Art & Antiquities Disputes

Introduction

  • Art Law
  • English Law remedies
  • The Artist-Dealer Relationship
  • Title
  • Appraisal
  • Misattribution
  • Auctions
  • UK Art market
  • Museums
  • Estate planning using international trusts to hold art assets

Art Law

I am developing ‘Art and Antiquities Disputes’ as a niche practice area to compliment my contentious probate, trust disputes, and mediation legal services. The appendix to my new book the ‘Contentious Trusts Handbook’, will contain a practice note about trust disputes involving art and heritage assets that will be co-written with an eminent art scholar and historian in London. To obtain a solid theoretical grounding in Art Law, in Autumn 2019 I also plan to undertake the diploma course in ‘Art Law’ run by the Institute of Art and Law.

English Law remedies

Art litigation includes claims for breach of contract and negligence (including economic loss claims), breach of fiduciary duty, and for equitable relief (including equitable compensation and restitution).

Art litigation may involve the assertion of complex personal property rights, and claims for equitable remedies which are sometimes based upon novel and evolving theories of liability. For example, where a dispute involves consideration of separate sets of rules derived from: (i) the law of agency; and (ii) the law of trusts.

Where it is trans-national in nature, it will also give rise to jurisdictional issues for determination by the English court through the application of English rules of private international law.

Commercial art disputes are highly suited to mediation, and ADR should be attempted at the earliest opportunity after the key issues in dispute have been clearly defined and presented. While ADR cannot be imposed on the parties against their will, failure or neglect to address, propose, and enter into ADR, is likely to result in adverse cost consequences.

In order to evaluate the legal merits of a claim, a forensic  analysis needs to be undertaken of:

(i) legal liability (resulting in a case theory);

(ii) quantum – which will invariably require expert evidence; and

(iii) remedies (including potential defences which could operate to bar or extinguish the claim).

Like any other civil claim, the process of investigation and due diligence commences with the drafting of a chronology of facts, and the assembly of documentary evidence and witness statements in support.

‘The Law applying to the purchase of art is no different from the law which applies to the purchase of any item in general, English Law applies the principle of caveat emptor (buyer beware) so that there is no obligation imposed on the seller to volunteer information. However, if information is provided, then the seller owes obligations to make sure that it is a correct representation.

The buyer is not obliged to exercise any due diligence. However, in almost every case the buyer will want to have information concerning:

  • The item’s provenance: while (absent any clause to the contrary) the seller will warrant title, asking about and obtaining details of the history of the item may reassure that the item is not stolen and does not have a period of unknown provenance and may provide information about its previous sale history (including price0.
  • The item’s condition: the buyer acquires the item in its actual condition (unless the seller gives any express description on which the buyer can rely)). Sellers will often volunteer a condition report; if not one should be obtained by the buyer.

In private treaty sales it is usual to carry out a search of one or more of the stolen art databases. The major auction houses will have conducted these before including the item in the sale. If it later emerges that the item was previously stolen, it is possible that the buyer may not be in a position to establish the “good faith” of the purchase (if that is relevant) without a clear search result from a database. There are a lot of possible databases (including Interpol, the ICOM Red List, the FBI, the Art Loss Register and Art Recovery International). However, the extent of what a court will expect the purchaser to have done may depend upon the importance or value of the transaction … While [Under English law] there are some statutory remedies available, these tend to fall to be dealt with under the general law. Where the forger is the seller, or connected to the seller, the buyer will be entitled to rescind the contract on the basis of fraudulent misrepresentation. This allows the buyer to return the item and recover damages. Otherwise, where the seller is innocent but mistaken, in the absence of any express warranty of authenticity, whether or not English law will provide a remedy is not clear. Those cases which have been decided by the courts in recent years (including Drake v Thos. Agnews (2002), Taylor Thomson v Christie’s (2005) and Thwaytes v Sotherby’s (2015)) have generally found that, provided the view expressed by the seller is reasonable and genuinely held, there is no contractual remedy against the seller. However, there have been other decisions which suggest that a dealer or international auction house may owe a more demanding duty when selling an item within the scope of their advertised expertise. Each case will depend upon on its own facts. In many cases it is likely that the seller could not reasonably have misrepresented the item’s authenticity in which case the court might find the seller liable for misrepresentation and (depending on the circumstances) allow the contract to be rescinded or require the seller to compensate the buyer with a sum representing the difference in values …

Under the Sale of Goods Act 1979, title passes when the contract is made. However, in most cases the seller can only pass the title that the seller has: if the seller’s title is capable of challenge, then the same is true of the buyer’s title. The buyer’s remedy lies against the seller who has warranted title. However, in limited circumstances the buyer can acquire greater protection against the alternative claimant by reason of limitation of actions. Section 3 of the Limitation Act 1980 provides that a person who has been dispossessed of property must bring an action within six years of the dispossession, failing which the title of the claimant is extinguished. Section 4 deals with stolen items: in that case the six year period begins only when there has been a good faith purchase of the item. The onus of proving the good faith purchase is on the buyer. However, six years after that purchase, the victim of the theft’s title is extinguished … [The] Limitation Act 1939 applies a slightly different regime and if the relevant provenance of an item predates the 1980 Act it is necessary to consider the earlier legislation. Adrian Parkhouse and James Carleton of Farrer & Co LLP, in ‘The Art Collecting Legal Handbook’ by Bruno Boesch and Massimo Sterpi.

The Artist-Dealer Relationship

‘Whatever the size of gallery, there are usually two forms of transactions between dealer and artist: an outright purchase of artwork by the dealer and, more commonly, a consignment.

In [an outright purchase] the relationship between dealer and artist is a buyer-seller relationship, and not a fiduciary relationship, because the dealer is not acting as the artist’s agent, but rather becomes the owner of the work.

[In a consignment transaction], the artist consigns the work to a dealer. Artist-dealer representation agreements are sometimes confused with simple consignment agreements. Each form creates different legal obligations. A consignment agreement ordinarily addresses particular works for a limited transaction (for example, a specific gallery exhibition), whereas an artist-dealer agreement usually includes general provisions that pertain to consigned works and a separate consignment agreement or rider identifying specified works. Thus an artist-dealer representation agreement is more comprehensive than a simple consignment agreement, and tends to establish the terms and protocols of the business arrangement.’ (‘Visual Art And The Law – A Handbook For Professionals’ by Judith B. Prowda published by Sotherby’s Institute of Art, page 135).

Title

‘Establishing good title before exercising a transaction by searching its provenance or history of ownership is an important first step for a collector, auction house, dealer, or museum. An art object may possess an impeccable chain of ownership, however, it is not the exclusive answer to the issue of good title … The work itself may be a forgery and not be authentic. An art expert that issues a certificate of authenticity might change his or her opinion based on new facts or revelatory technology. A buyer relying upon one expert’s professional judgment that is disputed by a different art appraiser or art historian might cause the value of the acquired art to decrease dramatically, which might lead to breach of warranty claims. Another concern, especially for works of antiquities and even post-modern art, is that because of their rarity they may have acquired a unique intrinsic, and sometimes sentimental, “inflated” value. In a celebrity-driven commercial world, art connected to the social status of the seller may impact the work’s market value. A fundamental duty exists for a buyer of an object d’art to examine the work’s provenance, authenticity, and value before making a purchase. It is also imperative to know and trust the party that is brokering the art transaction.’ ‘Art Law’ by Michael E. Jones, page 57.

Appraisal

‘Essentially an appraisal is an informed opinion or expert estimate of the monetary value of an object. Appraising original artwork is fraught with difficulty … When original works of art change hands, it is often done privately, and the prices are not necessarily made publicly available. Objective factors, such as the rarity of the work, may tend to increase value, since the laws of supply and demand influence the art market as they do any market … The physical condition of a work may also have an effect on the price … The provenance of a work is a critical factor in valuation. For example, if a work originated from the estate of the artist, a prominent collector, or had been owned by or exhibited in a museum or by a prominent art dealer, the history will enhance its value, because it is an indication of high quality. Celebrity ownership is also an important factor in prices achieved for works of art as well as memorabilia. This is often true even if the object has no great intrinsic value … Subjective determinants, such as taste, style and reputation of the artist, influence prices, and evolve constantly. An artist’s stature may be difficult to measure objectively, but reliable indicators include exhibition history, critical response, publications, and inclusion in important public and private collections. Still, often the relative quality and value of a work is debated, even among appraisers … When it comes to the work of recognised artists, authenticity is without doubt the single most important factor that determines the value of the work of art … An appraisal can take the form of an oral opinion, with minimal or no supporting data, a brief letter, or a highly detailed formal written report prepared by an expert based on extensive research and documentation.’ (‘Visual Art And The Law – A Handbook For Professionals’ by Judith B. Prowda published by Sotherby’s Institute of Art, pages 203 – 205).

Misattribution

‘Upon consignment, an in-house specialist or external expert appraises each lot in order to generate a description for the sale catalogue. In appraising an art object, the expert identifies its attributes, namely its creator or the respective place of origin or discovery, the date or period of creation and provenance. The final result of that assessment is expressed in the art object’s attribution … A sleeper is an artwork or antique that has been undervalued and mislabelled due to an expert’s oversight, which consequently is undersold at auction. The auction house’s misattribution is printed in the sale catalogue as well as displayed on its website, communicated to potential clients and to those attending the sale. Accordingly the art object is introduced into the public art market under a wrong label … When a sleeper is introduced at auction, the expert has failed to correctly determine the valuable attribution of the art object. As a result, the art object is sold for a considerably underestimated price …

A misattribution is an erroneous attribution: the error lies in the wrongful identification or appreciation of the object. With sleepers, the misattribution must also devalue the art object. Essentially, three types of erroneous and undervalued attributions produce sleepers … attribution of the artwork or antique to a lower-valued creator instead of the actual higher-valued creator … incorrect dating of the object, which is essentially relevant for antiques; and … incorrect provenance or ownership history. To be clear, an art object’s physical condition is not an attribute. The erroneous identification of one attribute often inevitably leads to a wrong assessment of many of the art object’s other attributes.’ The Sale of Misattributed Artworks And Antiques At Auction by Anne Laure Bandle, published by Edward Elgar.

Auctions

‘An auction is defined by its three players – the consignor (seller), the auction house (agent), and the buyer – and the intricate relationships among them. [The Consignor-Action House relationship] is characterised by its fiduciary nature. The auction house must act in the utmost good faith and in the best interest of the principal, the consignor, at all times. A breach of fiduciary duty could give rise to liability on the part of the auction house as agent for the consignor as principal, whether the cause of action is based in contract or negligence.

The auction process begins when a consignor decides to sell property through an auction house. Sellers are typically known to consign works from their collections in the event of death, divorce, debt or discretion … the last point referring to sellers who do not have to sell but chose to do so in order to take advantage of a strong market…

The job of the auction house is twofold: to attract consignments and to conduct the sale, both in a responsible manner. First the auction house must assess whether an item is “auctionable,” that is whether it should be sold in a public fashion at auction, or privately via a “private treaty sale,” or sold through a private dealer or gallery …

Once an item is deemed auctionable and the consignor decides to go forward with the sale, the parties will enter into a written consignment agreement …

Most major auction houses, including Sotherby’s and Christie’s, require the consignor to make certain representations and warranties as a condition to accepting the property for sale. The most important of these concern legal title. Specifically, the consignor must represent and warrant ownership and clear title to the work being consigned, free of all liens, claims, and encumbrances, and to support the provenance of the work if it is questioned. Upon sale the consignor warrants that good title and right to possession of the work will pass to the buyer free and clear of any liens, claims, or encumbrances.

The consignor is also required to represent and warrant that he will indemnify the auction house if there is a defect in title …

[The main concerns] of the buyer are authenticity, provenance, and clear title. The buyer relies on the credibility and expertise of the auction house and on the representations about the property that are contained in the auction catalog. Therefore, if an auction house represents to the buyer that the work is authentic, the buyer has a right to rely on that information. Later, if questions arise concerning the authenticity of the work, the buyer will seek recourse from the auction house, even if the identity of the consignor is disclosed, since the auction house is considered a market expert and has made representations in the catalog concerning authenticity …

The buyer is also entitled to rely on the auction house for assurance that he will be granted clear title to the item purchased whether or not the principal is disclosed …

All bidders at an auction can assume that the auction process is conducted with integrity and that the estimated prices are reasonable, and can bid with confidence on the assumption that the auction is not subjected to illegal manipulation by the auction house in order to obtain higher prices (no shill bidding).

Because courts have enforced time limitations for breach of warranty of authenticity claims, buyers have resorted to other theories, such as negligent misrepresentation and fraud.

The most common tort claim asserted is negligent misrepresentation, in which a buyer claims the auction house represented that the work was authentic, and it is proven to be inauthentic. A prerequisite to negligent misrepresentation is the existence of a “special relationship” between the parties, which under New York law is a fiduciary one, requiring more than an arms-length business relationship.’

(‘Visual Art And The Law – A Handbook For Professionals’ by Judith B. Prowda published by Sotherby’s Institute of Art, pages 184 – 199).

UK Art Market

‘In order for the UK to maintain its status in the global art market it must attract the highest priced art available for sale worldwide by providing the most favourable and most competitive conditions. Fine art (paintings, drawings, prints and sculpture) dominates the art market, accounting for 64% of all sales by value in the UK in 2016. The analysis of fine art sales at auction … demonstrates the significance of high value art sales to the British art market … In the UK, although 89% of the volume of all transactions in the market was accounted for by works priced at less than $50,000, they made up just 10% of the value of all sales. 90% of the overall value of the market was accounted for by individual sales of over $50,000. Works priced at over $1 million represented a 57% share, despite accounting for just under 1% of the number of individual transactions. In the market for works priced below $50,000, the US, UK and China accounted for a 67% share by value and 51% of all individual transactions. However in the market priced over $1 million, their combined share rose to 94% (by value) and 92% (by volume).For individual sales over $1 million, the UK accounted for a 22% share by value and 21% by volume of the world market. Within the EU as a whole, 81% of the number of transactions at this level in 2016 were in the UK and an 87% share by value. For individual works sold for over $10 million, the UK accounted for a 24% share by value and volume in 2016. Only 2% of the total value of auction sales over $10 million took place outside the top three markets, and just 3% of all individual transactions. Within the EU as whole, the UK accounted for 91% by value and 89% of all individual transactions above $10 million. Although HMRC’s official figures suggest that the bulk of the trade both in and out of the UK by value is with countries outside the EU, with just 16% of imports into the UK coming from within the EU, and just under 3% of exports destined to countries within the Single Market, this picture is incomplete. HMRC statistics understate the extent of intra-EU trade, because many EU sales under the VAT margin scheme are not necessarily recorded. Additional research carried out in the auction sector in 2016 showed that while the US was the most important trading partner by value, for some of the major auction houses, consignments from EU member states accounted for up to 25% of their UK sales on average, while up to 20% of their exports were destined to EU buyers. In the dealer sector also, the main dealer associations reported that on average between 10% and 22% of dealers’ purchases for subsequent sale were made in the EU, and EU purchasers accounted for 15% – 20% of all their sales. The art market contributes to the UK economy through taxes and levies paid to the Exchequer on sales, trade, incomes and profits. These amounted to an estimated £1.46 billion in 2016. It is worth noting that the fiscal contribution of the art trade has grown at more than double the rate of underlying sales since 2013: sales in the art market increased in value by 15% between 2013 and 2016, whereas the contribution made through taxation increased by 22%.

Sales in the art market are divided into those related to Fine art, which includes paintings, sculptures and works on paper (including watercolours, prints, drawings and photographs); and Decorative art, which includes furniture and decorations (in glass, wood, stone, ceramic, metal or other material), couture, jewellery, ephemera and textiles. The fine art sector dominates in terms of values and accounted for close to 64% of all sales by value in the UK in 2016. Given the significance of the fine art sector, the analysis in this section looks at the sectors that comprise the fine art market. While both dealer and auction data is used to research trends within the market and estimate total sales, precise analyses of prices and individual sales within sectors of the art market relies primarily on auction data, which provides the only large scale, global and publicly available information on individual transactions. The sectoral analysis that follows is based only on auction results In the UK fine art auction sector, Modern and Post War & Contemporary art accounted for a 75% share of sales by value in 2016, a percentage which reflects the global market as a whole. Considering both dealers and auctions, these two sectors represented just over half of the value of the UK art market in 2016. While Post War & Contemporary art remained the largest sector of the fine art market in the UK (with a share of 45%), after two years of growth from 2013 to 2015, sales declined significantly in 2016 (by 32%) to $976 million. Worldwide, sales in this sector also fell in 2016 by 18%. Sales in this sector in the UK are now 37% lower than their peak in 2008 of $1.6 billion. The UK’s share of global sales in the Post War & Contemporary sector fell 3% in 2016 to 14%, and has declined ten percentage points since its high point in 2008 of 24%. However, the UK is by far the largest Post War and Contemporary market in the EU, accounting for 65% of the value of sales and 24% of all transactions in 2016. Within the Post War & Contemporary art sector, sales of work of living artists at auction accounted for 20% of total sales in UK fine art auctions in 2016 (or 44% of the Post War and Contemporary sector by value). Sales in this sub-sector reached $434 million in 2016, a decline of 41% year-on-year (against a global decline of just 7%). The UK accounted for 19% global share of the value of living artists sales at auction in 2016, down from 30% in 2015. Within the EU, the UK accounted for the largest share of sales, with 72% by value and 30% by volume in 2016. European Old Masters dominate the Old Master sector in the UK, accounting for 94% of the value of Old Master sales in 2016, with only 6% of sales accounted for by non-European artists. The UK was the largest sales centre for European Old Master works at auction in 2016 with a share of 43% (up 4% year-on-year). Sales of European Old Masters increased in the UK by 16% in value in 2016, by far the best performing of the fine art sectors. The UK also has the highest share of sales in Europe in the sector, accounting for 71% of the value of EU sales of European Old Master works and 40% of number of lots sold.’

The British Art Market 2017 – An Economic Survey prepared for The British Art Market Federation by Arts Economics.

Museums

‘A fine art museum is one that focuses its activities specifically on painting, drawing, watercolours, prints, posters, graphics, sculpture, interactive mixed media, photography, ceramics, textile art,  conceptual art, and the like … Any discussion about artefacts or art in a museum begins with a brief understanding of the various leadership roles in a museum. The board of trustees or directors is responsible for overseeing a museum’s policies, executive management, and assets. They must conduct the museum’s affairs consistent with a fiduciary duty to ensure that it fulfils its primary goal of responsibility serving and educating the public. On a practical level, decisions regarding a museum’s collection including what to collect and exhibit is relegated to senior staff , such as the executive director, collections manager, and curator … [The museum’s board] must conform to rules, statutes, treaties, and other legal obligations that relate to its operations and collection management. Nearly every museum board has promulgated a code of ethics that serves to guide institutional conduct over the activities of board members, executive leadership, staff, and volunteers … All museums function as partners with the community they serve. A fine art museum’s identity frequently turns on the nature and quality of the art collected, preserved and exhibited along with the esteem of the artists represented. Taken as a whole, a museum’s collection reflects the institution’s cultural values. The manner in which a museum engages the public by serving as a community focus, organizing accessible exhibitions, outreaching to under-represented groups, and collecting and preserving interesting and inspirational fine art is the responsibility of museum officials. These officials are obligated to act in the best interests of the public under ethical guidelines, and operate consistent with the legal fiduciary duties that are imposed on trustees and directors.’  ‘Art Law’ by Michael E. Jones, pages 47 – 55.

Estate planning using international trusts to hold art assets

The following is an extract from my book ‘Tax-Efficient Wills Simplified 2014/2015’,  5th edition (2014/2015), which while now out of  date, highlights the potential use of international trusts to hold art assets for estate planning purposes. Please note that ‘T’ refers to a Testator; ‘IHT‘ refers to Inheritance Tax; ‘IP‘ refers to an ‘interest in possession’, and that all statutory references are to the Inheritance Tax Act 1984. The book is available as a Kindle book from Amazon.

Excluded property

In the UK, excluded property is carved out of the charge to IHT by s.3(2), and by virtue of s.5(1) is not included in T’s chargeable estate. Note that: (i) the value transferred by a transfer of value does not take account of the value of excluded property ceasing to form part of T’s estate as a result of a disposition (s,3(1), (2)); (ii) T’s estate immediately before his death (on which IHT is payable) does not include excluded property, s.5(1); and (iii) if the excluded property is settled property, the termination of an IP in it is not taxable (nor is it ‘relevant property’ for the purposes of the rules). However, there is uncertainty about whether ceasing to reserve a benefit in excluded property constitutes an IHT potentially exempt transfer (‘PET’), or whether the excluded property rules take precedence so that there is no potential charge. A non-dom’s property becomes excluded property the moment that it becomes non-UK situate, and there is no qualifying period. The same applies to trustees of a settlement made by a non-dom.

Excluded property status is determined by reference to:

  1. T’s domicile (whereas in contrast the availability of IHT exemptions is largely dependent upon the tax status of the recipient of a transfer of value);
  2. the type of property; and
  3. its location.

Excluded property can be classified into three groups:

  1. property situated in the UK (see Diagram No.21,UK situs assets designated as excluded property’ (s.6 and s.157) in Appendix 4);
  2. property situated abroad; and
  3. reversionary interests.

Specific examples include:

  1. chattels [including art and antiquities] and real property owned by a non-dom and situated abroad [e.g. in a bank vault, inside a business or residential property, or on a luxury superyacht] (s.6(1));
  2. investments in an authorised unit trust (‘AUT’) or open-ended investment company (‘OIC’) owned by a non-dom (s.6(1));
  3. settled property outside the UK, provided the settlor was a non-dom at the time the trust was made (s.48(3));
  4. settled property situated anywhere consisting of investments in an AUT or OIC, provided the settlor was a non-dom at the time the trust was made (s.48(3)(A));
  5. a future interest under a trust (a ‘reversionary interest’) (s.48(1)), however this is subject to three exceptions, including where the interest has been acquired for consideration; and
  6. certain Treasury certificates issued subject to a condition authorised by s.22 Finance (No.2) Act 1931 (or s.47 Finance (No.2) Act 1915), in the beneficial ownership of a non-dom.

Settled property that is excluded property is not relevant property. For high net worth individuals who are non-doms, it is critical for IHT that they maintain excluded property status for as much of their estate as possible through the holding of assets outside the UK. The most tax-efficient form of testamentary planning using excluded property, is to make gifts in favour of chargeable beneficiaries, i.e. T’s children and grandchildren. Where T has become deemed domiciled he can no longer create an excluded property trust, however the author has innovated a new planning strategy that shelters foreign income and gains in a non-resident trust, which can be used for example, to set-up a child or grandchild in business, or to pay for their university fees, which he has named a First Start Trust’  [which is outlined in the book and reproduced below].

Offshore holding structures

IHT charges can be avoided by holding UK assets through a non-UK resident ‘shield’ company (which converts the holding of a UK asset by an individual into a holding of a non-UK asset). However, in the case of residential property that is occupied through an offshore holding structure a charge to tax may arise under the benefit in kind legislation. The benefit in kind provisions set out in ITEPA 2003, Chapter 5 can be applied to an individual who is deemed to be a director under s.67 ITEPA 2003 (including a shadow director), R v. Allen (2001). Capital gains of a closely controlled non-UK company are attributable to non-UK domiciled individuals triggering an immediate liability to CGT on a disposal of property at a gain.

Excluded property trusts (‘EPT’s’)

An EPT is a life-time settlement of property situated outside the UK settled by a non-dom before he either: (i) acquires a UK domicile or (ii) is deemed domiciled in the UK for IHT. An EPT can be any type of trust, and a non-dom settlor (who has not become deemed domiciled for IHT) can be a beneficiary without being caught by the [IHT gifts with reservation of benefit rules] GWR. Even where a settlor subsequently becomes UK domiciled for IHT, he is still able to benefit under the trust because the tax legislation only requires the settlor to be UK domiciled at the time the settlement is made.

Property added to an EPT after the settlor becomes a UK domiciliary is not excluded property. Sections 81 and 82 should also be considered where property moves between trusts after the settlor has become UK domiciled. EPT status is lost where the settlor retains a life interest with the remainder being held on a discretionary trust (or where the trust can be converted into a discretionary trust in the future by the exercise of an overriding power), if the settlor subsequently becomes UK domiciled, or is UK domiciled either at the time of his death, or at the time of any prior termination of his life interest. Where a non-dom creates a Discretionary EPT of which he is a beneficiary and then dies domiciled in the UK, s.48(3) overrides the GWR provisions, with the result that the settled property does not form part of that individual’s estate on death (see IHTM 16161). However, in the current fiscal environment and political climate this may change. Planning requires meticulous care, and in the author’s view, expert professional advice should be sought to evaluate the potential benefits and risks of implementing any offshore tax-planning strategy, so as to ensure that it is both legally, and fiscally robust. Practitioners please note the discussion of ‘Sham Trusts’ under that heading ‘Sham attack’ in Chapter 6 – ‘Traps for the Unwary’.

[Please note that the above tax analysis is out of date and should not be relied upon. To properly evaluate the benefits of undertaking offshore estate planning using an international trust you should consult a specialist CTA].

“When utilising trusts for international tax planning one needs to look not only at the country of residence but also at the assets held. With the evolution of new tax legislation, domestic jurisdictions are looking to obtain new tax revenues and traceability. In certain circumstances such as immoveable property or quoted investments held by the trust (by way of the trust company), taxes can fall due despite the non tax residency of the beneficiary as well as the settlor. This is illustrated by the recent French trust legislation which came into force in July 2011. Money-laundering is an international problem and governments can equally demand with the numerous new treaties of exchange of information, who are the ultimate beneficiaries. Tracfin will control the origin of funds, as trusts become more transparent than before. Note that foundations are often also considered as trusts. This is mentioned for two reasons. Firstly, a non domiciled person generally will hold assets outside the UK to avoid UK taxation. The method by which these assets are held needs careful examination and regular review in light of the legislative changes. The nationality of the trust and its position to treaty protection becomes more relevant than ever. In addition certain banks are now asking clients to leave due to their corporate governance issues making things even more complicated. The same as above applies to the assets of an EPT. By nature whether moveable or immoveable assets, the identification of the investments becomes more and more important and not just the client. It is for this reason that I often refer to the use where possible of capital life insurance policies based often in Luxembourg due to its flexible legislation. Assets held by a life policy belong to the insurance company and not a person. There is the policy holder and the beneficiaries. It is important to state however, that on death, this could bring the assets into the UK estate for IHT unless the deceased is not resident there or the policy is irrevocable. If not resident in the UK one should look at the domestic legislation of the country of residence. This will depend on the necessity of the accessibility of the assets to the person establishing the policy. Advice should be taken accordingly. Restructuring assets with respect to anti -avoidance legislation can engender capital gains tax gift taxes as well as transfer duties.” (Comment contributed to my book by Professor Robert Anthony, Professor of International Tax Law at the Thomas Jefferson School of Law, University of San Diego, USA.)

My book was also written before the decision in Crociani v Crociani [2014] UKPC 40 that an exclusive jurisdiction clause in a trust deed is an Achilles heel, and not an effective litigation shield. In his leading judgment Lord Neuberger stated,

‘In the context of contractual exclusive jurisdiction clauses, the approach of the court to a claim brought in another jurisdiction was authoritatively described by Lord Bingham of Cornhill in Donohue v Armco Ltd [2001] UKHL 64, [2002] 1 All ER 749, para 24 in these terms:

“If contracting parties agree to give a particular court exclusive jurisdiction to rule on claims between those parties, and a claim falling within the scope of the agreement is made in proceedings in a forum other than that which the parties have agreed, the English court will ordinarily exercise its discretion … to secure compliance with the contractual bargain, unless the party suing in the non contractual forum (the burden being on him) can show strong reasons for suing in that forum. I use the word ‘ordinarily’ to recognise that where an exercise of discretion is called for there can be no absolute or inflexible rule governing that exercise, and also that a party may lose his claim to equitable relief by dilatoriness or other unconscionable conduct. But the general rule is clear: where parties have bound themselves by an exclusive jurisdiction clause effect should ordinarily be given to that obligation in the absence of strong reasons for departing from it.

Whether a party can show strong reasons, sufficient to displace the other party’s prima facie entitlement to enforce the contractual bargain, will depend on all the facts and circumstances of the particular case.”

As Lord Hobhouse of Woodborough explained in para 45 of that case, the defendant to such a claim “has a contractual right to have the contract enforced” and his “right specifically to enforce his contract can only be displaced by strong reasons being shown by the opposite party why an injunction should not be granted”. Thus, where a claim has been brought in a court in breach of a contractual exclusive jurisdiction clause, the onus is on the claimant to justify that claim continuing, and to discharge the onus, the claimant must normally establish “strong reasons” for doing so. Counsel referred to other cases where judges have expressed themselves somewhat differently, but the Board considers that the position is accurately stated by Lord Bingham and Lord Hobhouse, and that any statement which is said to involve a different approach should not be followed.

The question of principle which arises in this case is whether the same test applies to an exclusive jurisdiction clause in a deed of trust. Contrary to the appellants’ argument, the Board is of the opinion that it should be less difficult for a beneficiary to resist the enforcement of an exclusive jurisdiction clause in a trust deed than for a contracting party to resist the enforcement of such a clause in a contract. The Board is of the opinion that in the case of a trust deed, the weight to be given to an exclusive jurisdiction clause is less than the weight to be given to such a clause in a contract. Given that a balancing exercise is involved, this could also be expressed by saying that the strength of the case that needs to be made out to avoid the enforcement of such a clause is less great where the clause is in a trust deed.

In the case of a clause in a trust, the court is not faced with the argument that it should hold a contracting party to her contractual bargain. It is, of course, true that a beneficiary, who wishes to take advantage of a trust can be expected to accept that she is bound by the terms of the trust, but it is not a commitment of the same order as a contracting party being bound by the terms of a commercial contract. Where, as here (and as presumably would usually be the case), it is a beneficiary who wishes to avoid the clause and the trustees who wish to enforce it, one would normally expect the trustees to come up with a good reason for adhering to the clause, albeit that their failure to do so would not prevent them from invoking the presumption that the clause should be enforced. In the case of a trust, unlike a contract, the court has an inherent jurisdiction to supervise the administration of the trust – see eg Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709 para 51, where Lord Walker of Gestingthorpe referred to “the court’s inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts”. This is not to suggest that a court has some freewheeling unfettered discretion to do whatever seems fair when it comes to trusts. However, what is clear is that the court does have a power to supervise the administration of trusts, primarily to protect the interests of beneficiaries, which represents a clear and, for present purposes, significant distinction between trusts and contracts.

