How liability in both contract and tort is assessed
WELLESLEY PARTNERS v WITHERS (CA) [2015]
The Court of Appeal (“CA”) decided that where there is potential liability in both contract and in tort, the narrower contractual principle of ‘remoteness of loss’ will be applied. A firm of solicitors was sued for professional negligence after wrongly drafting a partnership agreement which potentially caused its client significant losses.
Background:
Professionals such as solicitors can, at the same time, be under a contractual obligation to exercise reasonable skill as well as being under a corresponding duty to their clients not to act negligently which, if broken, amounts to a tort (meaning a civil ‘legal wrong’).
The question that arose in this case was which test should be applied for the recovery of loss suffered - on the basis of breach of contract or tort - as there were two concurrent rights to sue the defaulting party for loss.
Remoteness test:
The ‘remoteness’ test is used to determine the types of loss for which damage caused by a breach of contract or breach of duty may be compensated by a damages award. Loss which is too ‘remote’ is not recoverable.
Tort
The test for remoteness in tort is whether the type of loss suffered was reasonably foreseeable at the time the breach of duty occurred.
Contract
The test for remoteness in contract is whether the loss is of a type which may fairly and reasonably be regarded as having been within the reasonable contemplation of the parties at the time the contract was entered into as the probable (and not unlikely) result of the breach. This principle is divided into loss arising directly and naturally flowing from the breach and that which must have been specifically known to the parties as likely to result from the breach.
‘Remoteness’ under the contractual test is thought to be more restrictive of the amount of compensation that can be claimed compared with an action in tort.
Facts:
- Wellesley Partners (“WP”) was a firm of head hunters specialising in investment banking. Withers, a firm of solicitors, was instructed by WP to draft a change to its partnership agreement (“Agreement”) so that a new partner could not exercise an option to withdraw its capital contribution until 42 months after signature. WP had also written a business plan at about the same time as the Agreement was being drafted by Withers which included projections for profitability of a US venture (“Business Plan”).
- A new partner withdrew half its capital contribution, which was a significant sum, a year after the Agreement was signed. WP sued Withers in the High Court (“HC”) for negligence as the amendment that it drafted enabled the option to be exercised within the first 41 months. The withdrawal by the new partner was within the Agreement’s terms but was contrary to WP's instructions which were that this could not happen until 42 months after signature.
- WP maintained that because the partner had withdrawn some of its capital after just a year, it had been unable to finance the planned expansion of its business abroad, particularly the opening of an office in New York. The judge considered that Withers knew that WP was thinking of expanding into the US and that the capital raised by the new partner was to be used in this way with a view to making profits.
- Consequently WP claimed it had lost profit which it would otherwise have made, principally from pursuing certain opportunities in the US which would have been very lucrative.
Decision in HC:
- The HC found that Withers had been negligent in failing to give effect to WP's instructions in relation to the drafting and awarded damages of approximately £1.6 million, applying the principle of remoteness in tort (not contract). This sum included just over £1 million for the loss of profit WP argued it would have made from the US office based on it having a 60% chance of realising certain identified opportunities.
- The judge commented that he did not consider that the loss of profits from the US office would be recoverable under the contractual test.
- Withers appealed on the basis that the claim for loss of profits was too remote and should not have been awarded.
Decision in CA:
- The CA upheld WP's claim for loss of profits. However, it decided that where there is liability in both contract and tort, the correct test to apply is the more limited contractual test not the wider test under tort as applied by the HC. It found that the losses WP claimed ought to have been within the parties' reasonable contemplation and WP had drawn special circumstances to Withers' attention at the time the contract was being entered into and the losses were therefore within the scope of the contractual test.
- Withers knew enough for it to be reasonably foreseeable that if the partner was able to withdraw its capital early, WP might be prevented from earning profits in the US, and so it was within the parties' reasonable contemplation that it was 'not unlikely' that this would be the case. Withers' appeal was therefore dismissed.
Points to note:
- The CA remarked it would be an anomaly if the party pursuing a remedy could assert that the defaulting party had assumed a responsibility (in tort) for a wider range of losses than it would be taken to have assumed under the contract. The CA said that the test for the recoverability of financial loss in situations such as these should be the same and that it should be the contractual one ie limited to losses that were in the parties' reasonable contemplation when the contract was made. That does seem sensible given that it will often be very difficult to ascertain the practical impact of the different formulations of the two tests.
- One point the decision does neatly highlight is that even if the scale of a particular category of loss suffered is unforeseeable, this does not make it too remote to be recovered.
- The CA in this case seems to have formulated the remoteness test in very traditional terms. It does not seem that there was much, if any, discussion about the ‘assumption of responsibility’ formulation which was advocated in Transfield v Mercator [2008] and which practitioners thought might be a significant change which would make certain categories of loss more difficult to recover.