Haugesund Kommune & Anor v Depfa ACS Bank & Anor

This is my second judgment in this action. In it I refer to the parties in the same way as I did in the first. This second judgment is to be read with and in the light of the first. In the first judgment, [2009] EWHC 2227 (Comm), delivered on 4 September 2009, I determined that the municipalities were entitled to declaratory relief to the effect that they are not bound by the swap transactions into which they apparently entered with Depfa, but I pointed out that this was a Pyrrhic victory as I also determined that the municipalities were liable to make restitution to Depfa. I further determined that the municipalities’ partial defence of change of position failed, with the effect that the municipalities were liable to reimburse Depfa for the principal sums advanced, together with interest.

In the first judgment I also held that Wikborg Rein was in breach of its contractual duty to exercise reasonable care and skill in failing to advise Depfa that the swaps were prohibited loans. I also held that, had Depfa been advised that the swaps were prohibited loans, or even that there was a material risk that they might be so characterised, Depfa would not have entered into the swap transactions with the municipalities. Various questions were left over as to the quantification of the damages which Depfa was in consequence entitled to be paid by Wikborg Rein.

Throughout the trial I was under the impression, wrongly, that it was only to the extent that it could not recover, or recover in full, from the municipalities that Depfa claimed damages from Wikborg Rein – see for example paragraphs 5, 176 and 181 of my judgment. What I had in mind was that Depfa would recover from Wikborg Rein any shortfall in its recovery from the municipalities in consequence of the restitutionary remedy either being unavailable or affording less than a complete indemnity – because for example of a successful partial defence of change of position. I also had in mind that Depfa would wish to recover from Wikborg Rein, either as costs or as damages, compensation for the expense to which it had been put in consequence of having to defend the action brought by the municipalities and to maintain a counterclaim therein, in so far as that expense was irrecoverable from the municipalities as costs of the action. Furthermore, Depfa’s written opening submissions at trial pointed out, at paragraph 5.13, that Depfa’s loss was suffered when it paid away the loans on the faith of agreements which it believed to be valid but which were in fact void, and that the loss would not be reduced in so far as Depfa was unable to recover any part of the sums advanced by reason of how they were used by the municipalities – i.e. to the extent that a defence of change of position succeeded. The unspoken corollary seemed to be that to the extent that Depfa could recover from the municipalities, its loss recoverable from Wikborg Rein would be reduced.

In fact Depfa’s claim against Wikborg Rein is not contingent upon an inability to recover from the municipalities, although it gives credit for such recoveries as are in fact made. The relevant parts of Depfa’s Amended Particulars of Part 20 Claim against Wikborg Rein, which I had obviously overlooked, read:

“13.

If Depfa had been advised that Haugesund did not have the power, authority or capacity to enter into the swap agreement, or that there was an appreciable risk that it did not, Depfa would not have proceeded with the agreement, and would not have paid any amount thereunder.

14.

In the premises, by reason of Wikborg Rein’s breach of contract and/or duty Depfa has suffered, or may suffer, loss and damage:

(a)

If (which is denied) Haugesund is correct in its allegations that the swap agreement between it and Depfa is void, Depfa will have suffered loss in the amount paid to it thereunder. Depfa will give credit for payments received from Haugesund in respect of such amount.

(b)

Further, Depfa has suffered or may suffer loss in the amount of any costs it may be held to pay Haugesund, and (in so far as not recovered from Haugesund), the costs which it has incurred and continues to incur in connection with the dispute between it and Haugesund.

15.

Further, Depfa claims compound interest as damages on the amount of its loss:

(a)

If it had not proceeded with the swap agreement with Haugesund, and had not paid the first fixed amount thereunder, it would have used the funds in an alternative transaction on which it would have earned a similar return. Depfa accordingly has suffered loss in an amount equivalent to the return which it would have received under the swap agreement with Haugesund.

(b)

Alternatively, Depfa has suffered loss in the amount representing its cost of funding the payment of the first fixed amount under the swap agreement with Haugesund, particulars of which will be provided in due course.”

The paragraphs dealing with the claim in respect of Narvik are to the same effect.

By the end of the trial it was agreed on all sides that matters of quantification of damages and interest were best left until after resolution of the primary issues. There was thus no need to focus on the question whether the measure of Depfa’s loss as against Wikborg Rein should be regarded as, on the one hand, the amount paid away, together with the cost of funding, costs and expenses, or rather, on the other hand, that amount less the value of Depfa’s restitutionary rights against the municipalities.

It is apparent from various observations made by Mr David Railton QC, for Depfa, in his closing submissions at trial that at that stage, May 2009, Depfa was confident that the municipalities would honour a judgment of this court rendered against them. I have in mind particularly observations which he made as recorded in the transcript for 7 May at pages 103 to 104 and in the transcript for 8 May at pages 49 and 50. In retrospect it can be seen that there is the potential for a difference in outcome dependent upon whether the judgment of this court proceeds from the premise that the swap agreements were valid and binding or whether it proceeds from the premise that they were not valid and binding but concludes that the municipalities must nonetheless make restitution to the extent that they have been unjustly enriched at the expense of Depfa. Whether consciously or not Mr Railton may have referred to that distinction in his remarks on 8 May, transcript page 49 lines 12-13. However that may be, the municipalities themselves drew no such distinction when they sought expedition of the trial. They were plainly alive to the possibility that the outcome of the trial might be that they would be required to make restitution of what they had received, over and above simply the net proceeds of the failed investments. Their Norwegian lawyers Messrs Lund & Co advised Depfa by letter dated 13 October 2008 that they had taken advice from English leading counsel on the extent of any restitutionary remedy. The municipalities stood ready to pay over the net proceeds of the failed investments. The municipalities must have been advised that there was a prospect that their defence of change of position would fail, so that they were exposed to a larger claim. Indeed, the evidence deployed by the municipalities in support of their application for expedition is explicable only on that basis. In his witness statement of 19 December 2008 their English solicitor, Iain Mackie, a partner at Macfarlanes, said this:

“9.

