No duty, no loss, no claim - it couldn't be clearer…could it?

Published 25 mayo 2017

Swynson Ltd v Lowick Rose

The Supreme Court found the claimants' loss had been extinguished in this accountant's negligence claim. In doing so, it has given important guidance on the legal concepts of collateral benefits, transferred loss and unjust enrichment.

Background

The claimant, Swynson, at the direction of its owner and controller, Mr Hunt, was in the business of granting loans to distressed companies. In 2006, Swynson made a loan (the "2006 loan") to an English company, ESML, to enable it to acquire a US company Evo, for circa £15m, relying on a due diligence report prepared for it by the accountants, Lowick Rose. Lowick Rose's only letter of engagement was with Swynson.

Evo was at risk of financial collapse and therefore Swynson lent EMSL a further £1.75m in July 2007 (the "2007 loan") and £3m in June 2008 (the "2008 loan"). In December 2008, Mr Hunt became the majority owner of EMSL meaning that the loans between EMSL and Swynson were a debt between connected entities, resulting in unfavourable tax treatment.Mr Hunt therefore lent EMSL £18m to repay the debt to Swynson which it duly did (the "2008 refinancing").The purpose of the 2008 refinancing was so EMSL could repay the 2006 and 2007 loans to Swynson to clean up its balance sheet and reduce its future tax liabilities. However, due to financial difficulties, EMSL was subsequently wound up.

Mr Hunt and Swynson sued Lowick Rose to recover damages for losses resulting from the acquisition of Evo and the 2006, 2007 and 2008 loans to EMSL. The accountants conceded at trial that their due diligence of Evo was negligent but argued that (i) Swynson had suffered no loss as EMSL had repaid the loans in 2008 and (ii) it owed a duty of care to Swynson and not to Mr Hunt.

The trial judge, pointing to the letter of engagement between Swynson and Lowick, ruled there was no duty of care owed to Mr Hunt. The judge, however, awarded damages of £15m (being the level of the cap agreed in the engagement letter) on the basis that the 2008 refinancing was "collateral" to the loss caused by the accountants' negligence (res inter alios acta) and did not extinguish Swynson's recoverable loss against Lowick Rose.

The Court of Appeal agreed the 2008 refinancing was res inter alia alios and it dismissed Lowick Rose's appeal. It is noteworthy that Mr Hunt had abandoned his argument that the accountants personally owed him a duty of care by this stage.

The Supreme Court decision

A unanimous Supreme Court overturned the earlier decisions and allowed Lowick Rose's appeal.

Res inter alios acta ("collateral benefits")

Broadly, loss which has been avoided cannot be the subject of a claim. An exception to this general rule is where the loss is avoided through collateral benefits ie. payments arising independently of the circumstances giving rise to the loss. Classic cases include payments under indemnity insurance where the payments arise through the independent decision to pay insurance premiums. 

The Court concluded that the 2008 refinancing could not be regarded as a collateral benefit. The reality was that these were not "collateral" payments but distinct, commercial loans between different parties, each made for valuable consideration.

Transferred loss

The Court concluded that the principle of transferred loss (i.e. whether Swynson's loss transferred to Mr Hunt) did not arise on the facts, in particular because the accountants did not owe Mr Hunt a personal duty of care and no aspect of the 2006 loan was intended to benefit Mr Hunt. The 2008 refinancing did not arise from their breach of duty. 

Unjust enrichment

The Court considered whether there was any unjust enrichment by the accountants because Mr Hunt had made a mistake in assuming that the 2008 refinancing would not affect his/Swynson's right to claim against Lowick Rose. Whilst the Lords had different views on whether Lowick Rose was enriched by the 2008 refinancing, they concluded that the necessary element of it being "unjust" did not arise because the refinancing was not a "defective" transaction. Mr Hunt got exactly what he intended to get, namely the discharge of EMSL's debt to Swynson with consequent tax benefits for Swynson.

Comment

This Supreme Court decision confirms the importance the courts place on separate legal personalities, the corporate veil and a strict interpretation of legal rights and principles."Armchair justice" found no sympathy in this commercial context.Lord Sumption stressed the need for precedence and legal certainty.Parties to commercial transactions are encouraged to expect strict legal rights to be recognised by courts.

Arguably the key question was conceded by Mr Hunt before the case reached the appeal courts, namely whether a duty of care was owed by the accountants to Mr Hunt personally. However, the letter of engagement was addressed to Swynson. The trial judge found any reliance placed by Mr Hunt on Lowick Rose's work was in his capacity as shareholder or agent/officer of Swynson. The fact that the engagement letter addressed only to Swynson post-dated the due diligence report and subsequent investment was not a consideration. 

This case does therefore also emphasise, yet again, the paramount importance of the engagement letter in English law and the crucial part they play in restricting a professional's duty of care to its client. Accountants and other professionals should take care to ensure the retainer clearly and unambiguously sets out the terms of engagement.