessarily be recoverable if those losses are not directly attributable to the solicitor’s negligence.

Clarke J considered the UK authorities of Banque Bruxelles SA v Eagle Star (commonly called SAAMCo) and Bristol and West BS v Fancy & Jackson.  He noted that these decisions were authority for the fact that where a professional, who was under a duty to take reasonable care to provide information on which someone else would decide a course of action, was negligent in the provision of that information, he was not responsible for all of the consequences of that course of action.  Instead he was only responsible for the consequences of that information being wrong.

The Court found that the value of the lands over which security should have been obtained was at least 50% less than ACC had thought resulting in the institution lending significantly more than was prudent. As such, had Mr Johnston refused to close the sale in the absence of security, the transaction would never have gone ahead and ACC would have been saved from entering into what was in effect a bad loan.

However, Clarke J drew a distinction between losses directly attributable to the negligence of Mr Johnston and those attributable to the disadvantageous nature of the transaction itself (for which Mr Johnson was not responsible).  The direct consequence of Mr Johnston’s negligence was that no security was put in place. The court therefore found that ACC’s damages should be calculated by reference to the value of the security, had it been put in place, at the time it would have been enforced, by which time the value of the lands had dropped considerably.  The losses incurred by ACC which flowed from its own decision to enter into a poor transaction could not be attributed to the negligence of Mr Johnston and were not therefore recoverable.


KBC Bank case

In this case, the High Court  made clear that certain factual circumstances might be such as to render a negligent solicitor liable for the total loss incurred by his client in entering a transaction which he would not have otherwise entered, even if arguments could be made that other factors also contributed to the loss.

KBC’s solicitors failed to ensure that proper security was put in place before releasing loan monies in respect of numerous properties.  The lender claimed that, had it been aware that no proper security had been put in place, it would not have entered into the transactions and that damages should be assessed on a ‘no transaction’ basis. It claimed the full amount of the loans made in damages.  KBC’s solicitors argued that the case was not a ‘no transaction’ one as KBC had been aggressively pursuing the borrowers and would have made the loans even if the security had not been obtained.  They also claimed that KBC was guilty of contributory negligence as it had failed to assess the borrowers’ ability to repay. 

The court found that KBC’s solicitors’ responsibility was to put in place proper security for the lender and, not only had they failed to do so, but they conveyed to KBC that security had been obtained.  The court said that in this case the loss arose, not so much from the failure to obtain the necessary security, but rather, from KBC being deceived into permitting the release of the funds on express untrue assurances from its solicitors.  The Court held that the damages should be approached on a ‘no transaction’ basis and held on the basis of the facts of the case that the bank was entitled to recover all of the loss it had suffered as a result of entering into the loans.

In relation to the clam of contributory negligence, the Court held that even if KBC was somewhat negligent in assessing the borrowers, the loans would not subsequently have been approved but for its solicitors’ negligence.  The proximate cause of KBC’s loss was therefore the solicitors’ negligence and breach of duty. In reaching this conclusion, the Court stated that every case must be decided on its own facts and said that the facts in this case were quite exceptional. 


Kelleher v O'Connor

This case provides guidance as to how damages should be assessed in cases where it is not clear whether the case is a ‘no transaction’ case or not.

The defendant solicitor had acted for the plaintiff, Edmund Kelleher, in the purchase of a restaurant.  However, shortly after acquiring the restaurant it emerged that it would have to be downsized in order to comply with certain food hygiene regulations.  Subsequently the plaintiff was unable to lease the restaurant to a lessee who had intended to open an Indian restaurant on the premises.  The court found that had the defendant solicitor not acted negligently by failing to conduct specific inquires, he would have been in a position to properly advise the plaintiff not to proceed.

Clarke J stated that in order to analyse the consequence of a solicitor’s negligence, it is necessary to look at what would have happened had the solicitor not been negligent.  In some cases, had there been no negligence, the transaction would not have taken place and in those cases the damages should be assessed on a ‘no transaction’ basis.  At the other end of the spectrum would be cases where it may be clear had the solicitor not been negligent, the client might have obtained good title to the relevant property (referred to by Clarke J as ‘completed transaction’ cases).  In ‘completed transaction’ cases, the proper approach to the calculation of damages would be to look at what would have happened had the conveyancing transaction been properly conducted.  Although satisfied that the evidence in the Kelleher case supported his finding that the transaction would not have proceeded but for the solicitor’s negligence, Clarke J went on to consider an intermediate scenario where it would not be possible to say for certain whether, but for a solicitor’s negligence, a transaction would have gone ahead.

Clarke J’s view was that the proper approach in intermediate cases is to assess both eventualities and award damages based on the likelihood or otherwise of each of them occurring.

By way of example of an intermediate case, Clarke J referred to the UK case of Joyce v Bowman Law. In that case there was an adverse clause in the contract which the licensed conveyancer negligently failed to notice. What would have happened next was not absolutely clear. The vendor may not have been willing to renegotiate the terms of the contract, in which case there might have been ‘no transaction’. On the other hand the vendor might have been willing to renegotiate in which case there would have been a ‘completed transaction’.  Clarke J approved the approach of the court in Joyce where the court assessed damages on the basis of a completed transaction but reduced appropriately for a weighting derived from the risk that it would not have been possible to secure a successful conclusion, even had the problem been identified.


Conclusion

Although the Irish cases discussed above deal with solicitors’ negligence, the principles will apply equally to all professional negligence cases.  Ultimately, the Irish courts’ approach appears to be that, if proper conduct on the part of the professional would have led the client not to go ahead with a transaction at all, then damages will be assessed by looking at what would have happened had there been no completed transaction.  If on the facts it appears that, despite negligence on the part of a professional, a transaction would have gone ahead, albeit with ensuing loss to the client, the assessment of damages will be a calculation of so much of the loss as can be directly attributed to the breach of duty on the part of the professional.  The facts of each underlying transaction and the scope of the professional’s retainer will be important factors in this assessment.

For further information on any of the issues discussed in this update please contact Sharon Daly, Valerie Shaw or Mary Byrne.

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