Accordingly, the Board considers that, while it is right to confirm that a trustee is prima facie entitled to insist on and enforce an exclusive jurisdiction clause in a trust deed, the weight to be given to the existence of the clause is less (or the strength of the arguments needed to outweigh the effect of the clause is less) than where one contracting party is seeking to enforce a contractual exclusive jurisdiction clause against another contracting party. It is right to mention that counsel referred to some cases (including some of those identified in para 31 above) in which it seems to have been assumed that the weight was the same, but it does not appear to the Board that the issue was fully discussed or considered in any of those cases, which are in any event not binding on the Board.’

The implications of the case will be discussed in my next book, the ‘Contentious Trusts Handbook’.

The International First Start Trust

This is a novel fact-specific structure I innovated in 2012. Please note that the underlying tax analysis is now out of date and should not be relied upon.

If the planning strategy is tax robust, and you would need to obtain professional advise from a CTA in order to properly evaluate the planning integrity of the steps, then potentially hundreds of thousands of pounds of income tax, CGT, and IHT, can effectively be fully mitigated, with the enhancing benefits of: privacy; flexibility; and asset-protection.

In principle the offshore trust could acquire and hold art assets to be loaned to and exhibited in a gallery or museum anywhere in the world.

If T is deemed domiciled for IHT, he cannot set up an excluded property trust. However, where a beneficiary under 17 (is a non-dom, i.e. because he has inherited a foreign domicile from T), and both the settlor and beneficiary have unremitted foreign income and gains below £2,000 in the current tax year, the author has developed an alternative arrangement under which:

(i)        the remittance basis will apply automatically to both the settlor and beneficiary (s.809D Income Tax Act 2007); and

(ii)       the remittance basis charge is not levied, and neither the settlor nor the beneficiary lose their annual income tax allowance, and annual CGT exemption.

Under the arrangement the settlor can make a gift to a non-resident trust that will shelter future income and capital gains from income tax and CGT in the UK. If the gift qualifies as normal expenditure out of income under s.21, it will be an exempt gift for IHT, thereby preserving the settlor’s NRB. Under this arrangement the unremitted future income and gains will not be caught by the ‘transfer of assets abroad’, ‘settlor’, and ‘beneficiary’ anti-avoidance rules. A non-resident person is outside the scope of CGT regardless of domicile and regardless of the situs of the asset disposed of. Therefore in principle, a person who is neither resident nor ordinarily resident in the UK during a tax year is not within the UK charge to CGT. For a beneficiary to cease being UK resident in a tax year after the age of 17, will require him not to be resident and ordinarily resident in the UK, for at least 5 full tax years between the year he leaves the UK and the year of his return.

If the gain in the trust crystallises after he has ceased to be resident or ordinarily resident in the UK for CGT, followed by the winding-up of the trust, a UK CGT charge cannot arise. This could be achieved if the beneficiary ceased to be resident and ordinarily resident in the UK whilst living abroad, for example to attend University or to work / set-up a business. In the tax year (following the tax year in which the trust was collapsed), the beneficiary can return to the UK, and elect to claim the arising basis, without affecting his overall actual non-domiciled status for income tax and CGT. If the trust assets are located in a low tax jurisdiction (for example Luxembourg), there will be little or no tax to pay in that jurisdiction either. If the trust assets enable the beneficiary to set up a business through for example a non-resident company, effective international corporate tax planning can also be undertaken, and potentially BPR can be claimed for IHT in the estate of the beneficiary in the future, and then be re-cycled within the family. This arrangement enables T to skip a generation when transferring and preserving wealth for the benefit of future generations, to afford them a start in life. Asset-protection can be obtained where the trust takes the form of a terminable life interest that converts into a discretionary trust. The architecture of the trust requires bespoke planning and drafting.

Glossary of Terms

  • Art Authentication Boards
  • Artist’s Resale Right (‘ARR’)
  • Catalogue raisonné
  • Droit moral

Art Authentication Boards

Art authentication boards, committees, and foundations are sometimes created after an artist’s death to maintain the integrity of the artist’s oeuvre, and artists foundations often set up a de facto authentication process by preparing a catalogue raisonné. Without the authentication by the relevant board, an artwork purported to be by a particular artist has virtually no monetary value.

Catalogue raisonné

A catalogue raisonné is a comprehensive catalogue of works by one artist, usually presented chronologically, with details such as date, medium, dimensions, references, provenance, and exhibition history. It is typically prepared by scholars, art historians, dealers, committees, and foundations consisting of droit moral holders, family members of the artist, and other experts, who critically examine the oeuvre of an individual artist and with the intent to be definitive and all-inclusive. In preparing a catalogue raisonné, typically the author will classify the works as either autograph (meaning it is deemed a part of the artist’s oeuvre), those he rejects, or those about which he is undecided. The entries of each work include the work’s provenance, exhibition and publication history, and attributions.

Artist’s Resale Right (‘ARR’)

In the UK, the Regulations created an intellectual property right (“resale right”) which was previously unknown to United Kingdom law.

The Regulations implemented Directive 2001/84/EC of the European Parliament and of the Council on the resale right for the benefit of the author of an original work of art (‘the Directive’).

The Directive entered into force on 13 October 2001 and required transposition into national law by 1 January 2006.

The Directive was an internal market measure adopted under Article 95 of the EC Treaty which required Member States to introduce a harmonized right for authors of an original work of art, and their successors in title, to benefit from a share of the proceeds when the artists’ works are resold on the art market.

The Regulations introduce a new right which has not previously existed in the UK, although it has existed in several other EU Member States. The Directive has also been extended to the European Economic Area.’

Article 3 of the Regulations states,

‘3.

(1)   The author of a work in which copyright subsists shall, in accordance with these Regulations, have a right (“resale right”) to a royalty on any sale of the work which is a resale subsequent to the first transfer of ownership by the author (“resale royalty”).

(2)   Resale right in a work shall continue to subsist so long as copyright subsists in the work.

(3)   The royalty shall be an amount based on the sale price which is calculated in accordance with Schedule 1.

(4)   The sale price is the price obtained for the sale, net of the tax payable on the sale, and converted into euro at the European Central Bank reference rate prevailing at the contract date.

(5)   For the purposes of paragraph (1), “transfer of ownership by the author” includes in particular—

(a)       transmission of the work from the author by testamentary disposition, or in accordance with the rules of intestate succession;

(b)       disposal of the work by the author’s personal representatives for the purposes of the administration of his estate; and

(c)        disposal of the work by an official receiver (or, in Northern Ireland, the Official Receiver for Northern Ireland) or a trustee in bankruptcy, for the purposes of the realisation of the author’s estate.

Regulation 9(1) further provides ‘Subject to regulation 10(2), resale right in respect of a work is transmissible as personal or moveable property by testamentary disposition or in accordance with the rules of intestate succession; and it may be further so transmitted by any person into whose hands it passes.’

Resale right may be transmitted to:

  1. a natural person (and where it is transmitted to more than one person, it shall belong to them as owners in common); or
  2. a qualifying body.

Regulation 11 further provides that nothing in Regulation 9 prevents a resale right from being held, and exercised in respect of a sale, by any person acting as trustee for the person who would otherwise be entitled to exercise the right (“the beneficiary”), or from being transferred to such a trustee, or from the trustee to the beneficiary.

ARR entitles visual artists or their heirs to receive a royalty payment each time their work is sold on the secondary market in the UK through an auction house, gallery or dealer. The royalty is calculated as a percentage of the sale price, on a sliding scale ranging from 0.25 per cent to 4 per cent, subject to exemptions and a cap of €12,500 – see Schedule 1 of the Regulations.

The right lasts for as long as the copyright in the work subsists, which is normally for 70 years after the death of the artist. It may accordingly be inherited by the artist’s successors. Two points arise from the fact that resale right was previously unknown to United Kingdom law. The first is that, where an artist dies before the Regulations come into force, there will at that time have been no resale right to pass to a successor. In regulation 16, the Regulations accordingly make provision for which of the artist’s successors is to be regarded as holding resale right in such circumstances. The second point is that the Article 8(2) of the Directive provides a special derogation which is limited to those Member States which did not previously have resale right in their national law. Such a State may prevent the successors of a deceased artist from exercising their resale right until 1st January 2010. Regulation 17 takes advantage of that derogation.

Resale right is declared by the Directive to be inalienable, and accordingly may neither be assigned nor waived. This principle is implemented in regulations 7 and 8. The limited exceptions provided by regulation 7(3) (transfer between charities) and regulation 11 (transfers of legal title to trustees) are not in reality a derogation from that principle, as the beneficial ownership of resale right is not thereby affected.

The Regulations also impose certain nationality requirements on the enjoyment of resale right (see regulation 10) . Only an EEA national, or a national of a country specified in Schedule 2, may benefit from resale right. This reflects the fact that (leaving aside EEA nationals, who must be treated equally with United Kingdom nationals) resale right is a right enjoyed on the basis of reciprocity. Thus only the nationals of countries which make resale right available to EEA nationals may benefit from the rights given under the Directive. That principle is also applied to charitable bodies, which may benefit from resale right only where they are based in such a country.

Droit moral

The ‘droit moral’ doctrine, which applies in France and other European countries, gives an artist the right to protect his oeuvre and to designate a party to protect it after the artist’s death. In the absence of a specific designation, the right is passed down by law to the artist’s heirs and remains the property of the family. In France, the droit moral holder has the right to authenticate works by that artists, and has the legal right to challenge the authenticity in court.

Claim Analysis

 

 

Burden of Proof

 

Legal Framework

 

Private International Law Principles

The English rules of private international law rules that govern the determination of the substantive law applicable to a tort involving a foreign element, are contained in the Private International Law (Miscellaneous Provisions) Act 1995.

The general rule (Section 11) is that:

(1)      the applicable law is the law of the country in which the events constituting the tort in question occur;

(2)      where elements of those events occur in different countries, the applicable law under the general law is to be taken as being –

(a)      for a cause of action in respect to damage to property, the law of the country where the property was when it was damaged;

(b)      in any other case the law of the country in which the most significant element or elements or those events occurred.

Following the decision in the House of Lords in Boys v Chaplin (1971) AC 356 it is clear that whether or not the plaintiff is entitled to recover damages for a particular head of damage is a substantive matter to be governed by the applicable law. It is a well established principle that whereas a questions of substance are governed by the applicable law, matters of procedure are governed by the law of the forum. While it is necessary to look to the relevant foreign law to determine the nature of the rule in question, it is for the English law to characterise it as either substantive or procedural. Questions of quantification are procedural.

Public International Law Principles

 

Jurisdiction

 

Powers

 

Remedies

Contract

The contract damages award is a remedy for breach of contract, if there has been no breach of contract there can be no award of contract damages.

Contract damages are a common law remedy, both in the sense of being primarily a creature of case law rather than statute, and in the sense of being a creature of the common law rather than equity.

Damages for all loss caused by a single breach must be recovered once and for all at the trial of that cause of action.

Nevertheless, the court’s case management powers do allow the splitting of a trial into two trials, one for liability and another of quantum, which is common.

Once judgment has been given, the all or nothing nature of civil litigation means that no further damages can be claimed from the same breach. The cause of action is lost, or merged, into the judgment, which is calculated to include all damages (including interest) as if payment is made at the date of judgment. Thereafter, any late payment must be compensated for by interest at the judgment rate (arising under the obligation to pay interest on a judgment), if at all.

The key feature of the damages award is that it is compensatory. A crucial built-in feature of the damages award is the requirement of factual causation. Only if the claimant would not have suffered a detriment or achieved a gain ‘but for’ the breach is the loss recoverable.

The award is often called the ‘expectation’ measure because the promisee is entitled to be put by an award of damages in the same position as it ‘expected’ to be in if the promisor had performed the contract. Thus, because of the damages award, a promise takes effect as a guarantee of the position the promise will be in if the promise is performed. Traditionally the expectation measure has been contrasted with the ‘reliance’ or tort measure.

The award of damages must be a single lump sum.

Breach of contract is actionable per se. Unlike the tort of negligence, the cause of action for breach of contract does not require any damage to have been suffered. Breach alone is enough. This means that limitation starts to run against a contract claim (including for breach of a contractual duty of care) on the date of the breach (the date on which the cause of action arises), whereas on a tortuous negligence claim it runs from the date of damage (the date on which that cause of action arises).

See ‘The Law of Contract Damages’ by Adam Kramer, published by Hart Publishing.

Tort

In order for a court to be able to hold that a defendant is liable in the tort of negligence for the claimant’s loss:

(i)       the defendant must have owed a duty of care to the claimant in relation to the claimant in relation to the claimant’s actual loss;

(ii)      the defendant must have breached that duty;

(iii)     that breach must have caused the claimant’s loss; and

(iv)     the claimant’s loss must not be too remote.

All of these components of liability need to be satisfied for the claimant’s cause of action to be complete.

Concurrent claims

Under English law where a set of factors constitutes both a breach of contract and a tort a claimant may choose to base their claim either on contract or on tort. A claim based on negligent misstatement can give rise to contractual remedies under the Misrepresentation Act 1967 (if a contract results) or to a common law claim in tort (whether or not a contract resulted).

Any claims made by in tort will remain subject to any defences available under a contract , subject to the availability of such defences under the proper law of tort.

Whilst the tests for establishing the existence of liability in contract and tort are different many principles are common to both forms of claim. The approach of the English court to damages claims is fact-specific (as opposed to being formulaic). Damages require quantification taking into account the appropriate method of calculation, the rules of remoteness, and the rules about mitigation of loss. Cases are decided on their precise facts. Every minute detail will need to be looked at, along with the question of the reasonableness of each particular claim. This approach permits the pleading of a claim in the alternative on the grounds of breach of fiduciary duty. In the first two parts of this article however the discussion is about the classic formulation of a claim under English Law in either contract or tort.

‘Whilst the two causes of action in contract and tort are independent, it is nevertheless significant that the tortious liability normally arises because one party has assumed a responsibility towards another: see per Lord Goff in Henderson v Merrett at pages 180-181. In a case such as the present (although not in all cases) the responsibility is assumed under a contract. It would be anomalous, to say the least, if the party pursuing the remedy in tort in these circumstances were able to assert that the other party has assumed a responsibility for a wider range of damage than he would be taken to have assumed under the contract.’ Lord Justice Floyd in Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146.

Breach of fiduciary duty

It is important to work out the nature of the breach, as a  breach by a fiduciary which is not a breach of fiduciary duty but breach of his duty of care, will be treated like a claim for damages.

A trust takes effect over property creating equitable proprietary rights in favour of the beneficiaries, and Trustees owe fiduciary duties to beneficiaries not to:

(i)      make unauthorised profits;

(ii)     allow any conflict of interest; and

(iii)    self-deal with trust property.

‘Trustees are under a duty to act in “the best interests” of their beneficiaries. This is such a firmly established assumption that the duty has been incorporated explicitly in various statutes.’ The Law of Trusts by Geraint Thomas and Alastair Hudson.  It is also a fiduciary duty.

If the trustee makes an unauthorised disposal of the trust property, the obvious remedy is to require him to restore the assets or their monetary value. It is likely to be the only way to put the beneficiaries in the same position as if the breach had not occurred. It is a real loss which is being made good.

‘Trust duties are… fiduciary duties, trust relationships are necessarily fiduciary relationships, and trustees are… fiduciaries. On the other hand, fiduciary duties may not be trust duties.… [Fiduciaries] are obliged, within the fiduciary elements of their interactions to focus their energies on serving their beneficiaries’ best interests. The definition of “best interests” is not entirely straightforward, though. Does it entail that fiduciaries have positive duties to foster or further their beneficiaries’ interests, such as taking positive steps to obtain the best possible price for a property? Alternatively… must fiduciaries only refrain from acting in ways that are detrimental to their beneficiaries’ interests, thereby entailing that their duties are negatively fashioned – for example, a duty not to engage in conflicts, whether of interest and duty or of duty and duty?… Whether or not the rules and obligations imposed upon fiduciaries are positive (you must do this) or negative (you may not do that), the fact is that the fiduciary concept prescribes such rules and obligations: these are positive, purposive inclusions designed to achieve particular results. As with the situation involving express trustees, once persons or things are described as fiduciaries, Equity intervenes and prescribes a standard of conduct to which they must adhere.’ ‘Fiduciary Law’ by Leonard L. Rotman.

Equitable compensation

 ‘Although the normal remedy for equitable wrongdoing is restitutionary … the notion of equitable compensation is recognised by English law. Although this remedy has sometimes been called restitutionary, since the effect of it is to restore the claimant to the position which he or she occupied had the wrong not been committed, the remedy has nothing to do with the law of restitution as such simply because it is not assessed by reference to the gain made by the defendant but is instead assessed by reference to the loss suffered by the claimant… It is still unclear, however, to what extent the prevalence of restitutionary remedies for equitable wrongdoing will be affected by the growing recognition of equitable compensation.’ The Principles of the Law of Restitution by Graham Virgo.

‘Equitable compensation is not compensation for loss, it is restitution of the trust fund. If the defaulting trustee cannot restore the assets to the trust fund, then he must pay money into the trust instead. How much has to be paid into the trust fund is assessed by looking at the matter with hindsight to see what would be comprised in the trust fund but for the breach. Issues of remoteness, causation and mitigation have no place in the assessment of equitable compensation as they do with damages.’ Equitable Compensation: The Traditional View by Penelope Reed QC, presented to the Chancery Bar Association 5 May 2017.

Whilst the remedy is not limited by foreseeability, remoteness, and other considerations which affect the recovery of common law damages, there must be a causal link between the breach and the loss to the trust fund. It is important to work out the nature of the breach, as a breach by a fiduciary which is not a breach of fiduciary duty but breach of his duty of care, will be treated like a claim for damages.

In AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] Lord Toulson, affirming the approach in Target Holdings stated (see below),

‘Monetary compensation, whether classified as restitutive or reparative, is intended to make good a loss. The basic equitable principle applicable to breach of trust, as Lord Browne-Wilkinson stated, is that the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach. Equitable compensation and common law damages are remedies based on separate legal obligations. What has to be identified in each case is the content of any relevant obligation and the consequences of its breach.’

Lord Reed further stated,

‘The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach. The requirement that the loss should flow directly from the breach is also the key to determining whether causation has been interrupted by the acts of third parties.’

Proprietary claims to derived assets based on unjust enrichment

When establishing an unjust enrichment claim, the claimant must show that the defendant is enriched at the claimant’s expense. To assert a proprietary claim, it is generally thought necessary to establish a proprietary base, which is done by way of a following or tracing exercise. In the case of disposition, the claimant (A) is deprived of the proprietary interest in the asset if the defendant (B) disposes of the property in the asset to a third party, say by selling it to C, who raises an ‘exception’ to nemo dat quod non habet [i.e. the rule that the purchase of a possession from someone who has no ownership right to it denies the purchaser any ownership title], and B is vested with the proceeds of the disposition, as C pays the price under the contract of sale to C. Although B has not obtained A’s asset it can be said that B obtained the value of A’s asset for the purposes of a claim in unjust enrichment. In order to establish a proprietary base, it can be said that B has obtained proceeds of realization, effecting A’s loss of the proprietary interest, that is, changing the legal position of A insofar as his proprietary rights are concerned. If B were simply to destroy A’s asset, the proceeds of realization would be zero. When considering the notion of enrichment in Lowick  Rose LLP v Swynson Ltd [2017] Lord Sumption emphasised that the repayment of the debt is said to be a matter of ‘reality rather than the formal shape of a transaction, or of a co-ordinated series of transactions’. See below and paragraphs 6.35, 6.37, and 6.40 of ‘The Law of Tracing in Commercial Transactions’ by Magda Raczynkska, OUP (2018).

Recent cases

AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58

In AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58, which was a unanimous decision, in the leading judgment Lord Toulson stated,

‘The bank alleged that the solicitors acted in breach of trust, breach of fiduciary duty, breach of contract and negligence. It claimed relief in the forms of (i) reconstitution of the fund paid away in breach of trust and in breach of fiduciary duty, (ii) equitable compensation for breach of trust and breach of fiduciary duty, and (iii) damages for breach of contract and negligence, in each case with interest. The solicitors admitted that they acted negligently and in breach of contract but denied the other allegations and they claimed relief under section 61 of the Trustee Act 1925 if found to have acted in breach of trust …

The debate which has followed Target Holdings is part of a wider debate, or series of debates, about equitable doctrines and remedies and their inter-relationship with common law principles and remedies, particularly in a commercial context. The parties have provided the court with nearly 900 pages of academic writing. Much of it has been helpful, but to attempt even to summarise the many threads of argument which run through it, acknowledging the individual authors, would be a lengthy task and, more importantly, would not improve the clarity of the judgment. Nor is it necessary to set out a full historical account of all the case law cited in the literature reaching back to Caffrey v Darby (1801) 6 Ves Jun 488 …

The determination of this appeal involves two essential questions. The more important question in the appeal is whether Lord Browne-Wilkinson’s statement in Target Holdings of the fundamental principles which guided him in that case should be affirmed, qualified or (as the bank would put it) reinterpreted. Depending on the answer to that question, the second is whether the Court of Appeal properly applied the correct principles to the facts of the case.

Two main criticisms have been made of Lord Browne-Wilkinson’s approach. They have been made by a number of scholars, most recently by Professor Charles Mitchell in a lecture on “Stewardship of Property and Liability to Account” delivered to the Chancery Bar Association on 17 January 2014, in which he described the Court of Appeal’s reasoning in this case as incoherent. He expressed the hope that “if the case reaches the Supreme Court their Lordships will recognise that Lord Browne-Wilkinson took a false step in Target when he introduced an inapt causation requirement into the law governing … substitutive performance claims.” He added that if it is thought too harsh to fix the solicitors in this case with liability to restore the full amount of the loan (subject only to a deduction for the amount received by the sale of the property), the best way to achieve this is “not to bend the rules governing substitutive performance claims out of shape”, but to use the Trustee Act 1925, section 61, to relieve them from some or all of their liability.

The primary criticism is that Lord Browne-Wilkinson failed to recognise the proper distinctions between different obligations owed by a trustee and the remedies available in respect of them. The range of duties owed by a trustee include:

(1)     a custodial stewardship duty, that is, a duty to preserve the assets of the trust except insofar as the terms of the trust permit the trustee to do otherwise;

(2)     a management stewardship duty, that is, a duty to manage the trust property with proper care;

(3)     a duty of undivided loyalty, which prohibits the trustee from taking any advantage from his position without the fully informed consent of the beneficiary or beneficiaries.

Historically the remedies took the form of orders made after a process of accounting. The basis of the accounting would reflect the nature of the obligation. The operation of the process involved the court having a power, where appropriate, to “falsify” and to “surcharge”.

According to legal scholars whose scholarship I have no reason to doubt, in the case of a breach of the custodial stewardship duty, through the process of an account of administration in common form, the court would disallow (or falsify) the unauthorised disposal and either require the trust fund to be reconstituted in specie or order the trustee to make good the loss in monetary terms. The term “substitutive compensation” has come to be used by some to refer to a claim for the value of a trust asset dissipated without authority. (See the erudite judgment in Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 of Edelman J, who attributes authorship of the term to Dr Steven Elliott.)

In a case of breach of a trustee’s management stewardship duty, through the process of an action on the basis of wilful default, a court could similarly falsify or surcharge so as to require the trustee to make good the loss resulting from the breach. The phrase “wilful default” is misleading because, as Brightman LJ explained in Bartlett v Barclays Bank Trust Co Ltd (Nos 1 and 2) [1980] Ch 515, 546, conscious wrongdoing is not required. In this type of case the order for payment by the trustee of the amount of loss is referred to by some as “reparative compensation”, to differentiate it from “substitutive compensation”, although in a practical sense both are reparative compensation.

In a case of breach of the duty of undivided loyalty, there are possible alternative remedies. If the trustee has benefited from it, the court will order him to account for it on the application of the beneficiary. In Bristol and West Building Society v Mothew [1998] Ch 1 Millett LJ described such relief as “primarily restitutionary or restorative rather than compensatory”. Alternatively, the beneficiary may seek compensation in respect of his loss.

The history of the account of profits is more complex than this summary might suggest, and the whole concept of equitable compensation has developed and become far more prominent in the law since Nocton v Lord Ashburton. However, what I have said is sufficient to identify the main criticism advanced against Lord Browne-Wilkinson’s approach in Target Holdings. It is said that he treated equitable compensation in too broad-brush a fashion, muddling claims for restitutive compensation with claims for reparative compensation.

The relevant principle, it is suggested, in a case of unauthorised dissipation of trust funds is that “the amount of the award is measured by the objective value of the property lost, determined at the date when the account is taken and with the benefit of hindsight”, per Millett NPJ in Libertarian Investments Ltd v Hall [2014] 1 HKC 368, para 168. In determining the value of what has been lost, the court must take into account any offsetting benefits received, but it is not relevant to consider what the trustee ought to have done. The court is concerned only with the net value of the lost asset.

This argument has the approval of Edelman J in Agricultural Land Management Ltd v Jackson (No2), and there are statements in the authorities cited by him which support that approach, for example, by Lord Halsbury LC in Magnus v Queensland National Bank (1888) 37 Ch D, at paras 466, 472, although the issue in that case was different. The defendant advanced an argument which Bowen LJ, at para 480, likened to a case where “A man knocks me down in Pall Mall, and when I complain that my purse has been taken, the man says, ‘Oh, but if I had handed it back again, you would have been robbed over again by somebody else in the adjoining street.'” It is good sense and good law that if a trustee makes an unauthorised disbursement of trust funds, it is no defence to a claim by the beneficiary for the trustee to say that if he had not misapplied the funds they would have been stolen by a stranger. In such a case the actual loss has been caused by the trustee. The hypothetical loss which would have otherwise have occurred through the stranger’s intervention would have been a differently caused loss, for which that other person would have been liable. Bowen LJ’s example is far removed in terms of causation of loss from the present case, where the loan agreement involved the bank taking the risk of the borrowers defaulting, and the fault of the solicitors lay in releasing the funds without ensuring that the bank received the full security which it required, with the consequence that the amount of the bank’s exposure was greater than it should have been.

In Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 Tipping J rightly observed that while historically the law has tended to place emphasis on the legal characterisation of the relationship between the parties in delineating the remedies available for breach of an obligation, the nature of the duty which has been breached can often be more important, when considering issues of causation and remoteness, than the classification or historical source of the obligation.

Tipping J identified three broad categories of breach by a trustee. First, there are breaches of duty leading directly to damage or to loss of trust property. Secondly, there are breaches involving an element of infidelity. Thirdly, there are breaches involving a lack of appropriate skill and care. He continued at para 687:

“In the first kind of case the allegation is that a breach of duty by a trustee has directly caused loss of or damage to the trust property. The relief sought by the beneficiary is usually in such circumstances of a restitutionary kind. The trustee is asked to restore the trust estate, either in specie or by value. The policy of the law in these circumstances is generally to hold the trustee responsible if, but for the breach, the loss or damage would not have occurred. This approach is designed to encourage trustees to observe to the full their duties in relation to trust property by imposing on them a stringent concept of causation [ie a test by which a “but for” connection is sufficient]. Questions of foreseeability and remoteness do not come into such an assessment.”

According to the bank’s argument, the responsibility of the solicitors is still more stringent. It seeks to hold them responsible for loss which it would have suffered on the judge’s findings if they had done what they were instructed to do. This involves effectively treating the unauthorised application of trust funds as creating an immediate debt between the trustee and the beneficiary, rather than conduct meriting equitable compensation for any loss thereby caused. I recognise that there are statements in the authorities which use that language to describe the trustee’s liability. For example, in Ex p Adamson; In re Collie (1878) 8 Ch D 807 , at paras 807, 819, James and Baggallay LJJ said that the Court of Chancery never entertained a suit for damages occasioned by fraudulent conduct or for breach of trust, and that the suit was always for “an equitable debt, or liability in the nature of a debt“. This was long before the expression “equitable compensation” entered the vocabulary. Equitable monetary compensation for what in that case was straightforward fraud was clothed by the court in the literary costume of equitable debt, the debt being for the amount of the loss caused by the fraud. Whatever label is used, the question of substance is what gives rise to or is the measure of the “equitable debt or liability in the nature of a debt”, or entitlement to monetary compensation, and what kind of “but for” test is involved. It is one thing to speak of an “equitable debt or liability in the nature of a debt” in a case where a breach of trust has caused a loss; it is another thing for equity to impose or recognise an equitable debt in circumstances where the financial position of the beneficiaries, actual or potential, would have been the same if the trustee had properly performed its duties …

There are arguments to be made both ways, as the continuing debate among scholars has shown, but absent fraud, which might give rise to other public policy considerations that are not present in this case, it would not in my opinion be right to impose or maintain a rule that gives redress to a beneficiary for loss which would have been suffered if the trustee had properly performed its duties.

The same view was expressed by Professor Andrew Burrows in Burrows and Peel (eds.), Commercial Remedies, 2003, pp 46-47, where he applauded Target Holdings for impliedly rejecting older cases that may have supported the view that the accounting remedy can operate differently from the remedy of equitable compensation. Despite the powerful arguments advanced by Lord Millett and others, I consider that it would be a backward step for this court to depart from Lord Browne-Wilkinson’s fundamental analysis in Target Holdings or to “re-interpret” the decision in the manner for which the bank contends.

All agree that the basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law. Where there has been a breach of that duty, the basic purpose of any remedy will be either to put the beneficiary in the same position as if the breach had not occurred or to vest in the beneficiary any profit which the trustee may have made by reason of the breach (and which ought therefore properly to be held on behalf of the beneficiary). Placing the beneficiary in the same position as he would have been in but for the breach may involve restoring the value of something lost by the breach or making good financial damage caused by the breach. But a monetary award which reflected neither loss caused nor profit gained by the wrongdoer would be penal.

