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Avoidance of loss: a review of Swynson Limited v Lowick Rose LLP (in liquidation)

This Court of Appeal decision provides useful guidance on how to assess damages when a claimant has avoided loss without taking steps to mitigate. 

Facts

In 2006, the Claimant lent Evo Medical Solutions Ltd (‘EMSL’) £15 million, to enable it to buy an American company called Evo. The loan was made in reliance on a due diligence report prepared by the Defendant accountancy firm. 

In July 2007, due to EMSL facing financial difficulties, the Claimant lent a further £1.75 million. EMSL was unable to repay either of the two loans, and so the Claimant lent a further £3 million in 2008, in a bid to protect its original investment.

In December 2008, the owner of the Claimant, Mr Hunt, undertook a ‘refinancing’ exercise by providing EMSL with c.£18.6 million. This enabled EMSL to repay the 2006 and 2007 loans to the Claimant, and owe Mr Hunt personally instead.

EMSL continued to struggle financially and, eventually, it was wound down. Neither Mr Hunt’s refinancing loan, nor the Claimant’s separate 2008 loan could be repaid.

The Claimant brought a claim against the Defendant in relation to its due diligence report. The Defendant admitted that it prepared the report negligently and it was agreed that there was a causal link between that negligence and the Claimant’s decision to make the original loan.

Loss was disputed, with the Claimant claiming a sum to cover all three loans, and the Defendant arguing that, as EMSL had technically repaid the first two loans, it should only be liable for the remaining 2008 loan (i.e. for £3 million).

At trial, the judge found that EMSL’s repayment via Mr Hunt was collateral to the loss caused by the breach of duty and did not eliminate the Claimant’s loss in respect of the first two loans. The judge awarded damages in respect of all three loans, subject to a £15 million cap on liability as set out in the Defendant’s letter of engagement.

The Defendant appealed that decision.

Decision

The appeal was dismissed, by a majority of two to one.

Longmore LJ, for the majority, noted that there are occasions when a Claimant has taken steps to mitigate loss and may thereby avoid all or part of his loss. This was not such a situation as the Claimant was not in the position to mitigate its loss and had not done so.

There are also occasions, such as this one, when a loss is avoided even though the claimant has not taken steps to mitigate. In such a case the avoided loss should be considered as part of assessing damages only where it arises out of the consequences of the breach and in the ordinary course of business.

Longmore LJ decided that although the refinancing may have arisen because of the breach, it certainly did not arise in the ‘ordinary course of business’, because there was no prospect of a third party purchasing the debt in normal circumstances due to EMSL’s poor repayment history. As such, it was not necessary to consider the repayment when assessing damages.

Sales LJ agreed and added that it was necessary to look at the substance and not the form of the transactions giving rise to the avoided loss. If Mr Hunt had given the sum of £18.6 million directly to the Claimant company to assist it balance its books, no-one would suggest that such a payment should be deducted from the damages. There was no difference therefore, simply because the money had come from Mr Hunt via EMSL. In terms of basic justice and public policy, the Defendant should not benefit from Mr Hunt’s payment to the Claimant.

Davies LJ disagreed, noting that the repayment was not ‘collateral’ as it had come directly from EMSL to the Claimant, in accordance with the lending agreement between those two parties. He was of the view that the damages should be assessed in accordance with ordinary principles, in this case being the advance, plus any outstanding interest, less any repayments made by EMSL. 

Comment

The decision provides useful insight into how a court will assess damages when a claimant has avoided loss without taking steps to mitigate. According to Longmore LJ, the benefits of avoiding loss should be considered as part of assessing damages only where they arise out of the particular breach and in the ordinary course of business. Sales LJ also indicated that the court should look closely at the substance, and not the form, of any transactions that lead to an avoidance of loss.

We would note that the subject is by no means clear, however. The decision was made with a dissenting judgment, and even those in the majority appear to have reached their conclusions based on different factors.

What is clear is that the case serves as a reminder that claimants are not always obliged to give credit for losses they may have recovered. Consideration must always be given to the interplay between the underlying transaction and the recovery made in each individual situation. 

Contact

For further information please contact Philippa Bayes, Trainee Solicitor on 020 7280 5258.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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