Eastgate Group Ltd v Lindsey Morden Group Inc (Smith & Williamson, Part 20 defendant)

Liability for the same damage under the Civil Liability (Contribution) Act 1978 does not require identical measures or amounts of damages. The court must identify the substance of the loss.

A contribution claim is potentially available where payments by either alleged wrongdoer would reduce the claimant’s recoverable loss against the other. A payment diminishing the claimant’s actual loss must ordinarily be brought into account in assessing contractual damages. This differs from payment towards a damages claim which leaves an independent debt unaffected.

Whether contribution is just and equitable requires a fact-sensitive assessment. A claim should not be struck out on that ground where issues such as responsibility, valuation and possible unjust enrichment require determination at trial.

Eastgate Group Ltd purchased the shares in Hambro Legal Protection Ltd from Lindsey Morden Group Inc for £51 million. Eastgate alleged that the vendor had breached warranties concerning the company’s accounts, business and financial position. The vendor sought a contribution from Eastgate’s investigative accountants, Smith & Williamson, alleging negligent investigation.

Andrew Smith J struck out the Part 20 claim. He held that the vendor and the accountants were not potentially liable for the same damage and that the claim failed the mutual-discharge condition derived from Howkins & Harrison v Tyler. He would not, however, have struck out the claim on the ground that contribution could not be just and equitable.

The vendor appealed on the first two issues. The accountants cross-appealed on the just-and-equitable issue. The central question was whether both were potentially liable to Eastgate for the same loss within section 1 of the Civil Liability (Contribution) Act 1978.

1. Appeal allowed and cross-appeal dismissed. Lord Justice Longmore delivered the judgment, with which Lord Justice Potter agreed. Lindsey Morden Group Inc could pursue its Part 20 contribution claim against Smith & Williamson.

2. The mutual-discharge inquiry stated in Howkins & Harrison v Tyler was a necessary, though not sufficient, condition of a contribution claim under section 1(1) of the Civil Liability (Contribution) Act 1978. The inquiry asks whether payment by either alleged wrongdoer would reduce or extinguish the claimant’s liability claim against the other. Both questions could be answered affirmatively here.

3. The judge had extended Nykredit plc v Edward Erdman Group Ltd beyond its proper context. The value of a borrower’s covenant must be brought into account in a negligent valuation claim because the covenant is an independent debt. A contractual warranty claim is instead a claim for damages requiring proof of loss. Any payment by the accountants which actually diminished the purchaser’s loss would therefore be brought into account when assessing the vendor’s liability.

4. The same damage may support different measures and amounts of damages. The court must identify the substance of the loss rather than compare only the starting points for quantification. The vendor and accountants were potentially liable for the same damage: the purchaser’s loss from acquiring a company worth less than it reasonably expected. The vendor’s liability arose from selling a company worth less than warranted; the accountants’ liability arose from causing the purchaser to buy it without proper advice.

5. Section 2 left the trial judge free to award any contribution, or none, according to what was just and equitable. The contention that contribution would unjustly enrich the vendor had force, but could not properly be resolved on an interim application. The company’s value, the accountants’ conduct and the possibility of unjust enrichment required factual determination at trial.

• Court of Appeal: The appeal was allowed unanimously and the Part 20 contribution claim was permitted to proceed. The accountants’ cross-appeal on the just-and-equitable issue was dismissed: [2001] EWCA Civ 1446.
• High Court, Queen’s Bench Division (Commercial Court): Andrew Smith J struck out or set aside the Part 20 claim because it failed the mutual-discharge condition and did not concern the same damage. He rejected strike-out on the separate just-and-equitable ground. No citation is stated in the judgment.