In this case the Claimant was adjudged to have failed to act reasonably in mitigating its losses and, despite a finding of negligence against a tax advisor, was therefore unsuccessful in its claim. Whilst the case is a useful reminder of the principles relevant to an assessment of mitigation of loss, it is suggested that it is extremely fact specific.

The Case

The Claimant was formed in 2003, following the merger of two large global companies specialising in the production of flavours and fragrances. The deal was highly leveraged, and as part of the post-merger integration a debt “pushdown” was implemented in several countries, including Mexico. The pushdown in Mexico was completed in 2004, with the Claimant’s Mexican subsidiary becoming burdened with debt that equalled its pre-pushdown value. 

In 2005, the Mexican Tax Authorities (the MTA) challenged the tax planning pushdown arrangements. They regarded the interest payments made by the Claimant’s Mexican subsidiary to its parent as in reality being dividends, and therefore not eligible for tax relief. MTA’s challenge was partly referenced to a clause in the Intercompany Loan Agreement (ICLA) (establishing the debt pushdown arrangement) which the Defendant had advised on. The relevant clause (relating to recourse arrangements) was said to infringe Article 92 of the Mexican Income Tax Law.

The Claimant complained about the Mexican tax law advice given by the Defendant – specifically as to whether the drafting of the ICLA was appropriate, and the failure to advise that the relevant clause arguably engaged Article 92. Mr Justice Burton, sitting in the Commercial Court found that the Defendant had breached its duty to the Claimant in this regard. The Defendant’s own expert witness accepted that a reasonable tax lawyer should have advised that there was a risk that the relevant clause of the ICLA would be challenged by reference to Article 92(1); it was also clear that the wording of the ICLA could easily have been altered so as to significantly reduce the risk of a challenge by the MTA.

On the question of causation, the Defendant sought to argue that the MTA would have pursued an investigation in any event, premised on another section of Mexican tax law (Article 31). It was stated in evidence that where the MTA finds aggressive tax structures it attacks them – and that too much debt was pushed down as part of the post-merger integration. However, the Commercial Court concluded that the purported infringement of Article 92 made it more likely that the MTA’s investigation would continue, irrespective of whether infringement of Article 31 was also a live issue.

The key issue that remained for the Commercial Court to consider was whether the Claimant had adequately mitigated its losses. The Claimant’s Mexican subsidiary paid various tax demands following the challenge to the pushdown arrangements but had then (on the advice of the Defendant) in January 2007 and October 2008 issued proceedings (referred to as nullity proceedings) in the Mexican courts, to challenge the MTA’s determinations. However, having instructed another local firm specialising in tax matters in November 2008 (Tron), the Claimant decided in July 2009 to settle its tax liabilities with the MTA (without any real discount). As part of the settlement, however, the MTA was said to have offered a non- binding agreement in respect of treatment of future tax years.

The test to be applied as to the reasonableness of the settlement with the MTA was the one set out in Siemens v Supershield [2009]. There Ramsey J stated that the court needs to assess whether the settlement was “in all the circumstances within the range of settlements which reasonable people in the position of the settling party might have made. Such circumstances will generally include: (a) the strength of the claim; (b) whether the settlement was the result of legal advice; (c) the uncertainties and expense of litigation; (d) the benefits of settling the case rather than disputing it”.

It should be noted that, during the course of the trial, the Claimant conceded that the Claimant’s Mexican subsidiary would have succeeded with the nullity proceedings if they had proceeded with them. However, the Claimant sought to suggest that the deal with the Mexican authorities was reasonable, by reference to five factors: (i) the benefit of obtaining the unenforceable undertaking from the MTA about treatment of future tax returns; (ii) the Claimant had received advice from Tron that the nullity proceedings were not likely to succeed; (iii) the Claimant wanted to avoid protracted litigation; (iv) the Claimant’s Mexican subsidiary saw benefit in “showing good faith” to the Mexican tax authorities; and (v) the Claimant’s Mexican subsidiary needed to be brought out of a hole that it had been put into.


In assessing the reasonableness of the settlement the Claimant entered into, the first question Mr Justice Burton posed was to compare what was obtained from the deal with the MTA, against  the potential downside from carrying on with the nullity proceedings and losing them. He determined that had the Claimant proceeded with the nullity proceedings and lost (something that was deemed to be unlikely on the expert evidence in the case), they would have been “not much” worse off than in entering into the settlement with the MTA. They would have lost the chance of the non-binding agreement with the tax authorities (not to challenge further tax returns) being effective, paid an additional €625,222 in fines, and had to pay the additional legal costs of running the nullity proceedings (US$110,000). This potential downside rather paled into significance when compared to the very significant potential upside (of reclaiming many millions of Mexican dollars that it had paid out in tax). It was determined that “on any sensible analysis it was inevitably right to proceed, for very little more money by way of costs, for very little downside if they went ahead and lost”.

In rejecting the five points submitted by the Claimant in support of the contention that their behaviour was reasonable, Mr Justice Burton concluded that: (i) the unenforceable undertaking was “of little worth”; (ii) the decision to settle with the MTA was taken before any advice was given by Tron, and in any event Tron only made reference to the nullity proceedings having limited prospects of success after significant “pressure” was applied by the Claimants (with one eye on – having by now consulted English lawyers on a potential claim against the Defendant – demonstrating reasonable efforts to mitigate loss); (iii) concluding the nullity proceedings would not have required protracted litigation (they were virtually concluded at the stage  they were settled); (iv) in reality the Claimant’s Mexican subsidiary had no interest in trying to show good faith to the MTA; and (v) if senior management of the Claimant wanted for their own Group reasons to conclude the litigation “all well and good, but not by dint of making an unreasonable decision, and not at the expense of [the Defendant]”.

In concluding, Mr Justice Burton stated “it is very often in cases of mitigation that a victim of a tort or breach of contract can say that it was put into a difficult position by the tortfeasor or contract breaker, and thus, often in the agony of the moment, had to get out as best it could ... But such is not this case”. He went on to say that “it would also not be reasonable for a victim, particularly one not in the agony of the moment, to be swayed by the expectation of recovery against the tortfeasor into taking a step influenced by that fact alone”.

Wider application

On the face of it, whilst a good reminder of principles the courts will apply when assessing  the reasonableness of effort to mitigate loss, this case is perhaps unlikely to have a great deal of wider application. This is on the basis that, in the current climate in the UK, regarding tax efficient arrangements (with HMRC in a particularly bullish mood), there are unlikely to be many instances where all expert evidence will point to a challenge to HMRC’s rejection of a claim for tax relief being successful. As a general rule, claimants will be able rely on the oft repeated informal mantra of “there’s no need to litigate to mitigate”. However, claimants should be reminded not to see a negligence claim against former advisers as their first port of call –   but carefully consider all potential avenues for mitigating loss before embarking on litigation.