Caught In The Crossfire?

The current economic climate has led to a substantial rise in claims against solicitors, including circumstances where solicitors are dragged into proceedings between commercial parties when one fails to honour an agreement.

The case of Haugesund v Depfa saw a Norwegian law firm brought into a dispute between counterparties to a cross-border "swap" agreement following the financial crisis. The solicitors had given what would typically be considered a routine opinion about the capacity of one of the parties.

Facts

In 2004 and 2005, two Norwegian municipalities, or Kommunes, entered into swap contracts with Depfa ACS Bank (Depfa) essentially providing a loan to the Kommunes by Depfa. The sums involved were around NOK 400 million. These arrangements were made rather than a loan agreement because section 50 of Norway's Local Government Act 1992 restricted the capacity of the Kommunes to raise loans. Depfa sought advice that the swap agreements were not caught by section 50 from Wikborg Rein, a firm of Norwegian lawyers.

Wikborg Rein advised that the swap contracts would not be caught by section 50 and that the Kommunes had full capacity to enter into such arrangements. For the purposes of the issues before the Court, the validity of the swap agreements was the only issue on which Depfa required Wikborg Rein's advice. However, Wikborg Rein had also advised Depfa that a successful claim against the Kommunes could not be enforced under Norwegian law. As such, it was accepted that Depfa knew and was willing to take the risk that it would not be possible to execute a judgment against the Kommunes and that Depfa bore the sole credit risk of the transaction. The swap contracts were governed by English law and subject to the English courts' jurisdiction.

The Kommunes performed their payment obligations under the contracts for several years. However, following the disastrous performance of investments entered into by the Kommunes with the borrowed funds, questions were raised in Norway as to the validity of this type of transaction. The Kommunes declined to make further payments and commenced proceedings in England for a declaration that the contracts were invalid. Depfa counterclaimed that if the contracts were invalid then it was then entitled to restitution in respect of the sums that it had advanced to the Kommunes. The Kommunes sought to defend the restitutionary claims by the defence of change of position (due to the loss of the funds).

Depfa also...