Article

May 2004

Loss of a chance and breaking the chain of causation

In Coudert Brothers v Normans Bay Ltd (formerly Illingworth, Morris Ltd) [2004] EWCA Civ 215, the Court of Appeal reviewed two interesting areas of the law: the test for loss of a chance and the question of whether a party can rely upon a wrong, perpetrated by itself, to break the chain of causation in contract and tort and therefore avoid the damages that would otherwise flow from its negligence.
Background
In loss of chance cases, the law is concerned with hypothetical acts, either of the claimant or of a third party. Generally it is said that the defendants breach of contract or negligence deprived the claimant of the opportunity to obtain a benefit or avoid a loss. For example, in previous cases it has been claimed that a defendants breach of contract prevented the claimant entering a beauty contest and deprived her of the opportunity of winning a prize. Damages were awarded for the loss of a chance of doing so. Similarly, damages have been sought in other cases for the loss of a chance of selling a company or shares arising from a breach of contract or negligence. was made first on the basis that the tender offered investment over five years and not three years, contrary to the requirements of the investment plan approved by the SPC, and secondly because NBL had failed to obtain approval for the tender from the Federal Antimonopoly Committee of Russia. The challenge was successful and the tender was declared invalid, as were the two agreements based upon it. NBL lost its investment in Bolshevichka and commenced proceedings against Coudert to recover its losses. NBL alleged that Couderts retainer included an obligation to investigate the provisions of local law and that Coudert had been negligent in not discovering the requirement that investment take place over three years. NBL contended that, but for the negligence of Coudert, there would have been a strong chance that the tender would not have been challenged by the Russian prosecutor, or, if it had been, that the challenge would have failed as a matter of Russian law. No point was taken by NBL in respect of the failure to obtain approval from the Anti-monopoly Committee, on the basis that the Russian courts decision on the point was wrong. It was held at first instance that Coudert had been negligent in failing to discover the requirement for a three-year investment plan. It had therefore failed to provide advice that would have created a chance that the transaction would not have been declared invalid, and so should be liable in damages, to be assessed by reference to the loss of a chance that it is the likelihood that the tender would not have been struck down if proper advice had been given. Buckley J assessed that chance at 70%, meaning that damages were assessed at 70% of the claim. Coudert appealed on a number of issues.

The transaction
The claimant, NBL, tendered for 49% of the shares in a Russian company, Bolshevichka, in 1993. The sale was administered by a state property committee (SPC), which issued two decrees approving Bolshevichkas investment plan. NBL made a successful bid for the shares in November 1993, providing for a total investment of $5.5m (3m) in Bolshevichka over five years. Under the terms of the tender, NBL was required to enter into a share purchase agreement within 30 days. Coudert, the defendant, advised on the completion of the share purchase agreement and a subsequent, related investment agreement. Following a disagreement between NBL and Bolshevichka, the Public Prosecutor of the City of Moscow was persuaded by the latter to challenge the legality of NBLs tender. The challenge

Kendall Freeman / May 2004

The Court of Appeal

The main judgment was given by Waller LJ, who reiterated the principles relevant to loss of advice cases outlined in Allied Maples Group Ltd v Simmons & Simmons (a firm) [1995] 1 WLR 1602. Those principles were also considered in Equitable Life Assurance Society v Ernst & Young [2003] EWCA Civ 1114). The circumstances in which a claimant can recover damages for the loss of a chance, assessed as a percentage of its full loss, are limited. As recognised by Waller LJ in Normans Bay, there is an obvious tension between the fundamental rule that a claimant must prove that the loss it claims has been suffered and the court allowing the recovery of a percentage of that loss because the claimant cannot establish that the full loss would have been suffered. Nevertheless, it is clear that damages can be recovered for breach of a contract to provide a chance, provided that the chance had some real value. Similarly, damages for loss of a chance can in theory be recovered where negligent advice prevented the claimant from obtaining a benefit or avoiding loss, provided that the chance of doing so is not entirely speculative. In summary, the cases establish that in a loss of chance claim the claimant must first establish on the balance of probabilities that it would have sought to secure the advantage, the loss of which is the subject matter of the complaint. If this is established, and where the claim depends on the hypothetical acts of a third party (for example, whether the panel of a beauty contest would have awarded a prize to theclaimant or whether a third-party potential purchaser would have bought a company), the question for the court is whether the claimant has lost a real or substantial chance, as opposed to a speculative or fanciful chance. If so, the court must assess that chance. If the chance is meagre, the court will award a low percentage of the value of the chance in damages; if approaching certainty, a high percentage will be awarded. Waller LJ refuted the claimants contention that the Court of Appeal should reconsider Allied Maples on the basis that there were inconsistencies between the principles being applied in that case and in certain medical negligence cases, stating that if there were inconsistencies, he was quite unpersuaded that the tendency should be to narrow the principles in those cases where loss of a chance has been recognised as a head of damage. As for the assessment of the value of the chance, the Court of Appeal found that the judges assessment of 70% was incorrect. Waller LJ found that the chance which Coudert should have provided to NBL was by no means a 100% chance and that, in the circumstances, NBL may have lost its investment in its entirety, even with proper advice. The trial judges finding that NBL was entitled to 70% of its losses was replaced with an entitlement of 40%.

Reliance on wrong
Coudert also argued that the transaction failed for a cause independent of the reasons pleaded by NBL, namely, the failure by Coudert to obtain anti-monopoly approval. Coudert asserted that anti-monopoly permission was needed, that it was negligent in not obtaining such permission, that the limitation period had expired and that, therefore, NBL was precluded from relying upon Couderts failure to obtain permission. Coudert asserted that NBL had to prove, on the balance of probabilities, that this failure was not an independent cause of the loss. NBL could not disregard this factor, it was said, on the basis that the failure to obtain permission was due to Couderts negligence, because this would have the effect of allowing NBL to recover damages in respect of a cause of action which was statutebarred. Alternatively, Coudert argued that it was almost certain that the transaction would have failed on this independent ground, and the percentage applied to the damages to reflect the loss of a chance should be very much reduced. Had the limitation period not expired, Coudert would not have raised this point; as Waller LJ stated, where there are competing causes of damage to a claimant, there is no benefit to a defendant to rely on a factor which would provide a separate cause of action if that cause is also due to the defendants own negligence. The question in this case, however, was whether Coudert could argue that the value of the chance should be reduced due to an intervening act of negligence by Coudert, on the basis that the intervening act gave rise to a separate, time-barred cause of action. Although acknowledging there was very little authority on the point, Waller LJ relied on comments made by Lord BrowneWilkinson in Bolitho (deceased) v City and Hackney Health Authority [1998] AC 232 to hold that there should be a principle that disallows a defendant from relying on a wrong which it has committed so as to reduce the damages which would otherwise flow from a tort or breach of contract. He found it quite difficult to say why there should be such a policy, other than that it flows from the public policy principle that a person should not be entitled to rely on their own wrong in order to secure a benefit.

Conclusions
Normans Bay is an interesting case in both contract and tort. The Court of Appeal has articulated a principle that prevents a party from relying upon its own wrong to break the chain of causation and refused to narrow the scope of loss of chance cases in contract and tort. Further, the Court of Appeal has reiterated the principles applying to claims for loss of a chance and, in doing so, has made clear that any further challenges to these principles must be made to the House of Lords.

This article first appeared in In-house Lawyer (May 2004, issue 120). It is for guidance only and is not intended to be a substitute for specific legal advice. If you would like any further information please contact: Stephen Dunseath

Commercial Litigation

tel: +44 (0)20 7556 4593

stephendunseath@kendallfreeman.com

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