Pegasus Management Holdings SCA & Anor v Ernst & Young (A Firm) & Anor

In a professional-negligence wrong transaction case, actual damage sufficient to complete the tort may arise when negligent advice causes a claimant to obtain a transaction, right or commercial structure materially different from that which should have been obtained. Immediate financial loss is not essential where the claimant has suffered a material commercial disadvantage. Future contingencies and difficulty of valuation affect the quantification of loss, not necessarily its existence. There is no automatic presumption that negligent advice causes damage when acted upon; the court must infer damage on the facts. A duty of care to a company also requires evidence of a retainer, communication or assumption of responsibility. A bare expectation that accountants will advise an incorporated company, without contact or retainer, is insufficient.

Pegasus Management Holdings SCA and Ivan Bradbury sued Ernst & Young for professional negligence concerning tax-planning advice given before 2 April 1998. The claimants alleged that they should have been advised to establish, or resolve to establish, subsidiaries before a substantial share subscription, so that later acquisitions could avoid an adverse corporation-tax consequence.

Lewison J held that Pegasus had no realistic prospect of proving a contractual relationship or duty of care in tort owed by Ernst & Young. He also held that Mr Bradbury’s tort claim was time-barred because damage had been suffered by 2 April 1998. The appeal concerned those conclusions. Ernst & Young’s conditional cross-appeal on limitation of Pegasus’s tort claim therefore became unnecessary. The central issues were whether Ernst & Young owed Pegasus a duty of care and when actual damage occurred.

1. Pegasus’s claim. The court upheld summary judgment. Pegasus was incorporated only shortly before the relevant share subscription. There was no retainer between Pegasus and Ernst & Young, no communication with anyone acting for Pegasus during the material period, and no evidential basis for an assumption of responsibility. The relevant structural advice was a matter for Mr Bradbury. Pegasus therefore had no realistic prospect of establishing a duty of care in tort.
2. Actual damage in a wrong-transaction case. The general rule remains that actual damage is required before a negligence tort is complete. The Court of Appeal authorities, including Baker v Ollard & Bentley 12 May 1982, D.W. Moore and Co Ltd v Ferrier [1988] 1 WLR 267, Bell v Peter Browne & Co [1990] 2 QB 495 and Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172, establish that damage may arise when the claimant receives something materially different from what the professional ought to have secured. Immediate financial depreciation is not essential. There is no presumption in every negligent-advice case, but damage may be inferred. Future events and valuation difficulties ordinarily affect quantum.
3. Application to Mr Bradbury. Under the Taxation of Chargeable Gains Act 1992, the relevant structure needed an existing subsidiary or a documented intention to form subsidiaries by the subscription date. The failure to secure that structure immediately reduced Mr Bradbury’s flexibility in acquiring qualifying businesses. His shares need not have been worth less than the subscription price. The shares did not give him control of a company with the characteristics required to avoid the adverse tax consequence. That material commercial disadvantage was actual damage suffered on completion. The possibility that he might later avoid the consequence through asset purchases, or might never suffer the eventual tax loss, did not postpone accrual.
4. Disposition. The judge’s conclusion that Mr Bradbury’s claim was time-barred was correct. The claimants’ appeals were dismissed. Sir John Chadwick and Sir Mark Potter P agreed. The conditional cross-appeal did not require determination.

• Court of Appeal (Civil Division): In [2010] EWCA Civ 181 , the claimants’ appeals were dismissed. The conditional cross-appeal was unnecessary to determine.
• High Court of Justice, Chancery Division: Lewison J, in [2008] EWHC 2720 (Ch) , held that Pegasus had no realistic prospect of proving a duty of care and that Mr Bradbury’s tort claim was time-barred.