The sums advanced by Depfa under the swaps to each of the Claimants were invested in a series of investments which have resulted in very large losses. The Claimants have made an open offer to pay to Depfa the net proceeds of such sale of those investments on the basis that that is the largest sum to which Depfa would be entitled by way of restitution. That offer has also been ignored by Depfa.

10.

As matters stand both the Claimants are required to prepare their budgets for 2009 (and indeed subsequent years) on the assumption that the swaps are valid and that the sums claimed by Depfa are now due unless and until this Court has declared that the swaps are void or there is a binding settlement. If the budget is prepared on that assumption it is necessary for the Claimants to make catastrophic cuts in the expenditure which they can incur in providing the services which they are expected to supply to the communities which they serve.

…

25.

In the event that the Claimants’ contentions as to the invalidity of the swaps and the maximum amount they would be obliged to pay back to Depfa are right then those cuts can be avoided. It follows therefore that it is essential that the Court should determine whether the Claimants’ contentions are correct at the earliest opportunity.”

It is implicit in these contentions that the catastrophic cuts were equally necessary in the event that the Claimants’ contentions as to the invalidity of the swaps were right but their contentions as to the maximum amount they would be obliged to pay back to Depfa were wrong. In short, the implication of this evidence was that the municipalities would honour a judgment of this court, and wished to know as soon as possible the basis upon which they must make their financial plans. That is plainly how Depfa understood the position – see what Mr Railton said as recorded in the transcript for 7 May at page 104, lines 1 to 6.

I was unaware when I directed expedition of the trial that, as Wikborg Rein had in fact advised Depfa:

“A claim against a Norwegian municipality cannot be enforced, no distress or seizure may be obtained on any of its assets and no bankruptcy or debt settlement proceedings may be initiated against it.”

See the Haugesund Opinion letter dated 30 June 2004. Had I been aware of this, apparently a feature common to lending to public authorities, it would at the time have seemed irrelevant in the light of the municipalities’ apparent intention to meet their obligations, whether those obligations were contractual or restitutionary. The point did however emerge in the evidence at trial and it was discussed during final submissions. In the course of Mr Railton’s address I said this – see transcript for 8 May page 50 at lines 5 to 9:

“I have been thinking about this. I think in the absence of any evidence, I just have to proceed on the usual basis that the court assumes that the parties intend to carry out their obligations, and I think that’s the end of it really.”

To this observation Mr Railton replied “Absolutely, absolutely”.

After I had given judgment the municipalities successfully applied for a stay of execution on the judgment insofar as it exceeded the net proceeds of the failed investments. The stay was sought pending an appeal to the Court of Appeal on the change of position issue. Mr Mackie again made a witness statement in support of the application. The picture painted was somewhat different from that described in his first witness statement. It was now said that any possible spending cuts would be “small in comparison to the sum outstanding”. It was said to be “not clear at this stage how the shortfalls can be met”. The possibility of cross-default on other substantial loans was raised. Nothing was said about the municipalities’ assets – Haugesund for example has a shareholding in the local generating company, Haugaland Kraft AS – see paragraph 7 of the first judgment. It was in the light of this evidence that Mr Railton at the post-judgment hearing on 1 October 2009 raised for the first time the potential consequences as between Depfa and Wikborg Rein in the event that “there turns out to be a problem and we cannot get the money from the municipalities”. In that event, said Mr Railton, “it is our case against Wikborg Rein that we do not then have anything that we put by way of a credit against the amount of damages that they are to pay us”.

It is in this way that the question as to the true measure of Depfa’s loss has come to the fore. Depfa now says, consistently with its pleaded case, that its loss as against Wikborg Rein is to be assessed independently of the possibility of further recoveries from the municipalities. It gives credit for what it has already received, but it says that such rights as it has to recover further amounts from the municipalities do not reduce the amount for which it is entitled to judgment against Wikborg Rein. It is, it says, under no obligation to pursue its rights against the municipalities and is entitled without more to recover its outstanding loss in full against Wikborg Rein.

The extent of Depfa’s loss independent of the matters in dispute at the recent hearing is now a matter of agreement. It is agreed that in addition to its loss of principal Depfa is entitled to claim compound interest as damages representing its cost of funding the amounts advanced to the municipalities. It is agreed that the appropriate interest rate is 3.356% with quarterly compounding. No further question arises as to any further losses because Wikborg Rein has agreed to pay to Depfa its costs of the municipalities’ claims against it, the costs of Depfa’s counterclaim against the municipalities and the costs of its claim against Wikborg Rein. The quantum of those costs has also been agreed. Depfa accepts that it must give credit for the periodical payments received from the municipalities whilst the apparent swap agreements were being performed and for the net proceeds of sale of the failed investments which the municipalities paid over on 5 October 2009.

