Accountants' PI: assessment of damages
The Court of Appeal has held that repayments of loans, which had been made in reliance on a negligent due diligent report, did not go to reduce the amount of damages recoverable from a negligent firm of accountants.
Relying on a negligent due diligence report prepared by a firm of accountants, Swynson made loans to Evo, a company specialising in the distribution of medical devices. Swynson was indirectly owned by Mr Hunt. When Evo failed to repay the loans, Mr Hunt, for tax reasons, made funds available to Evo to allow it to repay part of the loans to Swynson.
Swynson brought a professional negligence claim against the accountants. Negligence was not in dispute but the accountants argued that they should not be liable for the amount of the loans that had been repaid. In response, Swynson said that the accountants would be unjustly enriched if they received the benefit of the repayments.
Upholding the first instance decision, the Court of Appeal held that:
- An innocent party who claims for breach of contract is under a duty to take reasonable steps to mitigate its loss. The result may be that the loss is wholly or partly avoided in which case the question is whether the avoided loss should be taken into account in assessing damages.
- A claimant’s loss can also be wholly or partially avoided despite the claimant taking no steps to mitigate the loss.
- The test is 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. If, however, the transaction giving rise to the avoided loss arises out of the circumstances of the breach and in the ordinary course of business it is to be taken into account.
- If a debt incurred as a result of negligent advice is repaid, the repayment must usually be taken into account when assessing damages, but that is not an inflexible rule.
- In the present case, the repayment may have arisen because of the defendant’s breach of duty but it had not arisen in the ordinary course of business. Accordingly the repayment should not be taken into account when assessing the damages for which the accountants were liable.
- Although it was not strictly necessary to rule on the unjust enrichment argument, the Court of Appeal said that Swynson would not have had an alternative claim for subrogation based on the principles of unjust enrichment. There were two difficulties with Swynson’s argument. First, the only remedy sought was subrogation and if Swynson had lost the right to claim the amounts of the repaid loans as damages, there were no rights in Swynson to which Mr Hunt could be subrogated. If, on the other hand, it was Swynson itself at whose expense the accountants were to be regarded as being unjustly enriched, there was no need for any subrogation as Swynson had its own rights. Secondly, it was by no means clear that the necessary finding of fact relating to mistake could be established.
Where a claimant has received a benefit which reduces its loss, in determining whether the benefit should be taken into account when assessing damages, the key question will be whether the transaction giving rise to the avoided loss arose from circumstances which were collateral to the breach of contract. While this decision suggests it may not always be easy for professionals to plead such arguments successfully, mitigation issues should always be carefully considered when defending professional negligence claims.
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