i Legal framework
Negligent acts or omissions conducted by a professional may give rise to various sanctions, including criminal charges and disciplinary actions, but this article mainly addresses the remedy of damages.
To establish professional liability, the aggrieved party essentially needs to establish that it has incurred financial loss (including the quantum of the loss) because of the professional's breach of his or her duty of care (negligence), that the breach was the cause of the loss (causation) and that the cause was adequate (to a certain extent foreseeable and within reasonable remoteness). Only the negligence test will be briefly described in this Section although all the requirements are indeed interesting and complex.
The standard of negligence is fairly high under Swedish law; a substantial breach of the professional's duty of care is typically required, although an adviser is also under a fairly strict standard of care regarding his or her obligation to inform a client of risks associated with matters on which advice is provided.
Many professions are subject to statutory regulation: inter alia, financial advice to consumers, insurance brokering, real estate brokering and auditing. These statutes typically stipulate general principles and rules that the relevant professionals must adhere to. These principles are in turn set out in more detail in various sources, many of which are traditionally considered 'soft law'. Examples of these sources include recommendations from business organisations, agreements between such organisations and authorities, guidelines provided by relevant authorities and precedents set by courts and by non-judicial policymakers (e.g., disciplinary committees). Where a professional has acted in breach of the norms intended to safeguard the interests of a client, there is generally a presumption for negligence.
Also, a test similar to the common law Learned Hand formula is commonly applied for establishing negligence. This test is of particular use and importance where there has been no breach of a relevant norm. In essence, the following four factors are assessed in this test:
- the probability that loss will be incurred;
- the gravity of the loss;
- the foreseeability of the loss; and
- the options for preventing the loss.
In a situation where there has been a high probability of major loss and the risk for the loss has been simple to foresee and could have easily been avoided, the professional would probably be considered negligent.
A professional's liability is often limited through limitation of liability clauses or monetary caps in the parties' agreement or through caveats made. Contractual limitations of liability are generally upheld by Swedish courts and arbitral tribunals. Exceptions are, however, possible where a provision is deemed unconscionable in accordance with Section 36 of the Swedish Contracts Act, having regard to the contents of the agreement, the circumstances prevailing when the agreement was entered into, subsequent circumstances and other circumstances in general.
Where the party in breach is an individual who has provided his or her services under employment, any claim would typically be directed against the employer under the Swedish legal principle on the principal's liability.
Defences to professional liability claims are in general the same as those to any liability claim (i.e., objections as to negligence, the existence and quantum of loss, causation and adequacy, contributory negligence or the aggrieved party's failure to mitigate its loss). It is typically the aggrieved party that has the burden of proof for the circumstances resulting in liability, although it can fall to the party in breach under certain conditions; for instance, when the professional has omitted to document the advice rendered.
ii Limitation and prescription
The general statutory time limitation for monetary claims is 10 years. This applies for most claims relating to professional negligence, with the result that no claim may be brought after 10 years from its 'occurrence' (a point in time that can be complex to establish but is typically when the alleged negligent act was committed) unless the period of limitation is interrupted prior thereto. The period of limitation is interrupted by any of the following events: (1) the debtor offers payment, makes payment of interest or principal amount, or otherwise acknowledges the claim of the creditor; (2) the debtor receives from the creditor a demand in writing or other written reminder in respect of the debt; or (3) the creditor commences legal proceedings or otherwise pleads the claim against the debtor in any court, before the Swedish Enforcement Authority, in arbitration proceedings, bankruptcy or insolvent liquidation proceedings, or in negotiations in respect of judicial composition in an insolvency procedure.
An exception is made where the professional is deemed a trustee. A trustee may be defined as anyone who is tasked by a principal to perform a legal act on the principal's behalf or represent the principal in relation to authorities. Claims against a trustee must be made by commencing legal proceedings within a year. However, as most professionals that provide advice are not deemed trustees, this exception to the 10-year main rule is, in practice, of limited significance.
