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Cite as: [2015] 2 CLC 102, [2015] EWCA Civ 629, [2015] WLR(D) 278, [2016] WLR 1045, [2015] PNLR 28, [2016] 1 WLR 1045

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Neutral Citation Number: [2015] EWCA Civ 629
Case No: A3/2014/2373

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
THE HONOURABLE MRS JUSTICE ROSE DBE

Royal Courts of Justice
Strand, London, WC2A 2LL
25/06/2015

B e f o r e :

THE RIGHT HONOURABLE LORD JUSTICE LONGMORE
THE RIGHT HONOURABLE LORD JUSTICE DAVIS
and
THE RIGHT HONOURABLE LORD JUSTICE SALES

____________________

Between:
SWYNSON LIMITED
Respondent
- and -

LOWICK ROSE LLP (IN LIQUIDATION – FORMERLY KNOWN AS HURST MORRISON THOPSON LLP)
Appellant

____________________

Mr David Turner QC & Miss Nicole Sandells (instructed by RPC LLP) for the Appellant
Mr Hugh Sims QC & Mr James Wibberley (instructed by Gardner Leader LLP) for the Respondent
Hearing dates: 19th May 2015

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Lord Justice Longmore:

    Introduction

  1. This appeal concerns the amount of damages recoverable by a lender from a negligent firm of accountants who failed to do a proper exercise of due diligence on the borrower to whom the money was lent. The majority of the loan was repaid by utilising money lent to the borrower by the owner of the lending company. Rose J has held that that repayment was a collateral matter which did not go to reduce the damages recoverable from the negligent accountants. The question is whether she was right.
  2. Outline facts

  3. The respondent ("Swynson") is owned indirectly by Mr Michael Hunt. On 31st October 2006 Swynson lent £15m to a company called Evo Medical Solutions Limited ("EMSL") to enable it to facilitate a management buyout of Evo, an American company specialising in the distribution of medical devices in the USA (the "2006 Loan"). The loan was secured by charges over EMSL's and Evo's assets, which were accompanied by personal guarantees given by the former executive team of Evo limited to £500,000. The loan was subject to interest at a rate of 6% above base and an arrangement fee of £750,000. The loan was repayable on 31st October 2007.
  4. The 2006 Loan was made by Swynson in reliance upon a due diligence report ("the Report") prepared by Mr Bruce Morrison of an accountancy firm now named Lowick Rose LLP (the appellant) but at the time named Hurst Morrison Thomson ("HMT"). Although breach of duty and causation were initially in dispute, during the course of the trial it was conceded by HMT that the Report had been prepared negligently and that there was a causal link between Mr Morrison's negligence and the decision of Swynson and Mr Hunt to make the 2006 Loan. The Report had been prepared negligently in that it failed to report that there was a $3-$4m adverse difference between Evo's actual and forecast working capital. This would have had a material impact on Evo's cash flow post-completion.
  5. In February 2007 HMT's letter of engagement, in which HMT's liability for its advice was capped at £15m, was signed by a Mrs Jenkins on behalf of Swynson. There was a dispute at trial regarding the limit of HMT's liability cap as there was some confusion owing to the existence of three versions of the engagement letter, each of which gave differing impressions as to the size of the liability cap. The judge decided that the parties had agreed to increase the original liability cap to £15m as evinced by the third version of the engagement letter. There is no appeal against that decision.
  6. By the end of the first quarter of 2007 it became clear that Evo was not performing as well as had been expected and was experiencing cash flow problems. By July 2007 Mr Hunt was told that Evo was at risk of financial collapse without further investment. On 13th August 2007 Mr Hunt caused Swynson to grant a further facility of £1.75m to EMSL (the "2007 Loan") through a drawdown of £1.25m on 14th August 2007 and £500,000 on 1st October 2007. Interest was set at 5.5% above base rate, with a minimum base rate of 5.75%. There was also a facility fee of £2,400 per month. The loan was repayable on 31st October 2007.
  7. By the end of October 2007 EMSL should have repaid the 2006 Loan and the 2007 Loan (total: £16.75m). It had failed to do so. There were also interest payments and other fees outstanding. By May 2008 EMSL had not made any interest payments in over six months. Mr Hunt gave evidence that if there was to be any chance of protecting the initial investment he had no choice but to support Evo until it could be floated on a stock exchange or financed by a private equity investor, which was not possible at that time. Mr Hunt therefore decided to provide to Evo, through a loan to EMSL by Swynson, a further £3m on 4th June 2008 (the "2008 Loan"). The Loan was to be repaid by 1st May 2010 by monthly instalments. Interest was charged at 1.5% over LIBOR in addition to an exit fee of 2% per annum from drawdown to repayment. In addition, the EMSL shareholders agreed that Henley Trustees Ltd's 25% shareholding in EMSL (held on behalf of Mr Hunt) would be converted into 85% preferred ordinary shares thereby giving Mr Hunt majority control of EMSL.
  8. At the end of 2008 there was what the judge described as a "refinancing of the 2006 and 2007 Loans". What happened was that on 31st December 2008 EMSL and Mr Hunt entered into a loan agreement whereby Mr Hunt made funds available to EMSL in the sum of £18,663,306.59 (the judge called this "the 2008 Partial Refinance"). EMSL then paid Swynson £17,015,000 which was the totality of the sums due under the 2006 and 2007 Loans, leaving only the 2008 Loan outstanding. The 2008 Partial Refinance was made partly because, now that Mr Hunt had become the majority owner of EMSL, Swynson and EMSL had become connected entities and, if the current structure of the loan continued, tax would be payable on interest due from EMSL to Swynson even though EMSL continued to default on such payments and partly because it was, in any event, thought to be better for Swynson not to have an impaired debt on its books. For those reasons Mr Hunt had been advised that the loans should be restructured by his arranging for EMSL to pay off most of the sums due with the monies provided by (and now owed to) Mr Hunt personally.
  9. Evo continued to encounter severe financial difficulties. On 31st May 2011 Mr Hunt exercised his rights under his loan and associated debentures to cause Evo to transfer real property in Iowa worth approximately £1.39m to him, which was sold a couple of years later for a net sum of approximately £1.36m. On 5th October 2011 an agreement was entered into whereby Evo's business was surrendered and transferred to a company called Global Medical Holdings LLC which was indirectly owned and controlled by Mr Hunt. This company continued to make efforts to realise value from Evo, but ultimately a decision was taken to wind the company down. Neither Mr Hunt nor Swynson received any monies from the realisation. Collections from debtors were absorbed by payments to creditors and continuing losses. The remaining stock was virtually unsaleable and there was nothing left. Neither the 2008 Loan nor the loan constituted by the 2008 Partial Refinance have ever been repaid. These are the circumstances in which the respondent claimed to recover the amounts of the 2006, 2007 and 2008 Loans as losses resulting from HMT's breach of duty.
  10. HMT says that it can only be liable for the amount of the 2008 Loan because EMSL has repaid the 2006 and 2007 Loans. The judge held that that repayment, effected as it was by the 2008 Partial Refinance was collateral to the loss caused by HMT's breach of duty, or (as some lawyers put it) res inter alios acta, and did not extinguish Swynson's loss in respect of the 2006 and 2007 Loans. She accordingly awarded damages against HMT in the amount of those loans (and the 2008 Loan) subject to the cap. She did not therefore have to consider alternative arguments by Swynson in relation to unjust enrichment and the so-called doctrine of transferred loss. These are now raised by a respondent's notice.
  11. Avoided Loss: Collateral or non-collateral?