Thus Depfa now seeks judgment against Wikborg Rein for NK108,003,413 in respect of Haugesund and NK149,727,831 in respect of Narvik. Those figures are calculated up to 29 January 2010, which at the time of calculation was expected to be the third and final day of the recent hearing before me.

Wikborg Rein denies that there is now any outstanding loss for which Depfa can properly obtain judgment against it. On the basis of the findings in my first judgment it accepts liability for Depfa’s costs, but this aspect has been resolved by agreement. It would require to be revisited in the event that Wikborg Rein succeeds in its appeal on the capacity point, but that is a matter for the Court of Appeal. Wikborg Rein also now accepts that in the event that the municipalities succeed in their appeal on the change of position point, Depfa would then be entitled to the judgment against them, Wikborg Rein, which it now seeks. That would be because Depfa had no right to recover in restitution from the municipalities over and above the recoveries already made. That too however is a matter for the Court of Appeal. A point might have arisen as to the cost of funding the principal amounts paid to the municipalities. However the municipalities have agreed that pursuant to my first judgment it is appropriate that Depfa should have judgment against them for the principal sums advanced, plus simple interest at 0.5% above three-month Euribor, less payments received. As it has turned out, this award of interest equals or possibly slightly exceeds Depfa’s costs of funding. The upshot is therefore that Wikborg Rein deny that there is now on the basis of my first judgment any sum in respect of which Depfa is entitled to an award of damages against them.

It is Mr Railton’s case that Depfa is now entitled as of right to the judgment which it seeks without consideration of whether the municipalities will in the future pay the balance of the judgments given against them. Execution in respect of the unpaid balance of the judgments is of course presently stayed pending the appeal to the Court of Appeal. However if his primary point were held to be wrong Mr Railton was inclined to suggest that the correct course would be to adjourn further consideration of the value to be attributed to the judgments which Depfa has against the municipalities and to permit further evidence to be adduced. In the light of the conclusion to which I have come that Depfa is entitled to judgment against Wikborg Rein, this suggestion does not arise. I need therefore say no more about it, save to observe that the prospect of an adjournment for this purpose, which in fairness to Mr Railton was first floated by me in argument as a possibility, is fraught with difficulty. Not least of the difficulties is the question how long an adjournment would be necessary or appropriate.

The considerations to which I have just briefly alluded may point additionally to the convenience and correctness of Mr Railton’s case that Depfa is entitled without more to judgment against Wikborg Rein. I have however concluded that in the light of principle and authority that case is in any event correct.

It is common ground that the contract between Depfa and Wikborg Rein was governed by Norwegian law, but as I recorded at paragraph 6 of my first judgment the duties owed by Wikborg Rein to Depfa are the same as the duties which English law would, in such circumstances, regard as undertaken, with however the important reservation that no concurrent non-contractual duty of care was owed. I am therefore concerned only with the assessment of contractual damages according to English principles.

It follows, and it has not been suggested otherwise, that Depfa’s cause of action arises at the date of breach. However Depfa does not assert that it suffered loss at the date of breach. It asserts that it suffered loss the moment it parted with the money paid to the municipalities in reliance upon Wikborg Rein’s negligent advice.

I agree with Mr Gordon Pollock QC for Wikborg Rein that the assessment of damages is a fact sensitive exercise and that it is wrong to approach it on the basis that there is some inflexible rule to be derived from the authorities which will necessarily be appropriate in all cases.

The starting point of the enquiry is in my view that Depfa would not have advanced the money to the municipalities had it been advised by Wikborg Rein that there was any material risk that the swaps were prohibited loans giving rise to no contractual obligation on the part of the municipalities. The money so advanced was in fact irrecoverable as a contractual debt in accordance with the agreed but unenforceable terms. The money was paid over in circumstances where no legal relationship subsisted or came into effect between the payor and the payee. Depfa could recover the money only to the extent that it could demonstrate that the municipalities had by its receipt been unjustly enriched at its expense. That is an uncertain remedy, often difficult of valuation, for as pointed out by Goff and Jones, The Law of Restitution, 7^th Edition at paragraph 14-002, a restitutionary claim is not one for damages for loss suffered. In my judgment this is one of those perhaps rare cases where it is possible and appropriate to say that the bank had lost the money advanced the moment it paid it over. It acquired in return no right to its recovery. Indeed it acquired nothing in return.

Mr Pollock sought to characterise “the restitutionary right” as “an integral part of the (alleged) loss-making transaction”. I do not consider that this is appropriate. It is true that Depfa’s mistake as to the validity of the transaction is one of the factors which gives rise to the liability of the municipalities to make restitution. However in no sense can it be said that Depfa acquired valuable rights under the transaction. There was no transaction in the sense in which that word is in this context normally used. There was no contract. That is the essence of Depfa’s complaint against Wikborg Rein. In these circumstances, the approach which I derive from the authorities, even if they do not necessarily compel it, is that Depfa is to be treated as having suffered loss when it paid away pursuant to a non-existent transaction and that the measure of that loss is the whole amount advanced together with the cost of funding. Further losses might be incurred and its loss might in fact be reduced, but the situation is one in which the law permits recovery in full of the outstanding loss, that loss being assessed independently of the possibility of further recoveries. That is at least in part because the transaction itself was worthless to Depfa, and Depfa would not have advanced the money had it been advised that it would have no contractual right to its recovery.

