Lowick Rose LLP v Swynson Ltd & Anor [2017] UKSC 32

Swynson lent £15m to EMSL based on negligent due diligence by HMT accountants. Mr Hunt later personally funded EMSL's repayment of the loan. The Supreme Court held HMT escaped liability as Swynson's loss was extinguished by repayment, rejecting arguments based on res inter alios acta, transferred loss, and unjust enrichment.

Facts

Mr Michael Hunt, a wealthy investor, controlled and beneficially owned Swynson Ltd, which he used as a vehicle for high-risk lending. In October 2006, Swynson lent £15m to Evo Medical Solutions Ltd (EMSL) to finance a management buy-out of an American medical equipment distributor. Hurst, Morrison Thomson (later Lowick Rose LLP, or ‘HMT’) were jointly instructed by Swynson and EMSL to carry out due diligence on Evo. Their report negligently failed to identify fundamental problems with Evo’s working capital.

Evo subsequently developed severe cash-flow problems. Swynson advanced further loans of £1.75m (2007) and £3m (2008). By July 2008, Mr Hunt had become controlling shareholder of EMSL with 85% of the equity.

On 31 December 2008, Mr Hunt personally lent £18.663m to EMSL on an interest-free basis, with the express requirement that EMSL apply the funds in satisfaction of the 2006 and 2007 loans owed to Swynson. The refinancing was undertaken because (i) UK close company tax legislation meant Swynson was assessable to tax on unpaid interest after Mr Hunt acquired control of EMSL, and (ii) Mr Hunt wished to remove a large non-performing loan from Swynson’s books. EMSL duly discharged the 2006 and 2007 loans.

Swynson and Mr Hunt sued HMT. Liability was conceded at trial. Rose J awarded £15m (the contractual cap) on the basis that the December 2008 refinancing was res inter alios acta. The Court of Appeal upheld the award by majority. HMT appealed to the Supreme Court.

Issues

The issues, as Mr Hunt’s personal duty claim had been abandoned, were:

1. Whether the December 2008 refinancing was res inter alios acta, such that it should not reduce Swynson’s recoverable loss.
2. Whether Swynson could recover on the principle of transferred loss in respect of loss suffered by Mr Hunt.
3. Whether HMT had been unjustly enriched at Mr Hunt’s expense, such that Mr Hunt should be subrogated to Swynson’s claim against HMT.

Arguments

Swynson and Mr Hunt

It was argued that the repayment was collateral and should be disregarded; alternatively, that the principle of transferred loss permitted Swynson to recover the loss in fact suffered by Mr Hunt; and further, that HMT had been unjustly enriched at Mr Hunt’s expense by virtue of the discharge of the loans, with Mr Hunt entitled to subrogation. Mr Hunt relied on evidence (accepted by the trial judge) that he never intended to relieve HMT of liability and considered the claim against HMT unaffected by the refinancing.

HMT

HMT submitted that the loans had been repaid and Swynson had thus suffered no loss; the refinancing was not collateral but discharged the very liability constituting the loss; transferred loss did not apply as the engagement was not for Mr Hunt’s benefit; and there had been no defective transaction giving rise to a subrogation claim because Mr Hunt obtained precisely what he bargained for in the refinancing.

Judgment

Res inter alios acta

Lord Sumption (with whom Lord Neuberger, Lord Clarke and Lord Hodge agreed) held the general rule is that loss which has been avoided is not recoverable. Collateral benefits are those whose receipt arose independently of the loss-creating circumstances. The repayment of the 2006 and 2007 loans could not be regarded as collateral: it discharged the very liability constituting Swynson’s loss. Mr Hunt’s loan to EMSL was a distinct transaction for valuable consideration, and was not an indirect payment to Swynson. Nor could it be characterised as cost of mitigation, since the refinancing was not Swynson’s act.

Transferred loss

The principle is a limited exception driven by legal necessity, applying where the known object of a transaction is to benefit a third party. Mr Hunt did not suffer loss as the owner of property transferred to him; only the broader principle (per Lord Griffiths in Linden Gardens) could potentially assist, but its application was unnecessary to decide. The engagement of HMT was not in any sense for Mr Hunt’s benefit (the principal reason no duty was owed to him personally), and Mr Hunt’s loss arose from the December 2008 refinancing, which had nothing to do with HMT’s breach.