  12. It is, of course, the law that an innocent party, who claims for breach of contract, is under a duty to take reasonable steps to mitigate his loss. In so doing, he may bring about a situation in which his loss is partly or wholly avoided. In this category of cases a question will arise whether that avoided loss has to be brought into account in assessing his damages. It may also be the case that a claimant's loss is partly or wholly avoided despite his taking no steps to mitigate his damages. The principles governing the assessment of damages are (or, at any rate, should be) similar in both categories of case. It is usually said that, if the transaction giving rise to the avoided loss arises by virtue of circumstances which are collateral to the breach of contract, the avoided loss need not be brought into account; but if the transaction giving rise to the avoided loss arises out of the consequences of the breach and in the ordinary course of business it is to be taken into account.
  13. Typical examples of the second category of avoided loss, which is not brought into account because it is collateral, are insurance payments, benevolent payments and disablement (and other) pension payments, see Bradburn v Great Western Railway Co (1874) L.R. 10 Ex. 1, Redpath v Belfast and County Down Railway [1974] N.I. 167 and Parry v Cleaver [1970] AC 1 in which Lord Reid (at 15E) put the principle down to the "intrinsic nature" of the payments.
  14. Cases in the first category where the claimant has sought to mitigate his loss sometimes give rise to difficult questions. In Jebsen v East and West India Dock Co. (1874) L.R. 10 C.P. 300 delay caused by a charterer in discharging cargo caused the shipowner to lose passengers whom he had contracted to carry but he was able to take the same passengers in another of his vessels. It was held that the shipowners' damages were not to be reduced on that account.
  15. In British Westinghouse Co Ltd v Underground Electric Railways Co Ltd [1912] AC 673 buyers of eight steam turbines and turbo alternators claimed damages because the turbines did not meet the contractual specification and had to be replaced with eight new Parsons machines. The arbitrator held that the purchase of the new Parsons machines was a reasonable act of mitigating what would otherwise have been a loss incurred over the whole life of the original machines. He also held that the Parsons machines were so superior in efficiency and economy that the buyers were better off having the Parsons machines and the question was whether that benefit (or avoided loss) should be brought into account. This court held that it need not be but the House of Lords took the view that it should be brought into account. Viscount Haldane LC enunciated the principle in the following way (page 680):-
  16. "… provided the course taken to protect himself by the plaintiff in such an action was one which a reasonable and prudent person might in the ordinary conduct of business properly have taken, and in fact did take whether bound to or not, a jury or an arbitrator may properly look at the whole of the facts and ascertain the result in estimating the quantum of damages … The subsequent transaction, if to be taken into account, must be one arising out of the consequences of the breach and in the ordinary course of business."

