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Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146: changing remoteness, but forgetting consumers?

Matthew Isaacs

Matthew Isaacs

Matthew achieved a first in law from Cambridge University. His main interest is in Private Law topics, with a particular focus on the tort of negligence.

The Court of Appeal’s judgement in Wellesley Partners v Withers changed the test for the remoteness of damage in the tort of negligence when there was a concurrent contract between the parties. In doing so, the Court changed its understanding of the duty of care in the tort of negligence.

Court of Appeal judgement: [2015] EWCA Civ 1146

Facts

Wellesley Partners, an executive search consultancy, were raising money from investors to bid for a contract with Nomura, an investment banking company in the US. Withers LLP drafted the partnership agreement between Wellesley Partners and Addax Bank, one of the investors. Wellesley Partners wanted to give Addax the option to withdraw half its investment after 42 months had passed. However, the agreement actually gave Addax the option to withdraw any time within the first 41 months only. Addax executed this option 12 months into the partnership, stopping Wellesley Partners’ intended expansion into the US.

Wellesley Partners sought to recover its losses from Withers in contract and tort. We focus here on the claim in tort.

At trial, Nugee J found that Withers was negligent in drafting the option, which should have only given Addax the option of withdrawing its capital after 42 months ([95]-[119]). In the Court of Appeal, the important questions for the Court were how to quantify the loss and whether that loss was too remote.

Loss of a chance

The Court quantified Wellesley Partner’s loss as the loss of a chance. Nugee J made clear that this was not a typical Allied Maples style case: whilst Allied Maples v Simmons & Simmons [1995] 4 All ER 907 was about who caused the loss, this case was closer to Parabola Investments Ltd v Browallia Cal Ltd [2010] EWCA Civ 486 and Vasiliou v Hajigeorgiou [2010] EWCA Civ 1475 which (the cause established) concerned how to quantify that loss.

Nugee J asked (1) whether WP would have opened an office in New York, and (2) if so, whether WP would have secured the Nomura mandate ([188]). Applying this analysis, Nugee J concluded that (1) on the balance of probability WP would have opened its own office in New York, and (2) that there was a 60% chance that WP would have been awarded some part of the mandate.

Floyd LJ, giving the only reasoned judgement in the Court of Appeal, upheld Nugee J’s award. WP argued that the appropriate question was actually whether WP would have traded profitably. Floyd LJ stressed that neither Parabola or Vasiliou contradicted Stuart-Smith LJ’s point in Allied Maples that “a judge’s evaluation of the substantial chance of obtaining the benefit in question forms a legitimate part of the quantification of damages.” ([108]). Importantly, this meant that Nugee J was correct (and obliged) to consider hypotheticals to assess the chances of WP being profitable, and would have been “wrong in principle to treat the conclusion on causation as if it meant that the chances of obtaining some part of the mandate were 100%.” ([110]).

Floyd LJ also rejected that WP’s deal with Nomura was a ‘done deal’ such that it was not dependent on a third party’s decision. Therefore, Floyd LJ upheld Nugee J’s award of 60%.

Remoteness of Damage

Since Henderson v Merrett Syndicates [1995] 2 AC 145 (HL), the Court’s have held there may be concurrent duties in contract and tort. It had also been accepted that a claimant could rely on the more favourable test of remoteness in tort, even if that meant recovering more in tort than in contract. Contrary to this, Withers argued that when there is concurrent liability in contract and tort, the contractual test for remoteness should apply. They relied on obiter dicta by HHJ McKenna in Obsession Hair and Day Spa Ltd v Hi-Lite Electrical Ltd [2010] EWHC 2193 and academic commentary, such as an extract from McGregor on Damages.

Nugee J felt bound by the authority of Henderson to reject Withers’ argument, applying the tortious test and concluding that the damage was not too remote ([209]-[215]). However, he expressed his dissatisfaction with the state of the law, and stated that had he felt able to restrict Wellesley Partners to the contractual test then part of its loss would not have been recoverable ([215]-[216]).

The Court of Appeal did not feel so bound ([66] per Floyd LJ). Accepting Withers’ argument, the Court unanimously concluded that the existence of a contract restricted WP to the contractual test of remoteness ([80] per Floyd LJ); [163] per Roth J, and [186]-[187] per Longmore LJ). However, they disagreed with Nugee J that the contractual test gave a different result to the tortious test, and so upheld Nugee J’s award.

Two reasons were offered in support of this decision. Firstly, the Court suggested it would be “anomalous” if Wellesley Partners could recover more in tort than contract when the duties arose from the same even. The Court of Appeal constructed the tortious duty of care as being a voluntarily undertaken obligation, arising out of the contract. Therefore, according to Floyd LJ ([68]),

“[i]t would be anomalous, to say the least, if the party pursuing the remedy in tort in these circumstances were able to assert that the other party has assumed a responsibility for a wider range of damage than he would be taken to have assumed under the contract.”

The Court then asked itself which of the two tests was more appropriate. It concluded that where the parties have entered into a contract, the contractual test of remoteness was more appropriate because it better reflects the undertaking of risk which has taken place between the parties. All three judges relied on a passage from McGregor on Damages which says that,

“[w]here the claim in tort is in the context of a contractual relationship, the parties are not strangers, as most tortfeasors and tort victims are, and they should be bound by what they have brought to their contractual relationship in terms of what risks have been communicated by the one and undertaken by the other.”

Analysis

The Court of Appeal’s decision to limit WP to the contractual test of remoteness is problematic.

The scope of the Court’s decision is unclear. The Court did not deny the existence of the duty but instead varied it so that it did not extend wider than the contract. Whilst the Court never made it clear, implicitly they intended their ruling to be of general application. This suggests that the rule should apply to all cases. In obiter at paragraph [187], Roth J suggested that this rule should apply to cases which are equivalent to contract, supporting this conclusion.

The Court’s judgement on the remoteness point followed from its construction of the duty of care as a voluntarily undertaken duty, rather than one imposed by law. Whilst it might be appropriate for the Court to prioritise freedom of contract when the case concerns two commercial parties, this construction risks failing to offer consumers the appropriate level of protection.

This concern materialised in Greenway v Johnson Matthey plc [2016] EWCA Civ 408, in which Sales LJ refused to extend the duty of care owed by an employer to its employee because no equivalent term to avoid causing pure economic loss could be found in the contract ([51]). Sales LJ did this without considering the normative factors suggesting a duty should be imposed, such as the relative vulnerability of the employees.

It seems appropriate that ‘consumers’ be given more protection from the tort than commercial parties, with the former much less likely to prioritise the freedom of contract. It is worrying, therefore, that Wellesley Partners makes it much easier for the Court to alter the obligations owed in the tort of negligence based on a contract. It remains to be seen how far-reaching this shift will be.

For such a seminal change in the way we understand the tort of negligence and its relationship with contractual obligations, it is disappointing this case has not reached the Supreme Court.

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