Mason & Ors v Mills & Reeve (A Firm)

This is an appeal, brought by leave of the judge, against the Order of Arnold J dated 1^st March 2011 dismissing the claimants’ claim in professional negligence against the defendant, a firm of solicitors. There is also a cross-appeal on costs on the part of the defendant, brought by leave granted by Aikens LJ, against the Order of the judge dated 13^th June 2011 whereby (among other things) it was ordered that the claimants pay to the defendant 50% of its costs of the proceedings.

The claim form was issued on 10^th March 2009. The proceedings underwent a number of vicissitudes, some of which are mentioned in the judgment below, before eventually coming on for trial before Arnold J in February 2011. They will have been very costly to the parties, and not just in monetary terms.

The facts are set out very fully and with exemplary clarity in the judgment below, which is now reported: [2011] STC 1177; [2011] EWHC 410. Accordingly it is not necessary to give more than a relatively brief outline of the facts for the purposes of the appeal.

Mr Christopher Swain had been a successful businessman, having been managing director and principal shareholder (owning some 72.4% of the shares) of a company called Swains International plc. By 2006 he had withdrawn from full-time management of the company and spent most of his time in Thailand. He was separated from his third wife (who was Thai). However he was domiciled in England and – as was common ground – was ordinarily resident in the UK for tax purposes. He had four daughters, all living in England. Two (Claire and Abby) worked for the company. Each of the daughters owned 5.3% of the shares in the company. The remainder were held by an Employees’ Trust and three senior members of the management team.

Mr Swain had a history of ill-health. As described by the judge, Mr Swain was overweight and had been diagnosed with Type 2 diabetes in 1995. He had had a mild heart attack in April 2001 and later that year he underwent coronary angioplasty and a coronary stent was fitted to one artery. Atrial flutter was identified in 2006, while he was in Thailand, and in July of that year he was admitted to a Bangkok hospital for a planned catheter ablation. No restenosis of the artery was revealed but, after a transoesophagal echocardiogram, a left atrial thrombus was discovered. The ablation was postponed and anti-coagulation drugs were prescribed. Thereafter, as found, he attended the hospital periodically for blood tests. In addition he regularly attended the hospital for supervised exercise.

By early 2006 Mr Swain was interested in selling his shares in the company. His daughters were also prepared to sell their shares. As a result of a meeting at a seminar on exit strategies on 4^th April 2006 he and his daughter Claire came into contact with Craig Hodgson, a corporate finance partner in the defendant firm, a large “full-service” law firm with offices in Norwich, Cambridge and elsewhere. Mr Swain had had no previous involvement with the defendant. The company’s solicitors in fact were Berry & Walton, a two partner firm in King’s Lynn and they also had acted for Mr Swain personally. The company’s corporation tax returns were prepared by Kirby & Haslam, a small accountancy firm also in King’s Lynn. Kirby & Haslam prepared Mr Swain’s personal tax returns but, as the judge found, they did not give Mr Swain advice in advance of transactions and did not give him any tax planning advice.

Mr Swain and two of his daughters in due course met Mr Hodgson on 27^th June 2006. There was discussion of a possible Management Buy-Out (MBO). Thereafter there were further meetings and telephone conversations. The various attendance notes made by Mr Hodgson are fully set out in the judgment. Discussions with the MBO team progressed.

On the 30^th June 2006 Mr Hodgson sent Mr Swain a letter summarising the advice thus far given. He also enclosed an engagement letter. In the relevant respects it was in these terms:

“When you have read this letter and its enclosures, please sign and return the letter to my office. Your signature will be on behalf of all of the Swain shareholders of the Company and so please ensure that they agree to the terms of this letter.

….