In addition to the above, a claim may be time-barred or precluded if the aggrieved party has failed to provide the professional with a valid notice of its claim in due time. A valid notice requires that the aggrieved party make clear to the professional that the services provided were deficient (i.e., not of an acceptable standard) and that the professional is or will be held liable. We have seen an increase in claims being contested with reference to the notice period having been exceeded. However, when the notice period begins and the length thereof are open issues under Swedish law. Based on the opinions of leading scholars as expressed in legal literature, we believe that the answers are currently as follows:
- the notice period begins when the aggrieved party has realised, or ought to have realised, that its counterparty is in breach of contract, that is, the aggrieved party must not only have reasons to believe that it has incurred financial loss; it must also have reasons to believe that a breach of contract is the cause thereof. However, it has also been argued that the notice period begins when the aggrieved party realises (i.e., possesses actual knowledge of) that there has been a breach of contract; and
- the notice should be made within a reasonable time and the notice period varies according to the specific circumstances, but it is normally around six months.
iii Dispute fora and resolution
Professional liability claims may be subject to litigation and arbitration. Litigation is governed by the Swedish Code of Judicial Procedure and as a general rule the domicile of the defendant decides which court is competent in a particular case. A company (and similar entities) is domiciled where it has its registered office.
Arbitration is the favoured method of dispute resolution where the subject matter has been agreed upon, and many professionals provide for arbitration in their standard terms and conditions. Arbitration clauses are upheld by Swedish courts unless deemed unconscionable in accordance with Section 36 of the Contracts Act, which essentially never applies in commercial contexts. Arbitration is most commonly conducted under institutionalised arbitration rules, primarily the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce and secondarily the Rules of Arbitration of the International Chamber of Commerce.
Alternative dispute resolution (ADR) proceedings such as mediation are also available. ADR has gained some popularity over the past decade but is not frequently applied.
iv Remedies and loss
Several remedies are available to the claimant if professional liability applies. The claimant may, under certain conditions, demand that the professional perform the agreed service adequately or demand a reduction in price. For practical reasons, however, damages are virtually exclusive as the means of remedy. As a starting point and in the absence of an agreement on how to calculate damages, the aggrieved party is entitled to its actual loss incurred and nothing more. The 'doctrine of difference' is the primary tool in calculating the amount of damages that the aggrieved party is entitled to. According to this principle, the liable party is obliged to pay damages in the amount that puts the aggrieved party in the hypothetical position where it would have been had the negligent act not been performed (i.e., the aggrieved party is entitled to full financial compensation, including loss of profit). In other words, the aim of the calculation is to put the aggrieved party in the situation that it would have been in had the professional provided the services in accordance with the agreement or standard of care.
A professional's liability to pay damages is limited to the immediately aggrieved party; a professional can as a general rule (with a few exceptions, such as real property valuations and professional advice rendered in bad faith) not be liable to pay damages to a third party, (i.e., anyone who incurs financial loss as a result of the aggrieved party's loss). In addition, the compensation to the aggrieved parties may be reduced with reference to, for example, contributory negligence or failure to mitigate loss.
ii SPECIFIC PROFESSIONS
Lawyers in Sweden are not governed by any specific regulations. However, lawyers who hold the title 'advokat' (i.e., members of the Swedish Bar Association) must, as must any lawyer working under an advokat's supervision, supervision, 'observe good mores' according to the Code of Judicial Procedure. Essentially, this means that an advokat is bound by the Swedish Bar Association's Code of Conduct, which serves as a framework for various ethical norms that an advokat and his or her employees must adhere to. The obligations of an advokat are further specified in precedents from the disciplinary committee of the Swedish Bar Association, as well as declarative statements by the board of the Swedish Bar Association. The Code of Conduct contains disciplinary actions only; there are no provisions on remedies available to an aggrieved client. An advokat must carry liability insurance.
