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Supreme Court Rejects ‘Palm Tree’ Justice on Unjust Enrichment, By Joseph Chiffers

Posted by Lynne on April 21st 2017
(Business, Commercial Litigation, commercial litigation and dispute resolution, Litigation)

The case

Lowick Rose LLP (in liquidation) v (Appellant) v Swynson Ltd & another (Respondents) [2017] UKSC 32; see here for the full judgment.

The facts

Swynson advanced the sum of £15m to Evo Medical Solutions Ltd (EMSL) to enable them to finance the management buy out of an American company called Medical Industries America Ltd t/a Evo. The Appellants, a firm of accountants, were jointly instructed by Swynson and EMSL to carry out due diligence on Evo. It was accepted that the Appellant was negligent in carrying out the due diligence and that the Claimant relied on the due diligence when making the aforementioned advance of £15m.

The Managing Director of Swynson, Mr Hunt entered into a loan agreement with EMSL. It was a condition of this loan that EMSL would apply the loan monies in satisfaction of the Swynson loan. The effect of this loan was that no loss had been incurred as a result of the negligent due diligence, because the loan advanced in reliance on the same, was repaid. Mr Hunt made the loan on advice and for tax reasons. The Court at first instance accepted his evidence that he did not appreciate that the affect of the loan would be to absolve the Appellant of their liability for negligence.

The judge at first instance found for the Claimant/Respondent and awarded damages in the sum of £15 m (the judge rejected the argument that a duty of care was owed to Mr Hunt personally and this point was not cross appealed) by virtue of the doctrine of res inter alios acto (a thing done between parties does not harm or benefit others). The Court of Appeal dismissed the appeal and the Defendant appealed to the Supreme Court.

The decision

The Supreme Court allowed the Appeal. The Court held that res inter alio acto had been wrongly applied as the loan advanced by Mr Hunt was not merely a collateral transaction/benefit but discharged Evo’s liability to Swynson; such liability was the basis of the negligence claim against the Appellant/Defendant. The Court declined to apply the doctrines of equitable subrogation or unjust enrichment in favour of the Claimant/Respondent.

Equitable subrogation refers to the situation where A discharges B’s liability to C on the basis of some agreement or expectation that fails. As a consequence of such discharge A is regarded in equity as having been assigned the rights C would have against B had the liability not been extinguished. It is most commonly applied in mortgage scenarios where a mortgage is redeemed by another mortgage company but the security unintentionally fails.

Unjust enrichment is a wider cause of action and refers to the concept where A has provided B with a benefit for which B has provided no consideration. It could apply to a situation where A accidentally makes a bank transfer to B’s bank account.

The principal reason that neither of these concepts were applied, was because the transaction involving Mr Hunt was executed as intended. ‘Unjust’ within the context of the doctrine of unjust enrichment has a specific meaning and is not “of the palm tree variety” (paragraph 116 per Lord Neuberger).

Analysis

This judgment is worthwhile reading for lawyers on a complex and often poorly understood subject.

Mr Hunt was mistaken in believing that his loan would not negate Swynon’s claim for negligence against the Appellant. The Appellant benefited from this mistake because its liability to Swynson was discharged. However the character of the mistake was conceptually distinct from those mistakes which go directly to nature of the transaction.

Had the Court brought what was effectively a bad bargain within the law of unjust enrichment, then it would be difficult to see where the limits of unjust enrichment would end; whenever a party overlooks or fails to appreciate some particular consequence of the transaction, they could like to equity as an escape route.

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