Swain-Mason and Others v Mills & Reeve (A Firm)

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Davis,Lord Justice Richards,Lord Justice Lloyd,Lord Justice Elias,Lord Justice Patten
Judgment Date23 April 2012
Neutral Citation[2012] EWCA Civ 498,[2011] EWCA Civ 14
Date23 April 2012
Docket NumberCase No: A3/2011/1679 and A3/2011/1787,Case No: A3/2010/2845 and 2999

[2011] EWCA Civ 14

[2010] EWHC 3198 (Ch)

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Mr Justice Peter Smith

Before: Lord Justice Lloyd

Lord Justice Elias

and

Lord Justice Patten

Case No: A3/2010/2845 and 2999

Between
(1) Claire Swain-Mason, David Jonathan Berry and Neil Gordon Kirby (executors of C J Swain deceased)
Claimants Respondents
(2) Claire Swain-Mason
(3) Abby Swain
(4) Gemma Swain
(5) Christa Swain
and
Mills & Reeve (a firm)
Defendants Appellants

Mark Simpson Q.C. and Marianne Butler (instructed by Mills & Reeve) for the Appellants

Robin Mathew Q.C. and Alexander Learmonth (instructed by Berry & Walton) for the Respondents

Hearing dates: January 13–14, 2011

Lord Justice Lloyd

Lord Justice Lloyd:

1

We have before us appeals against two orders made by Peter Smith J, one made on 24 November 2010, in relation to which he gave his reasons in a reserved judgment handed down on 6 December 2010, [2010] EWHC 3198 (Ch), and the other made on 10 December 2010, in relation to which the judge gave an extempore judgment on that day.

2

The claim is for damages for negligence alleged on the part of the Defendant solicitors. The issue before the judge was whether the Claimants should be permitted to re-amend their Particulars of Claim, on an application made at the beginning of the trial. He granted permission to re-amend on 24 November, which would have been the second day of the trial, but subject to requiring the Claimants to put in evidence to support their amendments by 3 December, and to the Defendants being entitled to apply to have the amendments disallowed once they had seen the evidence. Evidence was duly filed and served on 3 December, and the Defendants then applied to have the amendments disallowed. For good measure they also applied under Part 24 of the CPR for summary judgment in their favour on the claim as originally pleaded. The judge rejected both of those applications. The first appeal is against the grant of permission to re-amend; the second is against the judge's refusal of the application to disallow the re-amendments (which is therefore the other side of the same coin as the first appeal) and also against his dismissal of the application under Part 24.

3

I will start by summarising the underlying events which gave rise to the claim, and then record in outline the history of the proceedings, before coming in more detail to what happened during the hearings before the judge.

The underlying facts

4

Mr Christopher Swain ("Mr Swain") was a successful businessman who had built up, among other business interests, a corporate group headed by Swain's International plc ("the Company"), of which he owned just over 72% of the shares. He had four daughters, of whom two worked in the business. Each of the four daughters owned some 5.3% of the shares in the Company. Most of the rest of the shares were held by an employee benefit trust.

5

By the beginning of 2007 Mr Swain spent most of his life in Thailand. He was 61 years old, and had a history of heart problems. During 2006 he had negotiated the principles of a Management Buy-Out (MBO) under which his shares and those of his daughters were to be bought by a new company owned by members of the current management. Heads of Terms had been agreed in November 2006 and the Share Purchase Agreement (SPA) was under negotiation in detail with a view to completion on 31 January 2007. We are told that it was particularly complex, even by the standards of such transactions. The overall value of the consideration, partly in cash and partly in loan notes, was about £3.5 million. About £1 million was represented by loan notes payable over ten years. The Defendant firm was retained in June 2006 to advise on the transaction on behalf of Mr Swain and his daughters. They gave advice about the tax implications of the transaction by a long letter dated 4 January 2007. (This and other advice was given to all their clients, and when, for the sake of brevity, I refer to them, or to a hypothetical solicitor, as advising Mr Swain, it should be understood that the advice was or would have been also to his daughters.)