ii Medical practitioners
Various statutes regulate medical practitioners. It follows from the Swedish Security of Patients Act that all medical practitioners are under an obligation to ensure they provide their services in accordance with proven experience and science. Any medical practitioners who do not comply with these requirements may lose their licence or be subject to criminal proceedings and be held liable for damages. All medical practitioners come under the supervision of the Swedish Health and Social Care Inspectorate. A medical professional is not obligated to carry liability insurance, but anyone who provides medical services must have insurance for patient injuries, according to the Swedish Patient Injury Act.
iii Banking and finance professionals
Banking and finance professionals who provide financial advice to consumers regarding investment of the consumers' assets in financial instruments or in life assurance with an element of capitalisation are governed by the Swedish Financial Advice to Consumers Act. Professionals are required to have sufficient skills and observe generally accepted practices. Furthermore, the statute provides that a consumer is entitled to damages for pure financial loss and contains a notification provision that the consumer must adhere to.
iv Computer and information technology professionals
Computer and information technology professionals are not specifically regulated in Swedish law.
v Real property surveyors
Real property surveying may be provided either by Lantmäteriet, the Swedish authority responsible for property division, or by professionals in the private sector. However, legally binding property divisions may only be based on surveying provided by Lantmäteriet. Professionals engaged in the private sector are not regulated specifically under Swedish law.
vi Construction professionals
Construction professionals are not specifically regulated in Swedish law. However, there are standard agreements that regulate the conditions of liability for construction services. These agreements are frequently applied on the market and may serve as a source of general principles and commercial usage in resolving issues of liability, even where the parties have not agreed to apply the agreements. The general principle of due care that the parties must exercise under the agreements is known as the standard of professionalism, although the agreements also impose strict liability in certain situations.
vii Accountants and auditors
Under Swedish law, auditors and accountants are regulated by the Swedish Public Accountants Act, which stipulates general principles auditors must adhere to. Detailed regulation is provided by FAR (a Swedish trade organisation for auditors and accountants), mainly in the form of an adapted version of the International Standards on Auditing, and precedents established in disciplinary matters addressed by the Swedish Inspectorate of Auditors. Auditors and accountants must carry liability insurance, unless the Inspectorate of Auditors has granted an exemption. Consultancy services (such as tax advice) provided by accountants and auditors are not specifically regulated under Swedish law.
viii Insurance professionals
Insurance brokers are regulated by the Swedish Insurance Distribution Act. Generally, insurance distribution may only be conducted under a licence from the Swedish Financial Supervisory Authority. A licence is only granted where the broker meets certain criteria (including possession of appropriate knowledge and skills for the business to be conducted).
A professional must observe 'good insurance distribution practice' and attend to the client's interests with due care. What constitutes good practice follows primarily from soft-law sources. The regulations issued by the Financial Supervisory Authority are a source of particular importance.
iii YEAR IN REVIEW
There is no significant recent legislation concerning or affecting professional negligence. As expected, however, the previous year saw a significant activity in Swedish courts in matters regarding professional negligence. We present below a few cases of particular importance.
ii The lawyer's tax advice case2
In last year's edition we anticipated that this case would be a landmark case of 2019 and the ruling was delivered by the Supreme Court in November. This precedent provides further guidance on the negligence test and has eliminated some ambiguities that arose following a ruling by the Supreme Court in June 2018 (the Havsbrisen case analysed in last year's edition, which was incorrectly interpreted by some scholars and practitioners to mean that only flagrant errors may result in lability).3
Briefly, the circumstances were the following. A lawyer, who is a member of the Swedish Bar Association and works for a reputable law firm, had provided tax advice to a client who had sold several apartment buildings in 2004. In 2006, the association retained the tax lawyer to assess several details of the transactions and issues regarding taxation. Subsequent to the lawyer's advice, the Swedish Tax Agency decided to increase the tax with 164 million Swedish kronor and impose a tax penalty in the amount of 67 million Swedish kronor.
The client filed a claim for damages against the law firm seeking compensation corresponding to the tax penalty plus interest, arguing that the lawyer's advice had caused the tax penalty. The law firm contested the claim arguing, inter alia, that the lawyer had not been negligent and that the client had failed to put the law firm on notice within the notice period (the latter question was unfortunately not addressed by the Supreme Court). The claim was rejected by the district court but, somewhat surprisingly, successfully appealed in the Court of Appeal before the Supreme Court granted leave to appeal.