The purpose of a restitutionary order is to replace a loss to the trust fund which the trustee has brought about. To say that there has been a loss to the trust fund in the present case of £2.5m by reason of the solicitors’ conduct, when most of that sum would have been lost if the solicitors had applied the trust fund in the way that the bank had instructed them to do, is to adopt an artificial and unrealistic view of the facts.

I would reiterate Lord Browne-Wilkinson’s statement, echoing McLachlin J’s judgment in Canson, about the object of an equitable monetary remedy for breach of trust, whether it be sub-classified as substitutive or reparative. As the beneficiary is entitled to have the trust properly administered, so he is entitled to have made good any loss suffered by reason of a breach of the duty.

A traditional trust will typically govern the ownership-management of property for a group of potential beneficiaries over a lengthy number of years. If the trustee makes an unauthorised disposal of the trust property, the obvious remedy is to require him to restore the assets or their monetary value. It is likely to be the only way to put the beneficiaries in the same position as if the breach had not occurred. It is a real loss which is being made good. By contrast, in Target Holdings the finance company was seeking to be put in a better position on the facts (as agreed or assumed for the purposes of the summary judgment claim) than if the solicitors had done as they ought to have done.

Other considerations reinforce my view that the House of Lords did not take a wrong step in Target Holdings.

Most critics accept that on the assumed facts of Target Holdings the solicitors should have escaped liability. But if causation of loss was not required for them to be liable, some other way had to be found for exonerating them from liability (unless the court was to use section 61 of the 1925 Act as a deus ex machina). The solution suggested by the bank is that the solicitors in Target Holdings should be treated as if the moneys which had been wrongly paid out had remained in or been restored to the solicitors’ client account and had then been properly applied after the solicitors had obtained the necessary paperwork. There is something wrong with a state of the law which makes it necessary to create fairy tales.

As to the criticism of the passage in Target Holdings where Lord Browne-Wilkinson said that it would be “wrong to lift wholesale the detailed rules developed in the context of traditional trusts” and apply them to a bare trust which was “but one incident of a wider commercial transaction involving agency”, it is a fact that a commercial trust differs from a typical traditional trust in that it arises out of a contract rather than the transfer of property by way of gift. The contract defines the parameters of the trust. Trusts are now commonly part of the machinery used in many commercial transactions, for example across the spectrum of wholesale financial markets, where they serve a useful bridging role between the parties involved. Commercial trusts may differ widely in their purpose and content, but they have in common that the trustee’s duties are likely to be closely defined and may be of limited duration. Lord Browne-Wilkinson did not suggest that the principles of equity differ according to the nature of the trust, but rather that the scope and purpose of the trust may vary, and this may have a bearing on the appropriate relief in the event of a breach. Specifically, Lord Browne-Wilkinson stated that he did not cast doubt on the fact that monies held by solicitors on client account are trust monies, or that basic equitable principles apply to any breach of such trust by solicitors. What he did was to identify the basic equitable principles. In their application, the terms of the contract may be highly relevant to the question of fact whether there has been a loss applying a “but for” test, that is, by reference to what the solicitors were instructed to do. If the answer is negative, the solicitors should not be required to pay restitutive monetary compensation when there has in fact been no loss resulting from their breach. That is not because special rules apply to solicitors, but because proper performance of the trustee’s obligations to the beneficiary would have produced the same end result.

I agree with the view of Professor David Hayton, in his chapter “Unique Rules for the Unique Institution, the Trust” in Degeling & Edelman (eds), Equity in Commercial Law (2005), pp 279-308, that in circumstances such as those in Target Holdings the extent of equitable compensation should be the same as if damages for breach of contract were sought at common law. That is not because there should be a departure in such a case from the basic equitable principles applicable to a breach of trust, whether by a solicitor or anyone else. (If there were a conflict between the rules of equity and the rules of the common law, the rules of equity would prevail by reason of section 49(1) of the Senior Courts Act 1981, derived from the provisions of the Judicature Act 1875.) Rather, the fact that the trust was part of the machinery for the performance of a contract is relevant as a fact in looking at what loss the bank suffered by reason of the breach of trust, because it would be artificial and unreal to look at the trust in isolation from the obligations for which it was brought into being. I do not believe that this requires any departure from proper principles.

There remains the question whether the Court of Appeal properly applied the reasoning in Target Holdings to the facts of the present case. It was argued on behalf of the bank that this case falls within Lord Browne-Wilkinson’s statement that “[u]ntil the underlying commercial transaction has been completed, the solicitor can be required to restore to the client account monies wrongly paid away.”

This argument constricts too narrowly Lord Browne-Wilkinson’s essential reasoning. Monetary compensation, whether classified as restitutive or reparative, is intended to make good a loss. The basic equitable principle applicable to breach of trust, as Lord Browne-Wilkinson stated, is that the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach. In this case, proper performance of the obligations of which the trust formed part would have resulted in the solicitors paying to Barclays the full amount required to redeem the Barclays mortgage, and, as Patten LJ said, the bank would have had security for an extra £300,000 or thereabouts of its loan.

When Lord Browne-Wilkinson spoke of completion he was talking about a commercial transaction. The solicitors did not “complete” the transaction in compliance with the requirements of the CML Handbook. But as a commercial matter the transaction was executed or “completed” when the loan monies were released to the borrowers. At that moment the relationship between the borrowers and the bank became one of contractual borrower and lender, and that was a fait accompli. The Court of Appeal was right in the present case to understand and apply the reasoning in Target Holdings as it did.

The further argument advanced on behalf of the bank in this court about the Solicitors’ Accounts Rules takes matters no further, for the reasons which Mr McPherson gave in his response to it. The solicitors were at fault in not reporting to the bank what they had done and in failing at that stage to remedy their breach of trust by ensuring that the shortfall was paid to Barclays. Their failure to do so was a breach of the rules, which could have disciplinary consequences but it does not affect the outcome in the present appeal. There is, as Mr McPherson submitted, no satisfactory logical reason why the question of the solicitors’ liability to provide redress to the bank for a loss which it would have suffered in any event should turn on their compliance or non-compliance with their obligations under rule 7.

My analysis accords with the reasoning of Lord Reed and with his general conclusions at paragraphs 133 to 138. Equitable compensation and common law damages are remedies based on separate legal obligations. What has to be identified in each case is the content of any relevant obligation and the consequences of its breach. On the facts of the present case, the cost of restoring what the bank lost as a result of the solicitors’ breach of trust comes to the same as the loss caused by the solicitors’ breach of contract and negligence.’

Lord Reed also stated,

‘Notwithstanding some differences, there appears to be a broad measure of consensus across a number of common law jurisdictions that the correct general approach to the assessment of equitable compensation for breach of trust is that described by McLachlin J in Canson Enterprises and endorsed by Lord Browne-Wilkinson in Target Holdings. In Canada itself, McLachin J’s approach appears to have gained greater acceptance in the more recent case law, and it is common ground that equitable compensation and damages for tort or breach of contract may differ where different policy objectives are applicable.

Following that approach, which I have discussed more fully at paras 90-94, the model of equitable compensation, where trust property has been misapplied, is to require the trustee to restore the trust fund to the position it would have been in if the trustee had performed his obligation. If the trust has come to an end, the trustee can be ordered to compensate the beneficiary directly. In that situation the compensation is assessed on the same basis, since it is equivalent in substance to a distribution of the trust fund. If the trust fund has been diminished as a result of some other breach of trust, the same approach ordinarily applies, mutatis mutandis.

The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach. The requirement that the loss should flow directly from the breach is also the key to determining whether causation has been interrupted by the acts of third parties. The point is illustrated by the contrast between Caffrey v Darby, where the trustee’s neglect enabled a third party to default on payments due to the trust, and Canson Enterprises, where the wrongful conduct by the third parties occurred after the plaintiff had taken control of the property, and was unrelated to the defendants’ earlier breach of fiduciary duty.

It follows that the liability of a trustee for breach of trust, even where the trust arises in the context of a commercial transaction which is otherwise regulated by contract, is not generally the same as a liability in damages for tort or breach of contract. Of course, the aim of equitable compensation is to compensate: that is to say, to provide a monetary equivalent of what has been lost as a result of a breach of duty. At that level of generality, it has the same aim as most awards of damages for tort or breach of contract. Equally, since the concept of loss necessarily involves the concept of causation, and that concept in turn inevitably involves a consideration of the necessary connection between the breach of duty and a postulated consequence (and therefore of such questions as whether a consequence flows “directly” from the breach of duty, and whether loss should be attributed to the conduct of third parties, or to the conduct of the person to whom the duty was owed), there are some structural similarities between the assessment of equitable compensation and the assessment of common law damages.

Those structural similarities do not however entail that the relevant rules are identical: as in mathematics, isomorphism is not the same as equality. As courts around the world have accepted, a trust imposes different obligations from a contractual or tortious relationship, in the setting of a different kind of relationship. The law responds to those differences by allowing a measure of compensation for breach of trust causing loss to the trust fund which reflects the nature of the obligation breached and the relationship between the parties. In particular, as Lord Toulson explains at para 71, where a trust is part of the machinery for the performance of a contract, that fact will be relevant in considering what loss has been suffered by reason of a breach of the trust.

This does not mean that the law is clinging atavistically to differences which are explicable only in terms of the historical origin of the relevant rules. The classification of claims as arising in equity or at common law generally reflects the nature of the relationship between the parties and their respective rights and obligations, and is therefore of more than merely historical significance. As the case law on equitable compensation develops, however, the reasoning supporting the assessment of compensation can be seen more clearly to reflect an analysis of the characteristics of the particular obligation breached. This increase in transparency permits greater scope for developing rules which are coherent with those adopted in the common law. To the extent that the same underlying principles apply, the rules should be consistent. To the extent that the underlying principles are different, the rules should be understandably different.’

Lowick Rose LLP v Swynson Ltd & Anor [2017] UKSC 32

In Lowick Rose LLP v Swynson Ltd & Anor [2017] UKSC 32 Lord Sumption (with whom Lord Neuberger, Lord Clarke and Lord Hodge agreed) stated,

Transferred loss

The principle of transferred loss is a limited exception to the general rule that a claimant can recover only loss which he has himself suffered. It applies where the known object of a transaction is to benefit a third party or a class of persons to which a third party belongs, and the anticipated effect of a breach of duty will be to cause loss to that third party. It has hitherto been recognised only in cases where the third party suffers loss as the intended transferee of the property affected by the breach. The paradigm case is the rule which has applied in the law of carriage of goods by sea ever since the decision of the House of Lords in Dunlop v Lambert (1839) 2 Cl & F 626, that the shipper may sue the shipowner for loss of or damage to the cargo notwithstanding that the loss has been suffered by the consignee to whom property and risk (but not the rights under the contract of carriage) have passed. In Albacruz (Cargo Owners) v Albazero (Owners) [1977] AC 774, 847 Lord Diplock, with whom the rest of the Appellate Committee agreed, expressed the rationale of the carriage of goods rule as being that:

“in a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into.”

The party recovering is accountable to the third party for any damages recovered: ibid, p 844.

In Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, this rationale was extended to contracts generally. A contractor had done defective work in breach of a building contract with the developer but the loss was suffered by a third party who had by then purchased the development. The developer recovered the loss suffered by the purchaser. Lord Griffiths, however, suggested (at p 97) that the result could be justified on what has become known as the “broader ground”. This is that the developer had himself suffered the loss because he had his own interest in being able to give the third party the benefit that the third party was intended to have. He could recover the cost of rectifying the defects because it represented what the developer would have to spend to give the third party that benefit, even though he had no legal liability to spend it. On the broader ground, the principle would not be limited to cases where the loss related to transferred property.

It is, however, important to remember that the principle of transferred loss, whether in its broader or narrower form, is an exception to a fundamental principle of the law of obligations and not an alternative to that principle. All of the modern case law on the subject emphasises that it is driven by legal necessity. It is therefore an essential feature of the principle that the recognition of a right in the contracting party to recover the third party’s loss should be necessary to give effect to the object of the transaction and to avoid a “legal black hole”, in which in the anticipated course of events the only party entitled to recover would be different from the only party which could be treated as suffering loss: see Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518, 547-548 (Lord Goff), 568 (Lord Jauncey), 577-578 (Lord Browne-Wilkinson), 582-583 (Lord Millett). That is why, as the House of Lords held in this last case, it is not available if the third party has a direct right of action for the same loss, on whatever basis …

Equitable subrogation as a remedy for unjust enrichment

Equitable subrogation is a remedy available to give effect to a proprietary right or in some cases to a cause of action. This is not a case where subrogation is invoked to give effect to a proprietary right. It belongs to an established category of cases in which the claimant discharges the defendant’s debt on the basis of some agreement or expectation of benefit which fails. The rule was stated by Walton J stated in Burston Finance Ltd v Speirway Ltd (in liquidation) [1974] 1 WLR 1648, 1652 as follows:

“[W]here A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor … It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged in whole or in part by the money so provided by him.”

Most of the cases are indeed about subrogation to securities, but the principle applies equally to allow subrogation to personal rights: Cheltenham & Gloucester Plc v Appleyard [2004] EWCA Civ 291, at para 36; Commissioners for HM Revenue and Customs v Investment Trust Companies (In Liquidation) [2017] UKSC 29.

In Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 the House of Lords reinterpreted the existing authorities so as to recognise that, subject to special defences, equitable subrogation served to prevent or reverse the unjust enrichment of the defendant at the plaintiff’s expense …

As with any novel application of the relevant principles, it is necessary to remind oneself at the outset that the law of unjust enrichment is part of the law of obligations. It is not a matter of judicial discretion. As Lord Reed points out in Investment Trust Companies (para 39) it

“does not create a judicial licence to meet the perceived requirements of fairness on a case-by-case basis: legal rights arising from unjust enrichment should be determined by rules of law which are ascertainable and consistently applied.”

English law does not have a universal theory to explain all the cases in which restitution is available. It recognises a number of discrete factual situations in which enrichment is treated as vitiated by some unjust factor. These factual situations are not, however, random illustrations of the Court’s indulgence to litigants. They have the common feature that some legal norm or some legally recognised expectation of the claimant falling short of a legal right has been disrupted or disappointed. Leaving aside cases of illegality, legal compulsion or necessity, which give rise to special considerations irrelevant to the present case, the defendant’s enrichment at the claimant’s expense is unjust because, in the words of Professor Burrows’ Restatement (2012) at Section 3(2)(a), “the claimant’s consent to the defendant’s enrichment was impaired, qualified or absent.” As Lord Reed puts it in Investment Trust Companies (para 42), the purpose of the law of unjust enrichment is to

“correct normatively defective transfers of value by restoring the parties to their pre-transfer positions. It reflects an Aristotelian conception of justice as the restoration of a balance or equilibrium which has been disrupted.”

In Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, Parc had borrowed money from R on the security of a first legal charge over property, and from an associated company, OOL, on the security of a second legal charge. The plaintiff bank partially refinanced the borrowing from R. For regulatory reasons the refinancing was structured as a loan to the general manager of the group holding company, who in turn lent it to Parc who used it to pay off part of the loan from R. The plaintiff’s loan was made on the strength of an undertaking by the general manager that intra-group loans to Parc would be postponed to the plaintiff’s loan. The undertaking was intended to bind all the companies of the group, but in fact bound only the holding company because it was given without the subsidiaries’ knowledge or authority. OOL accordingly sought to enforce its second charge ahead of the plaintiff. The plaintiff sought to defeat this attempt by claiming to be subrogated to R’s first charge. This depended on the contention that OOL would otherwise be unjustly enriched by the indirect use of the plaintiff’s money to discharge indebtedness which ranked ahead of theirs. The House of Lords accepted that contention, holding that the plaintiffs were subrogated to R’s first charge, but only as against intra-group creditors who would have been postponed had the general manager’s undertaking been binding on them.

Lord Hoffmann, with whom the rest of the Appellate Committee agreed, distinguished, at p 231H-G, between contractual subrogation (as in the case of indemnity insurance or guarantee) and equitable subrogation, which was

“an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived.”

He identified as the unjust factor in OOL’s enrichment the defeat of the plaintiff’s expectation of priority over intra-group loans which was the basis on which it had advanced the money. This was so, notwithstanding that that expectation was not shared by OOL who had nothing to do with the transaction and was unaware of it.

Lord Hoffmann cited in support of this proposition a number of earlier cases in which a right of subrogation had been held to arise when the expectations of the person paying the money (whether or not shared by the party enriched) were defeated because something went wrong with the transaction. Thus in Chetwynd v Allen [1899] 1 Ch 353 and Butler v Rice [1910] 2 Ch 277, the plaintiff lent money to pay off a prior loan secured by a mortgage on property. The plaintiff’s expectation that he would obtain a charge to secure his own loan was based on an agreement with the debtor, but was defeated because unbeknown to him the property in question belonged to the debtor’s wife. The plaintiff was subrogated to the prior mortgage because otherwise the wife would have been unjustly enriched by the discharge of the debt which it secured. In Ghana Commercial Bank v Chandiram [1960] AC 732, the plaintiff bank lent money to the debtor to pay off an existing loan from another bank secured by an equitable mortgage on property. It did this on the footing that it would obtain a legal mortgage over the property. That expectation was defeated because although the legal mortgage was executed it was invalidated by a prior attachment of the property in favour of a judgment creditor. The plaintiff bank was subrogated to the judgment creditor’s attachment because otherwise the judgment creditor would have been unjustly enriched by the discharge of the debt which the equitable mortgage secured. In Boscawen v Bajwa [1996] 1 WLR 328, the plaintiff Building Society agreed to lend money on mortgage for the purchase of a property. It paid the loan moneys to the solicitors acting for them and the purchaser, to be held on its behalf until paid over against a first legal charge on the property. The solicitors paid it over to the vendor’s solicitors to be held to their order pending completion. The plaintiff’s expectations were defeated because the vendor’s solicitors used it without authority to pay off the vendor’s mortgage before completion and the purchase subsequently fell through so that completion never occurred. The plaintiff was subrogated to the vendor’s mortgage because otherwise the vendor would have been unjustly enriched by the discharge of the debt which it secured. Likewise, in Banque Financière itself, the plaintiff’s expectation of priority over intra-group loans was defeated by the general manager’s absence of authority to bind the subsidiaries. In the absence of subrogation, OOL would have been unjustly enriched because Parc’s debt to R, which would otherwise have ranked ahead of its debt to OOL, was discharged at the plaintiff’s expense without the plaintiff’s effective consent. As Lord Hoffman observed, at p 235A-B, the plaintiff “failed to obtain that priority over intra-group indebtedness which was an essential part of the transaction under which it paid the money.”

Where the basic conditions for equitable subrogation apply, the fact that the legal right to which the Claimant is subrogated has been discharged is irrelevant. This is because, as Lord Hoffmann explained at p 236, subrogation operates on a fictionalised basis:

“In a case in which the whole of the secured debt is repaid, the charge is not kept alive at all. It is discharged and ceases to exist … It is important to remember that … subrogation is not a right or a cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment. When judges say that the charge is ‘kept alive’ for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge and, in particular, that he would be so treated in relation to someone who would not be unjustly enriched.

In Cheltenham & Gloucester Plc v Appleyard [2004] EWCA Civ 291, the Plaintiff Building Society lent money to Mr and Mrs Appleyard to refinance debts owed to the Bradford & Bingley Building Society secured by a first charge on their home, and to BCCI secured by a second charge. The plaintiff put its solicitors in funds and the solicitors paid the outstanding balance of both debts to the respective creditors. The Appleyards executed a legal charge over the property in favour of the plaintiff. But the charge could not be registered as a legal charge at HM Land Registry because BCCI (which was in liquidation) refused to recognise that it had received the money or to consent to the discharge of its own security, and the terms of that security prohibited any charge subsequent to its own. The plaintiffs were held entitled to be subrogated to the legal charge of Bradford & Bingley to the extent of the value of the Bradford & Bingley mortgage at the time it was paid off. This was because otherwise the Appleyards would be unjustly enriched to the extent that their property was burdened with a lesser security.

In Banque Financière and the earlier cases cited by Lord Hoffmann the defendants did not share the expectation of the claimant, whereas in Cheltenham & Gloucester they did. But in either case the intentions of the defendants were beside the point. The reason was that the claimant had bargained for the benefit which failed, whereas from the defendant’s point of view the discharge of the prior indebtedness was a windfall for which they had not bargained. If they had given consideration for it the result would have been different.

This point may be illustrated by the other leading modern case, Bank of Cyprus UK Ltd v Menelaou [2016] AC 176. The decision is authority for the proposition that a third party who pays the purchase price of property may be subrogated to the vendor’s lien for the purchase price, if the purchaser would otherwise have been unjustly enriched. The Menelaou parents proposed to sell the family home to release capital to be spent on (among other things) buying a house for their daughter. To enable this to happen, the claimant bank, to whom the family home was mortgaged, agreed to release its charges on condition that it would receive a charge over the house to be acquired for the daughter. This expectation was defeated because she was unaware of the arrangement and the signature on the charge was not hers. The daughter was enriched, not by the mere fact of acquiring a house, which she owed to the benevolence of her parents, but by the fact that she acquired it free of the charge which the bank expected to have and without which the transaction should not have proceeded. The main issue on the appeal was whether that enrichment occurred at the bank’s expense, given that the money to pay the purchase price had come from her parents out of the proceeds of sale of the family home, and not directly from the bank. Once that question was answered in the bank’s favour, it was held that the enrichment was unjust. This was because the bank’s consent to the use of the proceeds of the family home to buy the daughter a house had been conditional on it obtaining a charge. That condition had failed and the daughter had consequently been enriched. To reverse the enrichment, the bank was subrogated to the vendor’s lien, on the footing that the purchase price secured by that lien had in substance been paid with the bank’s money. The daughter’s intentions were irrelevant because the absence of a valid charge had been a windfall for her. As Lord Neuberger pointed out (para 70), this was because she did not pay for it. If she had been a bona fide purchaser for full value it might well have been impossible to characterise any enrichment arising from the absence of the intended charge as unjust.

The cases on the use of equitable subrogation to prevent or reverse unjust enrichment are all cases of defective transactions. They were defective in the sense that the claimant paid money on the basis of an expectation which failed. Many of them may broadly be said to arise from a mistake on the part of the claimant. For example, he may wrongly have assumed that the benefit in question was available or enforceable or that his stipulation was valid, when it was not. However, it would be unwise to draw too close an analogy with the role of mistake in other legal contexts or to try to fit the subrogation cases into any broader category of unjust enrichment. It is in many ways sui generis. In the first place, except in the case of voluntary dispositions, the law does not normally attach legal consequences to a unilateral mistake unless it is known to or was induced by the other party. But it does so in the subrogation cases. This is, as I have explained, because the windfall character of the benefit conferred on the defendant means that it is not unjust to give effect to the unilateral expectation of the claimant. Secondly, where money is paid under a contract, restitution is normally available only if the contract can be and is rescinded or is otherwise at an end without performance (eg by frustration). This is because the law of unjust enrichment is generally concerned to restore the parties to a normatively defective transfer to their pre-transfer position. Subrogation, however, does not restore the parties to their pre-transfer position. It effectively operates to specifically enforce a defeated expectation. Thirdly, as Lord Clarke suggested in Menelaou (para 21), the rule may be equally capable of analysis in terms of failure of basis for the transfer. Restitution on that ground ordinarily requires that the expectation should be mutual, whereas this is not a requirement for equitable subrogation. But some cases, such as Boscawen v Bajwa and Cheltenham & Gloucester v Appleyard, cannot without artifice be analysed in any other way, since the payer does not seem to have been mistaken about anything. His expectation was simply defeated by some subsequent external event. What this suggests is that the real basis of the rule is the defeat of an expectation of benefit which was the basis of the payer’s consent to the payment of the money for the relevant purpose. Mistake is not the critical element. It is only one, admittedly common, explanation of how that expectation came to be disappointed.

Two things, however, are clear. The first is that the role of the law of unjust enrichment in such cases is to characterise the resultant enrichment of the defendant as unjust, because the absence of the stipulated benefit disrupted a relevant expectation about the transaction under which the money was paid. The second is that the role of equitable subrogation is to replicate as far as possible that element of the transaction whose absence made it defective. This is why subrogation cannot be allowed to confer a greater benefit on the claimants than he has bargained for: see Paul v Speirway Ltd [1976] Ch 220, 232 (Oliver J), Banque Financière, at pp 236-237 (Lord Hoffmann), and Cheltenham & Gloucester v Appleyard, at paras 38, 41-42 (Neuberger LJ). It can be seen that the fact that all the cases relate to defective transactions is not just an adventitious feature of the disputes that happen to have come before the courts. It is fundamental to the principle on which they were decided.

The present case is entirely different from the kind of case with which equitable subrogation is properly concerned. The December 2008 refinancing was not a defective transaction. Mr Hunt intended to discharge EMSL’s debt to Swynson. Otherwise he would not have achieved his objective of cleaning up Swynson’s balance sheet and reducing its liability to tax. He received the whole of the benefit from the transaction for which he had stipulated: the covenant to repay, the security over EMSL’s assets, the tax advantage and the presentational advantage of removing a large non-performing debt from Swynson’s books. It is of course true that he did not receive repayment of his loan, because EMSL was (or became) insolvent and its assets were worth much less than the debt. But that was a commercial risk that he took with his eyes open, and it was not what enriched HMT. In these circumstances, subrogation is not being invoked for its proper purpose, namely to replicate some element of the transaction which was expected but failed. It is being invoked so as to enable Mr Hunt to exercise for his own benefit the claims of Swynson in respect of an unconnected breach of duty under a different transaction between different parties more than two years earlier.

Mr Hunt’s alleged mistake contributes nothing to this analysis. I need not enter into the long-standing controversy about whether a transaction may be set aside on account of a mistake relating to the consequences or advantages of a transaction as opposed to its terms or character, or whether any causative mistake of sufficient importance will do. That issue is discussed by Lord Walker in Pitt v Holt [2013] 2 AC 108 at paras 114-123 and by the editors of Goff & Jones, The Law of Unjust Enrichment, 9th ed (2016), paras 9-135 – 9-142. But it does not arise here. Mr Hunt is not seeking to set aside the December 2008 refinancing and would not be entitled to do so. He is trying to invoke a remedy which the law provides for a specific purpose, and to deploy it for a different one. When Mr Hunt entered into the December 2008 refinancing, he did not in any sense bargain for a right to recover substantial damages from HMT. Nor was he mistaken about what he was going to get out of the refinancing. At best, he was mistaken about the effect that the discharge of EMSL’s debt to Swynson would have on the latter’s claims under the very different transaction which it had entered into in 2006 when it engaged HMT to carry out the due diligence. In fact, however, his evidence does not even go that far. What it shows is that he wrongly believed that he had already bargained for a right to substantial damages from HMT back in 2006. This was because he considered that as the owner of Swynson he was as much entitled under Swynson’s contract with HMT as Swynson was. “As between me and Swynson,” he wrote in the passage from his witness statement cited by the judge, “the consideration of who technically would be entitled to recover the money from HMT did not matter as I was the owner of Swynson.” As a result, he did not think that by discharging EMSL’s debt to Swynson two years later he would diminish his own entitlement. As between Swynson and himself, it was “implicitly understood” that whichever of them made the recovery it would be shared between them pro-rata according to the unpaid lending advanced.

This was an error, but it does not follow that its consequences constitute an injustice which falls to be corrected by the law of equitable subrogation. Unless the claimant has been defeated in his expectation of some feature of the transaction for which he may be said to have bargained, he does not suffer an injustice recognised by law simply because in law he has no right. Failure to recognise these limitations would transform the law of equitable subrogation into a general escape route from any principle of law which the claimant overlooked or misunderstood when he arranged his affairs as he did.

The consequence of a rule as broad as that can be seen by supposing that after Mr Hunt has recovered damages from HMT by way of subrogation, the fortunes of Evo turn and EMSL is in a position to repay the December 2008 loan. It does not matter for present purposes whether or not this was a realistic prospect in December 2008, although the judge’s findings on mitigation suggest that it was not unrealistic. If Mr Hunt’s argument is correct, the transfer which enriched HMT at his expense was the payment of the loan moneys to EMSL and which EMSL then paid to Swynson. His right of subrogation is said to have arisen from the discharge of the debt which EMSL owed to Swynson. It did not depend on whether or not he was able to recover the money he lent to EMSL. If EMSL were restored to financial health, there would be nothing to stop him from obtaining repayment of EMSL’s debt under the December 2008 loan agreement. Subrogation on these facts would then have served to give Mr Hunt an additional right on top of everything the he bargained for in December 2008. This result would hardly do credit to the law. But it is the natural consequence of allowing subrogation to rights arising under a different transaction from the one which gave rise to the enrichment, instead of confining it to cases where it serves to replicate a missing element of the same transaction.’

Lord Mance further stated,

Mitigation and res inter alios acta?

HMT’s submission failed at first instance before Rose J and in the Court of Appeal before Longmore and Sales LJJ, with Davis LJ dissenting. Rose J and the majority in the Court of Appeal held that the transaction effected on 31 December 2008 fell to be regarded as res inter alios acta, as between Swynson and HMT. They considered, clearly correctly, that the transaction did not constitute mitigation by Swynson of its damage, since Swynson was in no position to, and did not effect, the transaction itself. But they regarded the transaction as in fact avoiding loss in a way which should only be brought into account, if it arose out of HMT’s breach of duty and in the ordinary course of business. They cited in this connection from Viscount Haldane LC’s speech in British Westinghouse Co Ltd v Underground Electric Railways Co Ltd [1912] AC 673, 690.