    The Lord Chancellor then distinguished Bradburn saying that the reason for that decision was that it was not the accident (for which the defendant was liable):-

    "but a contract wholly independent of the relation between the plaintiff and the defendant which gave the plaintiff his advantage."
  17. The judge, relying on this statement of principle, as well as dicta in the dissenting judgment of Staughton LJ in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1992) 30 Con. LR 1 at page 21 and Rix LJ in Mobil North Sea Ltd v P J Pipe & Valve Co [2001] 2 All ER (Comm) 289, decided that the 2008 Partial Refinance did not operate to extinguish the loss which Swynson had suffered with regard to the 2006 and 2007 loans. She said (para 54):-
  18. "It is not a transaction that Swynson could have brought about by itself, however eager it was to mitigate its loss. Given the poor record of EMSL in paying the sums due under the loan, there would have been no prospect of selling the debt to a third party for anything like its value, if indeed a buyer could have been found at all. The transaction was peculiar to Swynson in that Mr Hunt would not have funded the repayment of the loan on those terms for any other company. So far as Swynson was concerned, the repayment of the debt was mere good fortune albeit that Mr Hunt had his own tax reasons for taking over the loan. To adopt the wording used by Viscount Haldane in British Westinghouse the 2008 Partial Refinance was not something that Swynson brought about in the ordinary course of business in order to mitigate the consequences of HMT's negligence."
  19. Mr David Turner QC for HMT submitted, in reliance on obiter remarks of Stephenson LJ in London and South of England Building Society v Stone [1983] 1 WLR 1242 at 1261 D-G (which had not been cited to the judge) that any repayment of a loan must be taken into account in an action for damages against a surveyor or accountant for breach of a relevant duty of care. He also criticised the references made by the judge (at paras 20 and 48) to the fact that "Mr Hunt personally took over the loan from Swynson" and to Mr Hunt's lack of intention to relieve HMT from liability for their breach of duty.
  20. It is, of course, right as Stephenson LJ said in Stone's case that, if a debt incurred pursuant to negligent advice given to a lender has been repaid, that repayment must ordinarily be brought into account in an action by the lender against the adviser. But Stephenson LJ was not seeking to cover every conceivable case (see page 1262B) and there can, to my mind, be no inflexible rule to that effect. If the lender is in no position to exert any influence on the borrower to repay the loan and the borrower is unable to repay, no repayment will be made and there will be nothing to bring into account. Nor can the loan be sold on the open market since it will have no value and the negligent adviser will be liable in full. If in these circumstances Mr Hunt had given the amounts of the 2006 and 2007 loans to Swynson (so that Swynson could balance its books) from Swynson's point of view that would be an act of benevolence and no one could sensibly suggest that any such payment should enure to the benefit of the negligent adviser (Mr Turner did not concede this point but did not suggest any basis on which a court could decide that such payment would have to be taken into account). To hold that a different result should occur merely because the payment is made through EMSL would be a triumph of form over substance. That is not to pierce the corporate veil despite Mr Turner's submission to the contrary. It is merely to disregard technicalities as proposed by Lord Reid in Parry v Cleaver [1970] AC 1 at 14A when about to explain why payments made by reason of benevolence should not be brought into account when damages are assessed. The judge was, of course, aware that the corporate veil should not be pierced since that was the reason why she held in an earlier part of the judgment (para 55) that HMT owed no duty of care to Mr Hunt.
  21. Swynson was in no position to mitigate its loss resulting from HMT's negligent advice and did not do so. This case is, therefore not strictly within the first category of case referred to in paragraph 10 above and it may be said that the principle enunciated by Viscount Haldane LC in Westinghouse is not strictly applicable. But I have already said that even in the second category of case where loss is avoided without steps taken by way of mitigation, that avoided loss should be brought into account if the subsequent transaction (here the 2008 Partial Refinance) arises out of the consequences of the defendant's breach of duty and in the ordinary course of business. It may be the case that the 2008 Partial Refinance arose because of the defendant's breach (see, however, the illuminating analysis of Popplewell J in The New Flamenco [2014] 2 Lloyds Rep 230), but in no way did it arise in the ordinary course of business. As the judge said:-
  22. "Given the poor record of EMSL in paying the sums due under the loan, there would have been no prospect of selling the debt to a third party for anything like its true value, if indeed a buyer could have been found at all."
  23. I do not regard the judge's references in paras 20 and 54 to Mr Hunt taking over the loan as misplaced. She was just looking at the realities of the case as she saw them. Her acceptance of Mr Hunt's evidence to the effect that there was no intention on his or Swynson's part to relieve HMT from its liability for its negligence did not mean that she was looking at the 2008 Partial Refinance as being dependent on Mr Hunt's subjective intention and there is no indication in her paragraph 54 (which constitutes the ratio of her judgment) that she thought Mr Hunt's subjective intention was in any way relevant.
  24. I therefore conclude in agreement with the judge that the repayment made pursuant to the 2008 Partial Refinance need not (and should not) be taken into account for the purpose of assessing the damages for which HMT is liable to Swynson.
  25. I would therefore dismiss this appeal and it is therefore not necessary to say anything about Sywnson's alternative arguments about unjust enrichment or transferred loss. These issues were, however, argued before us albeit in a somewhat truncated way due to shortness of time and I think it right to say something about unjust enrichment to which the majority of the subsequent argument was devoted.
  26. Unjust enrichment