6

In the meantime the solicitors had advised on a clearance letter to be sent to HMRC in order to obtain an acceptance by HMRC that the MBO was being undertaken for bona fide commercial reasons and not with an objective of tax avoidance. The letter included reference to Mr Swain's "continuing weak health", to his heart attack and diabetes, and to the fact that he would not return to active work though he hoped to be active as a consultant to the business in Thailand.

7

Although Mr Swain spent most of his time in Thailand, he was domiciled in England and was also, for UK tax purposes, resident and ordinarily resident in the UK. The clearance letter referred to the possibility that he might cease to be resident and ordinarily resident in the UK, possibly as early as the 2007/8 tax year.

8

Mr Swain had had a heart attack in 2001, he suffered from type 2 diabetes and he was overweight. In January 2007 a date of February 17th was fixed for a procedure which he had been advised that he should undergo. He told his daughters and the members of the management team who were active in relation to the MBO of this by an email dated 13 January. This would prevent his attending several forthcoming board meetings. He told the addressees that he had to give priority to the heart treatment. He also passed the information on to Mr Hodgson, the corporate partner of the Defendants who was leading the advice on the transaction, though in a somewhat oblique way.

9

The MBO was agreed and was completed on 31 January 2007, as planned. Mr Swain underwent the planned heart procedure in Thailand on 17 February 2007. Sadly and unexpectedly, he died during the procedure. There is evidence that he had been worried about undergoing it, but there is also expert medical evidence (Dr Fynn, for the Defendant) to the effect that the risks of a patient dying during or as a result of the particular procedure were negligible: less than one in a thousand. There is a debate as to whether it was properly to be called an operation or only a procedure. I will refer to it as an operation without prejudice to the view to be taken as to its significance and the degree of risk which it carried.

10

The principal fiscal consequence of his having died at that time, after the MBO, was that the proceeds of the sale of his shares, held in his estate, were liable to inheritance tax (iht), since he was domiciled in the UK. If, by contrast, he had died still owning his shares, they would not have been subject to iht because they would have been covered by business property relief. Moreover, in that case there would have been a deemed disposal of the shares for capital gains tax (cgt) purposes on his death so that, on a later disposal of the shares (if, for example, the MBO had been entered into and completed by his executors), the only chargeable gain would have been any further increase in the value between the date of his death and the date of the disposal, whereas on the actual disposal there was a charge to cgt, albeit moderated by taper relief for business property. These two adverse fiscal consequences were called the Tax Consequences in the Particulars of Claim, and I will use that label.

The proceedings

11

In March 2008 the Claimants' solicitors sent their first letter notifying a claim. The gist of the complaint was that the Defendants, who knew of the forthcoming heart operation, should have advised Mr Swain that completion of the MBO be delayed until after the operation. If he had been given that advice, requiring a delay of no more than 18 days, he would have agreed, as would all other parties. After his death the MBO could then have been completed by his estate without the adverse Tax Consequences, the cost of which was put at £1.3 million.

12

In March 2009 the proceedings were issued. The Defendants were said to be under a duty by virtue of an express or an implied term of the retainer, or a duty of care at common law, to advise their clients, Mr Swain and his daughters, of any particular risks which as lay persons they might not appreciate but of which the Defendants had or ought to have had knowledge, namely the Tax Consequences in respect of iht and cgt if Mr Swain were to die after rather than before completion of the MBO.

13

The allegation of breach of duty or negligence was that, knowing of the forthcoming operation, the firm ought to have advised their clients of the Tax Consequences, and that the sale should be deferred until after the operation. The pleading in this respect spelled out at some length the advice that ought to have been given, all of which was tied to the prospect of the operation.

14

As regards causation, it was alleged that, if the advice had been given which ought to have been given, the entry into the MBO would have been delayed until after the operation, and the Tax Consequences would not have been incurred. The loss alleged to have been suffered was the iht and the cgt (and interest), amounting to some £1.35 million.

15

In the Defence, the Defendants contended, among other things, that the risk of death as a result of the operation was negligible. In a request for further information in June 2009 the Defendants asked whether it was the Claimants' case that the advice ought to have been given even if the Defendants did not know that Mr Swain had health problems and was about to undergo an operation. The Claimants refused to answer this request as...

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