The Supreme Court held that a lawyer's obligations in relation to the client depend to a large extent on the parties' agreement (typically an engagement letter or similar document of contractual relevance). Such agreements may limit the scope of the assignment, depending for instance on the complexity of the matter or on monetary caps set by the client. The Supreme Court further held that whether a lawyer has been negligent is dependent on the circumstances of each particular case. Circumstances relevant for this assessment include the scope of the assignment, the complexity of the factual and legal issues, time constraints, the amounts at stake, the client's instructions and the lawyer's particular experience within the relevant area of law. When the legal issue is complex, an assessment must first be made as to whether the lawyer has been reasonably diligent in his or her review and analysis of the factual and legal circumstances relevant to the case. In situations where the legal situation is uncertain, it must be assessed whether the lawyer has presented the legal situation, including uncertainties, to the client and thereby provided sufficient data for the client's decision making. Against this background, the Supreme Court concluded that the negligence test should not be focused on whether a lawyer's legal assessment is eventually upheld in court; the question is whether the lawyer has based the advice on a professional and diligent assessment of the legal situation as it appeared when the advice was provided. In our opinion, these statements by the Supreme Court are in line with a number of precedents rendered during the last decade that appear to be based on an approach similar to the common law business judgement rule.
Further, the Supreme Court stated that the ordinary standard of negligence shall be applied and that there is not a higher threshold for lawyers' negligence compared to other professionals. This statement should possibly be considered a clarification deemed necessary by the Supreme Court following some reactions from scholars and practitioners on the 2018 Havsbrisen case.
An additional issue of interest addressed by the Supreme Court concerns the client's own risk taking. On this issue, the court concluded that the client's awareness of its risk taking shall be taken into account in the assessment of the lawyer's negligence. However, the precedent provides that this should be considered on a case-by-case basis and the Supreme Court provided limited guidance on how this assessment should be made.
Applying the above principles on the circumstances of the case, the Supreme Court held that the lawyer had had a limited assignment (as argued by the law firm), that it had been a complex legal situation and analysis, that the lawyer had made well-founded caveats about the legal situation and had identified potential risks (although low), and that the client had accepted certain risks. Against this background, the Supreme Court concluded that the lawyer had not acted with negligence.
We consider this case to contain certain clarifications on the negligence test as regards lawyers under Swedish law. We are not, however, convinced that the Supreme Court would have granted leave to appeal had it not been for the fact that the Court of Appeal's ruling was somewhat controversial and widely criticised in the market.
iii The Kraft & Kultur case4
In essence, the circumstances were the following. The Swedish company Kraft & Kultur's annual reports had been manipulated for the financial years of 2003–2010. The annual reports showed that the company had been profitable, contrary to what was actually the case. Believing the company to be profitable, its parent company undertook various measures, including injecting capital into Kraft & Kultur. Once it turned out that Kraft & Kultur had in fact not been profitable, its parent company incurred losses allegedly exceeding 1 billion Swedish kronor. The parent company brought a claim against Kraft & Kultur's auditor (and the auditor's firm), alleging that the auditor had been negligent in its auditing, which had led to the company's losses not being discovered and thereby causing the parent company's loss. The auditor brought a recovery claim against the former board members, alleging that the board members were liable for any established loss. The claim against the auditor was dismissed by the Stockholm District Court, which held that the auditor had not been negligent (which resulted in the recovery claim against the former board members being 'automatically' dismissed). The claim was appealed to the Svea Court of Appeal, which delivered its ruling in late 2018.
