A warning bell has sounded for law firms that advised on complex financial deals involving local authorities before the economic downturn, after a firm was found liable to pay more than £28m for giving negligent advice.

In Haugesund Kommune v Depfa and Wikborg Rein (No.2), decided on 12 February in the High Court, Mr Justice Tomlinson found that Norwegian firm Wikborg Rein failed to advise Irish bank Depfa ACS that swaps contracts it entered into with two Norwegian municipalities fell outside the local authorities’ powers, and were therefore unenforceable. The contracts were governed under English law.

The municipalities had lost money advanced to them by Depfa after investments they made went badly wrong. However, they claimed that they did not have to repay Depfa, because they lacked the capacity ever to have entered into the transactions under laws that restrict their borrowing powers.

Before entering into the swap agreements, Depfa sought advice from Wikborg Rein on whether the municipalities had the power to enter into the transactions. Wikborg Rein advised that they did.

Tomlinson held that Wikborg Rein gave negligent advice and was liable to pay Depfa NOK258m (£28.3m) to cover the advance payments.

The case has similarities with a swath of cases in the 1990s where local authorities’ use of complex financial instruments were found to be outside their powers, causing problems for law firms that advised on the deals.

Tomlinson said: ‘Depfa would not have advanced the money to the municipalities had it been advised by Wikborg Rein that there was any material risk that the swaps were prohibited loans… Depfa advanced money on the strength of what turned out to be a non-existent promise to repay it by an entity which had no capacity to borrow or to promise to repay. It is to my mind consistent with [the relevant case law] to regard Wikborg Rein as responsible for the whole loss arising from the advice...’

In his original judgment, Tomlinson found that Wikborg Rein was in breach of its contractual duty to exercise reasonable care and skill in failing to advise Depfa that the swaps were prohibited. He also found that the municipalities were not bound by the swap transactions, but had to make restitution to Depfa nevertheless.

Depfa then sought judgment directly against Wikborg Rein for the £28m, relying on the fact that the firm gave negligent advice. Tomlinson addressed this issue in a second judgment on 12 February.

A Wikborg Rein spokesman said the firm was appealing the decision.