A wealthy investor, A, owned and controlled a company (Swynson) which provided £15m of finance to enable a buyout by EMSL of EMS. Swynson instructed a firm of accountants (HMT) to undertake due diligence on EMS, but HMT were negligent, and the concerns for EMS’ finances were sufficient, if known at the material time, to preclude the buyout and the financing by A through Swynson.
On risk of EMS’ financial collapse, Swynson advanced further sums totalling £4.75m and A acquired the majority shareholding in EMSL.
Refinancing of the loans in 2008 was effected by a personal loan by A to EMSL of £18.663m for the specific purpose of repaying Swynson. That loan was repaid, but EMSL eventually ceased business and was unable to meet its liabilities.
Both A and Swynson sued HMT for the losses arising out of the loans. HMT contended that there was no loss because of the discharge of the loan to Swynson and that, implicitly, their liability related only to the due diligence connected with the original advance.
At first instance and in the Court of Appeal, A was successful with an award of damages in the sum of £15m – the refinancing of the loans not being considered to be ‘res inter alios acta’.
The Supreme Court unanimously allowed the appeal.
Res inter alios acta is an exception to the rule that avoidable loss is not recoverable as damages where the payment received is independent of the circumstances giving rise to the loss. It was held that the refinancing was not to be regarded as ‘collateral’ – the transaction discharged the very liability in issue, and the monies were not advanced to Swynson (though it ultimately reached them) – the monies arrived via distinct transactions between different parties and made for valuable consideration.
It made no difference to Swynson for present purposes whether the funding came from A or a bank or other finance provider.
Swynson also sought to argue that HMT were liable under principles of transferred loss, but this was rejected on the basis that it was no part of the intended arrangement that the 2006 transaction would benefit A.
Finally, unjust enrichment, which was raised for the first time in the court of Appeal. Usually, cases of unjust enrichment involve bilateral dealings. This case is an example of the complexities which can arise in multi lateral dealings and the judgments bear close reading.
It was found that HMT were not unjustly enriched by the provision of funds to EMSL to repay Swynson, and that therefore A may not be subrogated to Swynsons claims against HMT.
Lord Sumption assumed for the sake of argument that there was an enrichment, Lords Neuberger and Mance taking the view that there was undoubted enrichment as a result of the discharge by EMSL of the loan to Swynson, the same being a clear avoidance of a pre-existing liability.
Further Lord Sumption concluded that there was enrichment at the expense of A – a matter placed in doubt by Lord Neuberger who drew the distinction between enrichment of Swynson at the expense of A which was clear, and enrichment of EMSL which was not, and Lord Mance who came to the same conclusion but highlighted a series of potential issues illustrating the difficulties.
In any event, all judges concluded that there was nothing unjust about any enrichment by HMT because there was no mistake: the transaction took effect exactly as had been intended, namely the discharge of EMSL’s debt to Swynson and a right to recover the new loan against EMSL. The mere fact that HMT receive a benefit which is unforeseen and incidental consequence of A’s pursuit of those objectives does not establish any normative or basic defect in the arrangements.