Swynson Ltd v Lowick Rose LLP

Repayment of a borrower’s loan does not automatically reduce damages recoverable from a negligent professional adviser. Avoided loss is generally brought into account where the transaction arises from the breach’s consequences and occurs in the ordinary course of business. A collateral payment may be left out of account. The court must consider practical substance, justice, reasonableness and public policy, rather than merely the formal route of payment. On the facts, refinancing funded by a person connected with the lender, on unusual and uncommercial terms, did not reduce the negligent adviser’s liability.

Swynson lent money to EMSL in reliance on a negligently prepared due diligence report by HMT, now Lowick Rose LLP. EMSL later repaid the 2006 and 2007 loans using money lent to it by Mr Hunt, Swynson’s indirect owner. Rose J held that this repayment was collateral to HMT’s negligence and awarded damages for the loans, subject to the agreed liability cap. HMT appealed. Swynson served a respondent’s notice advancing alternative claims based on unjust enrichment, subrogation and transferred loss. The central issue was whether the repayment extinguished Swynson’s recoverable loss.

By a majority, the appeal was dismissed and the order of Rose J was upheld.

1. The majority held that there was no inflexible rule requiring every repayment of a loan to be deducted from damages. Avoided loss is ordinarily brought into account where the subsequent transaction arises from the consequences of the breach and occurs in the ordinary course of business. Collateral benefits may be excluded. The approach reflected the principles in British Westinghouse Co Ltd v Underground Electric Railways Co Ltd [1912] A.C. 673 and Parry v Cleaver [1970] A.C. 1.
2. Longmore LJ held that the refinancing was collateral. Mr Hunt provided the funds because of his special relationship with Swynson and for reasons peculiar to the parties. EMSL could not have refinanced the debt commercially, and the transaction was not in the ordinary course of business. Treating the payment as collateral recognised its substance and did not pierce the corporate veil. Sales LJ agreed, stressing justice, reasonableness and public policy.
3. The alternative unjust-enrichment claim failed. If Swynson retained its claim, subrogation was unnecessary. If Mr Hunt was the claimant, there were no rights of Swynson to which he could be subrogated once the damages claim was treated as extinguished. There was also no sufficient evidence of mistake; the circumstances suggested mere causative ignorance rather than an incorrect conscious belief or tacit assumption. The transferred-loss argument was not considered in light of the House of Lords decision in Leigh and Sillivan Ltd v Aliakmon Shipping Co Ltd [1986] A.C. 785.
4. Davis LJ dissented. He would have allowed the appeal because EMSL itself repaid the loans under its contractual obligations, thereby eliminating Swynson’s loss. He considered that the corporate form had to be respected and relied on London and South of England Building Society v Stone [1983] 1 WLR 1242 and Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd [2002] EWCA Civ 336.
5. Sales LJ stated, as a non-controlling alternative, that if the repayment had extinguished Swynson’s claim, Mr Hunt would have been entitled to equitable subrogation under the unjust-enrichment principles discussed in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] A.C. 221.

• Court of Appeal (Civil Division): dismissed HMT’s appeal by majority and upheld Rose J’s order.
• High Court, Chancery Division: Rose J held that the repayment made through the refinancing was collateral and awarded damages for the 2006, 2007 and 2008 loans, subject to the liability cap.