In a welcome decision for professionals, the Supreme Court has overturned a ruling which had the effect of lifting the corporate veil to allow a claimant to recover against its accountants in circumstances where the loss claimed had been transferred from the claimant company to its owner. The decision, which centred around the equitable doctrines of collateral payments and unjust enrichment, represents a return to a stricter approach to the characterisation of loss and a reluctance of the courts to allow general notions of 'justice' to trump established legal doctrine.

Factual Background

In 2006, Swynson, which was owned by a Mr Hunt, made a £15 million loan to EMSL. The loan was made in reliance on negligent advice given by an accountancy firm ("Lowick Rose"). In December 2008, the loan together with further loans that had been made by Swynson to EMSL, was refinanced. Mr Hunt loaned the outstanding sum to EMSL on the condition that the monies be used to repay Swynson. The purpose of the refinancing was to clear up Swynson's balance sheet and reduce its tax liability. Ultimately EMSL ceased business and was unable to repay to Mr Hunt the sums lent by him.

Swynson and Mr Hunt commenced proceedings against Lowick Rose in 2012 seeking damages arising out of the unrepaid loans. Lowick Rose argued that they could have no liability in damages on the basis that Swynson had suffered no loss as its original loan, made on the strength of Lowick Rose's report, had been repaid by EMSL in December 2008 when the loan refinancing was agreed.

The Court of Appeal decision

The Court of Appeal upheld the first instance ruling against Lowick Rose on the basis of the collateral payments exception to the general rule in relation to avoided loss.

The general rule provides that loss which has been avoided is not recoverable as damages, although expense that was reasonably incurred in avoiding the loss may be recoverable as the costs of mitigation. Applying this rule, Sywnson would be unable to recover any loss as the entirety of the loss had been mitigated by virtue of Hunt's actions.

Sywnson argued that the exception in respect of collateral payments applied. The collateral payments exception states that where a loss has been avoided by way of a payment which arose independently of the breach, then the law considers that the claimant's loss has not in fact been made good. For example, a lottery win in the amount of a claimant's loss would not satisfy a claim, nor would an insurance payment.

The Court of Appeal considered that had Mr Hunt given the 2008 loan to Swynson directly, no one could suggest that such payment should impact upon the damages recoverable due to the negligent advice. The Court considered that holding differently just because the payment was made through EMSL would be a triumph of form over substance.

Supreme Court Judgment

The Supreme Court disagreed with this reasoning. It agreed with the first stage of the Court of Appeal's reasoning, namely that if Mr Hunt had lent the money to Swynson to strengthen its financial position in light of EMSL's default on the loans, the payment would have had no effect on the damages that Swynson could recover from Lowick Rose. The payment, in this scenario, would not have discharged EMSL's debt and would have been a collateral payment.

The Court of Appeal and the Supreme Court disagreed on the questions of whether substance ought to triumph over form. The Supreme Court held that the payments made by Mr Hunt to EMSL, and by EMSL to Swynson, could not be regarded as collateral payments for three reasons:

  • The transaction discharged the liability which represented Swynson's loss. The repayment of the loan could not be treated as having discharged the liability as between the lender and the borrower, but not as between the lender and its reporting accountant;
  • The money Mr Hunt lent to EMSL was not an indirect payment to Swynson even though it ultimately reached Swynson. It was instead a transaction distinct from the earlier loan agreements, between different parties, made for valuable consideration in the form of the respective covenant of EMSL to repay the loan to Mr Hunt; and
  • As the Court of Appeal also held, the consequences of refinancing the loans could not be recoverable as the cost of mitigation because the loan from Mr Hunt to EMSL could not be considered to be an act of Swynson and was not attributable to Lowick Rose's negligence.

The Supreme Court considered that the fact that EMSL repaid the loans with money borrowed from Mr Hunt was no more relevant than it would have been if the money had been borrowed by EMSL from a bank or some other unconnected third party.

The Supreme Court also declined to entertain arguments that Swynson's claim ought to succeed on the basis of the doctrines of transferred loss and unjust enrichment.

In relation to unjust enrichment, the Court highlighted that the purpose of the law of unjust enrichment is to correct defective transactions: the remedy of equitable subrogation is used to reverse the enrichment. Swynson's case had to fail because the December 2008 refinancing was not a defective transaction. Mr Hunt got exactly what he intended to get out of that transaction in that EMSL's debt to Swynson was discharged and he received the right to recover the new loan from EMSL. The fact that Mr Hunt made a mistake in assuming that the December 2008 refinancing would not impact upon the claim he and/or Swynson had against Lowick Rose was irrelevant.

Regardless of perceptions of fairness over the result in Lowick Rose v Swynson, the Supreme Court's ruling was critical for the preservation of the integrity of the legal doctrines it considered. In crafting a ruling that allowed Mr Hunt to succeed, the Court of Appeal created a confusing and potentially dangerous precedent in relation to the doctrine of collateral payments: an example of "hard cases making bad law". The Supreme Court's decision corrects this.

A key issue in professional negligence claims is often whether the claimant can establish loss. Whilst the facts of the present case are relatively unique, the decision is important because it represents a reluctance on the part of the Supreme Court to push the boundaries of equitable remedies and lift the corporate veil to accommodate a claimant, even where breach of duty is not contested.

More generally, the case is a reminder to professional advisors that the full consequences of restructuring transactions need to be properly considered. The Court will not act to correct a technical failing merely because it seems 'just' to do so.

Whilst the state of the law of collateral payments has not been advanced beyond what it was prior to the Court of Appeal's decision, there is likely to be further comment from the Supreme Court on this topic when the judgment in The New Flamenco decision is handed down later this year.