Mr Railton submits that the authorities demonstrate a principled approach to the question what credit is to be deducted in assessing what loss is recoverable in situations such as the present. He referred me to a line of authorities including Steamship Enterprises of Panama Inc., Liverpool (Owners) v Ousel (Owners) and Others. The Liverpool (No.2) [1963] P 64, International Factors Ltd v Rodriguez [1979] 1 QB 351, London & South of England Building Society v Stone [1983] 1 WLR 1242, Standard Chartered Bank v Pakistan National Shipping Corp & Others [2001] CLC 825, and Peters v East Midlands Strategic Health Authority and another [2009] 3 WLR 737. Authorities such as these are summarised in the textbooks as giving rise to a principle. In Halsbury’s Laws of England, 4^th Edition, Vol. 12(1) at paragraph 826 it is said:

“In general. Where a claimant has a right of action against two obligors in respect of a particular matter, but brings an action against only one, the defendant cannot generally avoid or reduce his liability on the ground that the claimant, having a potential action against the other obligor, has not suffered the loss claimed. The availability of any such alternative cause of action affords no defence to the particular obligor’s liability to pay damages in full unless the failure to pursue that liability constitutes a failure to take reasonable steps to mitigate the claimant’s loss. Where, however, a claimant who has concurrent claims against two obligors in respect of the same matter recovers the whole or part of his loss from one of those obligors, the amount which the claimant thus recovers is applied in diminution of the damages which are awarded to him against the other obligor. A claimant cannot recover more than the total sum due in respect of his loss, merely by reason of the fact that his claim may lie against more than one person. The rule reflects a general judicial dislike of over-compensation.”

The principle is however put differently in McGregor on Damages, 18^th Edition, paragraph 7-085:

“(vi)

A claimant need not take steps to recover compensation for his loss from parties who, in addition to the defendant, are liable to him. This is an undoubted principle. Indeed, as Harman LJ said in The Liverpool (No.2) ‘it is a principle which, strictly speaking, stands on its own feet independently of mitigation, a principle without which it would have been unnecessary for the legislature to make provision for contribution and indemnity between joint and several tortfeasors’. And The Liverpool (No.2) shows that, even if the third party offers payment of the amount for which he is liable, the claimant is not required to accept it in mitigation. In that case the defendants’ ship through negligence came into collision in port with another ship which sank. The claimant harbour board sued the defendants, whose liability was limited, for expense incurred and damage sustained in clearing the port of the wreck. However, the claimants had also taken steps to enforce their statutory right against the owners of the wreck to recover from them any expenses outstanding after raising and selling the wreck, and not only had this amount been established but the money had been tendered, refused by the claimants, and then put on deposit by the owners of the wreck. In such circumstances the Court of Appeal held that the claimants were under no duty to satisfy part of their damages by accepting the money already on deposit. Harman LJ, delivering the court’s judgment, pointed to the analogy that ‘it has never been the law that a creditor having a security against a third party for his debt must give credit for that when proving in the bankruptcy’.”

The formulation in McGregor is in my view to be preferred, not least because the Court of Appeal has on two occasions emphasised that the principle that a claimant is free to choose from whom to recover compensation has nothing to do with mitigation of loss – see The Liverpool (No.2) per Harman LJ at page 83 and Peters per Dyson LJ giving the judgment of the court at page 752, paragraph 41.

These cases are not however on all fours with the present. In The Liverpool (No.2) the Harbour Board had the right to recover the cost of removing the wreck of the Ousel from its waters both from the owner of The Liverpool, who had been one hundred percent responsible for the collision which led to the Ousel’s sinking, and, pursuant to their statutory powers under the Mersey Docks and Harbour Board Act, from the owners of the Ousel. It was held that in claiming against the owners of The Liverpool the Harbour Board was not required to give credit for the amount it could recover from the owners of the Ousel. The principle stated by Harman LJ at page 83 is that no duty rests on a claimant at the demand of a tortfeasor to satisfy part of the damages by resorting to another tortfeasor (scilicet, responsible for the same loss) still less by resorting to an innocent party made liable merely by statute. The present situation is at one further remove. I do not think that it is appropriate to regard the municipalities and Wikborg Rein as two parties responsible for the same loss suffered by Depfa. Insofar as Depfa has a right to recover from the municipalities, the recovery is not measured by reference to Depfa’s loss but rather by reference to the municipalities’ unjust enrichment.

The Liverpool (No.2) was not referred to in International Factors v Rodriguez where a director of a company, being sued for conversion of cheques which he had paid into the company’s account, but which should have been paid to the claimant factors, contended that the claimant factors had suffered no loss, because they had a right of action against the debtors, the drawers of the cheques. The debtors had been notified that the debts were assigned to the plaintiff debt factors but they mistakenly sent payment to the company. The argument was therefore that the claimant debt factors could have sued the debtors on the original obligation, making them pay twice over. That argument pursued by a tortfeasor guilty of conversion was perhaps unlikely to succeed. Sir David Cairns put it this way at page 359A-B:

“A plaintiff who has two causes of action cannot be met when he makes a claim against one defendant by the answer: ‘Oh, no; you’ve suffered nothing by my tort because you have a cause of action against somebody else.’ That clearly cannot be right.”

