Pegasus v Ernst & Young

Where a wrong causes loss to property, the owner’s subsequent assignment or disposal of that property does not, by itself, extinguish the loss or the accrued cause of action. The assignee of the cause of action may recover the loss suffered by the assignor, subject to the ordinary limits on recovery.

The assessment of damages at trial requires subsequent events and future uncertainties to be considered. That principle does not mean that a transfer of the affected property retrospectively removes loss which the law treats as having been suffered. The same approach applies whether the loss is direct and readily quantifiable or consequential and dependent on future events.

This was an appeal from a decision of Master Bowles dated 18 November 2011 on applications to strike out and amend proceedings. Pegasus claimed damages from Ernst & Young for allegedly negligent tax advice. During the proceedings Pegasus entered liquidation and transferred substantially all its assets, including the relevant cause of action, to Inhealth UK Holdings Ltd.

Ernst & Young argued that the transfer meant Pegasus no longer had any loss, and that Inhealth could not recover more than Pegasus could have recovered. The central issue was whether Inhealth could maintain the assigned claim for tax-related losses arising from the alleged negligence.

1. Appeal dismissed. The amendment substituting Inhealth UK Holdings Ltd for Pegasus was allowed.
2. The court rejected the argument that Pegasus ceased to have suffered loss because it had transferred the affected assets. Damages must be assessed realistically, by reference to the real loss in the real world. The conventional comparison between the claimant’s actual position and the position absent the wrong is a guide, not a mechanical or metaphysical formula.
3. The authorities, including GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd, Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd and Offer-Hoar v Larkstore Ltd, showed that a transfer of damaged or affected property does not necessarily destroy the assignor’s loss or cause of action. The assignee may recover the loss which the assignor could have recovered, but not the assignee’s independent loss or more than the assignor could have recovered.
4. The distinction between direct loss and future or consequential loss did not alter that conclusion. Later events must be considered when quantifying uncertain loss, but that does not answer whether the disposal of property removes loss already attributable to the wrong. The principle applies equally where the full extent of loss remains uncertain.
5. The transfer of the property was not analogous to a third party making good the loss. Treating it as such would allow a wrongdoer to escape liability and would cause the loss to disappear into a legal black hole. The professional fees were, in any event, accrued losses unaffected by the defendant’s argument.
6. The issue was determined as a preliminary issue and was to bind the parties at trial.

• High Court (Chancery Division): Mr Justice Mann dismissed the appeal from Master Bowles’s decision of 18 November 2011 and allowed the amendment substituting Inhealth UK Holdings Ltd for Pegasus.