Terms relating to this matter

1 The scope of the work

1.1

I anticipate that the following legal work will be required in connection with the Transaction:

…

1.1.3

Sale and purchase agreement

•

Advising on and negotiating the agreement (to be drafted by Newco's advisors)

•

Advising on and negotiating a tax indemnity

•

Preparing a disclosure letter to qualify the warranties in the sale and purchase agreement and complete disclosure bundles

…

1.2

Assumptions

In identifying the legal work to be undertaken as set out above we have assumed that:

…

1.2.6

we will liaise with you and/or Claire on behalf of all shareholders

….

1.3

In identifying the legal work required we have not included:

1.3.1

individual tax advice for shareholders;

…

1.4

If, however, personal tax advice is required then this is something which we will be delighted to provide and we will give you a separate costs indication for this advice.

2 People responsible for your work

I will be in charge of the day to day handling of the matter and will carry out the majority of the work involved. I am solicitor and partner in the firm's Corporate team specialising in work of this nature. ..

From time to time, specialist advice may be sought from other members of the firm. …

I will also be responsible for managing our overall working relationship. …

...

4 Estimates

4.1

I anticipate that if the matter proceeds then it should be concluded in 3 months.

On the basis of the anticipated timescale I would expect Mills & Reeve's fees to be between £50,000 and £65,000 plus VAT.

…

6 General Terms

6.1

Billing

You will be sent a bill on Completion and our fees will be deducted from the sale proceeds ….

6.2

Communications

We have agreed that we shall communicate by telephone and email to [the relevant email addresses were then set out]…”

Thereafter Claire returned the engagement letter duly countersigned. In her covering letter, she made reference, among other things, to “the tax implications”. The judge found that it was probable that Mr Hodgson had previously said, or at all events was understood to say, that there would be tax implications for them.

Negotiations for the MBO progressed. Valuations were obtained. Heads of Agreement were signed on 4^th October 2006, connoting a total consideration of £3.25 million in cash on completion; a further £1 million deferred in Loan Notes; and a proportion of the profits for the year ending 31^st March 2007. Clause 9 of the Heads of Agreement recorded that the buyers would seek to structure the acquisition “in any reasonable manner which accommodates the tax position and planning of the Sellers…”

During this time Mr Swain had on occasion attended the hospital in Bangkok. On the 22^nd July 2006 there was the planned catheter ablation. He had a blood test on 12^th August 2006. He did not (as the judge found) tell the defendant of these hospital visits.

After the Heads of Agreement were signed, the defendant was engaged to prepare the tax clearance application. Mr Hodgson liaised with colleagues in the defendant’s corporate tax department, in particular Ms Pooley, a senior assistant solicitor in that department. Ms Pooley’s note of a conversation with Mr Hodgson of 17^th October 2006, when he briefed her on the matter, included the following:

“Sellers: 72.5% Chris Swain – 60s, ill, lives in Thailand – not involved in business for 3 years.”

The Judge found that this was to be explained by Mr Swain having, at one of the meetings, told Mr Hodgson something about his medical condition. At all events, when Ms Pooley in turn came to brief a colleague in the corporate tax department, Mr Townsend (a partner), his note included the statement: “Chris Swain 72.5% in his 60s? Not well”. Ms Pooley’s understanding was that Mr Swain was selling his shares because of his poor health.

After Mr Hodgson, Mr Townsend and Ms Pooley had conferred, Mr Hodgson sent an e-mail on 17^th October 2006 to Mr Swain and Claire (Mr Swain being back in the UK at that time), copied to Ms Pooley. It included a first draft of the Share Purchase Agreement (SPA), without – as was explained – a tax covenant, which was still to be drafted. The e-mail was lengthy. It included this statement:

“Chris, you enquired about whether your daughters can receive cash rather than the loan notes and the issue is tax driven which we would be happy to answer and please confirm if you would like my firm to give the Swain Shareholders personal tax advice in connection with the proposed transaction. My tax colleague Isabel would be happy to give you a separate estimate for this advice and she could talk through what is required with you as the transaction is complex from a tax perspective. Isabel would go through the swains shareholder history with you and then based on the terms of the transaction would give you an indication now as to the likely tax treatment and rates of tax you would each have to pay. This is important as Abby and Claire will be taxed differently to your other daughters. Your accountant would then deal with the tax returns and any issues regarding valuations post completion.”

