The logic of causation: when a breach provides only an opportunity

The Court of Appeal’s decision in Logix Aero Ireland Ltd v Siam Aero Repair Co Ltd confirms that even where a contractual breach is arguable, it may not be enough to make the counterparty liable for any loss. The case involved an email interception fraud in which fraudsters inserted themselves into correspondence about the sale of two aircraft engines and diverted a payment of about US$825,000 to an account in Vietnam. The decision demonstrates that a conventional confidentiality clause may not, without more, transfer the risk of payment-diversion fraud to the other contracting party.

The case

Our previous Legal Update, available here, summarised the underlying case.  Logix and Siam Aero agreed a letter of intent regarding the sale and purchase of two aircraft engines. They intended to more formally document their agreement in sale and purchase agreements (SPAs).

After the SPAs had been signed, invoices were issued and Logix had transferred almost US$825,000, a fraud was discovered: despite being provided with a “proof of payment”, Siam Aero did not in fact receive any payment. The bank account details upon which Logix had relied were those of a fraudster.

The fraudster being unidentifiable, Logix sought to recover its losses from Siam Aero, but was denied any relief by the English High Court.

Logix accepted on appeal that there was no evidence that Siam Aero received the money or was culpable in relation to the fraud, apart from an alleged breach of the confidentiality provisions in the letter of intent. 

The issue for the Court of Appeal was whether, if Siam Aero’s breach of confidentiality were assumed, that  breach was, in law, an effective cause of Logix’s loss, such that Siam Aero could be held liable. The court held that the fraudsters’ intervention (by managing to insert themselves in the middle of email correspondence between the parties) broke the chain of causation, because the assumed breach was only part of the opportunity for the fraud, not the cause of it. 

The question of causation

English law draws a careful distinction between factual causation and legal responsibility. An assessment must be made of whether the relevant breach caused the relevant loss. The voluntary act of a third person intervening between the breach of contract by the defendant and the loss suffered by the claimant will normally break the “chain of causation”, such that the defendant may not be liable for the losses complained of.

Additionally, when asking whether a breach was the “effective” or “dominant” cause of loss, the inquiry goes beyond whether the loss would have occurred “but for” the breach. The proper question is whether the relevant conduct was an effective cause, rather than merely a factual precondition that provided the occasion for some other, unrelated factor to operate. There may be more than one effective cause, and where neither is clearly more decisive, the court should recognise both, rather than attempting to elevate one as dominant.

The boundary between cause and mere occasion is central to modern causation analysis. A breach that simply creates the setting or opportunity for loss, without being the operative mechanism producing it, does not attract liability. The practical consequence is that satisfying the “but for” test is only the first step. The court must then make a value judgment about the fair scope of responsibility. 

The Logix decision illustrates this analysis in action.

Why causation failed in Logix

The Court of Appeal’s reasoning turned on sequence, function and responsibility. The fraudsters had already intervened before Siam Aero’s assumed breach of confidentiality, and the fraudsters’ scheme depended upon both parties being deceived into communicating through false addresses. The court therefore treated Siam Aero’s communications to Logix as part, and only part, of the fraud’s machinery, not as the legal cause of Logix’s loss. 

The court also focused on the purpose of the confidentiality clause. The clause was concerned with protecting commercially sensitive information and documentation, not with guaranteeing the integrity of payment communications or protecting Logix from email-based fraud. That mattered, because English law increasingly asks whether the loss suffered is the kind of loss the relevant duty was meant to guard against. 

Significantly, the decision does not say that a confidentiality or systems-security breach can never be an effective cause of invoice-fraud loss. The Court of Appeal decided that the particular clause in question, in this factual setting, did not impose a special duty to prevent the very fraud and loss that occurred. The result reinforces a broader principle: a general commercial confidentiality obligation will not easily be read as a payment-fraud risk allocation clause.

Comment

Being wronged is not the same as having a cause of action. The gap between factual causation and legal responsibility is where commercial victims of fraud will most often find themselves stranded – with a breach they can argue, a loss they can prove, and a claim that nonetheless fails. 

Logix was careful to distinguish clauses that impose a special duty to prevent the very fraud that occurs. But the case also shows that courts will look closely at the clause’s purpose, the fraud’s sequence, the parties’ conduct and the evidential link between breach and loss. 

In many invoice fraud cases, the decisive question may be whether the claimant can prove that the defendant’s system, employee or security failure was the source of the fraud. Without that proof, a claimant may be left with a breach that is plausible, but not a legally effective cause of the payment loss. 

Going forward, those drafting confidentiality clauses might want to think about the following in more detail: 

• Does the risk allocation need to be expressed more clearly?
• Should the agreement include targeted security obligations?
• Is there express wording dealing with the remedies applicable to such breaches?
• Have you aligned party liability with any insurance that may be available?

It will be difficult for parties to entirely neutralise the risk of payment verification fraud, and even well-drafted clauses may fail without evidence that the breach was the source or legally effective cause of the loss.  However, having the above in mind may help to mitigate risk. 

For further information, please contact the authors or your usual CMS contact.

This article was co-authored by Alice Robson, Trainee Solicitor at CMS