  27. Mr Hugh Sims QC put his case simply on the basis that HMT would be unjustly enriched if it received the benefit of EMSL's repayment of the amounts of the 2006 and 2007 Loans to Swynson. He maintained that all the essential elements of an unjust enrichment claim were present in that, if Swynson had no claim to recover damages in respect of the 2006 and 2007 Loans because those loans had been discharged by the payments made by EMSL (with the money provided by Mr Hunt), (1) HMT would be enriched by being relieved of a substantial liability, (2) that enrichment was at the expense of Mr Hunt (or Swynson), (3) such enrichment was unjust and (4) there was no defence to the claim. He accepted that it was necessary to show some mistake on Mr Hunt's or Swynson's part before the enrichment of HMT could be said to be unjust. He submitted that the mistake was in failing to appreciate that EMSL's repayment would substantially diminish the claim against HMT. He accepted that there was no authority precisely in point but relied, by way of analogy, on cases which decided that a lender, who lends money to a borrower expecting to obtain security which is for some reason invalid and whose money is used to discharge or reduce a pre-existing mortgage, is entitled by way of subrogation to the benefit of the first mortgage. Such cases include Burston Finance v Speirway [1974] 1 WLR 1648, 1652 B-C per Walton J, Paul v Speirway [1976] Ch. 220, 231 E-G per Oliver J and Banque Financière de la Cité v Parc (Battersea) Ltd [1999] AC 221 in which the remedy of subrogation to reverse the relevant unjust enrichment was extended only to the personal rights inherent in the earlier security. He also relied on Menelaou v Bank of Cyprus Plc [2014] 1 WLR 854 where the remedy to which the counterclaiming defendant bank was subrogated was an unpaid vendor's lien.
  28. It seems to me that there are at least two difficulties with Mr Sims' argument. The first is that the only remedy sought by Mr Hunt or Swynson in respect of the alleged unjust enrichment is the remedy of subrogation. One has to ask who is to be subrogated to whose rights against the person unjustly enriched. In the above cases it was the second lender at whose expense the defendant had become unjustly enriched and it was the second lender who claimed in its own name to exercise the rights of the first lender whether those rights stemmed from the first mortgage, from a personal undertaking made to the first borrower or from the unpaid vendor's lien.
  29. In the present case, if Swynson has lost any right to claim the amounts of the 2006 and 2007 Loans as damages (which is the hypothesis on which the unjust enrichment is being advanced) there are no rights in Swynson to which Mr Hunt can be subrogated unless the theory of fictionalised assignment expounded by Lord Hoffmann in Banque Financière at page 236E solves this particular problem. If, on the other hand, it is Swynson itself at whose expense HMT is to be regarded as being unjustly enriched, there is no need for any subrogation; Swynson has its own rights whatever they may be and the most that can be said is that the fact of HMT's unjust enrichment is a good reason for holding that EMSL's repayment of its indebtedness is indeed collateral or "res inter alios acta" which is the conclusion to which I, at any rate, have already come.
  30. In the absence therefore of some abstract claim in respect of unjust enrichment, divorced from the remedy of subrogation, for which the Banque Financière case is no authority (see Cheltenham & Gloucester Plc v Appleyard [2004] EWCA Civ 291 at para 31 per Neuberger LJ), I do not see how Mr Sims' arguments about unjust enrichment can succeed.
  31. The second difficulty is that it is by no means clear that Mr Hunt or Swynson have the necessary finding of fact relating to mistake. It is here that the judge's acceptance of Mr Hunt's evidence, that there was no intention on his or Swynson's part that the refinancing exercise should relieve HMT from any liability assumes importance. The question is not so much whether there was an intention to relieve HMT from liability but whether Mr Hunt paid the money or Swynson accepted the repayment from EMSL in the mistaken belief that HMT's liability would be unaffected. Since the probability is that no consideration was given to the matter at all, the evidence of the mistake, which is necessary if HMT's enrichment is to be considered unjust, is missing. The case thus probably falls into the category of mere causative ignorance rather than that of incorrect conscious belief or incorrect tacit assumption and would not therefore qualify for unjust enrichment, see Pitt v Holt [2013] 2 AC 108 para 108.
  32. For these reasons if Swynson cannot make good its claim against HMT pursuant to the ordinary law of damages, I do not consider that it, or Mr Hunt, can have an alternative claim for subrogation based on the principles of unjust enrichment.
  33. Transferred Loss

  34. I do not, in these circumstances, think it necessary or appropriate to consider the further claim by Swynson or Mr Hunt based on transferred loss. It is not an argument readily open in this court in the light of its rejection in the House of Lords in Leigh and Sillivan Ltd v Aliakmon Shipping Co Ltd [1986] AC 785, 819-820.
  35. Conclusion

