Pegasus Management Holdings SCA & Anor v Ernst & Young (a firm) & Anor

In professional negligence, a claimant suffers actionable damage when, because of negligent advice, a transaction secures less valuable rights or benefits than the claimant should have obtained. This may occur at the date of the transaction even where the resulting financial consequences remain contingent or are not yet quantifiable.

The court must distinguish that situation from a transaction involving benefits and burdens where the claimant is not shown to be worse off than before entering it. A purely contingent liability, standing alone, is not damage. On the facts, the claimant subscribed for shares in a stand-alone company instead of a company with subsidiaries capable of avoiding the adverse tax consequences. Damage therefore occurred when the shares were issued.

The claimants sought damages from professional advisers for allegedly negligent tax advice concerning the subscription for shares in Pegasus and the subsequent acquisition of healthcare businesses. They alleged that advice to incorporate and fund subsidiaries would have enabled the acquisitions to be structured without an adverse capital-gains-tax consequence.

The defendants applied for summary judgment against Pegasus on the issue whether any duty was owed to it. They also contended that the tort claim was statute-barred because damage had occurred when Mr Bradbury subscribed for the shares, or when the relevant Revenue guidance was withdrawn. The court therefore considered duty, limitation, and the application of the authorities on damage in professional negligence.

1. Summary judgment and duty. The court applied the realistic-prospect test in Swain v Hillman [2001] 2 All ER 91, while recognising that a mini-trial must be avoided. On the evidence, Pegasus had no real prospect of establishing either a contract with E&Y or an assumption of responsibility to it. Pegasus did not exist when the relevant advice should have been given, there was no communication with it during the critical period, and the evidence did not establish any prior practice of advising Mr Bradbury’s companies. Summary judgment was accordingly entered for E&Y against Pegasus.
2. Damage in professional negligence. The court accepted the general rule that negligence requires actual, measurable damage, not merely potential loss. Where the professional was retained to secure a right or benefit in a contemplated transaction, and negligent advice means that the client receives less valuable rights or benefits than should have been secured, damage occurs when the transaction takes place. This principle was supported by the reasoning in Forster v Outred & Co, D W Moore & Co Ltd v Ferrier, Bell v Peter Browne & Co, Knapp v Ecclesiastical Insurance Group plc, Law Society v Sephton & Co and Shore v Sedgwick Financial Services Ltd.
3. The court distinguished cases requiring comparison of what the claimant parted with and received, including Nykredit Mortgage Bank plc v Edward Erdman Group Ltd and First National Commercial Bank plc v Humberts. A purely contingent liability is not damage merely because its risk can be assessed.
4. Application. Under section 164A(8A) of the Taxation of Chargeable Gains Act 1992, the relevant structure required subsidiaries to exist, or the necessary intention to incorporate them to have been formed, by the share issue. Once the issue occurred on 2 April 1998, the opportunity could not be retrieved. Mr Bradbury therefore acquired shares in a stand-alone company rather than the company with the characteristics that proper advice would have secured. That difference was objectively disadvantageous because disposing of the shares would jeopardise the tax relief.
5. The contractual claim was statute-barred. The tort claim concerning the failure to advise about subsidiaries was also statute-barred because damage was suffered at the date of the share issue.