The Court of Appeal has handed down judgment in LSREF III Wight Ltd v. Gateley LLP [2016] EWCA Civ 359, a case which concerned what, if any damages had been caused by solicitors' negligence and whether the claimant had failed to mitigate its loss where liability had been admitted.

Background

In September 2007, Gateley LLP solicitors (Gateley) failed to draw to a bank's attention an insolvency forfeiture clause in a lease of a property, over which a first legal charge was granted as security for a loan facility. The forfeiture clause seriously impaired the charge as security, but the issue only came to light when the bank sought to enforce its security in 2012. During the proceedings brought by the bank for negligence against Gateley, the bank assigned its rights to LSREF III Wight Ltd, a special purpose vehicle or SPV. At the trial, Gateley asserted that the bank and latterly the SPV had failed to mitigate its loss, by failing to negotiate a variation of the lease with the freeholder. In fact, before the trial, the freeholder had indicated his willingness to remove the offending clause for £150,000, a payment which Gateley offered to make on behalf of the SPV, but which was declined.

The trial judge held that the bank had suffered loss at the commencement of the transaction in September 2007 and that the amount of loss attributable to Gateley was represented by the diminution in the value of the lease as a security attributable to the forfeiture clause. The judge further held that the SPV had not failed to mitigate its loss by not pursuing the variation of the lease. Damages of £240,000 plus interest at 2% per annum from September 2007 were awarded. After trial, the SPV used part of the damages awarded to pay the £150,000 to the freeholder in order to vary the lease. In December 2015, the property was sold at auction for £645,000 although this sale has not yet been finalised.

Gateley appealed, arguing that the alleged loss should have been calculated as at the trial date, not as at the transaction date and that the bank/the SPV had unreasonably failed to mitigate its loss by not arranging for the lease to be varied (and for which Gateley had offered to advance the £150,000 as requested by the freeholder).

Decision

The Court of Appeal ruled that the alleged transactional loss which was sustained by the bank was to be calculated as at the trial date, not the transaction date, in circumstances where the loss had not been crystallised by realisation of the relevant security.

The test for quantifying loss caused as a result of lending money upon negligent advice was established in South Australia Asset Management Corporation v. York Montague Ltd [1997] A.C.191 and Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd [1997] 1 WLR 1627. The court will firstly consider whether loss has been suffered from entering into the transaction and secondly consider what part of that loss was properly attributable to the negligence. For the second stage, if a relevant diminution in the value of the security can be quantified as at the date of the transaction (broadly the date of the report on title in respect of solicitors' negligence) then the amount of the loss must generally be ascertained at the transaction date. However, the first step did not have to be carried out as at the date of the transaction, and as such as a matter of common sense, the court should consider all relevant facts which occurred after the transaction.

A lender's loss is most easily identified once that loss has crystallised by realisation of the security and the application of the proceeds of sale to the outstanding debt. Here, the Court of Appeal found that it would be rare that the loss would be better calculated by reference to any earlier date than the trial date, given that the transactional loss remained uncrystallised as at the date of trial. While the bank had suffered some loss at the date of the transaction in September 2007, the judge still had to quantify the transactional but uncrystallised loss as at the trial date itself. The amount of loss which had been suffered immediately upon completion of the transaction said little about the real transactional loss suffered upon crystallisation of the actual security.

The Court further held that the bank/SPV had unreasonably failed to mitigate its loss. A genuine offer to vary the lease had been made by the freeholder, the benefit of which far exceeded the cost (and which Gateleys had offered to pay in any event). The bank/SPV clearly had the funds with which to pay the freeholder to vary the lease and was a sophisticated investor in distressed assets with good commercial and property acumen.

The judge's award of damages of £240,000 plus interest was therefore replaced with an award of £157,100, being the price and associated legal costs of the variation of the lease, together with interest from 27 January 2015 at 2% per annum from that date.

Comment

The decision in LSREF III Wight Ltd v. Gateley LLP [2016] EWCA Civ 359 demonstrates that, where a bank's security has not crystallised, as at the trial date, the transactional loss suffered will be calculated at the trial date itself and not the date when the transaction was entered into. This would seem to be a sensible decision which must be followed by the courts and gives helpful clarification to both claimants and defendants, that where the security has not yet been realised by the date of the trial, this measure will be adopted.

The decision further serves as a reminder that a claimant must be able to demonstrate that it has attempted to mitigate its loss. A claimant should ensure that, where possible, the loss it has suffered as a result of the defendant's wrongful actions does not increase and also, that it does not take unreasonable steps which may increase the loss.

The duty of a claimant to mitigate is not "enforceable" by the court, but rather is a voluntary duty. However, if a claimant fails to take such steps to mitigate its loss, any damages it recovers may be affected by this failure, so that the court may award a sum that takes into account such steps which could have been taken to mitigate loss but which have not been taken. A claimant may therefore be prevented from recovering such loss which it could have reasonably prevented from incurring.