The Supreme Court also found that the accountancy firm, Hurst Morrison Thomson (HMT, later Lowick Rose LLP), had not been unjustly enriched by Michael Hunt's provision of funds to Evo Medical Solutions Ltd (EMSL) to repay Hunt's company, Swynson. This was because none of the underlying transactions were of themselves "normatively defective", the court said. An earlier argument that HMT owed a duty of care to Hunt was not renewed.
Swynson had loaned money to EMSL to facilitate a management buy-out of another company in 2006, in reliance on HMT's admittedly negligent advice. Had the true state of finances been known the transaction would not have happened. EMSL got into financial difficulties, so Swynson made two further loans in 2007 and 2008 in an effort to protect its original investment.
Later in 2008, Hunt, the owner of Swynson, 'refinanced' EMSL with his own money so that it could repay the 2006 and 2007 loans. He had other reasons to do so, including resolving tax difficulties being encountered by Swynson. Only the 2008 Swynson loan was left outstanding. Swynson and Hunt argued that they were entitled to damages for each of the 2006, 2007 and 2008 loans; while HMT responded that it could only be liable for the 2008 loan because the others had been repaid by the lender using its owner's money.
The Court of Appeal found in favour of the lender. It found that Hunt's refinancing of the loan from his own money should be treated as "collateral", arising independently of the circumstances which gave rise to the loss and therefore not discharging that loss. The Supreme Court disagreed.
Lord Sumption said that there was a general rule that "loss which has been avoided is not recoverable as damages", although expense reasonably incurred in avoiding that loss may be recoverable. In this case, the loss arising from the original loans "was made good when EMSL repaid them", he said.
"The fact that the money with which it did so was borrowed from Mr Hunt was no more relevant than it would have been if it had been borrowed from a bank or obtained from some other unconnected third party," he said. "There was nothing special about the fact that Mr Hunt provided the funds, once one discards the idea that HMT owed any relevant duty to him."
"The payments made by Mr Hunt to EMSL and by EMSL to Swynson to pay off the 2006 and 2007 loans could not possibly be regarded as collateral. In the first place, the transaction discharged the very liability whose existence represented Swynson's loss. Secondly, the money which Mr Hunt lent to EMSL in December 2008 was not an indirect payment to Swynson, even though it ultimately reached them, as the terms of the loan required. Mr Hunt's agreement to make that loan and the earlier agreements of Swynson to lend money to EMSL were distinct transactions between different parties, each of which was made for valuable consideration in the form of the respective covenants to repay," he said.
Further, the cost of the refinancing could not be recovered as a reasonable cost of mitigating the loss "because the loan to EMSL was not an act of Swynson and was not attributable to HMT's breach of duty", the judge said.
The court went on to consider whether the principle of 'transferred loss', which allows a third party to recover loss suffered by another in very limited circumstances, applied in this case. It concluded that it did not, as the original loan was for the benefit of Swynson rather than for Hunt himself. There was therefore no "legal black hole" in this case, where the only party entitled to recover was different from the party that suffered the loss, according to Lord Sumption.
"Mr Hunt's loss arises out of the refinancing … which had nothing to do with HMT and did not arise out of their breach of duty," he said.
"Although Mr Hunt lent EMSL the money which was used to pay off the debt, his loss was not attributable to the benefit thereby conferred on HMT. It was purely incidental, for Mr Hunt had no claim against HMT and was not affected by the reduction of their liability. He was affected only by the eventual insolvency of the borrower," he said.
Litigation expert Craig Connal QC of Pinsent Masons, the law firm behind Out-Law.com, said that the case was "another reaction by the UK's most senior court against the process of starting with whether the result seems 'not fair', and leading then to the conclusion that that must be remedied by the judge".
"Black holes are cases where the claim lies with one party though the loss lies with the other, an unpalatable result which from time to time the courts have tried to remedy," he said. "Essentially, the conclusion here was that Mr Hunt gained no assistance from the doctrine which was after all an exception to the general rule that a claimant can only recover his own loss. For the moment, at least, that doctrine should be confined within boundaries which were tightly drawn in earlier cases."
"The court went on to consider the possibility that Mr Hunt was subrogated to the rights of the original lending company, but concluded that that also did not avail him. He had entered the transaction for a series of reasons, all of which had been fulfilled, and had made no arrangements specifically to deal with the claim against the reporting accountants. That being so, although at least Lord Mance expressed some sympathy for Mr Hunt in a supporting judgment, the inventiveness of lawyers in seeking a remedy for him all ultimately fell on barren ground," he said.
Professional negligence expert Michael Fletcher of Pinsent Masons pointed out that Lord Mance also "specifically stated that he considered the Supreme Court's decision consistent with existing case law which may prevent a lender recovering its loss on a loan which it has repaid itself in the process of creating a new, second loan".
"The 2002 Preferred Mortgages case is often relied upon by defendant valuers where lenders have renewed a facility by repaying the original loan themselves," he said.
"Lord Mance emphasised that there is all the difference between an act which benefits the claimant and, as in this case, an act which satisfies the claimant's loss. If Mr Hunt had simply gifted monies to Swynson, rather than specifically providing them for the repayment of the 2006 and 2007 loans, the outcome to this case could have been different," he said.