It can readily be accepted that there was a causal link between Mr Hunt’s action in funding EMSL to repay Swynson and HMT’s negligence, and also that Mr Hunt was not acting in the ordinary course of business, but in the grip of a continuing and somewhat disastrous course of events brought about by that negligence. But, as has been held, Mr Hunt himself has no claim against HMT for negligence, and his action brought about the repayment of the loan granted to Swynson independently of any action by Swynson itself. In the passages cited, Viscount Haldane LC was speaking of loss mitigated by the claimant him- or itself in circumstances where there was no obligation to mitigate loss. Here, the payment off of the indebtedness was not undertaken by or at the request of Swynson. It was initiated by Mr Hunt in his personal capacity deciding that it would suit Swynson’s and his own interests to procure repayment by EMSL of its indebtedness to Swynson. Swynson and Mr Hunt are distinct legal personalities, and Mr Hunt’s conduct cannot be attributed to Swynson.

Transferred loss

Recovery for transferred loss can, in my view, be addressed quite briefly. The normal principle is that a claimant in action for breach of contract cannot recover damages in respect of loss caused by the breach to some third person not party to the contract: see The Albazero [1977] AC 774, 846 B-C per Lord Diplock. But there are, as Lord Diplock went on to say, exceptions. One exception, recognised and applied in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd and St Martins Property Corp Ltd v Sir Robert McAlpine Ltd (“St Martins”) [1994] 1 AC 45 exists where it was in the contemplation of the parties when the contract was made that the property, the subject of the contract and the breach, would be transferred to or occupied by a third party, who would in consequence suffer the loss arising from its breach: see Darlington Borough Council v Wiltshier Northern Ltd [1985] 1 WLR 68 and the narrow ground of decision expressed by Lord Browne-Wilkinson at p 114G-H in St Martins, in which all members of the House joined. In such a situation, the claimant is seen as suing on behalf of and for the benefit of the injured third party and is bound to account accordingly: see St Martins, per Lord Browne-Wilkinson at p 115A-B and McAlpine Construction Ltd v Panatown Ltd (“Panatown”) [2001] 1 AC 518, per Lord Clyde, at pp 530E-F and 532D-E.

Another broader principle was suggested by Lord Griffiths in St Martins, at p 96F-97D and reviewed inconclusively by Lord Browne-Wilkinson at pp 111F-112F as well as by the members of the House in Panatown. This is that a contracting party might itself have an interest in performance enabling it to claim damages without proving actual loss. In both cases the principle was being suggested in the context of contracts for supply, whether of goods or services. In St Martins the suggestion was made in circumstances where the claimant had actually incurred costs of repair, but was entitled to recover them from the associated company to which the building had been transferred before the breach. In Panatown the property was from the outset owned by an associated company of the company which contracted for its construction, and the construction defects which emerged did not lead to the latter company incurring any outlay. The reason why, in the majority view, the latter company was not entitled to recover damages was not that it had incurred no outlay, but was that there existed a deed of care deed entitling the owning company to make a direct claim against the contractors. Potential difficulties about the theory of performance interest are that it cannot prima facie embrace consequential losses suffered by the company actually (as opposed to contractually) interested in the quality of the property or services and that it is not clear whether or on what basis the company contractually entitled may be liable to account to the company actually interested: see on this latter point per Lord Clyde in Panatown at pp 532E-F, 534B-C and 535F.

Neither the narrow or the broad version of the transferred loss principle is in my view of assistance to Swynson. As to the narrow principle, it is clear that Swynson did not contract with HMT on behalf of or for the benefit of Mr Hunt. As to the broad principle, even if accepted, I do not see how it can apply in circumstances where Swynson itself suffered loss through being induced to support the management buyout by lending to EMSL, but the loan was ultimately repaid by EMSL. This is not a case where Swynson had any performance interest other than being indemnified in respect of the loss which it incurred in lending moneys to support the management buyout. That performance interest has been satisfied. The fact that it was satisfied by Mr Hunt making moneys available to EMSL to repay Swynson does not bear on or expand Swynson’s performance interest.

Unjust enrichment

I turn then to unjust enrichment. Swynson’s and Mr Hunt’s submission is that relief by way of unjust enrichment is available to preserve Swynson’s otherwise discharged claim against HMT for the benefit of Mr Hunt to the extent necessary to meet what are, it is submitted, the imperatives of the circumstances in which Mr Hunt effectively enriched HMT by arranging the repayment of the sums outstanding under the first two loans made by Swynson to EMSL, by reference to which sums HMT’s liability would, otherwise, have fallen to be measured. Longmore and Davis LJJ were not prepared to accept this as a potential basis of recovery for two reasons. The first was difficulty in seeing how subrogation could arise in favour of Mr Hunt in respect of a claim by Swynson which had been discharged, “unless”, Longmore LJ relevantly added, “the theory of fictionalised assignment expounded by Lord Hoffmann in Banque Financiere (see para 20 below) at p 236E solves this particular problem”. The second was doubt whether any mistake had been sufficiently demonstrated. Both Longmore and Davis LJ saw the case as involving causative ignorance, rather than any incorrect conscious belief or incorrect tacit assumption, referring for this distinction to Pitt v Hunt [2013] 2 AC 108. Sales LJ took a different view and would, if necessary, have recognised Mr Hunt as enjoying a right of subrogation to Swynson’s discharged claim against HMT.

The basic questions in a claim in unjust enrichment were summarised by Lord Steyn in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, 227A-C in terms recently adopted by the Supreme Court in the judgment delivered by Lord Reed in Commissioners for Her Majesty’s Revenue and Customs v The Investment Trust Companies (In Liquidation) (“ITC”) [2017] UKSC 29. The four questions are: (1) Has the defendant benefited or been enriched? (2) Was the enrichment at the expense of the claimant? (3) Was the enrichment unjust? (4) Are there any defences? More detailed examination and application of these questions in particular cases has proved controversial: see in particular Menelaou v Bank of Cyprus [2014] 1 WLR 854 and its academic aftermath. However, the comprehensive review of their significance in Lord Reed’s judgment in ITC now provides the essential basis for further consideration and application of the questions.

As to the first, there is, in the light of my conclusions on the issue of res inter alios acta, no doubt that HMT were, indirectly, enriched by the discharge by EMSL of the loan due to Swynson. The discharge had the immediate effect of reducing (in this case to nil) the damages in respect of the 2006 and 2007 loans which (subject to the overall £15m cap) Swynson could otherwise have recovered from HMT on account of HMT’s negligence. A relevant benefit for the purposes of unjust enrichment can consist in the discharge of a debt or (as in Banque Financière) of the promotion of a second charge due to the discharge of part of a prior secured debt. In principle, it seems to me that it can consist in the reduction of a loss, which would otherwise be recoverable by way of a claim for damages for breach of contract and/or duty.

The second question raises the issue what counts as enrichment “at the expense” of the claimant. That this issue can prove less straightforward is evident from the examination of its conceptual base in paras 37 to 63 in ITC. Usually, as Lord Reed points out (paras 46-50) the parties will have dealt directly with one another, but there are situations which are legally equivalent to direct provision and there may be other apparent exceptions or possible approaches, which it is not intended to rule out. The claimant must incur a loss by conferring a benefit on the defendant, but “economic reality” is not the test (paras 59-60). However, the reality, rather than the formal shape, of a transaction, or of a co-ordinated series of transactions, can show that the claimant has conferred a benefit on the defendant, despite the absence of a direct relationship between them.

Thus, in Banque Financière itself, the transaction was structured so that Banque Financière (“BFC”) advanced the relevant moneys to Mr Herzig who on-lent on different terms to Parc; the purpose was to reduce Parc’s borrowing from Royal Trust Bank (Switzerland) (“RTB”), which had a first charge over Parc’s assets; the moneys was actually remitted directly by BFC to RTB; and BFC believed, on the basis of a postponement letter written by Mr Herzig, that there had been agreement by all relevant companies in the Parc group that the advance made to Parc would have priority over other inter-group lending to Parc, including by OOL. In fact Mr Herzig had no authority to write the letter and so there had been no such agreement. The unintended effect of the advances paying off RTB was therefore to promote OOL’s second charge on Parc’s assets pro tanto. In these circumstances, BFC was treated, as against OOL, as subrogated to RTB’s (otherwise discharged) secured debt to the extent necessary to cover the advance which it had made. BFC’s failure to take proper precautions to ensure that Mr Herzig had authority to write the postponement letter was no ground for holding that the enrichment was not unjust: see per Lord Hoffmann at p 235F-G.

In reaching this conclusion, all five members of the House held that, despite Mr Herzig’s interposition, OOL was enriched at the expense of BFC. Lord Steyn (p 227B-E), Lord Clyde (p 238B-C) and Lord Hutton (p 239E-G) each referred to this as the “reality”. Lord Hoffmann (p 235C-E) with whose reasons Lord Steyn (p 228F), Lord Griffiths (p 228F-G) and Lord Clyde (p 238D-E) also agreed, gave as the reason that there was

“no difficulty in tracing BFC’s money into the discharge of the debt due to RTB; the payment to RTB was direct. In this respect, the case is stronger than in Boscawen v Bajwa [1996] 1 WLR 328.”

In Boscawen v Bajwa, money was advanced by a building society for the purchase of a property and were to be secured by a first charge. The purchaser’s solicitors passed the money on to the vendor’s solicitors, who, in circumstances not involving any want of probity but to some extent contributed to by the purchaser’s solicitors’ issue of a dishonoured cheque, used it to discharge a mortgage on the property without any transfer of the property to the intended purchaser ever occurring. The building society was held entitled to be subrogated to the discharged mortgage to the extent of its outlay, on the basis that the moneys were traceable into the discharged mortgage debt. Where claimant’s property is traceable into a receipt or property held by the defendant, there is the equivalent of a direct transfer.

In the present case, there is also no difficulty in tracing the advance made by Mr Hunt to EMSL into the discharge of Swynson’s borrowing from EMSL. It was a term of Mr Hunt’s loan to EMSL that it should be used for such discharge: para 7 above. Without more, this discharge would have been a benefit to Swynson alone, and that was no doubt how Mr Hunt saw it at the time. In fact, as I have held, the discharge of EMSL’s indebtedness to Swynson had the unforeseen consequence of eliminating any loss which Swynson would be able to show in respect of the 2006 and 2007 loans if it pursued a claim for damages against HMT, and did so moreover in circumstances in which Mr Hunt himself might (as proved to be the case) have no personal claim himself against HMT. But the transfers which Mr Hunt arranged cannot be regarded as received by HMT, or as traceable into any sort of discharge of HMT’s liability to Swynson.

It can however be argued that, even in Banque Financière, the transfers made by Banque Financière were not actually received, or converted into property held, by OOL. OOL was simply enriched by the promotion of its charge, which occurred due to BFC’s payment off of RTB’s loan. So here, it may be argued, HMT was enriched at Mr Hunt’s expense by the payment off through EMSL of Swynson’s loan. This is however to over-simplify and there are a number of potentially significant points that need to be considered. First and most importantly, in Banque Financière BFC bargained for, and mistakenly believed it was obtaining, priority over other group claims when it provided the moneys to discharge RTB’s loan. In the present case, Mr Hunt was not dealing with HMT, or addressing or discharging, or bargaining either to preserve or to step into the shoes of Swynson for the purposes of, any contractual or tortious claim which Swynson had against HMT.

Second, HMT submits that there can be no relevant benefit if all that can be shown is that the defendant “is not liable because a fundamental component of the cause of action against him (namely loss) is missing”. But subrogation by virtue of unjust enrichment is an equitable remedy which operates by adjusting relationships on a fictionalised basis. Thus, in Banque Financière, part of RTB’s secured claim was treated as alive, as against OOL only, as if it had not been discharged by payment by BFC, but had been assigned to BFC (see per Lord Hoffmann, p 236E-F). So, here, it seems to me that it could be possible, if the other ingredients of subrogation were all present, to treat Swynson’s claim against HMT as alive as if Swynson’s loss had not been discharged by the payment arranged by Mr Hunt through EMSL, and as if Swynson’s claim had been assigned to Mr Hunt. Longmore LJ’s qualification recognising the potential relevance of this fictionalised basis of subrogation was to that extent well-founded.

Third, Mr Hunt, when advancing to EMSL the money necessary to repay the first and second loans made by Swynson, acquired a countervailing right in law to repayment of those loans by EMSL. The value of that right depended on Evo and its future performance. The December 2008 refinancing was made on the basis that the EMSL loan was “impaired” (see per Rose J, paras 47-48 and Longmore LJ, para 7). Mr Hunt’s letter of claim of 24 August 2010 stated that Evo had long been in desperate straits and that it had never in Mr Hunt’s view been more than a “pig in a poke”. But the management accounts, summarised in the expert report of Ian Robinson produced at the request of Swynson and Mr Hunt for use before Rose J, indicate that there still existed hope that Evo might return to profitable trading in and after 2010. Mr Robinson’s opinion was also that as at December 2008 Evo had a net asset value in the order of USD 8m or a value on an earnings basis in the order of USD 4 to 5m. Evo did ultimately yield some realisations (para 42 above), though this fell far short of covering Mr Hunt’s loan and the interest under on it. In summary, it would seem unrealistic to regard Mr Hunt as suffering no loss at all in December 2008, as a result of advancing the money he did to EMSL to pay off Swynson. With the benefit of hindsight, it seems clear that his loss increased thereafter, as Evo’s position continued, despite his efforts, to deteriorate. However, this analysis highlights a feature of Mr Hunt’s claim that HMT has been unjustly enriched at his expense. The existence and extent of any enrichment could not be determined by simple reference to the amount that Mr Hunt lent to EMSL in December 2008. They would depend on Evo’s and EMSL’s subsequent fortunes.

A fourth point, arising from some observations of the Supreme Court in ITC, concerns the significance of the limited “benefits” intended and obtained from the repayment of the first and second loans made by Swynson to EMSL. These consisted in a tax saving (para 43 above) and the removal of the perceived disadvantage to Swynson of having an impaired debt on its books: see Rose J’s judgment, para 47. In different ways, the existence of a tax liability without receipt of any corresponding income and the impaired debt were both disadvantages resulting from the original management buyout on the basis of HMT’s original negligent advice. Their elimination was a step taken by Mr Hunt in the course of dealing with that disastrous investment. But it was a step taken by him personally, albeit in order to benefit his company Swynson. The difficulties on this appeal arise because (a) the step he took had the unforeseen, consequential effect of depriving Swynson of any claim against HMT and (b) the highest that Mr Hunt can put the matter is to say that he himself thereby suffered loss in his capacity as owner of Swynson, in circumstances where, as has been held, he himself had no direct right of action against HMT.

A fifth point, which I mention in passing, is that, had Swynson’s loan to EMSL been good, the same tax liability would have been incurred but in respect of moneys actually received, while the impairment would have been avoided. Apart from the repayment of the EMSL loan procured by Mr Hunt on 31 December 2008, Swynson’s damages claim against HMT could have included the full amount of the interest which EMSL had failed to pay to Swynson (which would no doubt have been taxable in Swynson’s hands as a business receipt, even if EMSL had paid it). Swynson having in fact been repaid by EMSL, Mr Hunt, if he were to have any subrogation claim against HMT, would probably have to give credit, against his gross loss for the purposes of that claim, for the amount of the tax on interest in respect of which he in effect indemnified Swynson (any subrogation recovery by him from HMT in respect of such interest not presumably being taxable). I understood Mr Sims QC for Mr Hunt to accept as much (transcript, 22 November 2016, p 125 ll.22-23.) But, in any event, as Mr Sims went on to point out, this would be likely to be irrelevant, as any such reduction in Mr Hunt’s gross claim for subrogation purposes would not reduce it below HMT’s maximum liability of £15m as at 31 December 2008, plus interest since then.

Turning to the significance of these points for Mr Hunt’s claim to be subrogated to Swynson’s claim against HMT, in ITC, paras 52 to 58, Lord Reed noted that, where the provision of a benefit to a third party is incidental to work done or expenditure incurred in pursuit of a person’s own interests, any enrichment may either not be regarded as being at the expense of the person doing the work or incurring the expenditure or may not be regarded as unjust. “One man heats his house, and his neighbour gets a great deal of benefit” – the classic example given by Lord President Dunedin in Edinburgh and District Tramways Co Ltd v Courtenay 1909 SC 99, , 105 – clearly involves circumstances in which it would be “absurd”, as the Lord President said, to suppose that the former could claim a contribution from the latter. The case of TFL Management Services v Lloyds Bank plc [2013] EWCA Civ 1415 was wrongly decided for this reason, as the Court held in ITC and as the Scottish jurisprudence cited by Lord Reed at para 55 in ITC presciently suggested nearly two centuries ago.

In such situations, the questions whether a benefit was obtained “at the expense of” the claimant and whether it would be “unjust” for the defendant to retain it are likely to be difficult to separate. If a person with a view to obtaining a small benefit for himself at the same time unintentionally and by mistake incurs a much larger loss in conferring a much larger benefit on a third party, the picture changes, and one is again potentially in the field of unjust enrichment. The particular features of the present appeal, on which attention must necessarily focus, are that it concerns deliberately structured transfers (by Mr Hunt to EMSL and EMSL to Swynson) which had unforeseen, consequential effects on Swynson’s separate relationship with a third party, HMT, and/or on Mr Hunt, as noted, particularly, in paras 62 and 65 above.

In these circumstances, I turn to consider whether there is here an “unjust” factor, which may make it appropriate to recognise the benefit conferred on HMT by the repayment of the first and second Swynson loans as giving rise to a claim by Mr Hunt. The primary case now sought to be advanced is that Mr Hunt was labouring under a mistake when he advanced the money to EMSL to pay off the loans. In the alternative, it is submitted that the unjust factor can be found in the failure of the “basis” on which Mr Hunt made such advance, or, in the further alternative, upon a more general policy-based approach recognising the suggested unfairness of what has happened. I do not see these two alternative submissions as adding in the present case to the primary submission or offering any real prospect of success if it fails. In the present case, the basis of the advance could hardly be said to fail, if there was no relevant mistake. Likewise, it is difficult to see any reason why Mr Hunt should have a remedy in respect of an advance if he made it without any mistake, particularly when it offered his company, Swynson, some advantage.

Having said that, there are cases which can be analysed as accepting such a subrogation claim simply in order to redress the defeat by unforeseen events of an expectation of benefit on the basis of which the claimant made a payment: see eg Banque Finanière and Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291. The underlying rationale of subrogation to redress unjust enrichment may well be to redress the defeat of such an expectation, mistake being only one context in which this can occur. But in each case, the nature of the expectation or mistake is also critical in determining whether there exists a subrogation claim to redress any enrichment. This brings one back to its closeness of its relationship with the right to which the subrogation claim relates.

The first problem which arises on this appeal regarding mistake is that it was not explicitly pleaded, leading to a submission by HMT that it would be unfair to treat it as a basis on which this appeal could or should be decided against them. This makes it necessary to examine the way in which the case was put and has developed. The first relevant reference in the pleadings is in the reply dated 14 June 2013, where in para 35d the defence plea that HMT owed no separate duty to Mr Hunt was addressed, and Swynson advanced three heads of positive case: in summary, res inter alios acta, equitable subrogation and transferred loss. The second was put simply on the basis that “Swynson suffered the losses claimed herein before any refinancing and is entitled to recover the same for itself and Mr Hunt on the basis that Mr Hunt should be treated in equity, by way of equitable subrogation or otherwise, as entitled to his pro rata share”.

Then, in its skeleton argument dated 8 May 2014 for the trial which began on 14 and continued to 23 May 2014, Swynson gave notice that it relied in support of its claim of subrogation on both Banque Financière and Menelaou. At trial, Mr Hunt gave apparently uncontradicted evidence, which Rose J in any event expressly accepted to the following effect:

“It should be obvious from what I have said … that there was no intention on my part or Swynson’s part to relieve HMT from any liability due to the refinancing exercise. As far as I was concerned the claim against HMT remained unaffected by this refinancing and was of no concern of theirs. As between me and Swynson the consideration of who technically would be entitled to recover the money from HMT did not matter as I was the owner of Swynson, but it was implicitly understood that the recovery would be held pro-rata according to the unpaid lending advanced.”

In written closing submissions dated 21 May 2014, Swynson submitted (para 27) that:

“Mr Hunt should be entitled to a subrogation remedy, having regard to the implied common intention of Hunt & Swynson [viz that after what was called the “refinancing” any recoveries would be shared as them in accordance with their outstanding and unpaid lending], on the principles analogous to the insurance cases, or to the remedy on the equitable principles of unjust enrichment as set out in Banque Financière [1999] AC 221; see as to the former at 231E, and as to the latter 234G-H, 227B-C &228D-E. As for the latter basis for the remedy, Mr Hunt’s decision to step in and take over some of the lending to EMSL was not intended to give HMT (or more substantially its insurer) a windfall. No-one could possibly suggest there was any discussion, intention or agreement that HMT would benefit by reason of Mr Hunt’s desire to give Evo an interest free loan and save Swynson from paying deemed interest. In these circumstances HMT would be unjustly enriched at his expense if it was held that any claim against it should be reduced by the extent to which he took over the lending previously owed to Swynson.”

Rose J recited the three heads of case which were advanced, decided the case on the basis of res inter alios acta, and did not need to consider the other two heads: see paras 49 and 55 of her judgment.

In the Court of Appeal the matter was put squarely on the basis that it had been “a mistake to make the 2008 Partial Refinance in order to relieve HMT of liability” (skeleton dated 11 May 2015, para 29) and that “Mr Hunt made a mistake in the way he structured this back in 2008” (transcript of opening, p 55B-C). In response on this head of claim, counsel for HMT submitted that there had been no pleading of mistake and that Mr Hunt’s evidence, accepted by the judge (para 68 above), did not establish a mistake. Asked directly by Sales LJ at this point whether she was saying that the argument was not available, counsel replied that HMT did “not have to put it that high, but yes” (transcript, p 67D-F). So HMT were, if necessary, taking a point on admissibility. In further submissions about the case of subrogation based on unjust enrichment, which it was accepted was before the judge, counsel submitted that there was lacking that “missing right which required subrogation in order to fix the gap”. When Sales LJ put that

“the missing right is Mr Hunt thought that he was going to make this loan but there would still be the benefit of the cause of action against HMT,”

the reply was that that was

“not enough for subrogation. For subrogation, there needs to have been a right bargained for and not achieved.

The Court of Appeal did not deal formally with the admissibility of the case based on mistake. But, having heard these submissions, it gave a judgment on 25 June 2015 in which all three members of the Court dealt on the merits with the issue of unjust enrichment based on the case of mistake which Swynson had advanced before it. Longmore and Davis LJJ rejected that case on its merits, for reasons summarised in para 55 above, while Sales LJ would have accepted it.

In these circumstances, I conclude that the Court of Appeal determined that the case based on mistake was fairly open to Swynson, and should be addressed on its merits, although the majority concluded that it should fail on the evidence. I see no basis on which to reach a different conclusion on the question whether the case was and is open. Indeed, I would myself have reached the same conclusion. The case on mistake needs to be addressed on its merits accordingly.

In my opinion it is clear that Mr Hunt was labouring under a form of mistake when he was advised to and did arrange to fund EMSL to pay off Swynson’s first and second loans. Not only did he have no intention thereby to relieve HMT of any liability, he gave positive evidence which Rose J accepted that “As far as I was concerned the claim against HMT remained unaffected by this refinancing and [the refinancing] was of no concern of theirs” (para 72 above). The fact that he did not think it important whether the claim against HMT was Swynson’s or his does not seem to me to matter in assessing whether he was acting under a mistake. It clearly belonged to one or other. What matters is that he mistook the significance of payment off of the Swynson loans.

In Pitt v Holt [2013] 2 AC 108, Lord Walker, in a judgment with which all members of the Supreme Court agreed, addressed suggestions in prior case law that a line fell to be drawn between mere causative forgetfulness or ignorance and a mistaken conscious belief or mistaken tacit assumption, concluding as follows in para 108:

“I would hold that mere ignorance, even if causative, is insufficient, but that the court, in carrying out its task of finding the facts, should not shrink from drawing the inference of conscious belief or tacit assumption when there is evidence to support such an inference.”

In the present case, I consider that, contrary to the view taken by the majority of the Court of Appeal, the accepted evidence, recited in paras 71 and 78 above, is of a conscious belief on Mr Hunt’s part that funding the repayment of the Swynson loans would have no effect on any claim against HMT. At the very least, however, it establishes a tacit assumption. This belief (or assumption) has been shown to be mistaken (a) as regards a negligence claim by Mr Hunt personally against HMT, by Rose J’s judgment and (b) as regards a claim by Swynson against HMT, by the Supreme Court’s present judgment. As to (a), if he had had a claim in his own name, then he would have been able to recover in full from HMT. His repayment of the Swynson loans would in this context have constituted a step taken in continuing mitigation of the effects of HMT’s breach of duty towards him. As to (b), if Swynson had retained a claim against HMT, Mr Hunt would, as Swynson’s owner, have been covered indirectly in respect of any loss arising to him from the December 2008 arrangements.

How far Mr Hunt was acting under advice in the arrangements he made is not known. It is certainly possible to suggest that it was in a general sense careless to make them without considering their implications. At least in so far as his mistake was to think that Swynson would, if necessary, retain its claim against HMT despite the December 2008 arrangements, it could be said in response that the mistake was understandable, since the Supreme Court has concluded that it was shared by both courts below. But, even if it were right to conclude that any mistake by Mr Hunt involved carelessness, that by itself is no bar to equitable relief, unless the circumstances show that Mr Hunt deliberately ran, or must be taken to have run, the risk of being wrong: see Banque Financière, 235E-G per Lord Hoffmann (cited in para 58 above) and Pitt v Holt [2013] 2 AC 108, 114, per Lord Walker. It seems clear that Mr Hunt did not intend to run or believe that he was running any such risk. Nonetheless, the arrangements he in fact made did involve the risk that he might himself have no direct claim, while paying off EMSL’s debt to Swynson meant that Swynson could no longer claim to have suffered loss recoverable from HMT, with the result that there was no basis on which either Swynson or Mr Hunt could claim any substantial damages from HMT.

Was any mistake causative? Like Sales LJ (para 59), I do not think that there is any chance that Mr Hunt would have made the payments in the way he did had he thought that they might have the effect of eliminating the liability of HMT in respect of the 2006 and 2007 loans. The advantages for Swynson in terms of tax and standing (para 43 above) would have been dwarfed by the loss of a claim for £15m (plus interest) against HMT. He could not conceivably have allowed any claim by Swynson to be fatally undermined in this way.

Was Mr Hunt’s mistake one in respect of which equity should grant relief, by way of subrogation keeping alive for that purpose Swynson’s claim against HMT to the extent that it was discharged by the payment off of the two Swynson loans? It is necessary to consider, first, in respect of what type of mistake such relief may be available. In this connection, Lord Walker in Pitt v Holt, paras 114-145, addressed a distinction suggested in prior authority between a mistake about the nature or characteristics of a transaction and the consequences or advantages to be gained by entering into it. After close analysis of authority, he concluded (para 122):

“I can see no reason why a mistake of law which is basic to the transaction (but is not a mistake as to the transaction’s legal character or nature) should not also be included, even though such cases would probably be rare. … I would provisionally conclude that the true requirement is simply for there to be a causative mistake of sufficient gravity; and, as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.”

Lord Walker was speaking in the particular context of the equitable jurisdiction to set aside a transfer for mistake. Mr Hunt has no possible claim to set aside the transfers which he arranged. If one takes Lord Walker’s approach, admittedly out of context, and applies it to the present context, it highlights a difficulty which Mr Hunt faces in showing any sufficient connection between the transfers to which he directed his attention and the relationship between Swynson and HMT under which HMT benefitted as a result of those transfers.

That brings one back to the submission on which HMT focused in the Court of Appeal (para 75 above), that a mistake relating to the effect on third party rights (Swynson’s against HMT) is not enough, because “For subrogation, there needs to have been a right bargained for and not achieved”. Before the Court of Appeal, this was developed more specifically as follows (transcript, p 70G-H):

“… this is critical … a lender cannot claim subrogation if he obtains all security which he bargains for or where he has specifically bargained on the basis that he would receive no security. Now, the bargain that Mr Hunt made in this case was a bargain with EMSL that he would make them a loan and EMSL would repay it. He did not make a bargain with Swynson to take an assignment of Swynson’s rights. He did not make a bargain with HMT. There was not even any clause in his bargain with EMSL that asked EMSL to acquire an assignment of Swynson’s rights against HMT. There was nothing missing. There is nothing in the contract between Mr Hunt and EMSL, which gives rise to the whole base of this claim. There is nothing missing that he bargained for and did not get.”

Reference was made in this context before the Court of Appeal to Banque Finanière and Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 29. In neither case, was there of course a “bargain” in the sense of any enforceable right or binding obligation. Otherwise, cadit quaestio. But in Banque Financière, BFC thought, however carelessly, that it had arranged priority for its loan. And in Appleyard, the lender, C & G, obtained what it thought and intended should be a first charge, but one of two prior chargees did not accept that it had been repaid and C & G’s charge was as a result purely equitable and was recorded as such at the Land Registry (see para 7 in the judgment). In giving the judgment of the court in Appleyard, Neuberger LJ identified 13 propositions of law, of which the tenth, relied on by HMT in the present case in the Court of Appeal, read:

“Tenthly, subrogation cannot be invoked so as to put the lender in a better position than that in which [he] would have been if he had obtained all the rights for which he bargained: see Banque Financière at 235D and 236G-273B per Lord Hoffmann. This point was also made by Lindley MR in Wrexham [re Wrexham Mold and Connah’s Quay Railway Co [1899] 1 Ch 440] at 447.”

The message here, and in the passages cited, is that subrogation cannot improve a lender’s position, by giving him more than he expected to get. The lender need not actually to have “contracted for” or “agreed” some benefit which he did not obtain. Thus, it was enough in Banque Financière that BFC thought, however carelessly, that it had obtained such a benefit by virtue of the postponement letter. But any transfer of value must have been on the mistaken basis that it would yield a benefit which did not materialise. Subrogation can redress the position where a claimant has bargained for a benefit which does not materialise, by putting the claimant in the position which he expected. Here, Mr Hunt bargained for nothing in relation to Swynson’s claim against HMT. The most that he can say is that there was an indirect transfer of value by him to HMT, as the unforeseen and indirect result of the directly intended effects of the actual arrangements he made on a separate relationship pre-dating those arrangements by over two years.