Thereafter the defendant opened a further, tax advice, file. On 19^th October 2006 Mr Swain sent an email which, among other things, said this: “Regarding Tax Advice. Generally, yes please ask Isobel [Pooley] to act for me and the family”. He also asked them to liaise with Kirby & Haslam as appropriate.

Thereafter Ms Pooley corresponded with Mr Swain, primarily by email, about the tax clearance application. In one e-mail of 25^th October 2006 Mr Swain stated “pray for my continued reasonable health – well for at least seven years”. The judge found that Mr Swain had no very great knowledge of tax matters and was simply referring to the well-known seven year rule for Inheritance Tax purposes.

In due course Mr Swain added some comments to the tax clearance letter drafted by Ms Pooley, suggesting proposed additions to this effect:

“He has a Thai wife of over ten years, who also has British citizenship.

However, his continuing weak health, following the heart attack in 2001, which was subsequent to his contracting Type 2 diabetes in the early nineties, and which which [sic] precipitated his early departure from the Swains International plc business means that he will not be returning to active work, although he does hope to be pro-active as a consultant to the business in Thailand. He is not salaried in Thailand, and does not expect to be."

In his covering email Mr Swain said:

A few more bits of information in blue. ... The bits about my health are all true, and I attend the Bangkok Heart Hospital 2/3 times a week for exercise – as I'm only allowed to do it under medical supervision. It sounds worse than it is, perhaps. Nothing really hurts (except the exercise!) and as regards 'Wine Women and Song' I regret to say I have slowed up terribly.”

Progress of the MBO was held up by the prospective loss of a major contract with Kodak. In consequence, the price was reduced, as evidenced by second Heads of Agreement signed on 23^rd November 2006. £2.2 million was to be paid in cash and £1.2million was to be paid by way of deferred consideration in the form of Series A, Series B and Series C Loan Notes (the latter being redeemable after 10 years if earlier triggering events did not arise).

Tax clearance was received on 1^st December 2006. On 5^th December 2006 Mr Hodgson spoke to Mr Swain on the telephone. Mr Swain was told that there would be some additional fees in connection with tax, “together with fees for personal tax advice.” On the same day, Ms Pooley sent to Mr Swain a lengthy email described at trial as “the tax retainer email”. After reference to Mr Hodgson having spoken to Mr Swain about general tax advice, this, among other things was said:

“Looking ahead, there is a requirement for ongoing tax input in relation to the structure of the various elements of the consideration to ensure that the various conditions are met for roll over relief to be available in respect of those elements of the consideration which are to be satisfied by the issue of loan notes or shares. In addition, Craig has spoken to you previously regarding the general tax advice to be provided to you and your daughters in addition in relation to the tax liabilities arising in respect of the transaction structure. I estimate that the cost of providing this ongoing tax support and advising you and your daughters to be £3,000 - £3,500 plus VAT.

By way of summary, we would be advising yourself and your daughters (the 'Swain Shareholders') with regard to the transaction structure but we would not be able to advise on how this transaction fits into each of your own financial and tax planning positions.

We will need to consider and advise you and your daughters over the specific tax issues which arise in respect of the disposal of your shares ….”

Thereafter there was a significant amount of further communication between the various parties and their advisers, duly summarised by the judge. On 4^th January 2007 Ms Pooley sent (via e-mail) to Mr Swain and Claire the final Letter of Advice. This is summarised in paragraphs 102 to 109 in the judgment. The judge noted that the letter did not address a previous question raised by Mr Swain on 14^th October 2006 as to whether his daughters could receive the cash element of the consideration and Mr Swain the deferred element.

At this time, the proposed completion date for the SPA was set for 29^th January 2007.