The principle, although unstated, is the same as that enunciated in The Liverpool (No.2). Like The Liverpool (No.2), the situation is a long way from the present.

In Standard Chartered Bank v Pakistan National Shipping Corp. the claimant confirming bank (SCB) was presented with falsely dated bills of lading, as well as with discrepant documents. SCB paid under the letters of credit, in the belief that the bills of lading were genuine, while negligently overlooking the discrepancies in the other documents. Its claim on the issuing bank for reimbursement was rejected on the grounds of the discrepant documents. SCB claimed to recover its loss against those responsible for the falsely dated bills of lading. One argument made by the defendants was that the cause of SCB’s loss was the refusal of the issuing bank to pay, and that that refusal had nothing to do with the false bills of lading, but rather with the fact that there were discrepant documents. In rejecting the argument Potter LJ said, at paragraph 52, page 841:

“The flaw in that argument is that it fails correctly to identify SCB’s loss. SCB suffered loss as soon as it paid out the money to Oakprime on 16 November 1993 in reliance on the false representations made to it by Oakprime through Mr Mehra. The cause of SCB’s loss was the deceit. Even if SCB contributed to its own loss by its negligent failure to spot discrepancies, that is no defence to SCB’s claim for deceit… The fact that SCB was later unable to obtain reimbursement from Incombank, which would have extinguished its loss, was irrelevant to its claim against Mr Mehra because a claimant is not obliged to sue a second tortfeasor to recover damages which he is entitled to claim against the first: see The Liverpool (No.2)…”

In fact the unavailable claim was the contractual claim for reimbursement by the issuing bank. However the interest of the case lies mainly in its approach to the occurrence of loss. SCB was treated as having suffered loss as soon as it paid out in reliance on the fraudulent documents. It gained nothing in return for its payment because the documents were worthless. That is as it seems to me a closer analogy to the present case, where Depfa obtained by its payment no contractual obligation to repay.

In London and South of England Building Society the security for a loan was negligently overvalued because the valuer overlooked the need for repairs to deal with subsidence. The mortgage contained a covenant by the borrower to repay all monies spent by the lenders in repairing the property. The house was in fact worthless for the purposes of security for a loan. The lenders spent nearly three times the amount advanced in repairing the house. The lenders did not however pursue their right to recover any part of that expenditure from the borrowers, who were not wealthy. The Court of Appeal, by a majority, treated the case as one in which the lenders had acted reasonably in not seeking to recover any part of the cost of repair from the borrowers by enforcing the covenant in the legal charge. The lenders were held entitled to recover in full from the valuers the amount they had advanced to the borrowers relying upon a negligent valuation of worthless security. The case appears to have been decided on the basis that the lenders were under no duty to mitigate their loss by enforcing the borrowers’ covenant. Stephenson LJ did however refer also to The Liverpool (No.2).

Peters affords a closer analogy with the present case. The defendants in a medical negligence case argued that, since the injured claimant had a statutory right to have her care and accommodation provided in kind by her local authority, she could not recover the cost of such care and accommodation from them because she had in that regard suffered no loss. The Court of Appeal, in reliance inter alia on The Liverpool (No.2), rejected this argument. Dyson LJ said, at paragraphs 53 and 54 of his judgment, at page 755:

“Having reviewed these authorities, we can now express our conclusion on this issue. We can see no reason in policy or principle which requires us to hold that a claimant who wishes to opt for self-funding and damages in preference to reliance on the statutory obligations of a public authority should not be entitled to do so as a matter of right. The Claimant has suffered loss which has been caused by the wrongdoing of the Defendants. She is entitled to have that loss made good, so far as this is possible, by the provision of accommodation and care. There is no dispute as to what that should be and the council currently arranges for its provision at The Spinnies. The only issue is whether the Defendant wrongdoers or the council and the PCT should pay for it in the future.

54.

It is difficult to see on what basis the present case can in principle be distinguished from the case where a claimant has a right of action against more than one wrongdoer or a case such as The Liverpool (No.2) where a claimant has a right of action against a wrongdoer and an innocent party. In The Liverpool (No.2), those two cases were treated alike. In our judgment, the present case should be treated in the same way. It is true that in the present case, the Claimant’s right against the council is the statutory right to receive accommodation and care. But the fact that there is a statutory right in the claimant to have his or her loss made good in kind, rather than by payment of compensation, is not a sufficient reason for treating the cases differently.”

The modern cases concerning negligent valuation of security do not adopt this approach. Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No.2) [1997] 1 WLR 162 is the leading authority. The valuers were liable in contract and in tort. A question arose as to the time of accrual of the cause of action. Lord Nicholls said, at page 1631D-F:

“When, then, does the lender first sustain measurable, relevant loss? The first step in answering this question is to identify the relevant measure of loss. It is axiomatic that in assessing loss caused by the defendant’s negligence the basic measure is the comparison between (a) what the plaintiff’s position would have been if the defendant had fulfilled his duty of care and (b) the plaintiff’s actual position. Frequently, but not always, the plaintiff would not have entered into the relevant transaction had the defendant fulfilled his duty of care and advised the plaintiff, for instance, of the true value of the property. When this is so, a professional negligence claim calls for a comparison between the plaintiff’s position had he not entered into the transaction in question and his position under the transaction. That is the basic comparison. Thus, typically in the case of negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower’s covenant and the true value of the over-valued property.”