That is in my opinion the crux of this appeal. Mr Hunt’s loan to EMSL and EMSL’s consequent discharge of Swynson’s loan were exactly as Mr Hunt specified and intended. They had indirect consequences, evidently overlooked by Mr Hunt or his advisers, for Swynson, for Swynson’s separate relationship with HMT, and so indirectly for both Swynson and Mr Hunt: see, in particular, paras 62, 65 and 68 above. These circumstances do not establish any normative or basic defect in the arrangements which Mr Hunt made.

In so far as Mr Hunt thought that he might, as owner of Swynson, himself have a claim for breach of contract and/or duty against HMT, he was not mistaken in any way which concerned the relationship between Swynson and HMT or which could give him any arguable claim to be subrogated to a claim by Swynson against HMT. In law, however, the only person with a claim against HMT was Swynson, as Rose J held. Again, the arrangements he made for EMSL to pay off Swynson did not address or concern the relationship between Swynson and HMT, or the consequences of such arrangements for any claim which Swynson might have against HMT. Again, Mr Hunt never envisaged obtaining any sort of direct interest in any such claim. Further (although I should not be taken as suggesting this is critical to the outcome of the issue of unjust enrichment), the arrangements which Mr Hunt made were not by way of gift, but by way of a loan to EMSL, which in December 2008 had at least some prospect, however remote, of being repaid. What matters is that any transfer of value by Mr Hunt to HMT was not just unintended, it was incidental and indirect and arose from the consequences of Mr Hunt’s deliberately structured arrangements on a relationship quite separate from that which the arrangements addressed in exactly their intended way.

In these circumstances, I do not consider that Mr Hunt can establish a basis for being subrogated to any claim which Swynson would have had against HMT, had its loss in respect of the 2006 and 2007 loans not been reduced to nil. In a very general sense, I can understand it being said that it is an injustice to Swynson or Mr Hunt and a pure windfall for HMT, if HMT benefits by avoiding paying damages. This is particularly so, when (as I believe to be the case) Mr Hunt made a mistake which was causative in the “but for” sense, that, apart from the mistake, he would not have structured the arrangements in the way he did. But mere “but for” causation is not sufficient: see ITC, para 52. Any benefit which HMT has from Mr Hunt’s mistake is no more than an indirect and incidental consequence of those arrangements on Swynson’s separate and pre-existing relationship with HMT. This is too remote to be the basis for a claim that HMT has been unjustly enriched at Mr Hunt’s expense, or for reversal of the consequences of Mr Hunt’s arrangements by treating him as having a (fictionalised) interest which he never expected, in respect of a claim by Swynson to recover from HMT a loss otherwise reduced to nil by the arrangements he made. This conclusion can be explained under the scheme indicated in Banque Financière either on the basis that there was no sufficiently direct transfer of value from Mr Hunt to HMT, or on the basis that there is no relevant unjust factor, or both. More generally, this conclusion underlines the fact that it is not the role of the law of unjust enrichment to provide persons finding to their cost that they have made a mistake with recourse by way of subrogation against those who may indirectly have benefitted by such a mistake under separate relationships which those making the mistake were not addressing.

For these reasons, I have, not without some sympathy for Mr Hunt’s position, come to the conclusion that Mr Hunt has no right by way of unjust enrichment as against HMT or by way of subrogation in respect of any claim for damages that Swynson would have had against HMT apart from EMSL’s discharge of its indebtedness to Swynson.’

 

 

 

 

Civil Procedure

 

Recognition and Enforcement

 

Costs

 

Proof

 

Valuations

 

Expert Evidence

 

Advocacy

 

ADR

Mediation of Art Disputes

‘“Litigation is a continuation of business by other means.” This adaptation of the quote from Carl von Clausewitz in his seminal book, On War, is probably truer than ever. Indeed, nowadays litigation is often the chosen route to resolve corporate battles, to protect intellectual property, to settle family clashes, and the list goes on. Disputes in the art market were a notable exception to the global litigation frenzy — not so much because the art market saw fewer rows, but rather they were mostly dealt with out-of-court.

More recently, however, litigation in the field of art and cultural property has increased, mainly driven by the huge sums often at stake in today’s art market. Sometimes the claimant brings legal action only to put pressure on galleries, auction houses or museums, which prefer not to be in the public eye over matters that question their scrupulousness or due diligence. Another reason for this increase is the controversial development of “litigation funding”, whereby a third-party professional funder pays the claimant’s litigation costs in return for a share of the proceeds if they win.

The types of art disputes vary substantially: they may regard the sale or loan of artworks, art insurance or shipping contracts, exhibition contracts, contracts between artists and galleries, the artist’s resale right, the right to reproduce a copyrighted work of art, the restoration of cultural goods, and the return of cultural property to the original owner, to name but a few. More recently, the press has widely reported famous cases of alleged forgeries and attempts to recover artwork looted by the Nazis.

These types of litigation are often very complex due to the need to reconstruct old historical events, to obtain expert opinions from leading scholars, to resolve intricate conflicts of law, etc. And with this come high legal costs, lengthy proceedings, and many uncertainties.

To deal with these problems, the latest emerging trend is to attempt to settle art disputes with informal procedures aimed at helping parties find an amicable solution. The parties refer the matter to a mediator who has the requisite skills and expertise in the field of art, which the average court judge seldom has.

The forerunner of this trend is the WIPO-ICOM Art and Cultural Heritage Mediation established in 2011 by the World Intellectual Property Organization and the International Council of Museums.

This year the Arbitration Chamber of Milan launched a new venture to promote alternative dispute resolution methods in the field of art and cultural property. The initiative has been warmly welcomed by all art market players as a useful alternative and efficient method of resolving conflicts amicably — avoiding lengthy and expensive proceedings in Italian courts. And within just a few months, the chamber has successfully mediated several cases in the field of modern and contemporary art. More significantly, the initiative has received strong endorsement from the national associations of both art galleries and antiques dealers 

The success of this endeavour could potentially serve as a model to adapt in other jurisdictions. Only time will tell whether this trend will consolidate and mediation will become a serious alternative to court . Usually, bad habits die hard. But in this case, there is cause for optimism because all the stakeholders share a common interest in avoiding the type of aggressive litigation that ultimately harms the very reliability of the art market.’

‘Art disputes: the rise of mediation’ by Alberto Saravalle is partner and head of the art and cultural property team at law firm BonelliErede, published in the Times 3 November 2016.

Arbitration

 

Mediation

 

Attribution Claims

Buyers and sellers of art often request expert opinions from art dealers, auction houses, art authentication boards and committees, and individual experts.

Authentication is the process by which experts attribute an artwork to a specific artist, culture, or era. Experts – art historians, curators, art dealers, or auction house specialists – base their opinions on scholarship and connoisseurship. Their opinions may evolve as new research emerges.

Provenance is the history of the ownership of an object or work of art.

 

Authenticity Claims

 

‘Provenance, or the chain of ownership from the original artist to the present owner, is considered persuasive evidence of authenticity. No one method is dispositive, although most attributions are still based on connoisseurship, relying on the trained eye of a specialist. Deciding whether a work is authentic is generally based on intuition and subjective criteria “that immediate reaction, like recognising a friend’s face in a crowd.” … Authenticators and appraisers may be found legally liable under contract, breach of fiduciary duty, and a variety of tort theories such as fraud, negligence, negligent misrepresentation, product disparagement, and defamation … An action for disparagement can be asserted against a person whose false statement about an artwork has reduced the market value of the work. To prove disparagement, the [Claimant] must establish: (1) the falsity of the statement; (2) publication to a third person; (3) malice; and (4) special damages, which are limited to losses related directly to the disparaging statements.’ (‘Visual Art And The Law – A Handbook For Professionals’ by Judith B. Prowda published by Sotherby’s Institute of Art, pages 205 – 211).

Breach of Contract Claims

Please note that this summary of principles is based upon a legal opinion I worte about a number of years ago for a construction dispute, and is now somewhat out of date and needs to be both updated and revised in the context of art and antiquities disputes.

RECOVERY OF LOSSES IN CONTRACT

 1.     Compensation and remoteness of damage

The basic principle of assessment is that the claimant should “as nearly as possible get at that sum of money which will put [them] in the same position as [he] would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.”[1] In applying this principle to an individual case Ribeiro[2] suggests two approaches, either a claim can be made  on what he terms the “successful transaction method” (to obtain damages to fulfil the claimant’s expectations), for example a claim for loss of profit, or on what he terms the “no-transaction method”  (to obtain damages to restore the claimant to their pre-contractual position), for example a claim for wasted expenditure or loss of use.

The general principle is subject to a policy that limits the items that can be claimed (“heads of damages”).

[1] Livingstone v Rawyards  Coal Co (1880) 5 App.Cas, 25, at 29.

[2] Ribeiro (2005), pages 10-11.

The general principle for the assessment of damages is compensatory. But if this purpose were relentlessly pursued it would lead to the party in default having to pay for all loss de facto resulting from a particular breach however improbable, however unpredictable. The Courts therefore set a limit to the loss for which damages are recoverable, and loss beyond such limit is said to be too remote.

Another sense in which remoteness is used is to defend a claim on the grounds that the alleged breach did not cause the loss claimed.[1]

Therefore a defendant cannot be liable for the consequences of a breach on any basis if the sole effective cause of the breach is attributable to the claimant – because the breach did not cause the loss. Alternatively there should be an apportionment of damages under the provisions of the Law Reform (Contributory Negligence) Act 1945 if the claimant contributed to the failure. However this will only apply to a claim in contract if the underlying fault also constitutes a tort, Vesta  v Butcher (1979) CA.[2] It will not be available where there has been breach of a strict duty in contract Barclays Bank v Fairclough Building Ltd (1995) CA.

By analogy it is submitted that a defendant cannot be found to owe a parallel duty of care in tort where the existence of such a duty is inconsistent with the contract structure negotiated and agreed between the parties.

[1] Chiemgauer Membran und Zeltbau GmbH (formerly Koch Hightex GmbH) v  New Millenium Experience Co Ltd (formerly Millenium Central Ltd) (2001)

[2] Forsikringsaktieselskapet Vesta -v- Butcher (1989) 1AC 852 (CA) O’Connor LJ at p.860 said:  “…I regard as a clearly established principle that, where under the general law a person owes a duty to another to exercise reasonable care and skill in some activity, a breach of that duty gives rise to a claim in tort, notwithstanding the fact that the activity is the subject matter of a contract between them. In such a case the breach of duty will also be a breach of contract. The classic example of this situation is the relationship between doctor and patient”.

2.     The Rule in Hadley  v  Baxendale

The principle of remoteness of damage for breach of contract was stated in Hadley  v  Baxendale (1854)9 Ex.341 by way of two tests (the “1st and 2nd Limbs of the rule”):  “Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either:

2.1   arising naturally, i.e. according to the usual course of things, from such breach of contract itself, [ 1st limb of the rule ][1] or

2.2 such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it [ 2nd limb of the rule].”                    

3.        Scope of the First Limb of the Rule in Hadley  v  Baxendale[2]         

3.1   The aggrieved party is only entitled to recover such part of the loss actually arising as may fairly and reasonably be considered as arising naturally, that is according to the usual course of things, from the breach of contract.

3.2   The question is to be judged as at the time of the contract.

3.3   In order to make the contract breaker liable it is not necessary that he should actually have asked himself what loss was liable to result from a breach of a kind which subsequently occurred. It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss of the type in question, not necessarily the specific loss, was liable to result.

3.4   The words “liable to result” should be read in the sense conveyed by the expressions “a  serious possibility” and “a real danger” and “not unlikely to occur” [for which purpose] knowledge of certain basic facts according to the usual course of things is imputed, but no special knowledge.

3.5   The important factor is whether the particular type of loss which occurs is within the contemplation of the  contracting parties as a serious possibility.

3.6   “It is clear from Victoria Laundry v  Newman that the contracting parties’ contemplation of loss of profits in general as a serious possibility does not allow a claim for a particular loss of exceptional profits to succeed. This is, as Stuart-Smith L.J made clear in rejecting counsel’s contrary contention in Brown v K.M.R. Services [ see (7) below ] because such a claim is to be regarded as for a different kind or type of loss” Bernstein .

3.7   “I do not see any difficulty in holding that loss of ordinary business profits are different in kind from those flowing from a particular contract which gives rise to very high profits, the existence of which is unknown to the other contracting party and who therefore does not accept the risk of such loss occurring. The law relating to remoteness of damage in contract is laid down in three cases, all of which deal with financial loss, namely Hadley v Baxendale (1854), Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949) 2 K.B. 528 and Koufos v Czarnikow Ltd (1967) 2 Lloyd’s’s Rep.457. The effect of these decisions is, in my  judgement, accurately summarised in Chitty on Contracts:

A type or kind of loss is not too remote a consequence of a breach of contract if, at the time of contracting (and on the assumption that the parties actually foresaw the breach in question), it was within their reasonable contemplation as a not unlikely result of that breach. 

And at par. 26-024, at p.1219: The reference to the “loss” in the formulations of the test for remoteness of damage is to be interpreted as the type or kind of loss in question. The “party” who has suffered damage does not have to show that the contract breaker ought to have contemplated, as being not unlikely, the precise detail of the damage or the precise manner of its happening. It is enough if he should have contemplated that damage of that kind is not unlikely….If the parties ought to have contemplated a particular type of loss they need not have contemplated the extent of that loss. The application of the test of remoteness to a particular set of facts therefore depends largely on the juridical discretion to categorise losses into broad categories, without requiring any contemplation of the precise manner in which the loss was caused, or the precise details of the loss.” per Stuart-Smith, L.J. Brown v KMR Services (1995) CA. at p.542.

4.     Scope of the Second Limb of the Rule in Hadley v Baxendale          

4.1   This depends upon additional special knowledge by the defendant [as stated in the following passage from Hadley v Baxendale]: “If the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated”.

But, on the other hand if these special circumstances were wholly unknown to the party breaking the contract, he at the most, would only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the multitude of cases not affected by any special circumstances, from such breach of contract.

For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them.

4.2   The question is to be judged at the time of contract so that damages claimed under the second limb will not be awarded unless the plaintiff has particular evidence to show that the defendant then knew the special circumstances relied on.

4.3   In order to make the contract breaker liable it is not necessary that he should actually have asked himself what loss was liable to result from a breach of a kind which subsequently occurred. It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss of the type in question, not necessarily the specific loss, was liable to result.

4.4   The words “liable to result” should be read in the sense conveyed by the expressions “a  serious possibility” and “a real danger” and “not unlikely to occur”. But the result in any particular case need not depend upon giving pride of place to any one of such phrases. It seems that the degree of likelihood can be less than evens Chitty on Contracts, even slight.

[1] “In other words would it have been clear to any reasonable person that such loss was likely to result from the  breach ?If so, damages are payable for that kind of loss. In later cases this has been called “direct” loss or damage.” Ribeiro.

[2] The House of Lords confirmed that Hadley v  Baxendale is the main authority on remoteness of damage in the Heron (1969).

Breach of Fiduciary Duty Claims

‘Whether the parties enter into a simple consignment agreement or an artist-dealer representation agreement, the arrangement involves the entrustment of works by the artist to the dealer, who acts as the artist’s legal agent. The law of agency governs the relationship. As the artist’s agent, the dealer is considered a fiduciary acting on behalf of the artist, who is the principal. Therefore the dealer is required to act only in the interest of the artist and to forego all personal advantage aside from just compensation. The dealer also owes the artist a duty of loyalty and I obligated to avoid conflicts of interest.

Fiduciary relationships are common in the art market. By law, a fiduciary acts on behalf of the principal. Similar to the dealer, who acts as a fiduciary to an artist he represents, auction houses are fiduciaries to their consignors. Museum directors and trustees act as fiduciaries to their institutions…

Typically, the artist retains title to the work while it is on consignment with the dealer. The work is considered trust property and the proceeds of the sale are considered trust funds belonging to the artist, and must be kept in a separate account. Dealers do not have discretion to use those proceeds for their own purposes … Once a sale is consummated; the dealer pays the artist an agreed-upon percentage of the sale price and keeps the remainder as a commission. Depending on the nature of the agreement with the artist, a dealer may pay the artist advances against future sales.

The dealer’s legal status as fiduciary means that he may not avail himself of any advantage at the expense of the artist, or engage in self-dealing, such as purchasing the artwork for himself, without the consent of the artist. For example if a dealer purchases a work outright from an artist, without disclosing that he had previously agreed to resell the work to a third party, the dealer would be in breach of his fiduciary duty and could be liable to the artist for damages resulting from that breach. In contrast if the dealer is not the artist’s agent and buys work outright from the artist, there is no fiduciary relationship, and hence no breach. However a dealer who knowingly defrauds an artist could be held criminally liable.’ (‘Visual Art And The Law – A Handbook For Professionals’ by Judith B. Prowda published by Sotherby’s Institute of Art, pages 135-6).

These disputes involve consideration of separate sets of rules derived from: (i) the law of agency; and (ii) the law of trusts. ‘Although equity’s fiduciary law has had a large role to play as between principal and agent, it is possible for agencies to operate without engaging with the law of trusts. Equally it is possible for trusts to operate without engaging the law of agency.  Sometimes the courts have allowed themselves to confuse the two sets of rules in ways that are illegitimate. [However] the two bodies of law do sometimes quite legitimately come into contact with one another, and from opposite directions. One the one hand, trustees may on occasions find it necessary or convenient, to delegate task to agents … On the other hand, principals sometimes require their agents to hold monies provided to them (either by the principals themselves or by a third party) on trust for the relevant principal. These situations … give rise to particular legal problems.’  (‘Some Aspects of the Intersection of the Law of Agency with the Law of Trusts‘ by Peter Watts, published in ‘Equity, Trusts And Commerce’ edited by Paul S Davies and James Penner (2017)).

Breach of Trust Claims

 

Contentious Probate Claims

 

Duress Claims

 

Equitable Compensation Claims

Introduction

‘Equitable compensation is not compensation for loss, it is restitution of the trust fund. If the defaulting trustee cannot restore the assets to the trust fund, then he must pay money into the trust instead. How much has to be paid into the trust fund is assessed by looking at the matter with hindsight to see what would be comprised in the trust fund but for the breach. Issues of remoteness, causation and mitigation have no place in the assessment of equitable compensation as they do with damages.’ Equitable Compensation: The Traditional View by Penelope Reed QC, presented to the Chancery Bar Association 5 May 2017: http://www.chba.org.uk/for-members/library/overseas-seminars/equitable-compensation

Whilst the remedy is not limited by foreseeability, remoteness, and other considerations which affect the recovery of common law damages, there must be a causal link between the breach and the loss to the trust fund.

It is important to work out the nature of the breach, as a  breach by a fiduciary which is not a breach of fiduciary duty but breach of his duty of care, will be treated like a claim for damages.

A trust takes effect over property creating equitable proprietary rights in favour of the beneficiaries, and Trustees owe fiduciary duties to beneficiaries not to:

(i)      make unauthorised profits;

(ii)     allow any conflict of interest; and

(iii)    self-deal with trust property.

‘Trustees are under a duty to act in “the best interests” of their beneficiaries. This is such a firmly established assumption that the duty has been incorporated explicitly in various statutes.’ The Law of Trusts by Geraint Thomas and Alastair Hudson.  It is also a fiduciary duty.

If the trustee makes an unauthorised disposal of the trust property, the obvious remedy is to require him to restore the assets or their monetary value. It is likely to be the only way to put the beneficiaries in the same position as if the breach had not occurred. It is a real loss which is being made good.

‘Trust duties are… fiduciary duties, trust relationships are necessarily fiduciary relationships, and trustees are… fiduciaries. On the other hand, fiduciary duties may not be trust duties.… [Fiduciaries] are obliged, within the fiduciary elements of their interactions to focus their energies on serving their beneficiaries’ best interests. The definition of “best interests” is not entirely straightforward, though. Does it entail that fiduciaries have positive duties to foster or further their beneficiaries’ interests, such as taking positive steps to obtain the best possible price for a property? Alternatively… must fiduciaries only refrain from acting in ways that are detrimental to their beneficiaries’ interests, thereby entailing that their duties are negatively fashioned – for example, a duty not to engage in conflicts, whether of interest and duty or of duty and duty?… Whether or not the rules and obligations imposed upon fiduciaries are positive (you must do this) or negative (you may not do that), the fact is that the fiduciary concept prescribes such rules and obligations: these are positive, purposive inclusions designed to achieve particular results. As with the situation involving express trustees, once persons or things are described as fiduciaries, Equity intervenes and prescribes a standard of conduct to which they must adhere.’ ‘Fiduciary Law’ by Leonard L. Rotman.

‘Although the normal remedy for equitable wrongdoing is restitutionary … the notion of equitable compensation is recognised by English law. Although this remedy has sometimes been called restitutionary, since the effect of it is to restore the claimant to the position which he or she occupied had the wrong not been committed, the remedy has nothing to do with the law of restitution as such simply because it is not assessed by reference to the gain made by the defendant but is instead assessed by reference to the loss suffered by the claimant… It is still unclear, however, to what extent the prevalence of restitutionary remedies for equitable wrongdoing will be affected by the growing recognition of equitable compensation.’ The Principles of the Law of Restitution by Graham Virgo.

Any s.14 application should be issued as a Part 7 claim. In addition to CPR r.8.8 (Procedure where defendant objects to the use of the Part 8 procedure), CPR, r.8.1(3) allows the court to make an order that the claim continues as if the claimant had not used the Part 8 procedure. As there are significant issues of fact, the Part 7 procedure is more appropriate. ‘Similarly, it is sensible for the claim to be formulated, as between solicitor and client, under the stricter Part 7 analysis before the question of issue arises, so that a weak claim can be filtered out and significant savings in costs achieved before too much money has been spent and too much has been incurred by way of a potential costs liability to the opposing party.’ Cohabitation Claims, 2nd Edition, by John Wilson QC, paragraph 14.26.

The costs management rules contained in CPR rules 3.12 to 3.18 and in PD 3E will apply. Where an application for a declaration under s.14 TLATA is issued by the claimant in his capacity as a person who ‘has an interest in property subject to a trust of land’, he is personally liable for costs, and if he loses, costs will not be indemnified out of C’s estate.

What is the legal basis for claiming equitable compensation for breach of fiduciary duty?

It is submitted that when considering compensation for a breach of an obligation the focus is not on the classification of the relationship as a whole but on the nature of the obligation which has been breached.

In AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (a case argued and decided in the context of a claim for breach of trust), Lord Reed stated,

‘Notwithstanding some differences, there appears to be a broad measure of consensus across a number of common law jurisdictions that the correct general approach to the assessment of equitable compensation for breach of trust is that described by McLachlin J in Canson Enterprises and endorsed by Lord Browne-Wilkinson in Target Holdings.

In Canada itself, McLachin J’s approach appears to have gained greater acceptance in the more recent case law, and it is common ground that equitable compensation and damages for tort or breach of contract may differ where different policy objectives are applicable.

Following that approach, which I have discussed more fully at paras 90-94, the model of equitable compensation, where trust property has been misapplied, is to require the trustee to restore the trust fund to the position it would have been in if the trustee had performed his obligation. If the trust has come to an end, the trustee can be ordered to compensate the beneficiary directly. In that situation the compensation is assessed on the same basis, since it is equivalent in substance to a distribution of the trust fund. If the trust fund has been diminished as a result of some other breach of trust, the same approach ordinarily applies, mutatis mutandis.

The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight. The foreseeability of loss is generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it. Losses resulting from unreasonable behaviour on the part of the claimant will be adjudged to flow from that behaviour, and not from the breach. The requirement that the loss should flow directly from the breach is also the key to determining whether causation has been interrupted by the acts of third parties. The point is illustrated by the contrast between Caffrey v Darby, where the trustee’s neglect enabled a third party to default on payments due to the trust, and Canson Enterprises, where the wrongful conduct by the third parties occurred after the plaintiff had taken Page 42 control of the property, and was unrelated to the defendants’ earlier breach of fiduciary duty.

It follows that the liability of a trustee for breach of trust, even where the trust arises in the context of a commercial transaction which is otherwise regulated by contract, is not generally the same as a liability in damages for tort or breach of contract. Of course, the aim of equitable compensation is to compensate: that is to say, to provide a monetary equivalent of what has been lost as a result of a breach of duty. At that level of generality, it has the same aim as most awards of damages for tort or breach of contract. Equally, since the concept of loss necessarily involves the concept of causation, and that concept in turn inevitably involves a consideration of the necessary connection between the breach of duty and a postulated consequence (and therefore of such questions as whether a consequence flows “directly” from the breach of duty, and whether loss should be attributed to the conduct of third parties, or to the conduct of the person to whom the duty was owed), there are some structural similarities between the assessment of equitable compensation and the assessment of common law damages.

Those structural similarities do not however entail that the relevant rules are identical: as in mathematics, isomorphism is not the same as equality. As courts around the world have accepted, a trust imposes different obligations from a contractual or tortious relationship, in the setting of a different kind of relationship. The law responds to those differences by allowing a measure of compensation for breach of trust causing loss to the trust fund which reflects the nature of the obligation breached and the relationship between the parties. In particular, as Lord Toulson explains at para 71, where a trust is part of the machinery for the performance of a contract, that fact will be relevant in considering what loss has been suffered by reason of a breach of the trust.

This does not mean that the law is clinging atavistically to differences which are explicable only in terms of the historical origin of the relevant rules. The classification of claims as arising in equity or at common law generally reflects the nature of the relationship between the parties and their respective rights and obligations, and is therefore of more than merely historical significance. As the case law on equitable compensation develops, however, the reasoning supporting the assessment of compensation can be seen more clearly to reflect an analysis of the characteristics of the particular obligation breached. This increase in transparency permits greater scope for developing rules which are coherent with those adopted in the common law. To the extent that the same underlying principles apply, the rules should be consistent. To the extent that the underlying principles are different, the rules should be understandably different.’

IPR Claims

Artist’s Resale Right (‘ARR’)

In the UK, the Artist’s Resale Right Regulations 2006 (the ‘Regulations’) created an intellectual property right (the ‘resale right’) which was previously unknown to United Kingdom law.

The Regulations implemented Directive 2001/84/EC of the European Parliament and of the Council on the resale right for the benefit of the author of an original work of art (‘the Directive’).

The Directive entered into force on 13 October 2001 and required transposition into national law by 1 January 2006.

The Directive was an internal market measure adopted under Article 95 of the EC Treaty which required Member States to introduce a harmonized right for authors of an original work of art, and their successors in title, to benefit from a share of the proceeds when the artists’ works are resold on the art market.

The Regulations introduce a new right which has not previously existed in the UK, although it has existed in several other EU Member States. The Directive has also been extended to the European Economic Area.’

Article 3 of the Regulations states,

‘3.

(1)   The author of a work in which copyright subsists shall, in accordance with these Regulations, have a right (“resale right”) to a royalty on any sale of the work which is a resale subsequent to the first transfer of ownership by the author (“resale royalty”).

(2)   Resale right in a work shall continue to subsist so long as copyright subsists in the work.

(3)   The royalty shall be an amount based on the sale price which is calculated in accordance with Schedule 1.

(4)   The sale price is the price obtained for the sale, net of the tax payable on the sale, and converted into euro at the European Central Bank reference rate prevailing at the contract date.

(5)   For the purposes of paragraph (1), “transfer of ownership by the author” includes in particular—

(a)       transmission of the work from the author by testamentary disposition, or in accordance with the rules of intestate succession;

(b)       disposal of the work by the author’s personal representatives for the purposes of the administration of his estate; and

(c)        disposal of the work by an official receiver (or, in Northern Ireland, the Official Receiver for Northern Ireland) or a trustee in bankruptcy, for the purposes of the realisation of the author’s estate.

Regulation 9(1) further provides ‘Subject to regulation 10(2), resale right in respect of a work is transmissible as personal or moveable property by testamentary disposition or in accordance with the rules of intestate succession; and it may be further so transmitted by any person into whose hands it passes.’

Resale right may be transmitted to:

  1. a natural person (and where it is transmitted to more than one person, it shall belong to them as owners in common); or
  2. a qualifying body.

Regulation 11 further provides that nothing in Regulation 9 prevents a resale right from being held, and exercised in respect of a sale, by any person acting as trustee for the person who would otherwise be entitled to exercise the right (“the beneficiary”), or from being transferred to such a trustee, or from the trustee to the beneficiary.

ARR entitles visual artists or their heirs to receive a royalty payment each time their work is sold on the secondary market in the UK through an auction house, gallery or dealer. The royalty is calculated as a percentage of the sale price, on a sliding scale ranging from 0.25 per cent to 4 per cent, subject to exemptions and a cap of €12,500 – see Schedule 1 of the Regulations.

The right lasts for as long as the copyright in the work subsists, which is normally for 70 years after the death of the artist. It may accordingly be

inherited by the artist’s successors. Two points arise from the fact that resale right was previously unknown to United Kingdom law. The first is that, where an artist dies before the Regulations come into force, there will at that time have been no resale right to pass to a successor. In regulation 16, the Regulations accordingly make provision for which of the artist’s successors is to be regarded as holding resale right in such circumstances. The second point is that the Article 8(2) of the Directive provides a special derogation which is limited to those Member States which did not previously have resale right in their national law. Such a State may prevent the successors of a deceased artist from exercising their resale right until 1st January 2010. Regulation 17 takes advantage of that derogation.

Resale right is declared by the Directive to be inalienable, and accordingly may neither be assigned nor waived. This principle is implemented in regulations 7 and 8. The limited exceptions provided by regulation 7(3) (transfer between charities) and regulation 11 (transfers of legal title to trustees) are not in reality a derogation from that principle, as the beneficial ownership of resale right is not thereby affected.

The Regulations also impose certain nationality requirements on the enjoyment of resale right (see regulation 10) . Only an EEA national, or a national of a country specified in Schedule 2, may benefit from resale right. This reflects the fact that (leaving aside EEA nationals, who must be treated equally with United Kingdom nationals) resale right is a right enjoyed on the basis of reciprocity. Thus only the nationals of countries which make resale right available to EEA nationals may benefit from the rights given under the Directive. That principle is also applied to charitable bodies, which may benefit from resale right only where they are based in such a country.