On 13^th January 2007 Mr Swain (who was in Thailand) sent Mr Comer – a senior member of the MBO team – an email, described by the Judge as “the central document in the case”. The e-mail, which had the subject line “Heart Operation”, was copied to Abby, Claire, Mr Williams, Mr Sealy (those two also being senior members of the MBO team), Mr Wilson (a director of the company) and to Mr Swain’s other two daughters, Christa and Gemma. It was not copied to any one at the defendant. The e-mail stated as follows:

“Dear All,

I have finally been given a date for my Heart procedure, which is February 17^th. Basically they do a pre-op. procedure to make sure the clots are gone, for which I would prefer to be put under, and then continue with the heart op. in the early evening – which can take about 4 hours. The bugbear is no long haul flights for four weeks after, which kills my attendace [sic] at Board Meetings of 'International' on Feb 22^nd and Voice and Data on 26^th. My apologies, but I really need to give the Heart treatment the priority.

The run in to the treatment starts on February 10th with a hospital visit in order that the week before is used to fine tune the body in readiness for the procedure. This particularly applies to my warfarin doseage, as I need to get weaned off that otherwise I leak too much when they operate!

Al, you were going to advise me if Jan 29^th was looking good for a UK meeting when you know. I will need to leave UK on February 8^th, latest, in order to be back in time for Heart procedures. Please advise ASAP, so that I can get a travel agent working upon my ticketing needs.

Once, again, apologies for the disruption to plans. It also wrecks a big trip I had planned for eight days away in Thailand on Water Projects, when I would have seen the installation of the Swains International site.

Regards,

Chris”

On 16^th January 2007 Mr Comer replied by email saying that 29^th January 2007 was still agreeable, but that he understood there was an issue as to whether the bank was to have a first charge over borrowings; the deferred consideration in effect being subordinated to that. Mr Swain replied to Mr Comer by e-mail the same day, expressing some concern over that point but indicating that it was “sortable”. He copied his reply to Claire. He “blind-copied” it to Mr Hodgson. The judge summarised the position in this way:

“As a result, Mr Hodgson also received copies of the two emails further up the chain, that is to say, Mr Comer's email dated 16 January 2007 and Mr Swain's email dated 13 January 2007 quoted above. Mr Swain did not specifically draw Mr Hodgson's attention to the email dated 13 January 2007, but on the other hand the subject line in the email chain continued to read "Heart Operation". Mr Hodgson read the chain of emails, including Mr Swain's email dated 13 January 2007; but his evidence was that Mr Swain did not discuss the matter with him during any of their subsequent telephone conversations prior to the completion of the MBO. Mr Hodgson did not forward the chain of emails to Ms Pooley or Mr Townsend, nor did he relay the information about the heart procedure to them in any other way.”

Mr Hodgson discussed on the telephone with Mr Swain a number of matters, which included the bank subordination issue (which in the event was resolved). There were further negotiations. Mr Swain flew to England on the 25^th January 2007. The MBO was eventually completed on 31^st January 2007. During the lengthy completion meeting Mr Hodgson at some stage politely asked Mr Swain about the proposed heart procedure. In due course he sent him a letter after completion, among other things expressing hope that the forthcoming operation would be a success.

Mr Swain attended the Bangkok Heart Hospital on 17^th February 2007 as planned. A transoesophagal echocardiogram was conducted, revealing the continued presence of a left atrial thrombus. Shortly afterwards, and without any ablation being attempted, Mr Swain suffered a catastrophic circulatory collapse. Attempts at resuscitation failed and he was pronounced dead. The precise cause of the circulatory collapse was not known. It seems there was no post mortem.

The death of Mr Swain gave rise – as was not disputed – to tax consequences. They are concisely described at the outset of the judgment in these terms:

“The principal fiscal consequence of Mr Swain having died at that time, i.e. shortly after the MBO, was that the proceeds of the sale of his shares, held in his estate, were liable to inheritance tax ("IHT"). The amount charged was approximately £1 million. 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 ("BPR"). 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. The amount charged was approximately £200,000. These two adverse fiscal consequences have been referred to in this litigation as "the Tax Consequences" and I will adopt that terminology”

It was those Tax Consequences that prompted the claim, brought in the name of Mr Swain’s executors and his four daughters. It was common ground that the defendant had not given advice as to the Tax Consequences in the event of Mr Swain’s death. The claimants, in a nutshell, contended that had due advice been given the MBO would have been deferred until after the heart procedure had taken place: thereby avoiding the Tax Consequences arising on the death of Mr Swain.

