Avoidance tactics: looking at loss

When a loss occurs through a professional’s negligence, it is natural and often essential, for the loss to be avoided as quickly as possible.  In commercial contexts, this might involve refinancing a loan or restructuring a transaction that went wrong.

But if this is done so that the loss is avoided, is the claimant prevented from recovering from the professional the loss that it caused in the first place?

In two cases that were before the Court in 2017 the Judges had to consider whether a benefit enjoyed by the claimant after suffering the loss should be taken in to account as collateral in assessing damages. That both cases, Swynson v Lowick Rose LLP [2017] 2 WLR 1161 and Tiuta International v De Villiers Surveyors [2017] 1 WLR 4627, were before the Supreme Court should tell us that it is not an easy question to resolve.

In Sywnson, the claimant company made three loans to a borrower. The claimant relied on professional advice from accountants in making the loans. The accountants’ advice turned out to be negligent; the borrower experienced cash-flow problems and defaulted on the loans.  The controlling shareholder of the claimant company stepped in to lend the borrower money which it could use to repay the claimant company the first two loans. The claimant company then issued a negligence action against the accountants in respect of all three loans.

The accountants conceded liability, but argued that because the claimant company had been repaid the first two loans, it was not entitled to damages arising from negligence relating to those loans because the loss had been avoided.

The claimant argued res inter alios acta (a thing done between others does not harm or benefit others) and that the refinancing did not affect the claimant’s recoverable loss.

Lord Sumption held that the general rule is that loss which has been avoided cannot be recoverable as damages, unless it was a collateral benefit which could not be treated as making good the claimant’s loss. The Court held that collateral payments can be characterised as those where the receipt of benefits for the claimant arises independently of the circumstances arising from the loss. Lord Sumption gave the examples of gifts, or insurance contributions, which he said are tantamount to the claimant making good the loss from his own resources because they are attributable to his own work or contributions.

The defendant in Swynson argued that because the loans had been redeemed by the loan from the shareholder of the claimant company the payment was not truly collateral and so should not be ignored in the assessment of damages. Lord Sumption decided that the association of the claimant shareholder was no more relevant than if the loans had been redeemed by money from a bank or an unconnected third party. The critical point was that the payment discharged the very liability at the heart of the transaction; the loans had been repaid by the borrower to the claimant company and thus the loss had been avoided. The transaction between the shareholder and the borrower was not true collateral and could not be ignored in assessing damages.

The Supreme Court overturned the Court of Appeal’s ruling on this point and reinforced the principled approach, which is not so much concerned about doing justice between the position of claimant, defendant and the unconnected party in making good the loss, but looking at the substance of the transaction.

In Tiuta, the question of collateral benefits arose in the context of a negligent valuation of property, which was the basis of a second loan. The second loan of £3.1m was used to refinance a first loan of around £2.8m. The borrower defaulted on the second loan and Tiuta faced the difficulty of having its damages cut down by virtue of the decision in Preferred Mortgages v Bradford & Bingley Estate which establishes that where a loan is paid off by further borrowing the first loan is treated as being redeemed.   To get around that problem, Tiuta argued that the redemption of the first loan should be treated as a collateral benefit and so should be ignored for the purpose of assessing damages, thus not confining Tiuta’s loss.

The Supreme Court did not accept the argument. Lord Sumption held that “the concept of collateral benefits is concerned with collateral matters. It cannot be deployed so as to deem the very transaction that gave rise to the loss to be other than it was”.

In summary, steps taken to avoid loss, if they go to the heart of the transaction, will only be recoverable if they are completely independent from the circumstances of the loss.

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