An accountant’s negligence exposed Swynson Ltd to losses on a loan. When the borrower repaid that loan and a second advance, it used money lent by Swynson’s owner personally. The issue was whether the owner could pursue the accountants for money the company itself had now recovered.
Swynson Ltd, controlled and beneficially owned by Mr Michael Hunt, was used to lend to businesses that could not borrow from banks on ordinary terms. On 31 October 2006 Swynson lent £15 million to Evo Medical Solutions Ltd (EMSL) so that EMSL could finance the management buy-out of an American medical-equipment distributor. Swynson and EMSL jointly instructed accountants, then Hurst Morrison Thomson and later Lowick Rose LLP, to report on the target. The report negligently failed to draw attention to fundamental financial problems, in particular insufficient working capital. It was common ground that a proper report would have stopped the transaction.
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When the business ran into difficulties, Swynson lent it a further £1.75 million in 2007 and £3 million in 2008. By December 2008 Mr Hunt controlled both companies. To address a tax problem and remove non-performing loans from Swynson’s books, he personally lent EMSL £18.663 million on terms requiring it to repay the 2006 and 2007 advances. EMSL made those repayments. The £3 million advance remained outstanding.
In 2012 Swynson and Mr Hunt claimed damages. The amount sought was £16.157 million, representing the £19.75 million advanced less recoveries, and was subject to a £15 million limit in the accountants’ engagement letter. Negligence was conceded. Rose J held that only the 2006 loan had been made on the strength of the report, but that the later loans were in principle recoverable as the cost of reasonable mitigation, subject to the cap. She treated the refinancing as irrelevant to the accountants and awarded £15 million. She also held that no duty of care was owed to Mr Hunt personally. In the Court of Appeal Mr Hunt abandoned that personal-duty argument. Longmore and Sales LJJ upheld the award; Davis LJ would have allowed the accountants’ appeal.
Repayment and avoided loss
Lord Sumption, with whom Lord Neuberger, Lord Clarke and Lord Hodge agreed, started from the rule that loss which has been avoided is not recoverable, although expense reasonably incurred in avoiding it may be recovered as mitigation. Payments which are merely collateral are an exception: the law treats them as not making good the loss. What matters is the character of the benefit. A gift, or a payment the claimant has in substance bought through premiums, contributions or work, may be collateral. A payment that discharges the very liability constituting the loss is not.
EMSL’s repayment made good Swynson’s loss on the 2006 and 2007 loans. The fact that EMSL borrowed the money from Mr Hunt was no more relevant than borrowing from a bank, once it was accepted that the accountants owed him no duty. The repayment could not discharge the debt between Swynson and EMSL while leaving it alive between Swynson and the accountants. Nor was it mitigation by Swynson: Swynson did not make the payment, and the refinancing was not attributable to the breach. A loan by Mr Hunt directly to Swynson would have been different, because it would not have discharged EMSL’s debt.
Transferred loss
Transferred loss is a limited exception to the rule that a claimant recovers only loss he has suffered. It may apply where the known object of a transaction is to benefit a third party and the contracting party must be allowed to recover that third party’s loss in order to avoid a legal black hole. It had been recognised where loss was suffered by an intended transferee of property. Lord Sumption held that it could not apply here in either its narrower or broader form. Benefiting Mr Hunt was no part of the object of the accountants’ engagement or of the 2006 transaction. His loss arose from the 2008 refinancing, which was unconnected with their breach.
Unjust enrichment and subrogation
Mr Hunt contended that the accountants had been unjustly enriched by the discharge of loans for which they would otherwise have been liable in damages, and that he should be subrogated to Swynson’s claim. Lord Sumption assumed, without deciding, that there was enrichment at Mr Hunt’s expense, but held that it was not unjust in the sense required for this remedy. In the relevant cases, subrogation prevents or reverses enrichment where money was paid on an expectation of a benefit which failed because the transaction was defective. The remedy replicates the missing element; it does not give the payer more than he bargained for.
The refinancing was not defective. Mr Hunt intended to discharge EMSL’s debt and obtained the repayment covenant, security, tax advantage and cleaner balance sheet for which he stipulated. EMSL’s inability to repay him was a commercial risk, not the enrichment of the accountants. Subrogation would have let him use rights arising from a different transaction, between different parties, more than two years earlier. His belief that ownership of Swynson made the claim against the accountants as much his as the company’s was a mistake, but not one corrected by giving him rights under that earlier transaction. Lord Sumption also observed that if EMSL later repaid the 2008 advance, subrogation could have given Mr Hunt a right in addition to everything for which he had bargained.
Lord Mance accepted that Mr Hunt would have arranged the refinancing differently had he understood its effect. Even so, the benefit to the accountants was incidental to a transaction directed to a different relationship. Lord Neuberger likewise concluded that Mr Hunt obtained what he had bargained for. The separate personalities of the shareholder and his company mattered even where one individual controlled all the commercial decisions.
Verdict: The Supreme Court unanimously allowed the accountants’ appeal. Swynson could not recover damages for the two loans EMSL had repaid, and Mr Hunt could not take over Swynson’s claim. The outstanding 2008 loan was outside the issue on appeal. The parties were invited to agree the order.
Source: Lowick Rose LLP v Swynson Ltd and another [2017] UKSC 32
