In the recent case of Symrise AG and anor v Baker & McKenzie and anor [2015] EWHC 912 (Comm), Mr Justice Burton of the High Court decided in favour of the Defendant solicitors (the "Defendant") in a claim for damages by Symrise AG, an international manufacturer of food flavourings (the "Claimant"), for the alleged negligent drafting of an Intercompany Loan Agreement (ICLA) which exposed the Claimant to substantial tax liabilities.

In the course of his judgment, Mr Justice Burton examined in detail the basic principles of causation in circumstances where the alleged loss is attributable to more than one cause and the duty of a claimant to mitigate its loss.

Background

The Claimant was formed in 2003 following a merger between two international companies which was to be mainly funded by loan facilities from various banks. The Defendant was retained by the companies prior to merger to advise on the appropriate post-merger strategies regarding any tax relief. The resulting strategy was to "push down" the debt to subsidiaries of the Claimant in order to obtain tax relief on interest payments due on the debts.

As a result of the Defendant's advice, the Claimant's Mexican subsidiary (the Subsidiary) would bear all of the debt pursuant to the ICLA which was approved by the Defendant's Mexico office (BMM). Some clauses in the ICLA were governed by English Law, and it was subject to the provisions of an Intercreditor Deed (ICD), the latter being preferred in the event of any conflict.

In 2005, however, the Mexican Tax Authorities (MTA) challenged the pushdown and concluded that the interest payments were, under the Mexican Income Tax Law (ITL), dividends and, therefore, no tax relief was applicable. The MTA demanded around £5.6 million in tax for the 2003 and 2004 years and around £5.3 million for the 2005 tax year.

BMM advised the Claimant to challenge the MTA's findings and it subsequently issued nullity proceedings in the Mexican tax court arguing that the ICLA did not contravene the ITL. Before a decision could be given, the Claimant instructed their new solicitors, Tron Abogados SC (Tron), to negotiate a settlement whereby the Claimant withdrew its nullity proceedings and settled the MTA's tax claim, which included a non-binding promise from the MTA that it would not initiate audits for the 2006 and 2007 tax years (the Settlement). However, that was not honoured and the MTA subsequently demanded further tax payments. The Claimant entered into costly and protracted litigation with the MTA which was ultimately unsuccessful. 

The Claimant pursued a claim against the Defendant in relation to the advice given by BMM. The issue was whether the ICLA triggered the relevant provisions of the ITL.  If it did, it was not fit for purpose given that it would have prevented the pushdown strategy from being successful. The Claimant claimed for all tax payments made to the MTA together with substantial sums in mitigation costs and legal fees.

Court's Findings

The Court found that the advice given by BMM was negligent.  It was accepted that there was, in fact, no breach of the ITL. However, the Court considered that BMM should have had sight of the ICD before advising on the ICLA and should have advised the Claimant that there was a risk that the ICD could have infringed the ITL and, therefore, be subject to challenge by the MTA.

The most notable remarks of the Court are, however, in relation to the issues of causation and mitigation.

Causation

The MTA had decided to investigate the tax position prior to having sight of the ICLA. However, the Court considered that the ambiguity of the ICLA made it more likely that the investigation would continue. Although the MTA had other grounds on which to challenge the tax issue, BMM's negligence made it likely that it would be challenged and, therefore, was "an effective and concurrent cause" of the MTA investigation which led to the loss to the Claimant.  Causation was accordingly made out.

Mitigation

The Claimant therefore succeeded on breach of duty and causation but the real issue in this case was whether the Claimant had taken reasonable steps to mitigate its position. The Defendant's position was that the MTA's case was weak and, therefore, the Claimant should have continued with the nullity proceedings rather than entering into the Settlement. The onus was on the Defendant to show that the Claimant's steps had been unreasonable.

The issue to be determined by the Court was whether the Settlement was, in all the circumstances, within the range of reasonable responses. In particular, the Court considered the following factors:

  1. strength of the claim;
  2. whether the Settlement was the result of legal advice;
  3. benefits of settling the case rather than disputing it; and
  4. uncertainties and expenses of litigation.

The Court determined from all the evidence that the steps taken by the Claimant were not in reasonable mitigation. The Court concluded that had the Claimant continued with the nullity proceedings, they would in all likelihood have succeeded. The Claimant had instead decided to settle the tax claims with the MTA before Tron's instruction for commercial reasons but it had later attempted to persuade Tron to advise that the nullity proceedings did not have a good chance of success, for the sole reason of being able to pursue a claim against the Defendant. The reality was the Claimant had not relied on any legal advice to enter into the Settlement; the Claimant settled the tax claim with the MTA notwithstanding the merits of the nullity proceedings.

The Claimant put forward at trial commercial reasons for settling the claim. The Court stated that, just because there were commercial reasons for settlement, that did not mean that the claimant would not be able to rely upon a settlement in order to recover the costs of the same from the defendant in circumstances where a claimant is put into a difficult position by a defendant's negligence and has to mitigate as best it can, subject to outside forces, time, and financial pressures. The Court, however, distinguished such a circumstance from the facts of this case where there were no such pressures and concluded that the Claimant's response to the situation was not within the reasonable range of responses.  It was clear that the Claimant wanted to settle the claim with MTA for purely commercial considerations because its group priorities had changed over the years since the pushdown.  It wanted to draw a line under the matter, notwithstanding the legal arguments in its favour. Had the Claimant proceeded with the nullity proceedings it would have succeeded and resolved the sole basis for the claim against the Defendant.  The Claimant made the wrong choice and had it not made that choice it would have avoided the tax losses, and so must bear the burden of its loss.

Loss

Notwithstanding the decision in the Defendant's favour, the judge provided some comments on loss.  He considered that the quantification of loss, had the Claimant succeeded, would have been on the basis of normal accounting principles, i.e. the diminution in value of the shareholding of the Subsidiary. However, prima facie, the value of the Subsidiary was nil given the extent of its liabilities. The Court, however, preferred the analysis of "delayed liquidity"; the prospect that something may occur to enable the Subsidiary to pay dividends, and, therefore, give it some value.  Therefore, any loss would have been based on the future value inherent in the Subsidiary, namely, a calculation of what dividends could have been paid at a future date. 

Comment

This case makes it clear that a claimant can decide what steps to take for its own good but it must accept the consequences of the decision if it is not within the realm of reasonable responses to the situation which has arisen because of a defendant's negligence. A claimant cannot recover the costs of an unreasonable decision which fails to mitigate its loss from a defendant even if it was made for sound commercial reasons.