  36. I would, in the event, dismiss this appeal and uphold the order made by Rose J.
  37. Lord Justice Davis:

  38. I would be for allowing this appeal.
  39. As found by the judge, the 2006 loan was made by Swynson in reliance on the advice of HMT. That advice was negligent. Swynson would never have made the 2006 loan (or, it may be, the 2007 loan) but for that negligent advice. In such circumstances, and in accordance with ordinary compensatory principles, I would expect the measure of Swynson's damages accruing by reason of such negligence to be assessed by reference to the amount of the capital advanced, perhaps with any outstanding interest, less the amount of any repayments made by the borrower.
  40. On that approach – in my view, the correct approach – it is evident that, in the circumstances of this case, Swynson has suffered no loss. The entire amount of the 2006 loan (and 2007 loan) was paid off in 2008 by EMSL, the borrower. It was paid off by utilisation of the funds injected into EMSL by Mr Hunt under the Loan Agreement of 31 December 2008. EMSL's obligations to pay Swynson under the 2006 and 2007 Loan Agreements were thereby discharged; and Swynson's rights of repayment under those Agreements were satisfied in full. In my view, in a nutshell, that is dispositive of the matter.
  41. That Mr Hunt never appreciated – to the extent that he thought about it – that his cash injection into EMSL for this purpose might have the consequence of nullifying an effective claim on the part of Swynson against HMT seems to me to be neither here nor there. In fact, it seems to me to be neither here nor there whether or not it was even appreciated by December 2008 that HMT may have been negligent.
  42. This case is not about mitigation as such. Rather, it is about avoidance of loss. I simply do not see, in the circumstances of this case, the availability of an argument that what happened here was res inter alios acta and that HMT should not be permitted to benefit from the financing supplied by Mr Hunt. The essential fact remains that this was a refinancing of EMSL whereby the 2006 and 2007 loans were repaid by EMSL to Swynson in full.
  43. That this is not to be regarded as res inter alios acta or some kind of collateral transaction is, in my view, demonstrated by the structure of the repayment. Swynson was not repaid by some third party, whether or not acting "benevolently". Swynson was repaid by EMSL itself – the counter party to the loan agreements – pursuant to the covenants to repay contained in the loan agreements procured by the negligence of HMT. The causal connection is therefore plain: and the avoidance of loss to Swynson has been achieved by the very party who was otherwise in breach of the contract. This therefore cannot be regarded as a collateral matter.
  44. It was submitted that had only the necessary payment been made personally by Mr Hunt directly to Swynson, rather than through EMSL, then the substantive claim of Swynson for damages against HMT would have survived. I am prepared to accept for present purposes that that may be so. It is accordingly submitted on that basis that simply because Mr Hunt – ultimate controller of all these companies – routed the payment via EMSL that should not give rise to any different result: otherwise this would, it is said, give rise to a triumph of form over substance. It is said that one must have regard to the "realities of the case". It is in essence, I think, that argument which appealed to the judge and appeals to Longmore LJ and to Sales LJ.
  45. I am afraid that I disagree. One cannot simply disregard the actual form which the transactions took, with a view to achieving what perhaps may appear (to some) to be a "just" result. In fact, as I see it, the form here is the substance. The commercial form which the 2008 arrangements took – and designedly took – was that Mr Hunt (not, I note incidentally, acting "benevolently" but through hard-headed commercial considerations) made the loan to EMSL. EMSL then, as required by clause 3.2 of the Loan Agreement of 31 December 2008, used most of that money to discharge its obligations to repay Swynson. It does not seem to me to be legitimate in such circumstances to say that, in effect, it was "all Mr Hunt". This is not a mere technicality. One cannot ignore the corporate structures involved. On the contrary, they must be respected. I am not able to agree with Longmore LJ that the contrary approach is "merely to disregard technicalities". Indeed, in the first part of her judgment relating to duty of care the judge had expressly rejected an argument that the corporate veil could be lifted such that Swynson could be equated with Mr Hunt. The same must be true for EMSL (cf. Prest v Petrodel Resources Ltd [2013] 2 AC 415, [2013] UKSC 34). Accordingly the repayments to Swynson were not to be regarded as made by Mr Hunt or by some third party. They were made, and were to be regarded as made, by the borrower itself: that is, EMSL.
  46. As I see it, this overall approach also is in accordance with the approach indicated in the (obiter) remarks of Stephenson LJ in London and South of England Building Society v Stone [1983] 1 WLR 1242. That was a case involving negligent advice given to a lender where the point falling for actual decision does not precisely correspond to the present case. Nevertheless in the course of his judgment Stephenson LJ said this at p.1261:
  47. "The borrower's obligation to repay was therefore not so collateral or remote as to be disregarded altogether in measuring the lenders' loss, and although the valuer was not a party to the mortgage, and the mortgage was literally res inter alios acta, it was a transaction with which the valuer's report and valuation and breach of duty were closely connected, as now demonstrated by the decision of Park J in Yianni v Edwin Evans & Sons [1982] QB 438. If, therefore, the borrowers had suddenly found themselves in sufficient funds to repay the lenders' advance, and had repaid it in full before the valuer's liability was established, I do not see how the lenders could have recovered more than nominal damages, or perhaps some expenses in investigating the condition of the property, because the lenders would have suffered no loss in consequence of the valuer's breach of duty. There are, of course, cases in which the lender can recover damages from a wrongdoer for tort and breach of contract, notwithstanding that he has been already compensated, e.g. by benevolence, private or public, or by insurance (though he had paid premiums for that), and the wrongdoer cannot get out of paying compensation himself by relying upon the uncovenanted benefit conferred on the plaintiff by another: see Parry v Cleaver [1970] AC 1, 14, per Lord Reid. But if an advance secured by the borrower's reliance on a false valuation of a property becomes in fact an advance which needs no security, but is repaid without recourse to the property, then in my judgment the valuer may be fortunate enough to be able to rely on the borrower's repayment in diminution of the lender's loss and of the compensation he is legally liable to pay for it."

