The Court of Appeal recently handed down an important decision on identifying loss in Swynson v Lowick Rose.
Facts of the case
In reliance on a negligent due diligence report prepared by Lowick Rose, Swynson advanced a loan to a company, EMSL. As a result of cashflow deficiencies which the due diligence report failed to identify, EMSL defaulted. Subsequently, the entrepreneur behind Sywnson, Mr Hunt, came to acquire majority control of both Swynson and EMSL. With the underlying business of EMSL clearly failing, Mr Hunt decided to inject some £18.6m into it so that it could repay Swynson the loan advanced, which it duly did.
Question for the court
Sywnson then sued Lowick Rose in respect of the deficient due diligence report. The question for the Court of Appeal was whether Sywnson could recover the full amount of the loan advanced to EMSL, notwithstanding the repayment. Rose J held at first instance that Sywnson could so recover. The Court of Appeal agreed, Longmore and Sales LJ in the majority, Davis LJ dissenting. With respect to the majority, I submit that Davis LJ’s dissenting decision was the correct one.
Basis for the majority judgments
The majority judgments of the Court of Appeal proceeded upon the basis that the key question was whether the repayment of the loan should be taken into account when assessing the damages. For this purpose, the court applied the principles of mitigation of loss (British Westinghouse Co Ltd v Underground) and collateral benefits (Parry v Cleaver) and held that, as the repayment did not arise in the ordinary course of Swynson’s business, because the funds had been made available to EMSL by Mr Hunt, the repayment was not to be taken into account.
The correct starting point
In my opinion, to begin by considering questions of mitigation of loss and collateral benefit is really the wrong starting point. As Davis LJ correctly identified, the important, anterior question was whether Swynson had in fact suffered any loss following the repayment (see paragraph 31).
The essential fact was that EMSL, the counterparty to the loan, had itself made the repayment; Swynson had not received a gratuitous or benevolent payment direct from a third party. The repayment discharged the loan agreement and extinguished any relevant loss or damage suffered.
Satisfaction of covenant to repay
This can be proved by reference to the leading cases on the accrual of a cause of action in negligence against a professional advisor arising out of a claimant’s entry into a defective transaction. As established in Nykredit plc v Edward Erdman Ltd, whether a claimant has suffered loss and damage is ascertained by reference to the value of the rights which he receives in the defective transaction (see Lord Nicholls at 1631). (Also see the analysis of Lord Wilson in Maharaj v Johnson.)
In Sywnson, the claimant suffered loss and damage by reason of the fact that the covenant to repay which it received from the borrower, EMSL, was worth much less than it had been led to believe as a result of the due diligence report. Indeed, the covenant with EMSL turned out to be worthless, as was evidenced by EMSL’s default. It was the defective covenant which constituted Swynson’s loss.
However, when the loan facility came to be repaid by EMSL, the covenant to repay was satisfied and discharged. Therefore, the very thing which constituted Swynson’s loss had been extinguished. It was for this reason that I believe Davis LJ was correct to hold that Swynson had suffered no loss.
Repayment extinguishes loss
This analysis is in accordance with the previous decision of the Court of Appeal in Preferred Mortgages v Bradford & Bingley, in which it was held that where a loan was repaid pursuant to a re-mortgage, a claim against negligent valuers in respect of that loan must fail. By virtue of the repayment, no loss had been suffered by the lender “because that transaction had pro tanto been satisfactorily completed” (see Latham LJ at paragraph 29).
The fact that the monies used to redeem the Swynson loan were in fact injected into EMSL by Mr Hunt ought not to detract from the conclusion that Swynson suffered no loss. Mr Hunt, Swynson and EMSL were all separate legal persons, and there was no ground for identifying EMSL with Mr Hunt in order to characterise the repayment as a gratuitous third party payment. Firstly, whatever the source of the monies, the clear intention and effect of the transaction was to redeem the loan (thus ameliorating any loss). Secondly, such an approach runs contrary to the principle of corporate personality, which, as the Supreme Court recently re-affirmed in Prest v Petrodel, is not to be disregarded save in specific, exceptional circumstances.
The Appeal in Swynson raised a difficult point on identifying the loss suffered as a result of complex commercial transactions ensuing as a result of professional advice. However, the view of Davis LJ is to be preferred. Where a borrower complies with its obligation to repay a loan entered into as a result of negligent advice, any loss is extinguished, whatever the ultimate provenance of the monies used for repayment.
