Lowick Rose LLP v Swynson Ltd and another

Damages do not include loss which has been avoided. A benefit is collateral only where its character is independent of the circumstances giving rise to the loss. Repayment of the very debt representing the claimant’s loss extinguishes that loss, even where a third party supplied the debtor with the repayment funds.

Transferred loss is a limited exception. It requires an intended third-party benefit, anticipated third-party loss and legal necessity to prevent a remedial black hole.

Equitable subrogation addresses a defective transaction in which money was paid on the basis of an expected transactional benefit which failed. It replicates the missing benefit and cannot confer more than the payer bargained for. It cannot transfer a claim arising under an unconnected transaction merely because the payer misunderstood an incidental legal consequence of the payment.

Swynson Ltd lent £15m to EMSL after receiving negligent due-diligence advice from its accountants, Lowick Rose LLP, formerly Hurst Morrison Thomson LLP. Further loans were made in an unsuccessful attempt to protect the original investment. Mr Hunt controlled Swynson.

In 2008 Mr Hunt personally lent EMSL enough money to repay Swynson’s first two loans. The refinancing achieved tax and balance-sheet advantages but left Mr Hunt with a substantially unrecoverable loan. Swynson and Mr Hunt later claimed damages from the accountants.

Rose J awarded Swynson £15m. A majority of the Court of Appeal dismissed the accountants’ appeal in [2015] EWCA Civ 629, holding that the refinancing was collateral to Swynson’s loss. The Supreme Court considered whether the repayment should be disregarded as res inter alios acta, whether Swynson could recover Mr Hunt’s loss under the transferred-loss principle, or whether Mr Hunt could obtain Swynson’s claim through equitable subrogation based on unjust enrichment.

Held, unanimously, allowing the appeal:

1. Lord Sumption, with whom Lord Neuberger, Lord Clarke and Lord Hodge agreed, held that Swynson’s loss on the first two loans was extinguished when EMSL repaid them. The general rule excludes loss which has been avoided. Collateral benefits are characterised by their independence from the circumstances producing the loss. The identity of the person supplying the debtor with funds does not convert repayment of the very debt representing the claimant’s loss into a collateral benefit. Mr Hunt and Swynson were distinct legal persons, and his conduct could not be attributed to the company.

2. The repayment was not mitigation undertaken by Swynson. It discharged EMSL’s liability and therefore eliminated the corresponding damages. The principles explained in Parry v Cleaver [1970] AC 1 did not confer a discretion to disregard avoided loss according to broad perceptions of commercial fairness.

3. Transferred loss did not apply. The doctrine is a limited, necessity-based exception to the rule that a claimant recovers only its own loss. It requires the known object of the transaction to benefit the third party and anticipated breach-related loss to that third party. HMT’s engagement was not intended to benefit Mr Hunt, and his loss arose from a separate refinancing more than two years later. Lord Sumption left the broader performance-interest formulation open because it could not affect the outcome.

4. Equitable subrogation was unavailable. The remedy ordinarily addresses a defective transaction in which the payer’s expected security, priority or other transactional benefit fails. It fictionally replicates that missing element and cannot give the payer more than was bargained for. Mr Hunt obtained every benefit stipulated by the refinancing: EMSL’s repayment covenant, security, the tax advantage and removal of the impaired debt from Swynson’s books. His mistaken understanding of the refinancing’s effect on Swynson’s separate claim against HMT did not make the refinancing defective or justify transferring that claim to him.

5. Lord Mance agreed that the appeal should be allowed. He accepted that Mr Hunt had acted under a causative mistake but held that any benefit to HMT was an indirect and incidental consequence affecting a separate relationship. Lord Neuberger, with whom Lord Clarke agreed, likewise held that unjust enrichment corrects normatively defective transfers rather than every unforeseen disadvantage. He considered that there was no significant difference between the concurring approaches.

The parties were invited to submit an agreed order or submissions concerning the appropriate order and costs.

1. United Kingdom Supreme Court: In Lowick Rose LLP v Swynson Ltd and another [2017] UKSC 32, the court unanimously allowed Lowick Rose LLP’s appeal and rejected all three grounds advanced to preserve liability for the repaid loans.
2. Court of Appeal: In [2015] EWCA Civ 629, also reported at [2016] 1 WLR 1045, Longmore and Sales LJJ dismissed the accountants’ appeal on the basis that the refinancing was res inter alios acta. Davis LJ dissented. The majority divided on equitable subrogation.
3. High Court: Rose J held that Swynson’s recoverable loss included the first two loans notwithstanding their repayment and awarded £15m, the contractual liability cap. She held that HMT owed no duty of care to Mr Hunt personally and did not decide transferred loss or equitable subrogation.