Lounge with flower vases and outside view.

Causation Basics: The breach must cause the loss

07 May 2013. Published by Sally Lord, Knowledge Lawyer

In the recent case of Clack v Wrigley Solicitors LLP, the Courts have reaffirmed the principles set down in SAAMCO and Nykredit; liability for loss is limited to the loss attributable to the misconduct.

In this case, Mr Clack entered into a loan agreement for £600,000 with an acquaintance, Mr B, on the basis of security of shares which Mr B purported to own. The solicitors were instructed to draft the loan and security documents. During the course of the transaction, no share certificate in Mr B's name or a copy of the register of members showing that he was a shareholder were produced.  In fact, at the time the loan was completed and the money was transferred, the shares were owned by a third individual and a company owned by Mr B, which had charges against its shares. Mr B was made bankrupt less than a year later.

Mr Clack brought an action against his solicitors, claiming that they had been negligent in failing to advise him not to complete the loan without seeing a copy of the relevant company's register of members and without being provided with a share certificate recording the fact that Mr B owned the shares in question.

The Court acknowledged that the solicitors had been put under considerable time pressure during the transaction however it found that they should have advised Mr Clack that without the share certificate and a copy of the register of members, the security for the loan was ineffective.

Even though negligence was established, Mr Clack was awarded only a fraction of his loss.  In establishing quantum, the Court relied on the assessment of damages in SAAMCO i.e. what is the particular breach of duty in respect of which damages are sought; and what loss is attributable to that breach.

The Court held that Mr Clack's decision to enter into the loan was based on a variety of factors, only one of which the solicitors were responsible for.  The Court stated it would be "manifestly unfair" to hold the solicitors liable for the consequences of a decision which was based mainly on Mr Clack's misplaced confidence on other matters and only in part on the solicitors' actions.

Any award of damages was therefore to be based on what Mr Clack lost as a result of having no security over the shares. i.e. what would he have recovered had the loan been made with effective security? Unfortunately for Mr Clack, the shares in question had no value and therefore no award was to be made in that respect.

Notwithstanding the above, under a Deed of Undertaking, had the security been effective, Mr Clack was entitled to become a director of the company and to recover director's fees. The Court assessed the likelihood of Mr Clack becoming a director and what remuneration he would have received, and awarded him £30,000.

Causation remains a little understood concept amongst litigation lawyers and this case acts as a good reminder that in this current economic climate, professionals should only be responsible for the loss that they have caused directly by any breach, and should therefore not be held accountable for what are ultimately, bad investment decisions.