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Introduction

This case concerns the measure of damages where a tort has been committed and the innocent party has received a benefit in consequence of the tort, should credit be given for this benefit?

Background facts

constanty_okolie_phThe Claimants (now Respondents) in this case are Swynson Limited and Mr Hunt (the indirect owner of Swynson). In 2006 Swynson lent a considerable sum of money to a company called Evo Medical Solutions Limited (EMSL) to enable them to effect the management buyout of a company called Evo, the consequence of which was to bring Evo under the direct control of EMSL.

The Claimants asserted that this loan was made in reliance of the advice and due diligence report of the Defendant (now Appellant), an accountancy firm called Lowick Rose LLP (who at the time were known as Hurst Morrison Thomson LLP (HMT)). Following the loan in 2006 Evo’s financial performance declined, causing EMSL to default on both interest payments and the principal sum.

Evo’s financial performance continued to deteriorate and, in an effort to improve its fortunes, Swynson provided additional loans to EMSL in 2007 and 2008. Despite these additional loans, Evo’s financial performance continued to decline. Towards the end of 2008, for tax purposes, the 2006 and 2007 loans were refinanced whereby Mr Hunt provided monies to EMSL, which used said monies to repay the loans made by Swynson (the “Partial Refinancing”).

Further attempts were made to save the ailing business and in 2011 Evo’s business was surrendered and transferred to a company indirectly owned and controlled by Mr Hunt called Global Medical Holdings LLC (GMHL). Ultimately the company was wound up in 2012 and proceedings were brought against HMT alleging negligence.

High Court

At first instance HMT accepted negligence and causation, but there remained issues between the parties, in respect of which the Court made the following determinations:

  • There was no duty of care owed by HMT to Mr Hunt personally;
  • The 2008 refinancing was not in the ordinary course of business and consequently did not affect Swynson’s entitlement to compensation from HMT;
  • The quantum of loss suffered by Swynson was not affected by the deemed value of the Evo business transferred to GMHL;
  • The 2007 and 2008 loans from Swynson represented reasonable attempts by Swynson to mitigate its losses on the 2006 loan;
  • HMT’s cap on liability had been increased by agreement to £15m; and
  • Interest was payable at a rate of 1% above the prevailing Bank of England base rate for the relevant periods.

Court of Appeal

The Defendants appealed against (2) above; the issue before the Court of Appeal was whether the Partial Refinancing made in 2008 was either: (a) a collateral transaction (such as an insurance payment or a benevolent payment) which the Claimant did not need to give credit for in determining the quantum of damages flowing from the Defendant’s negligence; or (b) a non-collateral transaction falling to be accounted for. A finding that the transaction was non-collateral in nature would have resulted in Mr Hunt and not Swynson bearing the losses.

The Court of Appeal dismissed the appeal by a majority of 2 to 1, relying on British Westinghouse Co Ltd v Underground Electric Railways Co Ltd [1912] A.C.673 found that that the transaction was collateral in nature because it was not in the “ordinary course of business” and as such HMT remained liable for the losses suffered by Swynson.

Justices Longmore and Sales (who were minded to dismiss the appeal) relied heavily on Parry v Cleaver [1970] A.C.1, in which it was held that benefits do not fall to be taken into account, even if caused by the breach, where it would be contrary to fairness and justice. The Court remarked that had Mr Hunt personally “given the amounts of the 2006 and 2007 loans to Swynson (so that Swynson could balance its books) from Swynson’s point of view that would be an act of benevolence and no one could sensibly suggest that any such payment should enure to the benefit of the negligent adviser… To hold that a different result should occur merely because the payment is made through EMSL would be a triumph of form over substance.”

Legal issues before the Supreme Court

The Supreme Court will consider whether the Court of Appeal erred in law in holding that a lender could recover damages from its negligent adviser representing loans that had been repaid by the borrower, on the basis that the borrower’s repayments were collateral to (or res inter alios acta) the adviser’s breach of contract.

The Hearing is expected to begin on 21 November 2016 and conclude on 24 November 2016, and will be heard alongside Globalia Business Travel S.A.U. of Spain v. Fulton Shipping Inc, which deals with similar issues. (See case preview here).

Implication

The Court of Appeal had commented in respect of the HMT’s liability post-refinancing that “the probability is that no consideration was given to the matter at all“. Considering the potential consequence of the refinancing had the appeal been allowed, it is hard to disagree with this assertion. Should the Supreme Court allow this appeal, it is clear that greater consideration (or in light of the Court of Appeal’s observation, or at least some consideration) should be given to the effect any refinancing will have on potential legal claims and indeed the best form by which to effect that refinancing.