David McClean and Others v Andrew Thornhill QC
| Jurisdiction | England & Wales |
| Judge | Mr Justice Zacaroli |
| Judgment Date | 08 March 2022 |
| Neutral Citation | [2022] EWHC 457 (Ch) |
| Docket Number | Case No: BL-2018-001516 |
| Court | Chancery Division |
[2022] EWHC 457 (Ch)
THE HONOURABLE Mr Justice Zacaroli
Case No: BL-2018-001516
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Rolls Building
7 Fetter Lane
London EC4A 1NL
Anneliese Day QC, Nik Yeo, Christopher Knowles and Harry Winter (instructed by Stewarts Law LLP) for the Claimants
Tom Adam QC and Max Schaefer (instructed by Mayer Brown International LLP) for the Defendant
Hearing dates: 9–12, 15–18, 22–24 November, 2, 3 & 6 December 2021
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
A: Introduction
The claimants are members of one or more of three limited liability partnerships (“LLPs”), formed for the purpose of participation in the distribution of films. Participation in the LLPs was marketed to potential investors on the basis that they would be entitled to tax relief against their income or capital gains for trading losses that the LLPs were anticipated to make (the “Tax Benefits”).
The three LLPs are Scotts Atlantic Distributors LLP (“SAD1”); The Second Scotts Atlantic Distributors LLP (“SAD2”); and The Third Scotts Atlantic Distributors LLP (“SAD3”). I will refer to them collectively as “the Schemes”.
SAD1 opened for subscriptions on 24 January 2003 and closed on 4 April 2003. SAD2 opened for subscriptions on 27 October 2003 and closed on 4 April 2004. SAD3 opened for subscriptions on 27 October 2003 and closed on 5 April 2004.
The Schemes were promoted by Scotts Private Client Services Limited, in the case of SAD1, and Scotts Atlantic Management Limited, in the case of SAD2 and SAD3 (together, “Scotts”).
The defendant, Andrew Thornhill QC (“Mr Thornhill”) was and is an eminent and experienced barrister specialising in tax. He was engaged to provide advice on the tax consequences of the Schemes to Scotts (in the case of SAD1) and to Scotts and the LLP (in the case of SAD2 and SAD3).
Mr Thornhill provided various opinions, including an opinion dated 28 January 2003 in relation to SAD1 (the “SAD1 Opinion”) a short form opinion dated 20 October 2003 in relation to SAD2 and SAD3 (the “SAD2/3 Short-form Opinion”) and a long form opinion dated 27 February 2004 in relation to SAD2 and SAD3, in materially similar terms to the SAD1 Opinion (the “SAD2/3 Long-form Opinion”). I will refer to these, together, as the Opinions.
Each Scheme was promoted to potential investors via an information memorandum (“IM”). Mr Thornhill confirmed in letters to Scotts that there was nothing inconsistent with his Opinions in those parts of the IM explaining the tax consequences of the Schemes.
Mr Thornhill was not engaged to advise any of the claimants, and none of the claimants was his client. He consented, however, to being named as tax adviser to Scotts (and the LLPs in SAD2/3) in the IMs and to the Opinions being made available to potential investors, if they requested them.
The claimants claim that Mr Thornhill owed them a duty of care in respect of the advice he gave to Scotts and consented to being made available to potential investors, and that they relied on his advice in entering into the Schemes. They contend that he breached that duty. The Tax Benefits which the claimants sought to gain from the Schemes were dependent upon the LLPs (1) carrying on a trade (2) on a commercial basis and (3) with a view to a profit. The claimants contend (in summary) that Mr Thornhill negligently advised that the Schemes would achieve the Tax Benefits because the LLPs would be carrying on a trade on a commercial basis with a view to profit, which was advice that no reasonably competent tax QC could have given, and/or that he negligently failed to advise that there was a significant risk that the Schemes would be successfully challenged by the Inland Revenue. (The Inland Revenue subsequently merged with HM Customs & Excise to form HMRC. In this judgment, when referring to the time-period in which Mr Thornhill advised, I will refer to it as the “Revenue”.)
HMRC subsequently refused the tax reliefs claimed by the investors in the Schemes. HMRC issued a “Closure Notice” to SAD1 on 13 September 2016 recording its decision to refuse the claimed tax reliefs. On or around 22 September 2017 HMRC wrote to the individual investors in SAD1, SAD2 and SAD3 making a settlement offer. All of the claimants accepted that offer.