Pausing there, a distinction can in my view be drawn between such a case and the present. Lord Nicholls’ approach calls for a value to be ascribed to the lender’s rights under the transaction. In the present case however Depfa has no rights under the transaction because there is no transaction. The gravamen of Depfa’s complaint against Wikborg Rein is that it is not after all a lender.

Lord Nicholls went on to deal with the implications of Lord Hoffmann’s speech in the earlier stage of the litigation, reported as South Australia Asset Management Corp. v York [1997] AC 191. Lord Nicholls continued, at page 1631G-H:

“However, for the reasons spelled out by my noble and learned friend, Lord Hoffmann, in the substantive judgments in this case…, a defendant valuer is not liable for all the consequences which flow from the lender entering into the transaction. He is not even liable for all the foreseeable consequences. He is not liable for the consequences which would have arisen even if the advice had been correct. He is not liable for these because they are the consequences of risks the lender would have taken upon himself if the valuation advice had been sound. As such they are not within the scope of the duty owed to the lender by the valuer.

For what, then, is the valuer liable? The valuer is liable for the adverse consequences, flowing from entering into the transaction, which are attributable to the deficiency in the valuation.”

It is of course a feature of the present case that had Depfa in fact acquired contractual rights against the municipalities, it would have been unable to enforce them by execution against their assets. As I have already pointed out, it is the potential difficulty involved in enforcing or obtaining satisfaction of Depfa’s restitutionary claim which has rendered it necessary to address the question of the measure of loss recoverable from Wikborg Rein. Again however there is in my view a distinction to be drawn. I leave on one side entirely questions which might potentially arise as to, for example, whether the municipalities are able to meet the judgment and decline to do so, or whether they are simply unable to satisfy the judgment. The distinction is that whilst Depfa knew, and ironically was so advised by Wikborg Rein, that it could not levy execution against the municipalities, and may therefore be said to have assumed that risk, it did not in my judgment intend to assume that risk in circumstances where the swap transactions were simply void. There is I think a substantial difference between a transaction which of itself gives rise to substantive obligations, albeit unenforceable by execution, and a “transaction” which is in fact void, of itself giving rise to no obligations at all. The difference is I think of particular significance where the “counterparty” is a public authority, default by which has ramifications going far beyond those attending default by a commercial entity. At paragraph 101 of my first judgment I said this:

“[Mr Rasmussen] was plainly under a duty to advise Depfa that whatever the view of the Ministry might be there existed at the very least a real risk that a municipality could itself, if things went wrong, rely upon its own lack of capacity to contract in order to escape liability.”

Whilst I did not then have in mind the point about inability to enforce any judgment, what I said was I think apt to encompass it. It is one thing for the municipalities, should this occur, to fail or to decline to honour a judgment which imposes upon them a liability to make restitution. It is another and different thing for the municipalities to decline to honour obligations freely and competently accepted.

I conclude therefore that, looking at the matter in the terms which Lord Nicholls enjoins, the adverse consequences flowing from entering into the transaction, attributable to the deficiency in Wikborg Rein’s advice, are that there is in fact no transaction in the sense of a contract and that, a fortiori, the value of the rights acquired under the transaction is nil. I consider that what Lord Hoffmann said in the Nykredit (No.2) case bears out this approach. At page 1639B-C Lord Hoffmann said:

“There may be cases in which it is possible to demonstrate that such loss is suffered immediately upon the loan being made. The lender may be able to show that the rights which he has acquired as lender are worth less in the open market than they would have been if the security had not been overvalued. But I think that this would be difficult to prove in a case in which the lender’s personal covenant still appears good and interest payments are being duly made. On the other hand, loss will easily be demonstrable if the borrower has defaulted, so that the lender’s recovery has become dependent upon the realisation of his security and that security is inadequate.”

As I understand it what must be brought into account is, effectively, the value of the contract. Here, at the risk of repetition, there is no borrower’s covenant. Where as a direct result of the negligence complained of there is no contract, there is nothing to bring into account. This is also I consider consistent with the approach of Ackner LJ in UBAF Limited v European American Banking [1984] 1 QB 713 at 725.

The same approach can in my view be seen in two cases where negligent solicitors failed to inform a mortgage lender of facts and matters which, if the lender had known of them, would have led them to decline to lend to the borrower. In the first case, Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 582 Chadwick J said, at page 622, dealing with the position of the defendants Steggles Palmer, a firm of solicitors:

“If the Society had known what it should have known, it would [have] decided that Mr Whittaker was a borrower to whom it did not wish to lend. In those circumstances it seems to me fair, and in accordance with Lord Hoffmann’s test, that the Defendants should be responsible for the consequences of the Society not being in the position to take the decision which it would have taken if the Defendants had done what they should have done. That is to say, the Defendants should be responsible for the loss suffered by the Society as a result of lending to Mr Whittaker. That, subject to questions of mitigation and contributory negligence, is the whole loss arising from the advance.”

