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‘No transaction’ damages in professional negligence cases

AUTHOR(S): Sharon Daly
PRACTICE AREA GROUP: Commercial Litigation and Dispute Resolution
DATE: 17.04.2013

Introduction

A series of recent High Court decisions have considered the concept of 'no transaction' damages in cases involving professional negligence. When a court makes an award of damages in breach of contract and tort cases, that award is designed to return the injured party to the position that it would have been in had the tort or breach of contract not occurred. In some cases it is clear that had it not been for the professional's negligence no transaction would have taken place. These cases are referred to as 'no transaction' cases. The Irish courts, following a similar line to the UK authorities, have confirmed that the correct approach to the assessment of damages is to determine whether the negligent act resulted in the occurrence of the transaction. If it did, then all loss associated with entering into the transaction will be recoverable. If not, then it is only the loss arising from the negligent act itself that will be recoverable. For example, if a financial institution instructed its solicitor to put security in place and that solicitor's negligence resulted in a failure do so, it is the loss flowing from the lack of security that would be recoverable and not the full cost of the loan.

ACC Bank v Johnston

ACC Bank suggests that even in a no transaction case, in order 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 solicitor's part.

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

The court considered the UK authorities of Banque Bruxelles SA v Eagle Star (SAAMCo) and Bristol and West BS v Fancy & Jackson. It 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 or she was not responsible for all consequences from that course of action. Instead, the solicitor was responsible only for the consequences of that information being wrong. In SAAMCo a firm of valuers was found to have negligently valued land over which a financial institution had obtained security. The evidence suggested that the financial institution would not have lent the money if it had been appraised of the true value of the land (a no transaction case).

Notwithstanding this, the House of Lords held that the damages recoverable would be the difference between the value placed on the land by the valuer and the true value at the relevant time. In Bristol, a case involving a finding that had the defendant solicitors not been negligent the financial institution would not have entered the loan transaction, having analysed SAAMCo the court nonetheless concluded that the financial institution should be entitled to recover all of its losses on the transaction. In Johnston the court considered that the essential difference in Bristol was that the specific instruction given to the solicitor was to report on any matters coming to his attention which might cast doubt on the lending transaction. Based on the facts, the solicitor in Bristol was found to have failed to do the very thing which he was instructed to do. For that reason the court held that it was unsurprising that the financial institution was entitled to its entire losses. The direct consequence of the solicitor's negligence was that the transaction was entered into.

In considering the facts in Johnston the court felt that the factual situation was different to that in Bristol and more analogous to SAAMCo. The solicitor was employed to put in place security and not part with moneys until that security was in place. The responsibility for the commercial sense of the loan rested on ACC. The court found that the value of the land over which security should have been obtained was at least 50% less than ACC had thought, resulting in ACC lending significantly more than was prudent. As such, had the solicitor 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, the court drew a distinction between losses directly attributable to the negligence of the solicitor and those attributable to the disadvantageous nature of the transaction itself (for which the solicitor was not responsible). The direct consequence of the solicitor'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 land had dropped considerably. The losses incurred by ACC, which came from its own decision to enter into a poor transaction, could not be attributed to the negligence of the solicitor and were therefore not recoverable.

KBC Bank

In KBC Bank 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 moneys in respect of numerous properties. KBC 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 case, as KBC had aggressively pursued 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 KBC. Not only had they failed to do so, but they also conveyed to KBC that security had been obtained. The court said that 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 funds on false assurances from its solicitors. The court noted that the undisputed evidence was that if the solicitors had acted in accordance with KBC's instructions none of the loans would have proceeded. The court held that the damages should be approached on a no transaction basis and held 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 contributory negligence claim, the court held that even if KBC was 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 that the facts in this case were quite exceptional.

KBC has been appealed to the Supreme Court and a decision is awaited.

Kelleher v O'Connor

Kelleher provides guidance on how damages should be assessed in cases where it is unclear whether the case is a no transaction case.

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 must to be downsized in order to comply with 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 advise the plaintiff properly not to proceed.

The court stated that in order to analyse the consequence of a solicitor's negligence, it was 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 the damages would therefore be assessed on a no transaction basis. However, in other cases it may be clear that had the solicitor not been negligent, that the client might have obtained good title to the relevant property (completed transaction cases). In completed transaction cases, the correct 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 Kelleher supported its finding that the transaction would not have proceeded but for the solicitor's negligence, the court went on to consider an intermediate scenario where it would be impossible to say for certain whether, but for a solicitor's negligence, a transaction would have gone ahead.

The court's view on intermediate cases was that the court must assess the likelihood that the negligent party would have been able to rectify the problem if it had been identified at the time. For example, the court considered the situation of an adverse term in a coneyancing contract which a purchaser's solicitor had negligently failed to notice. Had the solicitor noticed it, the vendor may not have been willing to renegotiate, and as a result the purchaser would not have gone ahead - which could lead to a no transaction case. However, the vendor may have been willing to renegotiate, which would mean a damages assessment based on the loss caused to the client purchaser by the presence of the adverse term in the contract. In such cases the court is faced with a hypothetical event that failed to occur due to the solicitor's negligence. Although the court did not have to decide this point on the facts of Kelleher, its view was that the proper approach in intermediate cases is to assess both eventualities and award damages based on the likelihood of, or otherwise of, each of them occurring.

By way of example the court referred to Joyce v Bowman Law. In this case there was an adverse clause in the contract which the licensed conveyancer negligently failed to notice. What would have happened next was unclear. 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. The court approved of the approach in Joyce, where the damages were assessed on the basis of a completed transaction but reduced appropriately for a weighting derived from the risk that it would have been impossible to secure a successful conclusion, even if the problem had been identified.

Comment

Although these cases deal with solicitors' negligence, the principles apply equally to professional negligence cases. Ultimately, the 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, then damages will be assessed by looking at what would have happened had there been no completed transaction. If based on the facts it appears that, despite negligence on the part of a professional, a transaction would have gone ahead (albeit with an ensuing loss to the client), the assessment of damages would be a calculation of so much of the loss as to 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. It remains to be seen whether this approach will be confirmed by the Supreme Court and a decision in KBC is awaited with interest.

For further information on this topic please contact Sharon Daly or Valerie Shaw.

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