The decision restates the principles of legal causation in contract and clarifies the limited reach of London Joint Stock Bank v Macmillan. Although the decision is one of English law, the causation principles applied are common law principles regularly cited in the Cayman Islands and other International Financial Centres (IFCs).

Logix agreed to purchase two aircraft engines from Siam Aero under a Letter of Understanding (LOI). The LOI was predominantly non-binding. However, certain clauses – including a confidentiality provision – were expressly stated to be legally binding.

Unknown fraudsters intercepted email correspondence between the parties. They registered domain names differing from the genuine addresses by a single character and began altering emails before forwarding them on. Among the changes, they substituted their own Vietnamese bank account details for Siam Aero’s Thai account in draft Purchase Agreements and invoices.

Logix paid the balance of the purchase price to the fraudsters’ account believing it was paying Siam Aero. Logix took no independent step to verify the bank details. The fraud came to light days later when Siam Aero informed Logix by telephone and WhatsApp that it had not received payment, by which point the funds had already left the fraudsters’ account.

Logix commenced proceedings in England. It initially alleged Siam Aero’s complicity in the fraud but dropped that allegation after forensic investigation. The claim was narrowed to a single ground: that Siam Aero’s four emails to the fraudsters breached the confidentiality clause and caused Logix’s loss.

At first instance, Mrs Justice Williams struck out the proceedings under CPR 3.4(2)(a), holding that the claim was “bound to fail”. She accepted it was arguable that Siam Aero breached the confidentiality clause by unwittingly “disclosing” documents and information to the fraudsters. She held, however, that it was not arguable that any such breach caused Logix’s loss.

Lord Justice Males granted permission to appeal solely on causation. On appeal, Logix argued that the Judge wrongly failed to follow Macmillan. In that case, a firm had drawn the cheque negligently, leaving gaps in the figures and words that the clerk exploited to increase the amount from £2 to £120. The House of Lords held that, notwithstanding the intervening fraud, the firm’s negligence in drawing the cheque facilitated the forgery and was the effective cause of the loss. As such, the firm was precluded from recovering its loss from the bank on the basis that “forgery is not a remote but a very natural consequence of negligence of this description”.

Siam Aero opposed the appeal on the ground it was not arguable that its actions breached the confidentiality clause at all.

Lord Justice Phillips (Lord Justice Peter Jackson and Lady Justice Cockerill agreeing) dismissed the appeal.

It was common ground that the “but for” test of factual causation was satisfied. The question was whether Siam Aero could be held liable despite the intervention of the fraudsters. The Court identified three principles by which the chain of causation may be broken:

1. First, the breach may not be the “effective” or “dominant” cause of loss but merely the opportunity or occasion for it (Galoo v Bright Grahame Murray; Armstead v Royal & Sun Alliance). The same distinction has been applied in the Cayman Islands. In Omni Securities v Deloitte & Touche, the Court of Appeal considered the Galoo  test in the context of auditors’ negligence and held that whether a breach was the “effective cause”  of loss, or merely the “occasion”  for it, was to be resolved by “the application of the court’s common sense”.
2. Second, the loss may not be of the type for which the contract breaker assumed responsibility (The Achilleas).
3. Third, the loss may not arise “in the usual course of things”  (Hadley v Baxendale).

The Court held that Macmillan  did not establish a free-standing rule that intervening fraud never breaks the chain of causation. That decision rested on three features specific to the banker-customer relationship: (i) the breach was the effective cause of the loss; (ii) the loss was within the scope of the duty assumed (preventing the very type of fraud that occurred); and (iii) forgery was “not a remote but a very natural consequence”  of the customer’s negligence in drawing the cheque.

Applying those principles to the facts, the Court found that the fraud was both the cause of, and an intervening cause after, Siam Aero’s assumed breach. The fraud preceded any assumed breach by Siam Aero. The first assumed breach was in fact Logix’s own response to the initial doctored email. Siam Aero’s assumed breach was merely one stage in the overall scheme, brought about by the fraudsters as part of it. The final stage (deception and mistaken payment) occurred without any involvement by Siam Aero.

The case was properly distinguished from Macmillan. The confidentiality clause was concerned with protecting the parties from commercial damage caused by information reaching competitors, not with preventing fraud by persons gaining sight of otherwise anodyne information. It would also have been open to the judge to find the loss outside the scope of duty and too remote.

Lord Justice Phillips added that Logix’s claim would have faced further obstacles at trial. It was far from clear that Siam Aero was in breach of the confidentiality clause by “disclosing”  its own information (including its own bank details) to a third party. There was also a question over whether Siam Aero could have relied on Logix’s own breach of the clause by way of circuity of action.

The reasoning in Logix  is familiar in the Cayman Islands. In Primeo Fund v Bank of Bermuda (Cayman) Ltd, the Grand Court dismissed claims against a custodian and administrator whose contractual breaches had given the claimant fund the opportunity to remain invested with Madoff. The breaches satisfied the “but for”  test, but the Court held that they were not the effective cause of Primeo’s losses: the Ponzi fraud was. That finding was ultimately upheld by the Privy Council. A breach that merely provides the setting for a third-party fraud will not ground a claim in damages.

The case of Arnage Holdings v Walkers  raised a similar question. There, clients alleged that a law firm’s disclosure of confidential Cayman court documents to Brazilian proceedings caused them loss, but the causal link turned on contested questions about the meaning and effect of those Brazilian proceedings. The Cayman Islands Court of Appeal held that “the issues of causation were substantial and could not be dismissed without trial”. However, as the break in the chain was obvious on its face in Logix, the court determined that it could resolve the causation point without a trial.

On the basis of Macmillan,  claimants will need to show that the duty breached was directed at preventing the very type of fraud that caused the loss. A general confidentiality clause will not suffice.

Both parties here unwittingly corresponded with the fraudsters. The Court treated it as wholly artificial to attribute the loss to one side’s emails alone.

On email fraud losses, the analysis may turn on what the breached duty was for. A confidentiality clause aimed at protecting commercial information from competitors is unlikely to support a damages claim where the loss is caused by third party payment fraud.

Parties to cross-border transactions (including those involving vehicles incorporated in the Cayman Islands, Bermuda or the BVI) should not assume that a breach of a boilerplate confidentiality obligation will sound in damages for losses caused by third-party fraud. Independent verification of payment details, such as call-back procedures before any wire transfer is made, can be sensible in order to avoid such fraud.

Note: Harneys does not practise the laws of England and Wales. English decisions can be persuasive in IFC courts and are therefore of interest.