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Wellesley v Withers: A significant change in the analysis of remoteness of damage

In Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146 the Court of Appeal made an important change to the law of causation. From now onwards, the contractual approach causation shall apply instead of the tortious principles of remoteness in cases of concurrent liability. The effect of this case will be to materially change causation analyses in professional negligence matters, albeit the conclusion (as demonstrated in the Wellesley case itself) through the two analytical frameworks may well be identical.

Background

Wellesley Partners LLP (“Wellesley”) is a recruitment firm specialising in the investment banking sector. Wellesley instructed Withers LLP in 2008 to prepare a new LLP agreement to include several new partners to the LLP following an investment by a Bahraini bank, Addax Bank (“Addax”). At trial (per Nugee J) it was held that Wellesley had instructed Withers to include an option in the new partnership agreement that permitted Addax to withdraw half its capital contribution from Wellesley any time after 42 months from the date of execution of the agreement.

Negligently, Withers drafted the relevant clause such that Addax was entitled to exercise the option at any time within the first 41 months from the date of execution of the agreement.

Following the negligent drafting, Addax was entitled to and did withdraw half of its investment in May 2009, only one year after the date of execution, and two years and six months earlier than would have been the case otherwise. The consequence of the withdrawal by Addax meant that Wellesley were unable to carry out their planned business expansion.

So far as relevant, Wellesley subsequently brought a claim in negligence against Withers alleging it had suffered: (i) loss of profit it would have earned from expansion into the USA; and (ii) loss of profit it would have earned if it had employed more UK employees.

Remoteness

A central question in the case concerned whether the losses flowing from Withers’ breach should be assessed according to contractual or tortious principles. Withers argued that it should, and that on this basis, the losses suffered by Wellesley in the USA were too remote and thus irrecoverable.

Floyd LJ summarised the law in this way:

  • The basic rule in contract is that “a contract breaker is liable for damage resulting from his breach, if at the time of making the contract, a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach.”
  • In tort, “the primary rule which determinates what damage is recoverable in tort remains that of reasonable foreseeability”, but this is not the “sole criterion”. In SaamCo it was held that the scope of the duty is determined by assessing “the purpose of the rule imposing the duty.”

The effect of these different formulations is that the contractual test is more restrictive than the test in tort: Floyd LJ noted that “damage may be of a kind which is reasonably foreseeable (and therefore recoverable in tort) yet highly unusual or unlikely (and therefore irrecoverable in contract)."

Floyd LJ then proceeded to assess a proposal made in McGregor on Damages that, in cases of concurrent contractual and tortious duties where the losses suffered are purely economic, the contractual test of reasonable contemplation should apply. He concluded that it should:

“80. Nevertheless, I am persuaded that where, as in the 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 for 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 on 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.” (emphasis added)

However, whilst this finding appeared to bode well for Withers’ appeal, the Judge nonetheless dismissed this appeal on the facts (Longmore and Roth LJJ concurring on this issue). He held that the type of damage was in the reasonable contemplation of the parties as not unlikely to result from a breach. Withers knew that Wellesley was considering expansion into the USA and that this was how the capital raised through the investment round would be deployed. Although no further details were known at that time (in particular the prospect of a recruitment consultancy contract with Nomura was not known) the parties did have a common contemplation that they would exploit such opportunities as arose.

Conclusion

The case represents an important development in the law of causation, albeit one that is possibly of greater academic importance than practical. The analytical process of considering remoteness in many solicitors negligence cases should now be according to contractual principles but (as the detailed discussion by Roth LJ suggests) whilst the contractual analysis concerning reasonable contemplation of the parties is in principle more restrictive than the reasonable foreseeability test, the relationship between the two on a practical footing is vanishingly close.

Due to the conclusion reached (whereby Withers were successful on the legal issue but unsuccessful on the facts) it seems unlikely that this case will be reconsidered to the Supreme Court.