The claim form was issued on 5 July 2018. The claims of ten claimants (from a total of over 100) were chosen to be taken to trial first. By an order of 5 December 2019, the claims of all other claimants were stayed pending judgment in relation to the sample claims. The court's determination in respect of certain issues, defined as “Common Issues”, will be binding on all claimants. In essence, the Common Issues concern whether Mr Thornhill owed a duty of care to the claimants and whether he breached that duty. The Common Issues include, in addition, certain issues relating to causation (such as whether the Schemes would have been promoted at all in the absence of Mr Thornhill's advice and whether the claimants must give credit for profits made from acquiring the Tax Benefits).
The issues
The principal issues, as agreed between the parties, are as follows:
(1) Duty: Did Mr Thornhill owe the claimants, as investors in one or more of the Schemes, a duty to take reasonable care in advising upon tax matters in respect of the Schemes; in approving and endorsing the tax aspects of each IM; and in reviewing and confirming his advice on subsequent occasions?
(2) Breach: Was Mr Thornhill negligent, and in breach of the duty of care owed to the claimants, in providing the Opinions and in endorsing the IMs?
(3) Reliance and causation:
(a) What advice should Mr Thornhill have given if he had acted competently?
(b) If Mr Thornhill had provided advice which the claimants contend would have been competent (including giving warnings of significant risk): would the Schemes have been promoted by Scotts (with appropriate risk warnings)? If so, would any of the claimants have invested in the Schemes? If the Schemes had not been promoted, but the claimants would have been willing to invest given the hypothetical opportunity, is any loss they suffered recoverable in law?
(c) Did the claimants, in deciding to invest in the Schemes, rely on Mr Thornhill's advice and on the fact that they had been endorsed by Mr Thornhill?
(4) Loss: What heads of loss have the claimants suffered as a result of the alleged breaches? Must they give credit for any profits made from the tax advantages they did acquire from the Schemes?
(5) Limitation:
(a) Are the claimants' claims (or any of them) barred under section 2 of the Limitation Act 1980 (“ LA 1980”), which essentially turns on when the claimants' causes of action accrued for the purposes of section 2?
(c) Are the SAD1 claimants' claims time-barred under section 14B LA 1980?
(d) On what date did the three-year period provided by section 14A LA 1980 commence, and are the claimants' claims (or any of them) time-barred under this provision?
B: The Schemes in more detail
Each of the Schemes operated in materially the same way. For convenience, throughout this judgment I will refer principally to SAD1, pointing out where necessary any differences with SAD2 or SAD3. The following is a high level summary of SAD1. I refer to aspects of the Scheme in greater detail later on in this judgment, when considering specific arguments of the claimants.
The contractual structure in brief
SAD1 was established in order to acquire and exploit distribution rights in the US, UK and Canada for an initial portfolio of ten films. It entered into a distribution agreement with Warner Bros (later Warner Bros Pictures) (“WB”), executed on 6 December 2002 but effective from 25 November 2002 (the “DA”). The DA is governed by Californian law, but neither party contended that this differed from English law in any relevant way.
Under the DA, WB licensed to SAD1 distribution rights in a portfolio of 10 films (although this was later reduced to 6), subject to WB's right to substitute films. SAD1 agreed to distribute, exploit and exhibit the films, and bound itself to do so via a marketing services agreement (“MSA”) with each of the following WB affiliates: Kendall Distributing LLP, Warner Bros Distributors Limited and Warner Home Video (UK) Limited (together, the “Sub-Distributors”). The Sub-Distributors actually carried out the marketing and distribution of the films. SAD1 was required to pay WB royalties from the proceeds of distributing the films.
The DA also provided for further pictures (the “Additional Pictures”) to be included within its scope.
Under each MSA the Sub-Distributor was appointed, exclusively, to sub-distribute, exploit and exhibit the films. SAD1 granted the Sub-Distributor a licence of those of its rights necessary to enable the Sub-Distributor to carry out its obligations. The Sub-Distributor was required to submit to SAD1, for its approval and recommendations, a budget setting out anticipated print and advertising costs (“P&A Costs”) and marketing materials.
SAD1 employed specialist consultants to advise it on marketing plans.
In the event of disagreement over SAD1's recommendations as to the marketing strategy, the parties were required to use their best efforts to agree on a plan. Under the DA, if agreement could nevertheless not be reached, WB had the right to withdraw the relevant film from the slate.
In the event of disagreement over the budget for a film, SAD1 would be responsible for paying that part of the budget to which it agreed, and the...
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