Swynson Ltd v Lowick Rose LLP (In Liquidation) (formerly Hurst Morrison Thomson LLP)
Citations:  UKSC 32;  AC 313;  2 WLR 1161;  3 All ER 785;  1 CLC 764;  PNLR 18;  CLY 637.
The claimant was a lending company. The defendant was an accountancy firm. The claimant made three loans to a borrower on the strength of a faulty due diligence report prepared by the defendant. The borrower defaulted on their loans. The claimant sued the defendant for breach of contract. By the time the trial judge was due to assess damages, the borrower had made a refinancing deal with the claimant’s owner. This allowed it to repay two of the loans using money borrowed from the owner.
The defendant argued that the court should reduce the damages to reflect the two paid-off loans. The claimant had three rebuttals:
- That the deal between the borrower and the owner was a purely collateral matter which should not be taken into account;
- Alternatively, the payments represented the claimant’s own mitigation. The refinancing deal was an expense incurred to mitigate the effects of the borrower defaulting on the loans;
- If the damages were reduced, the owner could recover the sums lent to the borrower from the defendant. The claimant was claiming this sum on the owner’s behalf under the principle of ‘transferred loss’;
- The defendant was unjustly enriched by the owner lending money to the borrower to repay the claimant. The owner had subrogated that claim to the claimants.
The Supreme Court held the following:
- The deal between the borrower and the owner was not a purely collateral matter. Rather, the transaction discharged the very liability which constituted the claimant’s loss.
- The owner was a separate entity to the claimant. His transactions could not be treated as the claimant’s transactions. As such, the claimant could not treat the refinancing deal as costs of mitigation.
- The purpose of the claimant’s contract with the defendant had nothing to do with the owner. It was not intended to benefit him. It was not foreseeable that the owner would suffer loss if the contract was breached. The principle of transferred loss was therefore inapplicable.
- The defendant may have benefited from the owner’s actions. However, they had not been enriched at the owner’s expense. Additionally, any enrichment was not unjust. The benefit was too incidental and indirect. The fact that the owner wrongly thought that the refinancing deal would not affect the claimant’s ability to recover full damages from the defendant did not make the enrichment unjust.
As such, all the claims failed.
This Case is Authority For…
Normally, if the claimant manages to avoid a loss, that loss is not recoverable as damages (though expenses incurred in avoiding the loss might be claimed as the cost of mitigation). There is an exception to this rule for truly collateral benefits arising independently of the circumstances which caused the loss. This is the ‘res inter alios acta‘ exception. A classic example is where the claimant has a disability pension and is later disabled by the defendant’s negligence. The court will not reduce the claimant’s damages to reflect the pension pay-out.
The principle of transferred loss was a device created to avoid the unfair consequences of the privity of contract rule before the enactment of the Contracts (Rights of Third Parties) Act 1999. Normally, a person can only recover losses they have personally suffered. The ‘transferred loss’ exception applies where the known or intended purpose of a contract is to benefit a third party, and it is foreseeable that a breach would cause loss to that third party. In such a case, the contracting party can sue for breach of contract on the third party’s behalf. In doing so, they recover losses incurred by the third party which they hold on trust for the third party. The seminal case on this is Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd  1 AC 85.
The Supreme Court clarified that the principle of transferred loss only applies where:
- It is necessary to give effect to the purpose of the transaction; and
- The failure to grant a remedy would create a ‘legal black hole’.
This legal black hole is a situation where the party who has suffered loss has no right to sue, while the party who has the right to sue has suffered no loss (and so could only recover nominal damages).
Enrichment is not unjust where the defendant benefits as an incidental consequence of the claimant’s pursuit of his own goals or self-interest.
Where a party alleges that unjust enrichment has arisen out of a transaction, they must show that there is some defect in the transaction itself. The claimant must have bargained for a particular benefit, which he did not receive.
It is not enough that a party is mistaken as to the consequences or advantages of a transaction (as opposed to its nature or characteristics). There is no unjust enrichment where a party to a transaction gets everything they expected or bargained for.