LSREF III Wight Ltd v Gateley LLP

Loss in a lender’s professional-negligence claim is quantified in two stages. First, the court identifies transactional loss by comparing the lending outlay and cost of funds with the amount recovered or recoverable from the borrower and security. Secondly, it identifies the part attributable to the negligent advice.

Where transactional loss remains uncrystallised at trial, it should generally be assessed at trial using reliable subsequent events. The loss attributable to the defective advice is generally assessed at the transaction date. Mitigation is fact-sensitive but ultimately requires an objective assessment of reasonableness. The cost of curing defective security is not collateral where it closely corresponds to the damage, and reasonable cure costs remain recoverable as damages.

Gateley LLP admitted negligence and breach of retainer in failing to report an insolvency forfeiture provision in a lease offered as security for a development loan. The claim was assigned to LSREF III Wight Ltd.

At a quantum-only trial, HHJ Dight assessed loss at the transaction date, awarded £240,000 with interest from September 2007, and rejected an alleged failure to mitigate by negotiating removal of the forfeiture provision.

Gateley appealed on assessment of loss and mitigation. LSREF cross-appealed, arguing that the cost of curing the defect remained recoverable. The central issues were the correct assessment date, the reasonableness of the proposed mitigation, and the treatment of its cost.

Lord Justice Briggs gave the leading judgment. Lord Justices McFarlane and Moore-Bick agreed. The appeal and cross-appeal were allowed.

1. Quantification of loss. The court applied the two-stage approach established in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 and Nykredit Mortgage Bank Plc v Edward Erdman Group Limited [1997] 1 WLR 1627. The first stage identifies transactional loss by comparing the lending outlay and cost of funds with recovery or recoverability from the borrower and security. The second identifies the part attributable to the negligent advice by measuring the deficiency in the security. The accounting comparison in Swingcastle Limited v Alastair Gibson [1991] 2 AC 223 applied.
2. For negligent valuation, and by parity of reasoning for a negligent solicitor’s report on title, the deficiency attributable to the advice will generally be assessed at the transaction or report date. However, where transactional loss remains uncrystallised at trial, it should ordinarily be quantified at trial by reference to reliable subsequent events. An earlier assessment may be appropriate where the loss has already crystallised.
3. Mitigation. Mitigation is fact-sensitive and multifactorial, and an appellate court should be slow to interfere. Nevertheless, unreasonable failure to mitigate requires an objective reasonableness analysis, not merely fact-finding. The proposed variation remained available, offered a benefit substantially exceeding its cost, could be funded, and was within the ordinary business judgment of a sophisticated distressed-assets investor.
4. The payment to remove the insolvency forfeiture provision was closely connected with the damage caused by the negligent security advice. It was therefore not collateral or res inter alios acta. The payment constituted mitigation, and would have constituted mitigation if made before trial. The court distinguished the benefit analysis in Swynson Ltd v Lowick Rose LLP [2015] EWCA Civ 629 and Fulton Shipping Inc of Panama v Globalia Business Travel SAU of Spain [2014] EWHC 1547 (Comm).
5. The court could use the undisputed subsequent evidence to assess the transactional loss without conducting an artificial historical assessment. The defect had been cured, so any later shortfall on sale was not attributable to Gateley’s negligence. The reasonable cure cost of £150,000 plus £7,100 legal costs was recoverable. Administration and realisation expenses formed part of transactional loss, not the cost of curing the title defect.
6. Damages were substituted in the sum of £157,100, with interest at 2% per annum from 27 January 2015.

• Court of Appeal (Civil Division): appeal and cross-appeal allowed; damages substituted at £157,100 with interest from 27 January 2015. [2016] EWCA Civ 359
• High Court of Justice, Chancery Division: HHJ Dight, after a quantum-only trial, awarded £240,000 with interest from September 2007 and rejected the alleged failure to mitigate.