As already mentioned, these proceedings were commenced on 10^th March 2009. The Particulars of Claim, as amended on 12^th May 2010, set out the background and summarised the relevant documentation including the tax retainer email and the letter of Tax Advice and related emails. By paragraph 8.1, 8.2, 8.3 and (by amendment) 8.3A, this was pleaded

“8.1

By reason of the breaches of retainer and/or duty of care and/or negligence on the part of the Defendants the Claimant Executors and/or Mr Swain’s estate have/has suffered loss and damage.

8.2.1

The Defendants having the actual knowledge [or if they deny such actual knowledge the deemed knowledge of such matters] as set out above in paragraph 5 ought to have advised Mr Swain and the Daughters and each of them of the Tax Consequences, and/or to delay the sale of the shares until after Mr Swain’s operation so that the payment of Capital Gains Tax and or Inheritance Tax might have, and in fact would have, been avoided. ”

8.2.2

The advice which the Defendants should have given to Mr Swain were words identical to or to the same effect as the following:

“as a result of the disposal you will incur 40% CGT on the sale of your shares, which is probably substantial. In addition we must mention that if most unfortunately you did not survive your heart operation in Thailand, your estate will have incurred that liability to CGT which could be avoided if the sale is deferred until after the operation. In terms of Inheritance Tax, you will lose “Business property” relief (of probably 100% of the value of your shares) and the proceeds in your estate will be liable to Inheritance Tax at 40% or thereabouts (depending on the value of other assets)”… and your belief about the shares of which you told us in or about 27^th June 2006 namely that the shares would transfer to your Daughters tax free will not hold good if the sale proceeds now, and the worst happened, but if the sale is deferred, and the worst happens, it is likely that they will transfer free of tax. You should of course consult your accountants as to the precise arithmetical calculation as to the tax mentioned by us or if you wish we could calculate it for you.”

8.2.3

The advice which the Defendants should have given to each Daughter was to the same effect as that which should have been given to Mr Swain, namely:

“We must mention that if most unfortunately your father does not survive his heart operation in Thailand, his estate will have incurred that liability to CGT which could be avoided if the sale is deferred until after the operation. In terms of Inheritance Tax your father’s estate would lose “business property” relief (of probably 100% of the value of his shares) and the proceeds in his estate will be liable to Inheritance Tax at 40% or thereabouts (depending on the value of other assets). Your father told us in or about 27^th June 2006 that he thought his shares would transfer to you free of tax. This will not hold good if the sale proceeds now and the worst happens, but if the sale is deferred and the worst happens it is likely that they will transfer free of tax. You are a separate shareholder in the Company and for the sale to proceed it needs your agreement. It is open to you to decide if you would prefer the sale to be delayed. Of course if you make that decision there may be a conflict of interest between you and your father and sisters in which case you must take independent legal advice as would your father and other sisters and we could not continue to act for anyone in the sale.”

“8.3

In the alternative the Defendants ought to have advised as to the risks of the incidence of taxation if Mr Swain were to die during the operation and advised Mr Swain and the Daughters of the risks they were running in continuing with the MBO in January 2007.