    I agree with those observations, which also accord in this respect, I think, with the approach of Sir Denys Buckley in that case (albeit he dissented in the result).

  48. An illustration of this approach can further be found in the case of Preferred Mortgages Ltd v Bradford & Bingley Estate Agencies Ltd [2002] 1 PNLR 35, [2002] EWCA Civ 336 which Mr Turner QC, for HMT, cited to us. In that case, a mortgage advance had been made in reliance on negligent valuation advice. In due course, a further advance was made by way of effective re-mortgage. It was held that the re-mortgage had the effect that no loss resulted from the negligent advice on which the original advance was based. Once the original mortgage was redeemed the (inchoate) liability of the negligent valuers had ceased. At paragraph 29 of his judgment, Latham LJ, with whom Buxton LJ and Sir Martin Nourse agreed, said this:
  49. "In any case such as this, the important question is, what is the scope of the duty of care undertaken by the valuer? The scope of the duty of care is determined by the transaction itself. As Lord Nicholls indicated, it is in relation to the transaction that one determines the liability of the valuer. The transaction in the present case was the mortgage which was granted on the basis of the respondent's valuation in January 1997. That transaction resulted in no loss to the appellants by reason of the fact that the mortgage, which was the consequence of the valuation, was fully redeemed. It follows that, although there might have been an inchoate liability to the appellants by the respondents as a result of the assumed negligent over valuation between March and November, once November came and that mortgage was fully redeemed, that liability ceased because that transaction had pro tanto been satisfactorily completed."

    That, if I may say so, seems to me to be plainly right.