That approach was approved and applied by the Court of Appeal on indistinguishable facts in Portman Building Society v Bevan Ashford (a firm) and Others [2000] PNLR 354. Again the trial judge had held that had the lender known what it should have been told, it would have concluded that the borrowers were not persons to whom they wished to lend. In other words, there would have been no advance and no transaction. Otton LJ said, at page 359:

“Thus I am satisfied that in these circumstances PBS was rightly held by Longmore J entitled to recover the whole of its loss. Longmore J was correct to follow the reasoning of Chadwick J in the application of the SAAMCO principle and has the effect that where a negligent solicitor fails to provide information which shows that the transaction is not viable, or which tends to reveal an actual or potential fraud on the part of the borrowers, the lender is entitled to recover the whole of its loss. In other words, the whole of the loss suffered by the lender is within the scope of the solicitor’s duty and is properly recoverable.”

In both cases of course the court had in mind the scope of duty limitation introduced or underscored by Lord Hoffmann’s speech in the South Australia Asset Management case. However the context was not that of a wrong valuation where, ordinarily, the consequence of a correct valuation would be an advance on different terms. The context was rather that of wrong advice or information where correct advice or information would have led to there being no transaction at all. In both situations the enquiry is at bottom what properly are to be regarded as the consequences of the advice or information being wrong. In the present case Depfa advanced money on the strength of what turned out to be a non-existent promise to repay it by an entity which had no capacity to borrow or to promise to repay. It is to my mind consistent with the approach in these cases to regard Wikborg Rein as responsible for the whole loss arising from the advice, save in so far as that loss has been reduced by recoveries made prior to the point at which the court is called upon to assess the loss. A similar approach is to be found in Aneco Reinsurance Underwriting Ltd. (In Liquidation) v Johnson & Higgins Ltd. [2002] 1 Lloyd’s LR 157 where brokers failed to advise their clients Aneco that the basis upon which they proposed to enter into a reinsurance was not viable since retrocession was unavailable. They were held liable for the whole of the losses suffered by Aneco consequent upon entering into the reinsurance, not simply the losses which they would have suffered in any event had the retrocession in fact obtained not been voidable and in due course avoided.

Mr Railton suggested that a rationale for this approach may be extracted from the decision of the Court of Appeal in Eastgate Group Ltd v Lindsey Morden Inc [2002] 1 WLR 642. In that case the claimant had purchased a company in reliance on the advice of investigative accountants. The purchase agreement contained warranties as to the accounts of the purchased company, which it was alleged were broken. The purchaser sued the vendor for damages for breach of warranty. The vendor claimed a contribution from the investigative accountants pursuant to the Civil Liability (Contribution) Act 1978 on the basis that if there were defects in the relevant accounts, they should have been spotted by the accountants, who would accordingly be in breach of duty to the purchaser, and liable to the purchaser in respect of the same damage as the vendor. The investigative accountants applied for the contribution claim to be dismissed. Andrew Smith J granted that application, on the basis, relying on the Nykredit (No.2) decision, that any damages which were payable by the investigative accountants to the purchaser would need to take into account the value of the warranties given by the vendor under the purchase agreement, and that accordingly a contribution claim would not be possible. The vendor’s appeal was allowed by the Court of Appeal. After citing and discussing the passage from Lord Nicholls’ speech in Nykredit (No.2) which I have set out above, Longmore J said, at pages 650-651:

“It cannot be the case, merely because a valuer can require a claimant, who brings an action for damages against him, to bring into account the value of a borrower’s covenant to repay a debt, that therefore any party liable to a claimant for professional negligence can require the claimant to bring into account the value of his claim against any other contractor for breach of warranty. This is due to the essential difference between a claim for repayment of a debt (to which there can ordinarily be no substantive defence and in respect of which a claimant does not have to prove loss) and a claim for damages for breach of contract (to which there may be many defences and in respect of which the claimant must prove his loss). If a claimant’s loss has in fact been diminished, that diminution must be brought into account in a claim for damages for breach of warranty. Thus the valuation cases, which decide that, in claims against valuers, the worth of the mortgagor’s covenant must be brought into account and that the debt is not reduced by any payment made to the creditor by the valuers, are not in point when the question is whether any claim against a person in breach of contract falls to be reduced by any payment made by a person liable for breach of professional duty (whether a valuer, accountant or other professional person).”

In that case the purchasers had available to them claims in contract against both the sellers and the investigative accountants. Here Depfa has in consequence of Wikborg Rein’s breach of contract no contractual claim against the municipalities. It would in the light of the approach of the Court of Appeal be surprising if Depfa’s loss recoverable from its negligent lawyers fell to be reduced by a value which the court must attribute to its claim in restitution. In this situation only actual diminution of loss falls to be brought into account – see again per Longmore J at paragraph 15, page 651, citing British Westinghouse Electric & Manufacturing Co. Ltd v Underground Electric Railways Co. of London Ltd [1912] AC 673.