Injunctions

 

Negligence Claims (including Economic Loss Claims)

  1. DUTY OF CARE IN TORT OWED BY AN AUCTION HOUSE

The duty of care owed by an auction house was recently considered by Mr Justice Rose in Thwaytes v Sotherby’s [2015].

‘As to what the general duty on an auction house is, this was considered by the Court of Appeal in Luxmoore-May and Another v Messenger May Baverstock [1990] 1 WLR 1009. That case was brought against a firm of fine art auctioneers outside London who failed to spot that two small paintings of foxhounds might in fact be the work of the celebrated painter of animals George Stubbs. The paintings, which had been very dirty and overpainted when assessed by the auctioneer, were given a reserve price of £40 for the pair and sold for £840. They were subsequently sold as being by Stubbs for £88,000. The Court of Appeal allowed the auctioneers’ appeal against a finding of liability. In that case the two pictures had initially been consigned by the claimants to the auctioneer ‘for research’.

Slade LJ held that this term had no standard,recognised meaning but that in the context of that case the duty of the auction house was: “to express a considered opinion as to the sale value of the foxhound pictures, and for this purpose to take further appropriate advice.”

The Court went on to consider what was the standard of skill and care which the plaintiff had the right to expect of the auction house in the discharge of their duties. Each member of the Court of Appeal emphasised that the defendant in that case was a provincial auction house and not a leading London house: see Mann LJ at page 1028F and the comments of Sir David Croom-Johnson at page 1029H-1030A.

In the leading judgment Slade LJ referred to the analogy with the distinction in the medical world between general practitioners and specialists. He cited the judgment of Lord President Clyde in Hunter v Hanley 1955 S.L.T. 213, 217 where the Lord President said :

“In the realm of diagnosis and treatment there is ample scope for genuine difference of opinion and one man is clearly not negligent merely because his conclusion differs from that of other professional men … The true test for establishing negligence in diagnosis or treatment on the part of a doctor is whether he has been proved to be guilty of such failure as no doctor of ordinary skill would be guilty of it if acting with ordinary care…”

Slade LJ regarded the defendants in that case as akin to ‘general practitioners’ rather than ‘specialists’ and held that the standard of skill and are required of them was to be judged only by reference to what may be expected of a general practitioner. He also warned against assessing the defendant’s behaviour with the benefit of hindsight and set out an important rider: “The valuation of pictures of which the artist is unknown, pre-eminently involves an exercise of opinion and judgment, most particularly in deciding whether an attribution to any particular artist should be made. Since it is not an exact science, the judgment in the very nature of things may be fallible, and may turn out to be wrong. Accordingly, provided that the valuer has done his job honestly and with due diligence, I think that the court should be cautious before convicting him of professional negligence merely because he has failed to be the first to spot a “sleeper” or the potentiality of a “sleeper”: …”

The trial judge had held that the person who assessed the foxhound pictures on behalf of the auctioneers had been negligent because no competent valuer could have fixed on a low valuation without need for further investigation. This was because it was the duty of a general practitioner to guard against his own want of specialist knowledge and to exercise proper caution in arriving confidently at his own conclusion. He must know his own limitations. The judge posed the question ‘whether there was enough about these foxhounds to make it unreasonable for a competent valuer to be sure he was right when in fact he was so dramatically wrong’ and he held that there was. The Court of Appeal overturned the judge’s findings noting that although by the time of the trial the ‘Stubbs potential’ of the pictures was obvious and undeniable, in the case of a ‘sleeper’ it is all too easy for the court or anyone else to be wise after the event.

Slade LJ listed six elements of the evidence that convinced him that the judge had demanded too high a standard of skill on the part of the auctioneer, even though there was an impressive list of people who had recognised some quality in the paintings.

These elements included the large numbers of horse and dog paintings by insignificant artists that a valuer is likely to come across ; the fact that the paintings were not themselves of the high quality one would expect from Stubbs and that only two bidders were prepared to bid for the paintings at auction – no one else present thought bidding was worthwhile.

In applying the test set out in Luxmoore-May I must of course take into account that here the defendant is a leading auction house not a provincial one and that it must be held to the higher standard that the Court of Appeal rejected in that case.

In what ways must that higher standard of skill and care owed by a leading auction house be manifested?

First, I consider that those who consign their works to a leading auction house can expect that the painting will be assessed by highly qualified people qualified in terms of their knowledge of art history; their familiarity with the styles and oeuvres of different artists; and in terms of their connoisseur’s ‘eye’. In contrast, the valuer used by the defendant in Luxmoore-May had no formal fine art qualifications but that , the Court held, did not prevent him from being fully competent to assess the paintings in the defendant’s storeroom before the auction. Further the specialists at a leading auction house will have ready access to the opinions and services of art historians at the highest levels of scholarship around the world.

I doubt that the valuer in Luxmoore-May would have been in touch regularly with Sir Denis or Dr Christiansen to ask their opinions about works of art in the same way that the Sotheby’s’ employees clearly are.

Secondly, a leading auction house must give the work consigned to it a proper examination devoting enough time to it to arrive at a firm view where that is possible.

Again, this would contrast with the position Luxmoore-May where it appears from the evidence that the valuer gave the foxhounds a rather cursory examination as two among 50 paintings that he examined on his visit to the storeroom . It was not suggested that this of itself was negligent for that defendant but is far from what would be expected of Sotheby’s.

Thirdly, I consider that it would be much more difficult for a leading auction house to rely on the poor condition of a painting as a reason for failing to notice its potential – one of the factors that the Court of Appeal did find militated against a finding of negligence in Luxmoore-May.

However, much of what the Court of Appeal said in Luxmoore-May is still relevant here in particular about the nature of the task of attribution, the need to avoid hindsight, the prevalence of copies of the Cardsharps and the absence of bidders prepared to take the price up above £42,000 at the auction.

I also accept that the principle that an art expert must know his or her own limitations and when to bring in an expert would apply as much to Sotheby’s as it does to a provincial auction house albeit, of course, that the bar for where that threshold is crossed is set at a much higher level in Sotheby’s’ case.

There is one additional submission made by Mr Legge QC appearing for Mr Thwaytes that I accept. That arises from the difficulty of determining the prevailing standard of conduct when there are only two generally accepted auction houses of this stature at least as regards Old Masters, namely Sotheby’s and Christie’s. Mr Legge referred to the case of Edward Wong Finance Co Ltd v Johnson Stokes & Master (A Firm) [1984] 1 AC 297 where the claimant had suffered loss because of the manner in which the conveyance of a mortgaged property was carried out. The defendants’ case was that they had followed the normal and customary conveyancing practice current in Hong Kong.

The Privy Council nevertheless restored the finding of the first instance judge that the solicitors had acted negligently.

Although they accepted that the Hong Kong practice had obvious advantages for both solicitors and clients they held that it involved a foreseeable risk as operated in that particular case.

Mr Legge drew from this the principle that if the accepted practice among professional people in a particular matter falls into bad habits and creates unnecessary and easily avoidable risks for the client, then following that practice may still be regarded as negligent. Whether that principle can in fact be drawn from the case is not entirely clear to me but I accept the proposition that merely because Christie’s and Sotheby’s can be shown to act in a particular way does not automatically mean that that way is not negligent. There must be a back stop consideration of the need to protect the interests of the client.’

  1. RECOVERY OF LOSSES IN TORT

Please note that this summary of principles is based upon a legal opinion I worte about a number of years ago for a construction dispute, and is now somewhat out of date and needs to be both updated and revised in the context of art and antiquities disputes.

2.1     The elements of liability

2.1.1   To establish a claim in negligence, the claimant must show that the defendant owes him a duty of care and that there has been a breach of that duty causing actionable damage.

2.1.2   Definition of the circumstances in which a defendant owes a duty of care is closely related to definition of what is actionable damage.

2.1.3   The critical question is whether the scope of the duty of care in the circumstances of the case is such as to embrace damage of the kind which the claimant claims to have suffered.

2.1.4   Whatever the nature of the harm sustained, the court asks whether the damage was reasonably foreseeable and considers the nature of the relationship between the parties and whether in all the circumstances it is fair, just and reasonable to impose a duty of care.

2.1.5   Generally, the damage necessary to sustain a claim in negligence must be actual physical injury to person or property other than property which is the product of the negligence itself.

2.1.6   Normally a claimant claiming in negligence cannot recover economic loss. Economic loss is monetary loss and pure economic loss is monetary loss unrelated to physical injury to person or other property.

2.1.7   Economic loss is only recoverable where there is:

(1)      a special relationship amounting to reliance by the claimant on the defendant; or

(2)     where the economic loss is truly consequential upon actual physical injury to person or property.

2.1.8   It is thought that the right to recover pure economic loss in tort, not flowing from physical injury, does not extend beyond situations where the loss is sustained by a claimant who relies on a defendant who has assumed responsibility to the plaintiff as in Hedley Byrne v Heller & Partners.

2.2   Foreseeability of damage

2.2.1   The only damage for which a Defendant can be held liable in the tort of negligence is damage which is of such a kind as a reasonable man should have foreseen;

2.2.2   Where damage of a particular kind is suffered, then damage of that kind, and not of any other kind must have been foreseeable;

2.2.3   Where damage of a particular kind is foreseeable, then it does not matter that the precise manner in which such damage was caused by the Defendant’s negligent act is not foreseeable;

2.2.4   Where damage which occurred is of a kind which a reasonable man would have foreseen, then (all other things being equal) the Defendant will be liable for the full extent of the claimant’s loss, even if a reasonable man could not have foreseen the extent of that loss.

2.2.5   “kind of loss” refers not to the distinction between economic loss and physical damage, but to the distinction between physical damage caused by one means (say by direct impact) rather than by another (say by fire).

2.2.6   The crucial question is whether damage of the type claimed was reasonably foreseeable by the defendant.

2.3     Proximity

2.3.1   “In addition to the foreseeability of the damage, the necessary ingredients in any situation giving rise to a duty of care are that there should exist between the party owing the duty and the party to whom it is owed a relationship characterised by the law as one of proximity or neighbourhood and that the situation should be one in which the court considers it fair, just and reasonable that the law should impose a duty of a given scope upon the one party for the benefit of the other” per Lord Bridge Caparo Industries plc  v  Dickman (1990) 2 AC at 617.

2.3.2   “Proximity is, no doubt, a convenient expression, so long as it  is realised that it is no more than a label which embraces not a definable concept, but merely a description of circumstances, from which, pragmatically, the courts conclude a duty of care exists” per Lord Oliver in Caparo at p.633

2.4     Scope of the duty

2.4.1   “One of the most important concepts to comprehend when considering whether a duty of care is appropriate in any particular category of case is that, although the first two of the essential ingredients (i.e. foreseeability and proximity) might be satisfied, and although it might in a general sense seem just and reasonable to impose a duty of care, the courts will refuse to do this if this would result in a duty of care being imposed which is of a wider scope, ambit or extent, or in respect of damage of a different kind than the judges believe is warranted in the interests of fairness, justice or pragmatism” Bernstein.

2.4.2   “The true question in each case is whether the particular defendant owed to the particular plaintiff a duty of care having the scope which is contended for, and whether he was in breach of that duty with consequent loss to the plaintiff. A relationship of proximity in Lord Atkin’s sense [Donohue -v- Stevenson] must exist before any duty of care can arise, but the scope of the duty must depend on all the circumstances of the case. So in determining whether or not a duty of care of a particular scope was incumbent upon a defendant, it is material to take into consideration whether it is just and reasonable that it should be so.” Lord Keith in Governors of the Peabody Donation Fund v Sir Lindsay Parkinson & Co Ltd (1985) 1 AC 210.

2.5     Justice and reasonableness

2.5.1   “Even if the plaintiff’s loss caused by the defendant’s negligent act was foreseeable, and even if the relationship between them was proximate, the court will not impose a duty of care on the defendant for the plaintiff’s loss unless the court is satisfied that, in all the circumstances, the interests of justice and fairness or what is simply called policy, would be better served by doing so than by not doing so… the problem for legal advisors is that it is very difficult to predict in advance how any judge will decide a policy issue in an area of law where the precise question for consideration has not arisen before.” Bernstein.

2.5.2   “The approach which the House of lords would like the Courts to follow is a composite approach in which all of the relevant considerations relating to the actual facts of the case and the wider implications of imposing or not imposing a duty of care on the defendant for the plaintiff’s economic loss are considered. While such well-known concepts as foreseeability and proximity may be invoked as guides to the answer in any particular case, they are not to be applied as steps in a rigid formula in which the answer will self-evidently appear if certain questions are answered one way or the other. Rather judges are exhorted to bear in mind that they are involved in a delicate balancing exercise of all the circumstances of the case, with a view to achieving a just and reasonable result. In  conducting this exercise, judges are to pay especial regard to settled decisions relating to the same category of case as the individual case calling for their decision, and are to move slowly and, by way of analogy, in small incremental steps in enlarging established duties of care, if at all.” Bernstein.

2.5.3   “At bottom I think the question of recovering economic loss is one of policy.  whenever the courts draw a line to mark out the bounds of duty, they do it as a matter of policy so as to limit the responsibility of the defendant.  Whenever the courts set bounds for damages recoverable – they maintain that they are, or not, too remote – they do it as a matter of policy so as to limit the liability for the defendant. …  it seems to me better to consider the particular relationship in hand and see whether or not, as a matter of policy economic loss should be recoverable, or not”. Lord Denning in Spartan’s Steel and Alloys Limited v Martin & Company (Contractors) Limited (1973) 1QB 27.

2.6    Proximity based on reliance

2.6.1 In Murphy Lord Oliver stated the following propositions (at p485):

(1)      The critical question is not the nature of the damage in itself, whether physical or pecuniary, but whether the scope of the duty of care in the circumstances of the case is such which the claimant claims to sustain.

(2)      The essential question which has to be asked in every case given that damage which is the essential ingredient of the action has occurred, is whether the relationship between the claimant and the defendant is such – or, to use the favourite expression, whether it is of sufficient proximity – that it imposes on the latter A duty to take care to avoid or prevent that loss which has in fact be sustained.

(3)      That the requisite degree of proximity may be established in circumstances in which the claimant’s injury results from his reliance upon the statement or advice upon which he was entitled to rely and upon which it was contemplated that he would be likely to rely is clear from Hedley Byrne and subsequent cases, but Annes was not such A case and neither is the instant case.

2.10.2 Bernstein submits that if as the House of Lords has said, the key factor in establishing proximity is reliance, or, more accurately, knowledge, actual or imputed, by the defendant that the claimant would be relying on his (defendant’s) skill and experience, that this test would be capable of being satisfied where the defendant knew, or ought to have known, that the claimant, or a person within the same class of the claimant, would be likely to use the defendant’s product without making an independent intermediate examination of his own which would be likely to reveal the hidden defect.  The plaintiff’s reliance and the defendants foresight of such reliance, does not in these circumstances have to be only a statement or advice.  Whether this test will actually be satisfied in any particular case will depend on what the parties actually said or did, or ought in the circumstances to have said or done. 

2.7    Misstatement and Misprepresentation

2.7.1 “The Law Lords in Hedley Byrne … all made statements which demonstrate that the basis of the existence of duty of care in this type of case is knowledge or foreseeability, actual or imputed, by the defendant that A particular person or class of persons would most probably place reliance on the defendants statement, advice or service rendered without making any further enquiries to verify the accuracy of that statement, advice or service”.

2.7.2 A negligent misstatement or misrepresentation may give rise to an action for damages for financial loss since the law will imply A duty of care when A party seeking information from A party possessed of special skill trusts him to exercise due care, and that party knew or ought to have known that reliance was being placed on his skill and judgement.

2.7.3 Liability for economic loss due to negligent misstatement is confined to cases where the statement or advice is given to A known recipient for A specific purpose of which the maker of the statement is aware and upon which the recipient has relied and acted upon to his detriment.

2.7.4 The law adopts A restrictive approach to any extension of the scope of the duty of care beyond the person directly intended by the maker of the statement to act upon it.

2.7.5 Matters to be considered are the purpose for which it was made and the purpose for which it was communicated to the plaintiff: the relationship between the maker and the receiver of the statement and any relevant third party; the size of the class to which the claimant belongs; the state of knowledge of the defendant; and whether and to what extent the claimant was entitled to rely of the statement (James McNaughton Paper Group  v Hicks Anderson & Co (1991) 2QB 113(CA).

In Caparo Plc v Dickman (HL) (1990) 2 AC 605

Lord Oliver said;

“It can be deduced from the Hedley Byrne case …. that the necessary relationship between the maker of a statement or giver of advice (the “Advisor”) and the recipient who acts in reliance upon (the “Advisee”) may typically be held to exist where (1) the advice is required for a purpose, whether particular specified or generally described, which is made known, either actually or inferentially, to the Advisor at the time when the advice was given; (2) the Advisor knows, either actually or inferentially, that his advice will be communicated to the Advisee, either specifically, or as a member of an ascertainable class, in order that it should be used by the Advisee for that purpose; (3) it known either actually or inferentially, that the advice so communicated is likely to be acted upon by the Advisee for that purpose without independent enquiry; and (4) it is so acted upon by the Advisee to his detriment.  That is not, of course, to suggest that these conditions are either conclusive or exclusive, but merely that the actual decision in the case does not warrant any broader propositions.”

Lord Jauncy emphasised that “the crucial question is the purpose in which the report was made.”

2.7.6 The misstatement must play A real and substantial part in inducing the claimant to act, though it need not by itself be decisive.

2.7.7 No duty arises if the person making the statement shows that he is not assuming or accepting A duty to be careful.

2.7.8 There must be something more than misstatement. There is the additional requirement that expressly or by implication from the circumstances the writer has undertaken some responsibility.

2.7.9 There may be liability deriving from relationships which are equivalent to contract, that is where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract, Caparo Industries v Dickman.

2.7.10 The Hedley Byrne principle has been expressly applied to A number of categories of person who perform services of a professional or quasi-professional nature (including auctioneers and valuers).

2.7.11 Although the duty of care will normally be owed to the recipient of  the statement, that will not always be exclusively so.

2.7.12 Circumstances where a liability for negligent misstatement has been or might be held to arise [include] “Specialist sub-contractors”:

1.       It is still judicially suggested that Junior Books v Veichi (which had it not been a decision of the House of Lords would have been overruled by Murphy) might be understood on the basis that there was a special relationship of proximity between the building owner and the sub-contractor which was sufficiently akin to contract to introduce the element of reliance so that the scope of the sub-contractor’s duty of care was wide enough to embrace economic loss. But it is not clear that the case was decided on such a basis nor is it clear what features of its commonplace facts support a sufficient special relationship. The duties were averred to flow from the defender’s position as reasonably competent flooring contractors, and not from any relationship which they had as such with the pursuers. The case has been classified as unique and it is thought that it should at most be regarded as a case of no general application.

  1. By analogy with the construction industry, where an an Employer obtained advice from a specialist, there is a direct contract or collateral warranty and this may regulate or even negate a duty of care in tort Greater Nottingham Co-Operative Society v Cementation Piling and Foundation (1989)QB 71 (CA).[1]

2.7.13 It is however possible that special factual circumstances may arise where an an Employer relies on specific advice from a specialist with whom he is not in contract so that the specialist assumes a duty to guard the an Employer against economic loss Simaan General Contracting Co -v- Pilkington Glass (No.2) (1988) Q.B. 758.

2.7.14         In Hamble Fisheries Limited -v- Gardner & Sons Limited (1999) Lloyds Law Rep Vol 2 p. 1 (CA) Tuckey LJ said;

“What is required to establish a special relationship of proximity? In White v  Jones at p.274 Lord Brown Wilkinson said: although the category of cases in which such a special relationship could be held to exist are not closed, as yet only two categories have been identified viz.1. where there is a fiduciary relationship and 2. where the defendant has voluntarily answered a question or tendered skilled advice or  services in circumstances where he knows or ought to know that an identified Plaintiff will rely on his answers or advice.  In both these categories this special relationship is created by the defendant voluntarily assuming to act in the manner by involving himself in the Plaintiff’s affairs or by choosing to speak.  If he does so seem to act or speak he is said to have resumed responsibility of carrying through the matter he has entered upon. 

But for the absence of consideration there would have been a contract between the parties Hedley Byrne  v Heller.  In White v Jones there was no privity of contract between the solicitor and the beneficiary although the contract was intended to benefit the latter.  This is now the accepted explanation for the decision in Junior Books Limited v Veitchi Company Limited (1983) where the nominated specialist subcontractor was to replace flooring for the benefit of the building owner.  The emphasis in the recent cases is on the assumption of responsibility by the Defendant.”

In Williams v Natural Life Health Foods Limited (1998) 1 LLR 830… Lord Stein at p.835 said:

“The touchstone of liability is not the state of mind of the Defendant.  An objective test means that the primary focus must be on things said and done by the Defendant or on his behalf in dealings with the Plaintiff.  Obviously the impact of what a defendant says or does must be judged in light of relevant contractual and textual scene.  Subject to disqualification the primary focus must be on exchanges (in which term I include statements and conduct) which crossed the line between the defendant and the Plaintiff).

… The test is an objective one so that the focus of the enquiry must be on statements and conduct which crossed the line between the parties.  Here the appellants had no dealings with the Respondents or the manufacturers at any time.  The Appellants were unknown to them as one of an unspecified number of customers who had purchase Gardner engines.  Only the manual crossed the line to the Appellants and that had not been issued by the Respondents.

I cannot spell out of the facts something akin to contract.  The parties simply had no dealings with one another.”

In Hamble Fisheries Lord Justice Mummery said;

“There is no general duty in English law to take reasonable care to avoid inflicting financial loss on those whom it is reasonably foreseeable will suffer such loss in consequence of acts or omissions. If a generalisation can competently be made about this controversial and difficult aspect of the law of negligence, it is that the recent decisions of the House of Lords cited by Lord Justice Tuckey affirm a general principle ruling out the recovery for carelessly inflicted foreseeable financial loss in the absence of the contract or a special relationship of proximity between the parties, giving rise to a voluntary assumption of responsibility for the financial loss. 

If this recent authority is upheld, liability for purely financial losses confined to cases of special relationships involving the voluntary assumption of responsibility, there cannot be any liability on this case because, as Mr G put it, there has been no crossing of the line between the parties so as to bring them into proximity of one and other: no direct supply of goods, advice or services, no commercial contract.”

2.8    Relational Economic Loss 

2.8.1 “In a relational economic loss case the defendant negligently damages property belonging to a third party and the plaintiff suffers economic loss because of a dependance upon that property or its owner.  The general rule is that no duty is owed to the plaintiff in such a situation” Clerk and Lindsell on Torts . This formulation was approved by Judge Hicks in London Waste Limited v Amec Civil Engineering Limited (1997) 83 BLR 136.

2.8.2 It is important to appreciate that the rule operates to exclude recovery where economic loss suffered by a claimant is consequential on damage to a third party’s property by a negligence where the plaintiff does not have a proprietary or a possessory interest in the property of the third party.

2.8.3 A proprietary interest is absolute ownership or an interest which allows the owner of it to exercise rights equivalent to rights of ownership.

2.9     Recent cases

Remoteness of damage and loss of chance

In Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146, Lord Justice Floyd stated,

‘The rule which controls what damage is recoverable in contract has been reviewed and analysed in many decisions since Hadley v Baxendale (1854) 9 E. 341. The rule was restated by the Court of Appeal in Victoria Laundry, re-examined by the House of Lords in The Heron II [1969] 1 AC 350 and most recently considered by the House in The Achilleas. It remains the basic rule that a contract breaker is liable for damage resulting from his breach if, at the time of making the contract, a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach. The principle is founded on the notion that the parties, in the absence of special provision in the contract, would normally expect a contract breaker to be assuming responsibility for damage which would reasonably be contemplated to result from a breach. The Achilleas shows that there may be cases where, based on the individual circumstances surrounding the making of the contract, this assumed expectation is not well founded. Thus, in that case, charterers of a ship were not liable for all the consequences of a late redelivery of the vessel, which had forced the owners to renegotiate a more favourable rate for a follow-on charter. The commercial pressure to renegotiate had arisen because of unusually and highly volatile market rates. According to Lord Hoffmann (see paragraph 23), with whom Lord Hope agreed, departure from the ordinary test was justified because the loss claimed would have been completely unquantifiable at the date of the contract and because the general understanding of the market was that the claimed loss was not recoverable. The charterer could not reasonably be taken to have assumed responsibility for the particular loss claimed. Lord Hoffman recognised that the mere fact that losses were unforeseeably large did not exclude recovery if loss of that type would fall within one or other of the rules in Hadley v Baxendale (see paragraph 21). Nevertheless there was also what he called an “exclusive principle” which meant that there could be some foreseeable losses for which the contract breaker would not be liable because they were not the kind or type of loss for which he can be treated as having assumed responsibility (ibid). Whether a type of loss was different is determined by asking whether it reflects what would reasonably have been regarded as significant for the purpose of the risk being undertaken (paragraph 22). Lord Hoffmann did, however, point out that:

“…cases of departure from the ordinary foreseeability rule based on individual circumstances will be unusual, but limitations on the extent of liability in particular types of contract arising out of general expectations in certain markets, such as banking and shipping are likely to be more common”.

Lord Rodger, with whom Lady Hale agreed, felt able to bring the case within the traditional remoteness rule, holding that the loss in question stemmed from an unusual occurrence of which the charterers were unaware and could not have been foreseen as being likely to arise out of the delay in question. He felt it unnecessary to deal with questions of assumption of responsibility in those circumstances (see paragraphs 60 and 63).

The speech of Lord Walker contains passages which appear to approve the “assumption of responsibility” approach of Lord Hoffman and Lord Hope: see for example his approval of the proposition that foreseeability itself is not a satisfactory test at paragraph 79. At paragraph 87, however, he allies himself in addition with the reasoning of Lord Rodger. I have not found it necessary to delve further into the question of whether this means that the true ratio of the decision is that given by Lord Hoffmann or Lord Rodger, or whether there are two inconsistent ratios.

I turn to consider the rules in tort. The primary rule which determines what damage is recoverable in tort remains that of reasonable foreseeabilty. As has been made clear by the decision of the House of Lords in SAAMCO, reasonable foreseeability is not the sole criterion. The damage must be of a kind which falls within the scope of the duty of care. In SAAMCO Lord Hoffmann explained at page 212 D-F that the scope of the duty is determined in the case of a statutory duty by deducing the purpose of the duty from the context and purpose of the statute. In the case of a tortious duty it is determined by the purpose of the rule imposing the duty. In the case of an implied contractual duty, the scope of the duty is that which the law regards as best giving effect to the express obligations in the contract.

SAAMCO was a group of cases brought against valuers who had provided negligent valuations to lenders on the strength of which money had been advanced. Concurrent duties were owed in contract and tort. Lord Hoffman said, after referring to Henderson v Merrett, that the scope of the duty in tort in such a case was the same as that in contract: see page 211 G. The question at issue was whether the valuers could be held responsible for the component of the lenders’ losses which was attributable to a general collapse in property prices which caused the lenders to suffer increased losses when the borrowers defaulted. The principle to be applied in such cases, as stated at page 214 C-D, limits the valuers’ liability to the consequences of the information being wrong. A duty which imposed on the valuer a responsibility for losses which would have occurred even if the information he gave were correct was not a fair and reasonable one to impose.

What then are the relevant differences in the rules governing the damage recoverable for breach of duty as between contract and tort? It appears to be accepted that the “reasonable contemplation” test in contract is more restrictive than the “reasonable foreseeability” test in tort: see the discussion of this in The Achilleas in the judgment of Lord Hope at paragraphs 31-32. Damage may be of a kind which is reasonably foreseeable (and therefore recoverable in tort) yet highly unusual or unlikely (and therefore irrecoverable in contract). Beyond this, although there are clear parallels between the contractual “assumption of responsibility” analysis of Lord Hoffmann and Lord Hope in The Achilleas and the “scope of duty” analysis in SAAMCO, they cannot be regarded as the same for all purposes, not least because the first depends on the individual circumstances surrounding the making of a contract and the second on the purpose of the rule imposing the tortious duty.

The passage in McGregor on Damages, on which Mr Pooles relies, argues as follows:

Difficulties can arise where actions in contract and tort lie concurrently and, on the particular facts, the damages are wider in tort than in contract. Since the tort of negligence has been expanded to allow recovery for pure economic loss so that in cases of professional negligence there is concurrent liability in contract and in tort, the question arises whether, where it would make a difference, the victim of the negligence may rely on the wider tortious test of reasonable foreseeability and ignore the stricter and more limiting contractual test of contemplation of the parties. It is thought that there is much to be said for not allowing this to be done. Where the claim in tort is in the context of a contractual relationship, the parties are not strangers, as most tortfeasors and tort victims are, and they should be bound by what they have brought to their contractual relationship in terms of what risks have been communicated by the one and undertaken by the other. This question has not yet been faced by the courts but one day, hopefully soon, it will have to be. … It is thought also that this solution would not entail depriving the victim of contractual and tortious negligence of the entitlement to take advantage of the longer limitation period available in the tort. For the exclusion of the tort remedy on remoteness ground[s] is geared to what risks the contracting parties have undertaken, a consideration that has no application to the availability of limitation periods.”

There can be no real doubt as to the good sense of this proposal. In Rubenstein v HSBC Bank plc [2012] EWCA Civ 1184, a case on which reliance was placed by Mr Pooles, the claimant, Mr Rubenstein, wished to invest the proceeds of sale of his house in a safe investment pending the purchase of another property. The bank advised him to invest in a fund which they viewed as “the same as cash invested in one of our accounts”. In fact the relevant fund was subject to market fluctuations and an investor was only entitled to what the underlying investments were worth at the time repayment was requested. The 2008 financial crisis intervened and there was a run on the fund, causing Mr Rubenstein a significant loss. The trial judge found that the advice given by the bank was both negligent and in breach of statutory duties, but the damage was unforeseeable and too remote.