  50. These cases also, in my view, show that invocations of the "adventitious" or "fortunate" nature of the means of repayment of the original loan cannot necessarily carry the day (cf. the observations of Staughton LJ in the Court of Appeal in Linden Gardens Limited v Lenesta Sludge Disposals Limited (1992) 30 Con LR 1). Suppose, for example, that a loan is made to an individual borrower in reliance on negligent valuation advice without which the loan would never have been made. Suppose, too, that the security, negligently valued, is worthless and that the individual borrower is otherwise without assets. The negligent valuer, in the ordinary way, thus faces liability for the full amount of the loan. But then suppose that the borrower receives an unexpected inheritance from a distant relative or a win on the lottery, by means of which he is able to repay, and does repay, the lender in full. As I see it, the negligent valuer then has no substantive liability in damages: just because the lender has, in the event, suffered no loss. That the lender has suffered no loss is by reason of purely adventitious circumstances: but that, in such a context, makes no difference. So here, in my opinion.
  51. Mr Sims QC for the respondents placed some reliance on the judgment of Rix LJ in Mobil North Sea Limited v PJ Pipe and Valve Company Limited [2010] EWCA Civ 714. But that case is, I think, readily distinguishable. In that case it would seem – although the facts are not altogether clear – that the main contractor had already paid for the replacement of the defective valves: and it was in such circumstances that entry into the subsequent settlement agreement was not to be regarded as an act of mitigation extinguishing the loss. That case is in any event quite different from the present case. In the present case, Swynson did nothing at all, by way of mitigation or otherwise, other than receive the sum from EMSL pursuant to EMSL's obligation to repay the loans: thereby avoiding any loss.
  52. I should also add that I do not regard it as particularly helpful to talk in rather colourful terms, as Mr Sims did, of the claim against HMT otherwise potentially disappearing down some "black hole". It is simply – if more prosaically – to be ascribed to there being no loss ultimately flowing from the negligence. That is not an uncommon occurrence in many contexts.
  53. Accordingly, in so far as the judge sought to justify the conclusion which she reached by reference to the "mere good fortune" of Mr Hunt intervening as he did I cannot agree that this requires a conclusion in favour of the respondents. Indeed, any subsequent refinancing by a borrower in any given case is, from the perspective of a negligent valuer who had advised on the original loan, in a sense likely to be adventitious. That it was Mr Hunt who provided the money, and that EMSL could not otherwise have refinanced the original loan, therefore seems to me to be beside the point.
  54. The judge sought to rely on the observations of Viscount Haldane in the British Westinghouse case [1912] AC 673 (as set out by Longmore LJ): in that the 2008 refinancing arrangements were not, as she found, brought about "in the ordinary course of business". But Viscount Haldane had, in that passage of his speech, been talking in terms of acts of mitigation as such: not – which is the present case – in terms of whether loss had been incurred. In any event I consider it irrelevant in this case that Swynson could not in the ordinary course of business have sold the benefit of the Loan Agreement or that EMSL could not itself in the ordinary course of business have arranged refinancing in the commercial market. Indeed Swynson itself was seemingly not in a position to undertake any acts of mitigation at all. Thus Swynson did not bring about the 2008 loan: Mr Hunt did. The point remains that EMSL was (through the funds received from Mr Hunt) able to – and did – refinance and thereby discharge its contractual obligations under the 2006 and 2007 loans to Swynson.
  55. Accordingly I consider that the appeal of HMT should succeed on this issue of loss.
  56. As to the arguments raised on the respondents' notice in seeking to uphold the judge's decision, I am in respectful agreement with the reasoning of Longmore LJ.
  57. As Longmore LJ points out, the evidence does not show – nor was there any finding – that Mr Hunt made the payment to EMSL acting under some positive mistake. The most that the evidence indicated is that, in so far as anyone considered the point at all (and they probably did not), they had not appreciated that any substantive claim against HMT might be lost. In any event, as Longmore LJ further points out, if (as is my own conclusion) Swynson has suffered no loss then there is no obvious right to recover loss to which Mr Hunt can be subrogated. I can see no real answer to this.
  58. Mr Sims sought as one element of his argument to invoke, by analogy, a right to subrogation by reference to insurance cases. That cannot possibly work. On no view did Mr Hunt or Swynson participate in the giving or receiving of an implied indemnity in the circumstances of this case. Equitable subrogation perhaps gave Mr Sims rather more room to manoeuvre, if only because of the rather elusive nature of the principles attaching to the remedy of equitable subrogation (notwithstanding the degree of order sought to be restored by Neuberger LJ in his judgment in Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291). But in circumstances where Mr Hunt made no repayment himself to Swynson and where Swynson has (as I consider) suffered no loss that cannot assist the respondents' argument.
  59. Mr Sims did in this context also seek to rely on cases in which a security right such as an unpaid vendor's lien may be, in the phrase used, "kept alive" notwithstanding the payment of the original vendor. But such cases are far removed from the present: and it was noticeable that the respondents could cite no authority whereby, in circumstances corresponding to the present, a subsequent lender was subrogated to a personal claim in damages against a negligent adviser of the original lender. Indeed in the present case it can be said that Mr Hunt got precisely what he bargained for. He made his loan, on commercial terms, to EMSL under the Loan Agreement of 31 December 2008; and EMSL then, as required under the terms of that Loan Agreement, repaid Swynson. In such circumstances it is most difficult to see how or why principles of subrogation should feature.
  60. Moreover such a claimed remedy has, to my mind, the further unacceptable consequence of opening up the liability of a valuer to a potentially indeterminate class, over and above the lender to whom the original valuation advice was given and duty of care undertaken. Moreover that would be so in circumstances where, in the present case, there was an express prohibition on assignment without consent of the original engagement terms of HMT by Swynson. To allow the respondents a remedy, by means of subrogation, which goes beyond the original bargain made is most unattractive.
  61. Mr Sims also sought, rather faintly, to rely upon the principle of transferred loss, as it has been styled, as set out in the decision of the House of Lords in The Albazero [1997] A.C. 704. This present case is a hundred miles, if not more, removed from that case. If the respondents cannot succeed either on the ground accepted by the judge or on the ground of subrogation – as, in my view, they cannot – they cannot succeed on this further ground. I think it unnecessary to say more on that issue.
  62. Accordingly I would for my part allow the appeal. I would accept the arguments advanced on behalf of the appellant. I would reject the arguments raised in the respondents' notice.
  63. Lord Justice Sales:

  64. I agree with Longmore LJ that this appeal should be dismissed, for the reasons given by him.
  65. I consider, on the authority of Parry v Cleaver [1970] AC 1, that the principles governing whether some matter which reduces loss is to be regarded as collateral (or, in old legal language, res inter alios acta), and hence to be left out of account when deciding whether damages are payable in respect of that loss, are intended to reflect practical reality and basic justice as between the three persons involved: the person who has suffered the loss, the person who is in law responsible for causing the loss and the third party who has made a payment which reduces that loss. As Lord Reid said at p. 13H, "The common law has treated this matter as one depending on justice, reasonableness and public policy." He went on to observe at p. 15E, "... the distinction between receipts which must be brought into account and those which must not must depend not on their source but on their intrinsic nature."
  66. To my mind, this approach requires a court to focus on the substance of the matter, as against the technical form which may have been adopted by the third party in choosing how to benefit the person who has suffered the loss. The contrary approach preferred by Davis LJ would place a huge premium on the particular form chosen for a transaction intended to benefit that person, which seems to me remote from the practical reality and justice of the matter. If Mr Hunt had chosen to provide funds directly to Swynson to help shore up its financial position, rather than paying money to EMSL for EMSL to use to repay the loan from Swynson to achieve the same object, those funds would not have diminished the damages payable by HMT. In my view, the fact that for tax reasons which had nothing to do with the merits of the position as between Mr Hunt, Swynson and HMT the funds were formally channelled to Swynson via a loan by Mr Hunt to EMSL to allow EMSL to repay the 2006 and 2007 loans Swynson had made to it is not something which affects the substantive position or the just result as between those three parties. I also think that the substantive approach I favour is supported by the views of the Appellate Committee in the Banque Financière case in relation to the cognate area of unjust enrichment, where the interposition of a loan to a Mr Herzig between the paying claimant (B.F.C.) and the enriched defendant (O.O.L.) was held to be a matter of form which did not alter the substance of the transaction and so did not affect the entitlement of the claimant to maintain a claim in unjust enrichment directly against the defendant: see [1999] 1 AC 221, 227B-C per Lord Steyn.
  67. I agree with Davis LJ that if EMSL had, say, won the lottery or been left a large sum in someone's will and used the funds it thereby received to repay the loans from Swynson, Swynson's loss would in fact have been reduced and in a way which should properly be brought into account when assessing whether HMT ought to pay compensation to Swynson. But that is because in that situation there would be no reasons of "justice, reasonableness and public policy" to indicate that they should not be brought into account. Where a person has debts and his fund of assets is increased in this way, he ought to use his available assets to pay his debts.
  68. However, in my judgment, in the present case we are dealing with a different situation, where countervailing reasons of "justice, reasonableness and public policy" are engaged. The negligence of HMT put Swynson and Mr Hunt in an invidious position, in which by reason of his special relationship with and interest in Swynson Mr Hunt felt he had to provide funding to shore up Swynson's position. He did so on uncommercial terms and in a manner which could not be regarded as remotely in the ordinary course of business so far as Swynson was concerned. Though Mr Hunt did not act out of pure benevolence for a person in distress, I think the position is analogous to cases of benevolence of the kind reviewed by Lord Reid in Parry v Cleaver at p. 14A-D. Like benevolent contributors, Mr Hunt certainly did not intend that HMT should benefit from the funding which he was driven to provide to Swynson via EMSL. Nor did he simply pay EMSL money as a general contribution to its fund of assets: the terms of his loan to EMSL were such that it had to pay the money on to Swynson. EMSL had no funds apart from what it received from Mr Hunt with which it could have repaid the 2006 and 2007 loans. In the circumstances, I consider it would be contrary "to the ordinary man's sense of justice, and therefore contrary to public policy" (to use Lord Reid's language) that the funding Mr Hunt was driven to provide to help Swynson in the difficult position in which it found itself as a result of HMT's negligence should be treated as inuring to the benefit of HMT rather than Swynson alone.
  69. I also wish to address, very briefly, the position which I consider would have obtained if, contrary to the main holding by Longmore LJ and myself, the correct analysis had been found to be that Mr Hunt had eliminated the entitlement of Swynson to claim damages from HMT in respect of the 2006 and 2007 loans by lending the funds to EMSL to repay Swynson. On that footing, I would (in respectful disagreement with both Longmore LJ and Davis LJ) have held that Mr Hunt had made out a good claim in unjust enrichment such that he would have been entitled to be subrogated in equity to Swynson's damages claim against HMT.
  70. Since, in light of the decision on the appeal, the point does not arise and since I am in a minority in relation to it, I do not think it would be right to lengthen these judgments by an extended discussion of it. I readily acknowledge that my view is based on what I would regard as the plain justice of the case which would have arisen on this hypothesis. In my opinion, in the circumstances of the hypothesis, the law of unjust enrichment would operate according to straightforward and established principles so as to support the remedy of subrogation in this situation.
  71. Applying the analytical framework in Banque Financière at p. 227A-B per Lord Steyn and at p. 234C-D per Lord Hoffmann, I think that HMT would have been enriched at Mr Hunt's expense; that the enrichment would have been unjust; and that no defence would be available. In my view, the factor making the enrichment unjust would have been the mistake of Mr Hunt in thinking that he could safely structure the channelling of funds to Swynson in the way that he did, without affecting the liability of HMT to Swynson. On the facts, I do not think there is any chance that Mr Hunt would have made the payments in the way he did had he thought they might have the effect (which, on this legal analysis, they would have had) of eliminating the liability of HMT in respect of the 2006 and 2007 loans: see para. [48] of the judgment below. In my opinion, although on this hypothesis Mr Hunt's money would actually have served to eliminate HMT's liability to Swynson in respect of those loans, the law would regard that liability as extant for the purposes of allowing Mr Hunt to be subrogated to Swynson's rights against HMT in order to provide an appropriate remedy to reverse the unjust enrichment which would have occurred: compare Banque Financière [1999] 1 AC 221, 236 per Lord Hoffmann, and Menelaou v Bank of Cyrpus plc [2014] 1 WLR 854, [17]-[18] and [48], per Floyd LJ.
  72. Having said this, however, I consider that the principles discussed in Parry v Cleaver provide a simple and more direct way in which justice can be achieved between the relevant parties. Like Longmore and Davis LJJ, I do not think it is necessary or helpful to address the respondents' further alternative case, based on the rules governing so-called "transferred loss".


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