I come finally to the decision in Niru Battery Manufacturing Co. v Milestone Trading Ltd (No.1) [2002] 2 All ER (Comm) 705. I again gratefully adopt Mr Railton’s summary of the decision as set out in his supplementary written submissions. The claimant had claims against a number of parties arising out of the circumstances in which it had, through a letter of credit issued by its bank, Bank Sepah, paid for a quantity of lead ingots which was never shipped. The underlying contract for the purchase of the ingots had been concluded between the claimant, Niru Battery, and Milestone. Milestone had sought to raise finance from its bank, CAI, to enable it to buy ingots with which it would meet its contractual obligation to Niru Battery. CAI agreed to, and did, finance the purchase of the ingots, but did so on terms that it kept the relevant warehouse warrants as security until it was paid. That in turn made it impossible for Milestone to ship the ingots, and to cause a bill of lading to be issued, and hence for it to be paid under the letter of credit provided by Niru Battery. Milestone accordingly arranged a scheme whereby the forwarding agent agreed to issue a bill of lading before the ingots had passed into its control. It also arranged for the ingots to be inspected and certified by SGS. The documents were then presented for payment under the letter of credit although, as a result of lack of funds, it was a month before Bank Sepah was able to make payment to CAI of the amount payable, US$5.8 million. In the meantime, the price of lead had dropped, and CAI decided to sell the warrants which it had, and indeed to stop providing further facilities to Milestone or those connected with it. It was after this that the proceeds of the letter of credit were received by CAI from Bank Sepah. After considering its position, and in the face of threats of legal action from Milestone if the proceeds were not released to it, CAI decided to pay away the proceeds in accordance with Milestone’s instructions. When Niru Battery discovered that no lead had been shipped, it brought claims against a number of parties, including SGS and CAI.

The claim against SGS was for negligence in issuing its inspection certificate. Moore-Bick J held that a duty of care was owed to Niru Battery, and that it had been broken. Judgment was entered against it for damages in the amount paid out under the letter of credit in reliance on the inspection certificate. The claim against CAI which also succeeded was in restitution for money paid under a mistake of fact. The unjust factor of mistake was admitted, and an alleged defence of change of position was rejected. Judgment was entered against CAI for the proceeds of the letter of credit which it had received. In the result therefore Niru Battery was awarded judgment in the same amount against both SGS and CAI. The claimant was not required to give credit for the value of its restitutionary claim in the calculation of its damages against the negligent inspector; only actual receipts from the bank would have reduced the amount of damages payable.

In the course of his judgment, Moore-Bick J considered submissions by SGS to the effect that the loss suffered by Niru Battery was not caused by the payment under the letter of credit in return for worthless documents, but rather by the subsequent extraordinary sequence of events, including CAI’s payment away of the funds. In rejecting that argument, Moore-Bick J identified the loss suffered by Niru Battery as arising when the funds were transferred to CAI pursuant to the letter of credit. At paragraph 90, page 730, Moore-Bick J said this:

“Since the bill of lading was in fact worthless Niru was bound to suffer loss once apparently conforming documents had been presented under the letter of credit, unless something subsequently intervened to prevent it. Mr Mahdavi [effectively the alter ego of Milestone] had hoped and intended that the payment of the price and the release of the goods by CAI would intervene to make good the position, but in the event they did not. The loss thus flowed from the original cause, namely, the presentation of worthless documents. Similarly, the prompt return of the money by CAI would no doubt have made good the loss, but the loss itself occurred as soon as the funds were transferred to CAI.”

Moore-Bick J’s reasoning was approved by the Court of Appeal – see [2004] 1 Lloyds Rep. 344 at 360 per Clarke LJ. In a subsequent stage of the litigation in the course of which SGS, having paid Niru’s claim in full, sought to recover from CAI, Clarke LJ also said this, at [2004] 2 Lloyds Rep 319 at 327:

“It does not seem to me to be appropriate to treat CAI and SGS as equally responsible. It is true that SGS was careless (and thus negligent because of the duty of care owed to Niru) but it would not have been liable if CAI had not paid the money away in bad faith because Niru’s cause of action would not have been complete.”

Presumably the cause of action, in tort, would not have been complete because no loss would have been suffered, although Moore-Bick J considered that loss was suffered as soon as the funds were transferred to CAI. In Charter plc v City Index [2008] Ch 313 at 335 Carnwath LJ confessed to having difficulty with Clarke LJ’s reasoning in this latter passage. It is I think sufficient for me to observe that the situation in Niru was analogous to the present. Niru in reliance on the advice of SGS paid away money on the strength of a worthless document of title. It accordingly acquired no interest in the goods apparently represented thereby. Niru was held entitled to recover the sum so paid away, without giving credit for incidental restitutionary rights unrelated to the rights which they had been negligently led to believe they were acquiring. If I were to accede to Wikborg Rein’s argument I would be reaching a conclusion at odds with that reached by Moore-Bick J and endorsed by the Court of Appeal.

For all these reasons I conclude that Depfa is entitled to the judgment which it seeks. It is not obliged to give credit for the value of its rights in restitution against the municipalities and thus the court need not undertake the difficult task of valuing those rights.

Mr Railton suggested that Wikborg Rein will in consequence of satisfying Depfa’s claim be in a position to recover its outlay in whole or in part from the municipalities. He suggested that there are a number of routes to this result, which he put under the broad heads of subrogation, recoupment and contribution, either under the 1978 Civil Liability Act or at common law. I have not heard full argument on this point and I should stress that my conclusion that Depfa is entitled to the judgment which it seeks is quite independent of the outcome of this further debate. The point will arise only if and when Wikborg Rein seek relief against the municipalities. The judgments in Niru Battery and Charter v City Index show that the point is not without difficulty and I say no more about it.