Unjust enrichment and subrogation

Equitable subrogation as a remedy for unjust enrichment operates to reverse unjust enrichment where a transaction has been defective, in the sense that the claimant paid money on the basis of an expectation which failed. Reviewing Banque Financière de la Cité v Parc (Battersea) Ltd, Boscawen v Bajwa, Cheltenham & Gloucester v Appleyard and Bank of Cyprus v Menelaou, Lord Sumption emphasised that subrogation cannot confer a greater benefit than the claimant bargained for, and that the rule operates to replicate the missing element of the same transaction.

The December 2008 refinancing was not a defective transaction. Mr Hunt received everything for which he stipulated: the covenant to repay, security over EMSL’s assets, the tax advantage and the removal of an impaired debt from Swynson’s books. He took the commercial risk of EMSL’s insolvency with his eyes open. His mistake, properly analysed, was a misunderstanding that as owner of Swynson he was entitled under its contract with HMT — an error about an entirely different transaction. Subrogation could not be used as a ‘general escape route from any principle of law which the claimant overlooked or misunderstood’.

Lord Mance, in a concurring judgment, reached the same conclusion by a slightly different route. He accepted Mr Hunt was mistaken in a relevant sense (a conscious belief or tacit assumption that the refinancing would not affect any claim against HMT). However, the transfer of value to HMT was ‘incidental and indirect’, arising from the consequences of deliberately structured arrangements on a separate pre-existing relationship. There was no sufficiently direct transfer of value, no relevant unjust factor, and no benefit bargained for and not received.

Lord Neuberger (with whom Lord Clarke agreed) considered the unjust enrichment claim failed because there was no defect in the transaction itself: Mr Hunt got precisely what he thought he was getting (repayment of the original loan by Swynson and a right to recover the new loan from EMSL). The fact that he did not appreciate the collateral effect on HMT’s liability was not a defect in the transaction.

Implications

Avoided loss and collateral benefits

The judgment reaffirms that for a benefit to be collateral (res inter alios acta), its receipt must arise independently of the loss-creating circumstances. A payment that discharges the very liability constituting the loss cannot be collateral, even where the funds come ultimately from a connected party. The decision draws a clear line between (i) gifts or independent benefits to a claimant, and (ii) third-party funding directed to discharging the loss itself.

Transferred loss

The Supreme Court reiterated the narrow scope of the transferred loss principle. It applies only where the contract is entered into for the benefit of an identifiable third party who will foreseeably suffer the loss arising from a breach. The Court declined to extend the principle to facts where the loss-suffering third party had no relevant connection to the original transaction.

Equitable subrogation and unjust enrichment

This is a significant case for the law of unjust enrichment. The Court emphasised that equitable subrogation as a remedy for unjust enrichment is confined to cases of defective transactions where the claimant fails to receive a benefit he expected to obtain from the transaction. It cannot be invoked to address mistakes about the collateral effect of a transaction on separate, pre-existing legal relationships between other parties. The decision constrains the use of unjust enrichment as a flexible doctrine, reinforcing that ‘the law of unjust enrichment is not a matter of judicial discretion’ and must be applied through ascertainable rules.

Significance

The judgment is important for practitioners advising on commercial restructurings, professional negligence claims and corporate finance arrangements. It reaffirms the strict separation of legal personality between a shareholder and his company — even a sole or controlling shareholder cannot conflate his personal interests with those of the company in seeking to recover loss. It also draws sharp limits around subrogation and unjust enrichment as potential routes to recovery where a refinancing or other transaction has the unintended consequence of extinguishing a third party’s liability.

Verdict: The Supreme Court unanimously allowed HMT’s appeal. Swynson had suffered no recoverable loss in respect of the 2006 and 2007 loans because they had been discharged by EMSL’s repayment funded by Mr Hunt. The arguments based on res inter alios acta, transferred loss and equitable subrogation for unjust enrichment all failed. HMT was therefore not liable in damages.

Source: Lowick Rose LLP v Swynson Ltd & Anor [2017] UKSC 32