Rix LJ, with whom Lloyd and Moore-Bick LJJ agreed, pointed out at paragraph 114 that there was a danger in such cases in considering the position under the tort of negligence first and only subsequently turning to breach of statutory duty. He explained:

“As Lord Hoffmann pointed out in SAAMCO … in a case of statutory duty the question as to scope of duty is to be answered by reference to the statute itself, and in such a context the position in negligence and contract will fall in behind the statutorily discerned purpose. If, however, the position in tort or contract, absent the context of statutory duty, might lead to a separate result, as it might, there seems to me to be no profit in considering that position first in a case where breach of statutory duty has been established. To do so increases the risk of error.”

Later when dealing with an argument about remoteness of damage (the loss had occurred at a point in time later than the end of the period for which Mr Rubenstein had said he required the investment) Rix LJ said:

“Ultimately, the question of remoteness (at any rate in a contractual setting, which Lord Reid in The Heron II suggested was the more restricted one, because a claimant could stipulate contractually for his own protection) is a matter of the reasonable contemplation of the parties. In the context of statutory protection for the consumer, it seems to me that a bank must reasonably contemplate that, if it misleads its client as to the nature of its recommended investment, and thereby puts its client into an investment which is unsuitable for him, when it could just as easily have recommended something more suitable which would have avoided the loss in question, then it may well be liable for that loss.”

This passage indicates that the nature of the statutory duty was one of the factors which informs what is within the reasonable contemplation of the parties on the issue of remoteness. The case is not, however, authority for the proposition that the rules of remoteness in tort, contract and breach of statutory duty are the same in cases of concurrent liability. By applying the more restrictive contractual approach, Rix LJ both recognised that the tests are not necessarily the same and caused that question to be immaterial in the case before him.

Nevertheless, I am persuaded that where, as in the present case, contractual and tortious duties to take care in carrying out instructions exist side by side, the test for recoverability of damage for economic loss should be the same, and should be the contractual one. The basis for the formulation of the remoteness test adopted in contract is that the parties have the opportunity to draw special circumstances to each other’s attention at the time of formation of the contract. Whether or not one calls it an implied term of the contract, there exists the opportunity for consensus between the parties, as to the type of damage (both in terms of its likelihood and type) for which it will be able to hold the other responsible. The parties are assumed to be contracting on the basis that liability will be confined to damage of the kind which is in their reasonable contemplation. It makes no sense at all for the existence of the concurrent duty in tort to upset this consensus, particularly given that the tortious duty arises out of the same assumption of responsibility as exists under the contract …

There is another and quite separate principle which arises not when there is a problem identifying a compensatable head of loss, but in the assessment or quantification of damages. It was expressed by Lord Diplock in Mallet v McMonagle [1970] AC 166 at 176 in the following way:

“The role of the court in making an assessment of damages which depends upon its view as to what will be and what would have been is to be contrasted with its ordinary function in civil actions of determining what was. In determining what did happen in the past a court decides on the balance of probabilities. Anything that is more probable than not it treats as certain. But in assessing damages which depend upon its view as to what will happen in the future or would have happened in the future if something had not happened in the past, the court must make an estimate as to what are the chances that a particular thing will or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages which it awards.”

The assessment or quantification of damages is itself an exercise which is different in nature from establishing whether any fact did or did not occur, or even whether any event would, in some hypothetical situation, have occurred or is likely in the future occur. One does not, for example, expect a party to show that the particular sum which he claims as general damages is more likely than not to be the precise damage which he has suffered.

As the passage from Mallet recognises, however, the assessment of damages may be dependent on the court’s view as to whether particular events would have occurred or will occur. Those chances are to be taken account of in the assessment of damages.

Questions of assessment of damage, however, have to be distinguished from questions of causation. These issues are discussed at length in the decision of this court in Allied Maples. As the court there explained, in the context of causation, some hypothetical questions (“what would have happened if …”) do fall to be decided on the balance of probabilities. Thus (see Stuart-Smith LJ at page 1610 D-H) where the breach of a duty consists of an omission, for example to provide safety equipment, and the question is what the claimant himself would have done had the breach of duty not occurred – a question of causation – the claimant has to prove the matter on the balance of probabilities. He does not get a percentage award if he falls just short of the threshold, and he does not suffer a discount if he passes it.

Stuart-Smith LJ went on to explain that in many cases the causation of the claimant’s loss may depend on the hypothetical action of a third party, either in addition to the claimant himself or independently of him. In those cases the court does not demand that the claimant establish his case of causation on the balance of probabilities: see Allied Maples at 1611 A-C. All the claimant has to show in such cases is that the chance is a real or substantial one. Having done so he must still show, on the balance of probabilities that the defendant’s act has caused the loss of the chance (see to this effect per Lord Nicholls in Gregg v Scott [2005] UKHL 2 at [17]). Once the claimant has shown on the balance of probabilities that he has lost the relevant chance, the valuation of the chance is a question for the quantification or assessment of damages.

I would have thought that, applying those principles to the present case, it would be plain that, whilst WP would need to show on the balance of probabilities that, but for the negligence complained of, they would have opened a US office (a question of causation dependent on what the claimant would have done in the absence of a breach of duty), the actual loss which they claimed to have been caused by the defendant was dependent on the hypothetical actions of a third party, namely Nomura. Accordingly, in line with well established principle, the chances of Nomura deciding to award the mandates to WP would have to be reflected in the award of damages.

Ms Parkin submits, however, that subsequent cases show this result to be incorrect. The Owners of the Ship “Front Ace” v The Owners of the “Vicky 1” [2008] EWCA Civ 101, concerned a vessel which had been prevented by a collision from 57 days of profitable employment by its owners. The experts had proceeded to agree a figure for hire in that period without any suggestion of a reduction on the basis of a loss of a chance that the vessel would be profitably employed. Sir Anthony Clarke MR (with whom Dyson LJ and Jacob LJ agreed) said this:

“71. … I am not persuaded that this is a case for the application of the loss of a chance approach discussed in Allied Maples among many other cases. This is not as I see it a case in which, as Stuart-Smith LJ put it at 1611A-B,

“… the plaintiff’s loss depends on the hypothetical action of a third party, either in addition to action by the plaintiff, as in this case, or independently of it.”

It is not a case where the claimants’ loss depends upon a chance of making a particular contract. The exercise upon which the experts were engaged was to find the appropriate market rate for the use of the vessel in the relevant 57 days in circumstances in which it was established that she would have been profitably employed during that period. The experts agreed the appropriate figure. So indeed did the parties, at any rate assuming that it was appropriate to adopt the time equalisation approach, which in my opinion it was.

  1. There are many cases in which courts or arbitrators have to determine what rate of profit would have been earned but for a tort or breach of contract. As I see it, in a case of this kind, where the court has held that the vessel would have been profitably engaged during the relevant period, where there is a relevant market and where the court can and does make a finding as to the profit that would probably have been made (and has been lost), there is no place for a discount from that figure to reflect the chance that the vessel would not have been employed.
  2. It has not in my experience been suggested in the past that any such discount should be made. This situation is to be contrasted with a case in which it is not shown that the vessel would have been profitably employed but she might have been. It may be that in those circumstances it would be possible to approach the problem as a loss of a chance. However, I would not wish to express a firm view on that question in this case, where it does not arise on the facts. Here, given the exercise carried out by the experts and given the figure agreed by them, there is in my opinion no warrant for a reduction of 20 per cent, either to reflect a risk that the vessel would not have been employed or for contingencies to reflect that the figure agreed might not be accurate.”

In Parabola (cited above) Tangent claimed damages in deceit for capital losses, and lost profits lost through being induced to engage in loss-making trades. The judge found on the balance of probabilities that, but for the deceit, Tangent would have traded profitably at a particular level. On appeal the defendants’ attack was on the figure for profitability on which the judge alighted. It was submitted that there was no basis for the finding that the claimant would have traded at this specific level of profitability. Toulson LJ, as he then was (with whom Mummery and Rimer LJJ agreed) rejected this argument:

“22. There is a central flaw in the appellants’ submissions. Some claims for consequential loss are capable of being established with precision (for example, expenses incurred prior to the date of trial). Other forms of consequential loss are not capable of similarly precise calculation because they involve the attempted measurement of things which would or might have happened (or might not have happened) but for the defendant’s wrongful conduct, as distinct from things which have happened. In such a situation the law does not require a claimant to perform the impossible, nor does it apply the balance of probability test to the measurement of the loss.

  1. The claimant has first to establish an actionable head of loss. This may in some circumstances consist of the loss of a chance, for example, Chaplin v Hicks [1911] 2 KB 786 and Allied Maples Group Limited v Simmons and Simmons [1995] 1 WLR 1602, but we are not concerned with that situation in the present case, because the judge found that, but for Mr Bomford’s fraud, on a balance of probability Tangent would have traded profitably at stage 1, and would have traded more profitably with a larger fund at stage 2. The next task is to quantify the loss. Where that involves a hypothetical exercise, the court does not apply the same balance of probability approach as it would to the proof of past facts. Rather, it estimates the loss by making the best attempt it can to evaluate the chances, great or small (unless those chances amount to no more than remote speculation), taking all significant factors into account. (See Davis v Taylor [1974] AC 207, 212 (Lord Reid) and Gregg v Scott [2005] 2 AC 176, para 17 (Lord Nicholls) and paras 67-69 (Lord Hoffmann)).
  2. The appellants’ submission, for example, that “the case that a specific amount of profits would have been earned in stage 1 was unproven” is therefore misdirected. It is true that by the nature of things the judge could not find as a fact that the amount of lost profits at stage 1 was more likely than not to have been the specific figure which he awarded, but that is not to the point. The judge had to make a reasonable assessment and different judges might come to different assessments without being unreasonable. An appellate court will therefore be slow to interfere with the judge’s assessment.”

Toulson LJ is thus saying that Tangent’s claim was not one which depended on “loss of a chance” in order to identify some head of loss. The judge had been able there to find that it was likely that Tangent would have traded profitably, as contrasted with cases such as Chaplin v Hicks where no analogous conclusion could be drawn. The judge was nevertheless required to take account, in the assessment of damages, of “the chances, great or small (unless those chances amount to no more than remote speculation), taking all significant factors into account.”

In Vasiliou the defendant was responsible for causing the claimant restaurateur to cease trading. There were two separate claims involved, but it is sufficient for these purposes to consider what was said about the first. The trial judge had concluded that, but for the difficulties created by the defendant, the claimant would have succeeded in running a successful restaurant. Patten LJ (with whom Ward and Black LJJ agreed) said this:

“21. In the classic loss of a chance case the most that the claimant can ever say is that what he (or she) has lost is the opportunity to achieve success (e.g.) in a competition (Chaplin v Hicks [1911] 2 KB 786) or in litigation (Kitchen v Royal Air Forces Association [1958] 1 WLR 563). The loss is by definition no more than the loss of a chance and, once it is established that the breach has deprived the claimant of that chance, the damage has to be assessed in percentage terms by reference to the chances of success. But there will be other loss of chance cases where the recoverability of the alleged loss depends upon the actions of a third party whose conduct is a critical link in the chain of causation. The decision of this court in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 has established that causal issues of that kind can be determined on the basis that there was a real and substantial chance that the relevant event would have come about.

  1. To that extent the Allied Maples approach may assist a claimant by providing an alternative way of putting his case on damage which avoids the possibility of total failure inherent in the judge being asked to decide whether, on the balance of probabilities, the causal event would have occurred. But caution needs to be exercised in identifying the contingency which is said to represent the lost chance. The loss of a chance doctrine is primarily directed to issues of causation and needs to be distinguished from the evaluation of factors which go only to quantum.
  2. So in the first claim the respondent’s case on causation was straightforward. The appellant’s breach of covenant had made the operation of the restaurant a legal impossibility. As a result, it did not trade. There was therefore no doubt at all that the breach had caused the loss subject only to the quantification of that loss. The issues raised about the respondent’s competence and the restaurant’s prospects of success were not matters that went to causation at all. They were relevant at most to the assessment of how profitable (or not) the restaurant would have been had it been able to operate. If it would have been a commercial failure Mr Vasiliou could have received no more than nominal damages for the breach.
  3. Judge Levy, in the passages I have quoted from his judgment, found as a fact that Zorbas would have been a successful restaurant and therefore assessed its lost profits on that basis. His analysis of the variable factors I have outlined which formed the agreed components of that calculation involved taking into account the time needed to establish a reputation and other everyday contingencies but did not involve a more general discount of the kind described in Allied Maples to take account of the statistical possibility of failure. That was excluded by his finding that the restaurant would have been a success.
  4. Where the quantification of loss depends upon an assessment of events which did not happen the judge is left to assess the chances of the alternative scenario he is presented with. This has nothing to do with loss of chance as such. It is simply the judge making a realistic and reasoned assessment of a variety of circumstances in order to determine what the level of loss has been. This process was described by Toulson LJ in Parabola Investments Ltd v Browallia Cal Ltd & Others [2010] EWCA Civ 486 …”.

Later, at paragraph 44, Patten LJ rejected an argument that the quantification of the lost profits should be discounted by a percentage to allow for the fact that the restaurant might have been a failure:

“… the issue of how successful the restaurant would have been was not an issue of causation. It was relevant only to quantum. Judge Dight and Judge Levy were satisfied that the restaurant would have been profitable and calculated the damages accordingly. One can express this in terms of them assessing the chances of success at 100% but either way there is no room for a further discount. The calculation of profits which they made was not determined as the best level of profits reasonably obtainable. It was the amount which on their findings he would have earned.”

In Aercap the claimant seller alleged that the defendant buyer was in repudiatory breach of a contract for the sale of two Boeing 757-200 aircraft. The seller resold at a reduced price and claimed damages. The buyer claimed that the seller had not been in a position to supply the contractually agreed engines, given certain leasing commitments into which it had entered. It argued that even if it was liable to the seller, its damages should be reduced by a factor to reflect the chance that the lessee would not have returned the engines in time for them to be delivered to the buyer. Gross LJ considered, in obiter and very tentative observations at the end of his judgment, that where the claimant can prove causation on the balance of probabilities, the authorities did not require the court to go on and evaluate the chances involved, even when it came to the assessment of damages. He went on to hold in any event that there was no relevant uncertainty.

The outcome in The Owners of the Ship “Front Ace” v The Owners of the “Vicky 1” depended on the fact that there was a finding that the vessel would have been profitably engaged and the existence of a relevant market. I do not think that it assists WP’s case here, where there was obvious uncertainty as to whether WP would find a market for its services in the US.

Parabola and Vasiliou are illustrations of the principles established by Allied Maples. As I have indicated, I do not read either judgment as disagreeing with Stuart-Smith LJ’s proposition in Allied Maples, that a judge’s evaluation of the substantial chance of obtaining the benefit in question forms a legitimate part of the quantification of damages. I do not think that Gross LJ was doubting these principles in Aercap. If he was, I respectfully disagree.

On the judge’s findings in the present case, the only viable claim to loss of profits in the United States was one to the loss of some of the Nomura mandates. WP’s case on causation, that Withers’ negligence caused WP to lose the Nomura mandates, was one which depended on the hypothetical actions of Nomura, a third party. WP had, first, to prove that its own actions would have been such as to place itself in a position to obtain that work, and it had to do so on the balance of probabilities. It did so. All that remained on the issue of causation was for WP to establish whether there was a real and substantial chance that Nomura would have awarded some part of the mandates to WP. It did so. That was the beginning and end of its case on causation.

Mr Justice Roth further stated,

(a) Remoteness of damage in the case of parallel liability

The concept of remoteness is a limiting principle on the damages that may be recovered based on considerations of policy. It has long been accepted that the test is different according to whether the claim lies in contract or in tort. Any suggestion that there is just a single test was decisively rejected by the House of Lords in The Heron II [1969] 1 AC 350.

The test in contract remains founded on the so-called rule in Hadley v Baxendale, as subsequently developed and refined. It will be necessary to consider the principles of remoteness of damage in contract in more detail below. But in essence, a defendant in breach of contract is liable only for damages of a kind that were or should have been within its contemplation at the time the contract was entered into, in the sense that there was a serious possibility of their occurrence or that they were not unlikely to occur. In tort, at least in the tort of negligence with which this case is concerned, the test is expressed differently and a defendant is liable for any type of damage which is the reasonably foreseeable consequence of its wrongdoing. In The Heron II Lord Reid explained the basis for this difference (at 386):

“In contract, if one party wishes to protect himself against a risk which to the other party would appear unusual, he can direct the other party’s attention to it before the contract is made, and I need not stop to consider in what circumstances the other party will then be held to have accepted responsibility in that event. But in tort there is no opportunity for the injured party to protect himself in that way, and the tortfeasor cannot reasonably complain if he has to pay for some very unusual but nevertheless foreseeable damage which results from his wrongdoing.”

Lord Pearce in that case explained the rationale of the distinction in similar terms (at 413):

“In the case of contract two parties, usually with some knowledge of one another, deliberately undertake mutual duties. They have the opportunity to define clearly in respect of what they shall and shall not be liable. The law has to say what shall be the boundaries of their liability where this is not expressed, defining that boundary in relation to what has been expressed and implied. In tort two persons, usually unknown to one another, find that the acts or utterances of one have collided with the rights of the other, and the court has to define what is the liability for the ensuing damage, whether it shall be shared and how far it extends.”

The Heron II concerned the breach by shipowners of a charterparty causing the charterers to suffer loss due to a decline in the market price of sugar at the port of destination. Accordingly, it was a claim only in contract and there was no issue of negligence. Moreover, at the time it was decided, the question whether a parallel liability could lie in tort and contract was unresolved. That issue was only conclusively determined 27 years later, by the House of Lords decision in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (although that followed and approved Oliver J’s seminal judgment in Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 384). In Henderson v Merrett it was held that a defendant who caused purely economic loss by reason of a breach of a duty of care in the provision of services owed pursuant to a contract would be liable in both contract and tort. Lord Goff, in his opinion with which the other members of the Appellate Committee agreed, explained this as a logical development from the acceptance of tortious liability for economic loss in Hedley Byrne & Co v Heller & Partners Ltd [1964] AC 465. He stated (at 186-187):

“I have already expressed the opinion that the fundamental importance of this case rests in the establishment of the principle upon which liability may arise in tortious negligence in respect of services (including advice) which are rendered for another, gratuitously or otherwise, but are negligently performed -viz., an assumption of responsibility coupled with reliance by the plaintiff which, in all the circumstances, makes it appropriate that a remedy in law should be available for such negligence. For immediate purposes, the relevance of the principle lies in the fact that, as a matter of logic, it is capable of application not only where the services are rendered gratuitously, but also where they are rendered under a contract.”

A little earlier in his opinion, in an important passage for present purposes that has already been quoted by Floyd LJ but which bears repetition, Lord Goff said:

“I think it is desirable to stress at this stage that the question of concurrent liability is by no means only of academic significance. Practical issues, which can be of great importance to the parties, are at stake. Foremost among these is perhaps the question of limitation of actions. If concurrent liability in tort is not recognised, a claimant may find his claim barred at a time when he is unaware of its existence. This must moreover be a real possibility in the case of claims against professional men, such as solicitors or architects, since the consequences of their negligence may well not come to light until long after the lapse of six years from the date when the relevant breach of contract occurred. Moreover the benefits of the Latent Damage Act 1986, under which the time of the accrual of the cause of action may be postponed until after the plaintiff has the relevant knowledge, are limited to actions in tortious negligence. This leads to the startling possibility that a client who has had the benefit of gratuitous advice from his solicitor may in this respect be better off than a client who has paid a fee. Other practical problems arise, for example, from the absence of a right to contribution between negligent contract-breakers; from the rules as to remoteness of damage, which are less restricted in tort than they are in contact; and from the availability of the opportunity to obtain leave to serve proceedings out of the jurisdiction. It can be of course argued that the principle established in respect of concurrent liability in contract and tort should not be tailored to mitigate the adventitious effects of rules of law such as these, and that one way of solving such problems would no doubt be to rephrase such incidental rules as have to remain in terms of the nature of the harm suffered rather than the nature of the liability asserted (see Tony Weir, XI Int.Encycl.Comp.L. ch.12, para. 72). But this is perhaps crying for the moon; and with the law in its present form, practical considerations of this kind cannot sensibly be ignored.”

Although Lord Goff there made express reference to the different rules on remoteness, a point on which Ms Parkin for WP naturally relied, that was not an issue in the Merrett case.

It follows that the rationale for maintaining a broader principle of remoteness of damage for liability in tort than in contract set out by Lords Reid and Pearce and The Heron II does not apply to a case of parallel liability, where the duty of care in tort rests on an assumption of responsibility arising from the contract, as Professor Andrew Burrows has pointed out: “Limitations on Compensation” in Burrows and Peel (eds), Commercial Remedies, 27 at 35.

The next relevant milestone in juridical development was the decision of the House of Lords in South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 (“SAAMCO“). That case concerned three claims by financial lenders against valuers who had negligently over-valued properties offered as security for loans. If the valuations had been properly conducted, the loan in each case would not have been advanced. But the loss suffered by the lenders was greatly increased by the subsequent fall in the property market. The valuers were held to be liable in both contract and negligence, but the critical issue was whether the damages should be based on the difference between the valuations they had provided and the true value of the properties at the time of valuation, or whether they had to compensate the lenders for the full loss suffered that took account of the decline in the market. In his opinion (with which all the other members of the Appellate Committee agreed), Lord Hoffmann stated (at 211):

“Because the valuer will appreciate that his valuation, though not the only consideration which would influence the lender, is likely to be a very important one, the law implies into the contract a term that the valuer will exercise reasonable care and skill. The relationship between the parties also gives rise to a concurrent duty in tort: see Henderson v. Merrett Syndicates Ltd [1995] 2 AC 145. But the scope of the duty in tort is the same as in contract.

A duty of care such as the valuer owes does not however exist in the abstract. A plaintiff who sues for breach of a duty imposed by the law (whether in contract or tort or under statute) must do more than prove that the defendant has failed to comply. He must show that the duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered.”

And Lord Hoffmann continued (at 212):

“The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less that he was reasonably entitle to expect, not extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.”

On that basis, he concluded that the valuers’ liability was determined on the basis of the difference between the wrong valuation and the actual value of the property at the time it was valued: that was the damage which fell within the scope of the duty of care.

The reasoning in SAAMCO was expressed entirely on the basis of causation. There is no discussion in Lord Hoffmann’s opinion of any of the leading authorities on remoteness, and apparently they were not cited in argument (see at 193-194). But writing extra-judicially, Lord Hoffmann subsequently acknowledged that to express the relevant test for recovery in terms of the scope of the duty of care is somewhat misleading:

“The scope of the duty of care is to take reasonable care to get the valuation right. It has nothing to do with the extent of the consequences for which the valuer is liable. When one considers what causal relationship is required, one is really speaking about extent of liability and not about the scope of the duty. … But I will say this. There is a close link between the nature of the duty and the extent of liability for breach of that duty.” “Causation” (2005) 121 LQR 592 at 596.

It seems to me that this highlights the degree to which the concepts of legal causation (as opposed to causation in fact) and remoteness are interrelated. In that regard, I derive assistance from the observations of Lord Hobhouse in a subsequent negligent valuation case, Platform Home Loans Ltd v Oyston Shipways Ltd [2000] AC 190 at 208-209:

“…the Banque Bruxelles principle does not involve any question of factual causation. It involves a question which arises subsequent to the ascertainment of the lender’s basic loss arising from the valuer’s breach of duty. Further, … it does not involve an approach of scientific apportionment. Although the speeches of Lord Hoffmann include the word “attributable,” it is not used as a factual concept but as a legal one. If an analogy is required, one can be found in the concept of remoteness of damage, for example the damages recoverable under the rules in Hadley v. Baxendale (1854) 9 Exch 341 for breach of contract. As has been pointed out in a number of cases …, there is a close relationship between the application of such concepts as remoteness, contributory negligence and causation (and, for that matter, scope of duty of care). The same result can often by justified or formulated in any of these three ways.

The principle drawn upon by Lord Hoffmann in the Banque Bruxelles case is stated in terms of, and defined by reference to, the scope of the duty of care. This is a distinct legal concept but is sometimes referred to in the language of remoteness of damage. The decision of the Privy Counsel in Overseas Tankship (UK) Ltd v. Morts Dock & Engineering Co. Ltd. (The Wagon Mound) [1961] AC 388, is commonly referred to as having revised and restated the law of remoteness of damage in the tort of negligence (disapproving In re Polemis and Furness, Withy & Co [1921] 3 KB 560). But the actual decision from which this consequence flowed was expressed in terms of the scope of the tort of negligence. In that case the defendant had been responsible for a spillage of oil which had caused some damage which was foreseeable and some which was not. It was held that the defendant was only liable in the tort of negligence for the foreseeable damage. In the words of the headnote:

“There is not one criterion for determining culpability (or liability) and another for determining compensation; unforeseeability of damage is relevant to liability or compensation – there can be no liability until the damage has been done; it is not the act but the consequences on which tortious liability is founded.”

Thus it is the scope of the tort which determines the extent of the remedy to which the injured party is entitled.”

Accordingly, in The Achilleas [2008] UKHL 48, a case where the argument and reasoning were addressed to the principle of remoteness, Lord Hoffmann referred to the SAAMCO case and explained it in these terms, at [17]:

“The effect of [SAAMCO] was to exclude from liability the damages attributable to a fall in the property market notwithstanding that those losses were foreseeable in the sense of being “not unlikely” (property values go down as well as up) and had been caused by the negligent valuation in the sense that, but for the valuation, the bank would not have lent at all and there was no evidence to show that it would lost its money in some other way. It was excluded on the ground that it was outside the scope of the liability which the parties would reasonably have considered that the valuer was undertaking.”

He proceeded to express the contractual test of remoteness in terms of assumption of liability on the basis that this corresponded to the presumed intention of the parties:

“[21] It is generally accepted that a contracting party will be liable for damages for losses which are unforeseeably large, if loss of that type or kind fell within one or other of the rules in Hadley v Baxendale … That is generally an inclusive principle: if losses of that type are foreseeable, damages will include compensation for those losses, however large. But the [SAAMCO] and Mulvenna cases show that it may also be an exclusive principle and that a party may not be liable for foreseeable losses because they are not of the type or kind for which he can be treated as having assumed responsibility.”

Although it is not easy to discern a single, precise ratio from the five opinions given in that case, Lord Walker expressly agreed with the reasoning of Lord Hoffmann, and Lord Hope (at [32]) articulated the contractual test as being “whether the loss was a type of loss for which the party can reasonably be assumed to have assumed responsibility.”

The Achilleas was a case that arose only in contract and therefore contains no discussion of the situation where there is parallel liability in contract and in tort. What, then, is the proper approach to that situation, in the light of the developments set out in these decisions of highest authority? Since the foundation of the parallel liability in tort when the engagement of the parties with one another arises from contract is a voluntary assumption of liability, and, secondly, the extent of damage for which the defendant is liable in contract is to be considered in terms of assumption of responsibility, I think it is only logical that the extent of damage for which he is liable in tort is determined on the same basis. Put another way, it seems to me that it would be rather inconsistent to say that a defendant in breach of contract is liable also in tort because by entering into that contract he had consciously and voluntarily assumed a duty of care to the claimant, but that for breach of that duty his liability extends to a type of loss for which he is not to be regarded as having assumed responsibility. Accordingly, I consider that it is the contractual test of remoteness which should apply in that situation.

I do not think that either the observation of Lord Goff in Henderson v Merrett regarding remoteness, which I have set out above, or indeed the statement by Lord Hope in The Achilleas (at [31]) that the test of remoteness in tort is much wider than that which applies in contract, preclude us from reaching this conclusion. The former was expressed before the analysis of contractual liability in SAAMCO, as explained above. And the latter was stated in a case where the question of parallel liability in contract and tort was not considered at all.

This conclusion derives some support from two decisions of this court. Brown v KMR Services Ltd [1995] 4 All ER 598 concerned further claims in the Lloyds’ litigation. The judge found that an underwriting ‘name’ should have been warned by his member’s agents of the high risk of being in syndicates that reinsured catastrophic excess of loss. On appeal, the defendants contended that the loss suffered was too remote because no one anticipated the size and frequency of the various disasters that occurred over the relevant years. The Court of Appeal applied the contractual test of remoteness in upholding the judge’s finding that this loss was recoverable: the considerations relied on by the defendants went only to the scale of loss, whereas the type of loss incurred was the natural, direct result in the ordinary course of being a member of high risk syndicates: per Stuart-Smith LJ at 620-621; per Hobhouse LJ at 642-643.

The claim in Brown was brought in tort as well as contract, and the Court of Appeal decision was given after Henderson v Merrett was decided: indeed, the House of Lords’ decision is referred to in the judgment of Hobhouse LJ (but not on this point). However, I cannot go as far as Professor Burrows in concluding that this case is authority for the application of the contract test for remoteness as regards a concurrent claim in negligence (ibid. at 35). The judgment under appeal determined liability on the basis of breach of contract, and having found that the contractual test for remoteness was satisfied, the Court of Appeal did not need to address the test in negligence. Nonetheless, I think it is not without significance that there is no suggestion in the judgments that approaching the matter in negligence might have resulted in a broader test being applied.