The Svea Court of Appeal held that an auditor is permitted to rely on statements made by the company unless the audit carried out indicates that the information is incorrect. The court also held that the auditor had not adequately possessed the particular knowledge and insight in the kind of business that Kraft & Kultur was involved in and that the auditor had not possessed adequate knowledge of Kraft & Kultur's IT and invoicing systems. It was deemed crucial that the auditor should have requested more information and conducted a more thorough review following which she would have realised that certain key information provided by management had not been extracted from the company's systems but was in fact manipulated. Because of this and a number of other reasons relating to each particular financial year, the court held, contrary to the district court, that the auditor had been negligent when auditing Kraft & Kultur.
The parent company further had to prove causation between the negligent audit and its alleged loss. The parent company argued that it would not have made the capital injections into Kraft & Kultur had the audit been carried out with due care (entailing that the parent company would have learned about the manipulations of the accounts). The court held, however, that the parent company's decisions to inject capital was based on the apprehension that Kraft & Kultur had a very good business idea and a bright future, rather than short-term profit, and that a hypothetical discovery of the manipulations in 2004 would not have affected the parent company's willingness to make capital injections. In this context, the court also noted that there were certain long-term fixed price agreements and guarantees that also would have given reason for the parent company to make the capital injections even if the annual reports for the relevant years had correctly shown that Kraft & Kultur was not profitable. The court, therefore, held that causation did not apply for the years 2004–2006.
Regarding the following years, the court decided to begin with an assessment of the parent company's calculation of its alleged loss. The auditor argued that only capital injections that had been used by Kraft & Kultur to cover losses stemming from electricity trading were relevant for the loss assessment. This was accepted by the court, which held that only such capital injections could be causally connected to the auditor's negligence. The parent company had made a number of capital injections into Kraft & Kultur but had failed to specify to what extent the capital injections were made in order to cover the trading losses. Based on this as well as other deficiencies in the calculation, the court held that even a basic and essential condition for the loss calculation was not fulfilled. The court further held that the calculation was so flawed that it was not possible to make a comparison between the hypothetical scenario (i.e., where the annual reports had correctly shown that Kraft & Kultur was not profitable) and the actual course of events. The claim was, therefore, dismissed.
IV OUTLOOK AND FUTURE DEVELOPMENTS
We expect to see a continued increase in professional negligence claims in the Swedish market during the next few years. Over the past decade, there have been a number of major claims brought before Swedish courts, including Prosolvia, HQ and the above-mentioned lawyer's tax advice and Kraft & Kultur cases. A few claims have been successful, resulting in auditors, board members and other professionals being held liable for, in some cases, substantial damages. These claims may result in an increased willingness of aggrieved parties and their insurers to litigate, based on the risk–reward test. In our view, the number of large claims against auditors and board members may increase, but we also expect a general increase in claims against legal and financial advisers.
The Swedish economy has had a long boom, arguably in part because of low interest rates, after having made a rather swift recovery from the credit crunch. The finance and construction sectors have been flourishing and the real estate market in Stockholm has seen increased prices and extensive production. There are, however, concerns in the retail and real estate markets, with well-known real estate companies having found themselves in financial difficulties. Extensive production, falling prices and distressed companies are all factors leading us to believe that the real estate sector is likely to produce claims in the years to come.
The transaction market is also a potential source of future disputes. There have been a few years of fairly intensive IPO activity, but this has yet to result in any major public professional negligence claims similar to the Danish OW Bunker case. There has also been strong market for private M&A deals, and this is likely to result in further post-M&A disputes concerning the professionals involved.
As we are writing this article, the 2020 coronavirus pandemic is also giving rise to major uncertainty in the market, although its effects in the medium to long term are difficult to predict.
In summary, the general willingness to litigate professional negligence claims in combination with an expected recession is likely to result in such claims also being made in the years to come.
1 Ola Hansson is a partner and Carl Rother-Schirren is a senior lawyer at Advokatfirman Schjødt.
2 Case No. T 2841-18, 7 November 2019, referred to as 'Advokatens skatterådgivning' by the Supreme Court.
3 Case No. T 12-17, 13 June 2018, referred to as 'Advokatens skadeståndsansvar' by the Supreme Court.
4 Case No. T 7073-16.