The Brown case was not cited in argument on the present appeal, but it is referred to in Rubenstein v HSBC Bank plc [2012] EWCA Civ 1184, on which Mr Pooles, for Withers, strongly relied. In that case, Mr Rubenstein sought a safe investment into which to place the proceeds of sale of his home until he found another property. He emphasised to the defendant bank that he could not afford to take any risk to his capital, and they advised him to place it into a form of AIG investment bond which they told him was as safe as a bank deposit. However, the bond depended for its value on the underlying assets, which were a mix of financial instruments, including various derivative products. In the crisis in the financial markets following the collapse of Lehman Brothers (“Lehman”) in September 2008, the value of those instruments, and thus of Mr Rubenstein’s investment, dramatically declined and he suffered a significant loss. Mr Rubenstein claimed against the bank in negligence and contract, as well as for breach of various statutory duties. The trial judge held that the bank was negligent, but dismissed the claim on the basis that the loss was too remote, being caused by the unprecedented and unforeseeable market turmoil surrounding the Lehman collapse. In his judgment, with which Lloyd and Moore-Bick LJJ agreed, Rix LJ discussed the authorities on remoteness in contract and the SAAMCO case, and held that the loss was not too remote. Considering the background of the transaction and the scope of the bank’s duties, he found that:

“what connected the erroneous advice and the loss was the combination of putting Mr Rubinstein into a fund which was subject to market losses while at the same time misleading him by telling him that his investment was the same as a cash deposit, when it was not…. It was the bank’s duty to protect Mr Rubinstein from exposure to market forces when he made clear that he wanted an investment which was without any risk (and when the bank told him that his investment was the same as a cash deposit). It is wrong in such a context to say that when the risk from exposure to market forces arises, the bank is free of responsibility because the incidence of market loss was unexpected.” (at [118])

And referring expressly to the contractual test for remoteness as based on the reasonable contemplation of the parties, and the statutory background that imposed duties on the bank for the protection of investing consumers, Rix LJ stated (at [123]):

“… it seems to me that a bank must reasonably contemplate that, if it misleads its client as the nature of its recommended investment, and thereby puts its client into an investment which is unsuitable for him, when it could just as easily have recommended something more suitable which would have avoided the loss in question, then it may well be liable for that loss.”

Like Floyd LJ, I do not see that Rubenstein can be regarded as authority for holding that the contractual test for remoteness applies also in tort in the case of concurrent liability. Since Rix LJ found that the loss was not too remote by applying the contractual test, he did not need to consider the test in tort. However, I recognise that, having found that the bank was negligent, and despite his reference to Lord Reid’s dicta in The Heron II, there is no suggestion in Rix LJ’s comprehensive judgment that the application of a test for remoteness in tort would have had a broader reach and therefore provided a simpler resolution of this issue.

Accordingly, for the reasons set out above, I conclude that in cases of parallel liability in contract and in the tort of negligence, the contractual test of remoteness should apply. This accords with the strong inclination of Nugee J below, who did not have the benefit of much argument on the point (judgment at [212]-[214]) and the views urged by academic writers: not only Professor Burrows and the late Dr Harvey McGregor, in the passage from McGregor on Damages quoted by Floyd LJ, but also Professor Edwin Peel: see Treitel on Contract (14th edn) at para 20-112. It is unnecessary to explore the position where the liability for negligent advice or professional services arises only in tort, such as (to take the example given by Lord Goff in Henderson v Merrett) where a client receives gratuitous advice from a solicitor; or where the loss is attributable to the concurrent negligence of two defendants only one of whom owes a duty in contract, such as where a client claims against both its solicitor and barrister but has no contractual relationship with the barrister. I incline to the view that where there is such a relationship “equivalent to contract” (to adopt the expression used by Lord Devlin in Hedley Byrne) the contractual test should apply, as suggested by Professor Burrows; but this will require separate consideration.

(b) Is the claim for lost US profits here too remote?

Having concluded that the contractual test of remoteness should govern, before seeking to apply it to the facts of this case it is appropriate to determine the parameters of that test. In The Pegase [1981] 1 Lloyd’s Rep 175, Robert Goff J (as he then was) considered that the two-limbed test in Hadley v Baxendale had been developed by the authorities into a single principle, which he expressed (at 183) in the following formulation that was subsequently approved by Lords Hoffmann and Hope in The Achilleas:

“In the light of the decided cases, the test appears to be: have the facts in question come to the defendant’s knowledge in such circumstances that a reasonable person in the shoes of the defendant would, if he had considered the matter at the time of making the contract, have contemplated that, in the event of a breach by him, such facts were to be taken into account when considering his responsibility for loss suffered by the plaintiff as a result of such breach.”

Further, it has frequently been stated that if the loss is of the type (or kind) which should be regarded as reasonably in the contemplation of the defendant, objectively viewed, at the time the contract was made, the fact that the extent of that loss is greater than contemplated does not render the damage too remote. In Brown v KMR Services Ltd, Stuart Smith LJ observed (at 621):

“I accept that difficulty in practice may arise in categorisation of loss into types or kinds, especially where financial loss is involved. But I do not see any difficulty in holding that loss of ordinary business profits is different in kind form that flowing from a particular contract which gives rise to very high profits, the existence of which is unknown to the other contracting party who therefore does not accept the risk of such loss occurring.”

And in The Achilleas, Lord Hoffmann addressed the matter as follows (at [22]):

“What is the basis for deciding whether loss is of the same type or a different type? It is not a question of Platonist metaphysics. The distinction must rest upon some principle of the law of contract. In my opinion, the only rational basis for the distinction is that it reflects what would reasonably have been regarded by the contracting party as significant for the purpose of the loss that he was undertaking.”

In the present case, a firm of City solicitors was instructed to advise on and draft amendments to a limited liability partnership agreement to provide for the injection of substantial additional capital by outside investors, including in particular a Bahraini bank (“Addax”), which would give them a 30% interest in the business: judgment at [12]. The solicitors of course knew that the business of WP was a successful executive recruitment consultancy, which is well recognised to be a “people” business where personal contacts are important, and that WP’s particular focus was the investment banking sector: they had acted for Mr Channing when he had set up WP originally: judgment at [10]. They were also specifically told that the injection of capital was sought as a means of financing the expansion of the business, including expansion overseas which involved setting up foreign offices. At the time that Withers were retained for this purpose, i.e. in January 2008, the parties did not contemplate that WP would expand into the United States: at that stage Mr Channing was planning to develop in the Middle East and India. The judge found that it was around May 2008 that Withers were told that WP was considering expansion into the United States: judgment at [215].

The negligence, as found by Nugee J, involved amending a clause in the draft LLP agreement, which then enabled Addax to withdraw, on 20 working days’ notice, half its investment of £2.5 million within 41 months, whereas WP’s intention was almost precisely the opposite. The judge effectively found that Addax would have signed up to the agreement with a restriction on early withdrawal of capital as WP had intended. As Nugee J observed, the effect of the clause being in the form that it took was significantly to reduce the advantage of raising the capital of £2.5 million, since half of this investment could not be relied on as working capital to finance expansion but had to kept as a ready reserve since it was effectively repayable on demand: judgment at [108].

Nugee J found that it was reasonably foreseeable that if Addax were able to withdraw its capital (or presumably, half its capital), at short notice, this might frustrate or prevent the overseas expansion which WP had intended to undertake, and thus deprive WP of the chance of earning overseas profits: judgment at [215]. The judge reached that conclusion expressly applying the tortious test, but it seems to me that the same conclusion flows if the standard is “not unlikely” or “a serious possibility”. Further, I think that, on an objective view, Withers would reasonably have contemplated that they would be responsible for this consequence: the whole reason for including a restriction in the agreement on the investor reducing its interest in the business and withdrawing its capital was clearly to protect the resources of the business, by which its development, including any overseas expansion, would be funded.

With the financial crisis that followed the collapse of Lehman in September 2008, Addax declared in February 2009 that it intended to exercise its option right under the agreement and withdraw half its investment. The financial crisis had badly affected WP’s business generally, and Nugee J found that once Addax had indicated that it would exercise its option, WP decided that it was impossible to open an overseas office: judgment at [195].

The judge found that WP had already contemplated expansion into the US, instead of into India, in April-May 2008: judgment at [160(9)] The Revised Business Plan drawn up at that time projected, albeit only in very broad outline, revenue and profits for a North American operation. After the onset of the financial crisis, WP abandoned its project for development in the Middle East. It seems clear that it would not have proceeded with its much less developed plans for expansion into the US but for the exceptional circumstance that Nomura had acquired the non-US investment banking business of Lehman. Given Nomura’s consequent plan for the rapid development of a US business, and Mr Channing’s contacts in the European business of Lehman who transferred over to Nomura, this gave WP the opportunity to develop a business in New York based on the Nomura ‘US buildout’. The judge found, on balance, that if Addax had not been able to withdraw half its capital WP would have opened its own office in New York: judgment at [201]. It was the inability to open that office which was the foundation of the claim for the lost US profits, or the loss of the chance to earn such profits.

I think it is self-evident that when Withers entered into the contract with WP, they could not reasonably have contemplated the Lehman collapse, the consequent financial crisis or the Nomura US buildout. But the loss for which WP is here claiming is the loss of the opportunity to earn profits on expansion into an overseas market. I do not consider that the fact that the particular overseas market turned out to be the United States as opposed to India or the Middle East renders this a different type of loss. As I have noted, the change of focus to the US had taken place well before the financial crisis. Protection of the opportunity to expand into the US market therefore seems to me within the scope of the responsibility which Withers reasonably assumed. I recognise that if the scale of loss claimed by reason of the Nomura build-out was very substantially higher than the profits that might have been anticipated from an overseas operation in normal circumstances, there might be a strong case for saying that this was outside the risk that Withers should be regarded as having assumed. But the primary claim pursued at trial, and on which the judge computed the damages in negligence, was based on the estimate in the May 2008 Revised Business Plan, which obviously had nothing to do with the Nomura US buildout. Indeed, the projected revenue and profit shown in summary form in that plan were the same for a WP operation in the Middle East and in North America: judgment at [161(1)]. Of course, the judge had to be satisfied that the damages he awarded corresponded to the value of what WP actually lost in the circumstances that occurred, which therefore rested on the Nomura US buildout. But in my view, that does not mean that the loss suffered was of a different type or kind from that for which Withers should have contemplated it would be responsible in the event of an early withdrawal of half the investor’s capital from WP. Withers clearly did wish to limit its exposure; but it did so by including a clause in its terms of business sent to WP at the outset that limited its liability to £10 million.

The Rubenstein case, on which Mr Pooles relied in his argument that the contractual test should govern, seems to me to support the conclusion that in applying that test to the facts here, the loss was not too remote. There, the trial judge had held that the loss in value of the particular AIG investment bond was caused by the wholly exceptional financial crisis following the collapse of Lehman, which the bank could not reasonably have contemplated. Reversing his decision that the damages were therefore too remote, Rix LJ held that the correct analysis was that the responsibility assumed by the bank to Mr Rubenstein was to protect his investment from the risk of exposure to market forces, and it was the operation of market forces, albeit in a wholly unexpected manner, that caused his loss. In his discussion of the authorities leading up to that conclusion, Rix LJ set out (at [109]) the analysis by Toulson LJ (as he then was) in Siemens Building Technologies FE Ltd v Suershield Ltd [2010] EWCA Civ 7:

“[43] Hadley v Baxendale remains a standard rule but it has been rationalised on the basis that reflects the expectation to be imputed to the parties in the ordinary case, i.e. that a contract-breaker should ordinarily be liable to the other party for damage resulting from his breach if, but only if, at the time of making the contract a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach. However, the South Australia Asset Management case and The Achilleas are authority that there may be cases where the court, on examining the contract and the commercial background, decides that the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties. In those two instances the effect was exclusionary; the contract-breaker was held not to be liable for loss which resulted from its breach although some loss of the kind was not unlikely. But logically the same principle may have an inclusionary effect. If, on the proper analysis of the contract against its commercial background, the loss was within the scope of the duty, it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances.

In my view, the present is just such a case. The fact that it transpired that WP would have been unlikely to earn profits in the US in the absence of the Nomura US buildout therefore does not change the analysis.

Since he had concluded that the contractual test for remoteness did not apply, Nugee J understandably gave only brief consideration to what the outcome would have been if the contractual test did apply: see his judgment at [216]. He expressed that view on the basis of an analogy with the determination of remoteness on the facts of Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, and The Achilleas.

In Victoria Laundry, the plaintiff company carried on business as launderers and dyers and contracted to purchase a large capacity boiler from the defendant engineering company. The defendants knew that the boiler was wanted for use in the plaintiffs’ business in the shortest possible time. When delivery of the boiler was delayed by five months, the plaintiffs claimed for the profits they lost over that period, including not only on their standard laundry business but through inability to take on some exceptionally profitable government dyeing contracts. The trial judge rejected the loss of profits claim as too remote. Reversing his decision, the Court of Appeal held that as the defendants knew that the boiler was being purchased for use in the plaintiffs’ business, loss of profits as such was something that the defendants should have contemplated as likely or liable to result from a delay in delivery, but the loss on the very lucrative dyeing contracts was not recoverable since the defendants had not been made aware of the prospect of those contracts and they were accordingly too remote.

Although the general propositions set out in the judgment regarding the approach to remoteness have made this a leading and oft-cited authority, I think it is relevant to consider how Asquith LJ proceeded to apply those principles to the facts of the case. Addressing the particular circumstances which had apparently led the judge at first instance to refuse damages for loss of profits as too remote, Asquith LJ said this (at 543):

“(b) the “circumstance” that the plaintiffs needed the boiler “to extend their business.” Reasonable persons in the shoes of the defendants must be taken to foresee without any express intimation, that a laundry which, at a time when there was a famine of laundry facilities, was paying £2,000 odd for plant and intended at such a time to put such plant “into use” immediately, would be likely to suffer in pocket from five months’ delay in delivery of the plant in question, whether they intended by means of it to extend their business, or merely to maintain it, or to reduce a loss;

(c) the “circumstance” that the plaintiffs had the assured expectation of special contracts, which they could only fulfil by securing punctual delivery of the boiler. Here, no doubt, the learned judge had in mind the particularly lucrative dyeing contracts to which the plaintiffs looked forward and which they mention in para. 10 of the statement of claim. We agree that in order that the plaintiffs should recover specifically and as such the profits expected on these contracts, the defendants would have had to know, at the time of their agreement with the plaintiffs, of the prospect and terms of such contracts. We also agree that they did not in fact know these things. It does not, however, follow that the plaintiffs are precluded from recovering some general (and perhaps conjectural) sum for loss of business in respect of dyeing contracts to be reasonably expected, any more than in respect of laundering contracts to be reasonably expected.”

The distinction between the ordinary contracts and the special contracts was striking: the plaintiffs quantified their loss through being unable to take on more ‘ordinary’ laundry customers at £16 a week whereas their loss through inability to accept the new government dyeing contracts was £262 a week (see at 535). On those facts, adopting the current characterisation, it seems to me readily explicable that the exceptionally lucrative government contracts could be regarded as involving a different type of loss, the risk of which could not reasonably be regarded as assumed by the defendants as a consequence of a delay in delivery. As Lord Hoffmann said of the Victoria Laundry case in The Achilleas (at [22]):

“The vendor of the boilers would have regarded the profits on those contracts as a different and higher form of risk than the general risk of loss of profits by the laundry.”

Factual analogies between cases which concern wholly different circumstances can never be drawn too closely. In the present case, I have already explained why I consider that the loss of the opportunities to make profits by expanding WP’s executive recruitment into a foreign market was a risk which the solicitors should be regarded as having assumed. Such opportunities can arise in myriad ways, and I do not see that the opportunity presented by the Nomura US buildout, which was quantified on the basis of general projections in the WP Business Plan and not at some much higher, specifically Nomura-based figure, should here be regarded as presenting a higher form of risk, and therefore a different type of loss.

As for The Achilleas itself, where the loss of a profitable follow-on fixture caused by the late redelivery of a vessel was held to be too remote, this was largely due to the particular fact that there was a general understanding in the shipping market that a charterer was not liable for loss beyond the period of late delivery, since in general the availability of the market would protect the owners if they lost a fixture. The parties entered into the charterparty against that background, and that accordingly determined the risk of loss which the charterer should be held to have assumed. That is wholly distinct from the circumstances of the present case.

In conclusion, therefore, while I consider that the contractual test of remoteness is here the relevant test, when applying that test as developed and explained in the recent authorities I find that it leads to the same measure of damages as found by Nugee J below.

By way of qualification, Lord Justice Longmore stated:

Save in one very minor respect I agree with the reasons given by my Lords for their disposition of this appeal. In any event I agree in the actual result.

I would like first to add a few words on the question whether remoteness of damage in the present case should be assessed by reference to the tortious or the contractual test for remoteness. The judge was attracted to adopting the contractual test but felt constrained by higher authority to hold that a claimant suing his solicitor could sue either in contract or in tort, with the result that, if tort gave a higher measure of damages based on the reasonable foreseeability test appropriate to tort, the claimant could choose that measure of damage as opposed to the measure of damage assessed by reference to the contractual (reasonable contemplation) test. The higher authority which the judge had in mind was, no doubt, Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 which decided that in English law, when there were concurrent causes of action in contract and tort, a claimant could choose the cause of action more favourable to him. If this was to change or undergo qualification, that change could only be adopted by a higher court than that in which the judge was sitting.

Mr Pooles submitted that the judge was not (nor should he be) constrained by Henderson v Merrett to hold that the contractual test for remoteness should not apply in what was, essentially, a contract case. He said that the legal scene had been transformed by the later case of South Australia Asset Management Corp v York Montague Ltd (“SAAMCO”) [1997] AC 191 in which the House of Lords unanimously agreed with Lord Hoffmann that it was wrong to begin with the principle that a claimant should be put as nearly as possible in the position in which he would have been if he had not been injured. That case was about the damage for which a negligent valuer was liable but has been recognised as applicable to other professional negligence defendants such as accountants and investment advisers. Lord Hoffmann said (page 211A):-

“Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages.”

He also observed that it is implied in a valuer’s contract that he will exercise reasonable case and skill and added:-

“The relationship between the parties also gives rise to a concurrent duty in tort: see Henderson v Merrett … But the scope of the duty in tort is the same as in contract.”

Therefore, submitted Mr Pooles, since the scope of duty of a solicitor, who owes an obligation to exercise due care and skill is a contractual duty, that solicitor is only liable for the kind of loss which is within the reasonable contemplation of the parties and not for an inability to profit from the specially profitable contracts which might have been made as a result of what has been referred to as the Nomura build out in New York.

This submission has the support of Dr Harvey McGregor’s invaluable work on Damages. The judge cited footnote 57 to paragraph 19-008 of the 18th edition. The 19th edition, published between the trial and the hearing of this appeal and now sadly the last which will have the authority of Dr McGregor himself (who died on the Friday before this appeal was opened), promoted that footnote to the text in the following terms (paras 22-009):-

Difficulties can arise where actions in contract and tort lie concurrently and, on the particular facts, the damages are wider in tort than in contract. Since the tort of negligence has been expanded to allow recovery for pure economic loss so that in cases of professional negligence there is concurrent liability in contract and in tort, the question arises whether, where it would make a difference, the victim of the negligence may rely on the wider tortious test of reasonable foreseeability and ignore the stricter and more limiting contractual test of contemplation of the parties. It is thought that there is much to be said for not allowing this to be done. Where the claim in tort is in the context of a contractual relationship, the parties are not strangers, as most tortfeasors and tort victims are, and they should be bound by what they have brought to their contractual relationship in terms of what risks have been communicated by the one and undertaken by the other. This question has not yet been faced by the courts but one day, hopefully soon, it will have to be. Citing this passage from the previous edition of this work His Honour Judge McKenna in Obsession and Hair Day Spa Ltd v Hi-Lite Electrical Ltd expressed agreement with its thinking, but his agreement was obiter. It is thought also that this solution would not entail depriving the victim of contractual and tortious negligence of the entitlement to take advantage of the longer limitation periods available in the tort. For the exclusion of the tort remedy on remoteness ground is geared to what risks the contracting parties have undertaken, a consideration that has no application to the availability of limitation periods.”

Dr McGregor’s “thoughts” are by no means to be lightly dismissed; his statement that “the exclusion of the tort remedy on remoteness grounds is geared to what risks the contracting parties have undertaken” may well have been influenced by the SAAMCO decision.

The provision of a valuation with the benefit of which a lender then makes a decision to lend means that the scope of a valuer’s duty is to give a non-negligent valuation and the measure of his ensuing liability is a liability for the consequences of the valuation being wrong. He will, normally therefore, not be liable for catastrophic falls in the housing market even if such falls are, in general, foreseeable. By way of contrast, an investment adviser gives advice to an investor about the placing of his money and (particularly in a case in which he advises the investment is the equivalent of cash) his duty is to give suitable advice and he will, typically, be liable for all the consequences of his advice being negligently wrong including unexpected falls in the market, see Rubenstein v HSBC Bank Plc [2013] 1 All ER (Comm) 915.

The scope of a solicitor’s duty will vary from case to case and will depend on the terms of the retainer. Sometimes he will be asked to give information e.g. as to whether a proposed course of action is lawful. In such a case the scope of his duty may be similar to that of a valuer. In other cases he will be asked to advise his client as to the appropriateness of a particular course of action for a client’s business or may be in a position where he is under a duty to advise but fails to do so. That situation may be more like the investment adviser in Rubenstein but even then a solicitor may well not be liable for the consequences of the lack of credit worthiness of a borrower with whom the client chooses to deal, see Haugesund Kommune v Depfa ACS Bank [2012] QB 549. A third kind of duty may be to carry out his client’s instructions. If that is the scope of his duty he will be liable for the consequences of his negligent failure to carry out those instructions. On the findings of the judge it is this third kind of duty that is applicable in the present case. But the question still arises whether the solicitor who acts in breach of his instructions is to be liable for all the foreseeable consequences of such breach or only for such consequences as are within the reasonable contemplation of the parties at the time when the contract was made.

In my view, a solicitor who negligently fails to follow his instructions should be liable for the normal contractual measure of damages (namely that the client should be restored to the position in which he would have been if the instructions had been complied with); the corollary of that proposition is that he should only be liable for loss which could reasonably have been contemplated by the parties when the retainer came into existence. As Dr McGregor puts it, a solicitor and his client “are not strangers as most tortfeasors and tort victims are”; they should therefore be bound by that contractual relationship “in terms of what risks have been communicated by the one and undertaken by the other”. There is, of course, no express communication and undertaking of risk in the usual solicitor and client relationship but the law of contract adopts the reasonable contemplation test and it is that test which should apply in contractual relationships even if they can also be categorised as relationships in tort. It follows that a solicitor who fails to carry out his instructions does not undertake responsibility for unexpected or catastrophic falls in the market any more that a valuer does. It cannot, moreover, be right that a claimant can opt to recover a contractual measure of damages but then opt to apply the tortious rules of remoteness; measure of damage and remoteness of damage must be assessed by reference to one system or the other, not by a sort of “pick and mix”.

Such authority as there is on the question of remoteness of damage in cases of concurrent tortious and contractual liability tends to support the above conclusion. Roth J has referred to Brown v KMR Services Ltd [1995] 4 All E.R. 598. Moreover, paragraph 3.51 of the 3rd edition of Flenley and Leech on Solicitors’ Negligence and Liability cites two first instance cases in which the reasonable contemplation test rather that the reasonable foreseeability test has been applied, namely the decisions of Wright J in Matlock Garogen Ltd v Potter Brooke Taylor & Wildgoose [2000] Lloyd’s Rep PN and of Vos J in Scott & Scott v Kennedys [2011] EWHC 3808 (Ch). Both judges expressly applied the principles of Hadley v Baxendale (1854) 9 Exch 34 and in my view were correct to do so. Flenley and Leech also point out that liability in tort on the part of a solicitor derives from Hedley Byrne v Heller [1964] AC 465 in which it was held that liability for negligent misstatement arises in cases of an assumption of responsibility which is equivalent to contract see per Lord Devlin at page 529 and per Lord Goff in Henderson v Merrett itself at pages 180-181. If the rationale of tort liability in such cases is that the situation is equivalent to contract, contractual rules of remoteness of damages should apply. That consideration is not to my mind affected by the proposition that for limitation purposes a claimant is entitled to rely on the date of accrual of a cause of action in tort, if a contractual time bar has already expired. Limitation is a separate matter but rules relating to measure of damages and remoteness of damages have to be consistent with one another.’

 

Ownership Claims

 

Proprietary Estoppel Claims

 

Third Party Duress, Undue Influence or Unconscionable Conduct Claims

 

Tracing

 

Restitution Claims

 

Retribution Claims

 

Unconscionable Dealing Claims

 

Undue Influence Claims

 

Unjust Enrichment Claims

 

Cases & Materials

Cases

Avrora Fine Arts Investment Ltd v Christie, Manson & Woods Ltd [2012]: http://www.bailii.org/ew/cases/EWHC/Ch/2012/2198.html

Drake v Thos. Agnew & Sons Ltd. [2002]: http://www.bailii.org/ew/cases/EWHC/QB/2002/294.html

Thomson v Christie Manson & Woods Ltd & Ors [2005]: http://www.bailii.org/ew/cases/EWCA/Civ/2005/555.html

Thwaytes v Sotherby’s [2015]: http://authenticationinart.org/pdf/artlaw/Thwaytes-v-Sothebys1.pdf

Statutes and Regulations

Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013: http://www.legislation.gov.uk/uksi/2013/3134/made

Consumer Rights Act 2015: http://www.legislation.gov.uk/ukpga/2015/15/contents/enacted

Dealing in Cultural Objects (Offences) Act 2003: https://www.legislation.gov.uk/ukpga/2003/27/contents

Limitation Act 1980: https://www.legislation.gov.uk/ukpga/1980/58

The Artist’s Resale Right Regulations 2006: http://www.legislation.gov.uk/uksi/2006/346/contents/made

Sale of Goods Act 1979: https://www.legislation.gov.uk/ukpga/1979/54

Tribunals Courts and Enforcement Act 2007 (Part 6): https://www.legislation.gov.uk/ukpga/2007/15/part/6

EU Directives

EU Directive 2014/60/EU: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0060

Treaties

The Granada Convention 1985 (The Convention for the Protection of Architectural Heritage in Europe): https://rm.coe.int/168007a087

The Hague Convention 1954 (The Convention for the Protection of Cultural Property in the Event of Armed Conflict): http://portal.unesco.org/en/ev.php-URL_ID=13637&URL_DO=DO_TOPIC&URL_SECTION=201.html

The Paris Convention 1954 (European Cultural Convention): https://www.coe.int/en/web/culture-and-heritage/european-cultural-convention

The Valetta Convention 1992 (The Convention for the Protection of the Archaeological Heritage of Europe): https://www.coe.int/en/web/culture-and-heritage/valletta-convention

The World Heritage Convention 1972: http://whc.unesco.org/en/conventiontext/

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Keating Building Contracts.

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McGregor on Damages.

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Symeonides S.C., “A Choice-of-Law Rule for Conflicts Involving Stolen Cultural Property”, Vanderbilt Journal of Transnational Law, 2005, p. 1177 ff.

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Vrdoljak A.F., International Law, Museums and the Return of Cultural Objects, Cambridge University Press 2006.

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Woodhead C., “Not Merely Symbolic Restitution: Constable’s Beaching A Boat, Brighton”, Art Antiquity and Law, October 2015, p. 243 ff.

Woodhead C., “Redressing Historic Wrongs, Returning Objects to Their Rightful Owners or Laundering Tainted Objects? 21st Century UK Remedies for Nazi-Era Injustices”, International Journal of Cultural Property, 2014, p. 113 ff.

Useful Websites

Arrest of a vessel: http://www.maritimelawcenter.com/html/arrest_of_vessel.html

Arrest of Ships: Impact of the Law on Maritime Claimants by Stanley Onyebuchi Okoli: http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=1698588&fileOId=1698590

A summary of ship arrest in the UK and in English law based jurisdictions: https://www.iylegal.com/a-summary-of-ship-arrest-in-the-uk-and-in-english-law-based-jurisdictions

Arts Council England: http://www.artscouncil.org.uk/

Art and the Law: http://www.artscouncil.org.uk/sites/default/files/download-file/lawpack_public_order_0.pdf

Art law: Restrictions on the export of cultural property and artwork November 2017 –  A report by the IBA Art, Cultural Institutions and Heritage Law Committee: https://www.ibanet.org/LPD/IP_Comm_Tech_Section/Art_Cultl_Inst_Heritage_Law/Default.aspx

Art Law London Blog: http://artlawlondon.blogspot.co.uk/

British Art Market Federation: http://tbamf.org.uk/

Boodle Hatfiled Art Law Blog: https://artlawandmore.com/home-2/the-articles/

Christie’s Education: https://www.christies.edu/london/courses/masters-art-law-business.aspx

CLANCCO (Art and Law Resources): http://clancco.com/wp/category/art-law/

Courtauld Institute of Art: www.courtauld.ac.uk

Design and Artists Copyright Association: https://www.dacs.org.uk/

Department for Culture Media and Sport: https://www.gov.uk/government/organisations/department-for-digital-culture-media-sport

How to Prove ‘Authenticity’ in Court: The English Perspective by Lisette Aguilar, Associate General Counsel Sotheby’s: http://www.uiavalencia2015.com/public/pdf/AGUILAR_Lisette_Art_Law_EN.pdf

Institute of Art and Law: https://www.ial.uk.com/

Museums Association: https://www.museumsassociation.org/home

National Gallery of Art (Washington DC) 2016 Annual Report: https://www.nga.gov/content/dam/ngaweb/About/pdf/annual-reports/annual-report-2016.pdf

NAVA: http://www.nava.org.uk/

Professional Advisors to the International Art Market: http://www.paiam.org/

Society of London Art Dealers: http://www.slad.org.uk/

Sotherby’s Art and Law: http://www.sothebys.com/en/news-video/blogs/specials/art-and-law.html

TEFAF 2016 Art Market Report: http://1uyxqn3lzdsa2ytyzj1asxmmmpt.wpengine.netdna-cdn.com/wp-content/uploads/2017/03/TEFAF-Art-Market-Report-20173.pdf

The Art and Antiques London Stolen Art Database: http://collectionstrust.org.uk/resource/london-stolen-arts-database/

The Association of Art & Antique Dealers: https://lapada.org/

Thwaytes v Sotherby’s [2015]: http://authenticationinart.org/pdf/artlaw/Thwaytes-v-Sothebys1.pdf

Today’s Art World Blog:https://todaysartworld.wordpress.com/2018/01/09/drawing-artists-to-keep-an-eye-on/

UK P&I Club Ship Arrest Briefing: https://www.ukpandi.com/fileadmin/uploads/uk-pi/Latest_Publications/LEGAL_BRIEFINGS/Legal_Briefing_Ship_Arrest_.pdf

V&A Art and Law Training: https://www.vam.ac.uk/event/ErL2x6NM/art-and-law-training

WIPO Alternative Dispute Resolution (ADR) for Art and Cultural Heritage: http://www.wipo.int/amc/en/center/specific-sectors/art/