8.3A In the further alternative, the Defendants at the very least ought in their letter of the 4^th January 2007 to have advised Mr Swain and the Daughters as follows: “This letter does not include advice on the effects of the MBO for Inheritance Tax purposes, including the potential liability to Inheritance Tax on the consideration (in particular the loan notes) which you will receive for the shares. Whilst we advise on what we consider to be the relevant CGT consequences of the sale of the Shares and redemption of the loan notes, the advice on CGT is not comprehensive.” The Defendants did not so advise. Had they done so, Mr Swain and the Daughters would have sought such advice from the Defendants. The Defendants would then have either (a) advised Mr Swain and the Daughters in summary as to the Tax Consequences, or (b) informed them that it would not be able to provide sufficient advice on the other tax effects of the MBO in the time prior to the scheduled completion of the MBO, and therefore suggested that completion of the MBO be delayed until such advice could be given.”

The pleading went on to aver that all relevant parties would have agreed to defer completion until after the heart operation.

In a very fully pleaded Defence, the defendant denied that it had been negligent as alleged.

The case first came on for trial before Judge Kaye QC (sitting as a Judge of the Chancery Division) on 20^th April 2010. It had to be adjourned for various reasons. However at that stage Mr Mathew QC (appearing with Mr Learmonth for the claimants) indicated an intention to amend; among other things, it was proposed to aver that the defendant should have advised Mr Swain that the MBO would have consequences relating to his estate planning and that further advice on that was needed before proceeding. Nothing was finalised or approved at that stage before Judge Kaye QC but the amended pleading (including the new paragraph 8.3A as set out above) was in due course produced and served in May 2010.

On the refixed trial date, 23^rd November 2010, before Peter Smith J, Mr Mathew indicated an intention further to amend: to the effect that there was a duty to advise as to the Tax Consequences even before the defendant knew of the proposed heart procedure set for 17^th February 2007. Again it is not necessary here to go into full details: because the application for leave to re-amend ended up in the Court of Appeal and that decision too is reported: [2011] 1 WLR 2735; [2011] EWCA Civ 14.

Peter Smith J had been broadly sympathetic to the application further to amend, notwithstanding the lateness and notwithstanding the previous attempts to amend. There were various rulings by Peter Smith J. It is evident from his ultimate ruling ([2010] EWHC 3198 (Ch)) that he – rightly – regarded the present pleading as founded on a duty alleged to subsist which was dependent on knowledge on the part of the defendant of Mr Swain’s ill-health and of the forthcoming heart procedure. The judge’s view was that there were “major difficulties” about that way of putting the case. He also thought that there was “a difficult case (to put it mildly) on causation”. But he considered that a duty could properly be alleged to arise, in the circumstances, whatever the state of Mr Swain’s health. It can be gathered that Peter Smith J’s then view was that, appropriately pleaded, that way of putting the matter might represent an altogether stronger way of formulating the claim. Re-Amended Particulars of Claim in due course were drafted. The judge considered that, notwithstanding the delay, he should exercise his discretion to allow such re-amendment (on terms as to further evidence, costs, short adjournment of trial and so on). It is clear that the judge was concerned that otherwise the “real dispute”, as he saw it, between the parties would not be adjudicated; and that if the re-amendment were refused the trial might proceed on a “false and artificial premise,” and so injustice might result.

The Court of Appeal took a different view. It emphasised that a heavy onus lay on parties seeking to justify so late an amendment, referring to the Court of Appeal decision in Worldwide Corporation Ltd v GPT Ltd (unrep 1998), as endorsed by the Court of Appeal in Savings & Investment Bank Ltd v Fincken [2004] 1 WLR 667; [2003] EWCA Civ 1630 (neither of which authorities apparently having been cited in the court below). It further emphasised that such amendment must be properly and fully pleaded to ensure that the other side knew, with appropriate detail, the case he had to meet. The Court of Appeal, after very fully reviewing the circumstances and the proposed re-amendments and after considering various other authorities, ruled that the exercise of the discretion of the judge had been flawed. It held that the judge’s decisions on the amendment “were the product of misdirection, both as to the correct approach of the court to a late amendment and by taking too relaxed a view of the adequacy of the pleading in itself.” Exercising the discretion afresh the Court of Appeal declined to permit the re-amendments. The reasons are fully set out in the judgment of Lloyd LJ (with whom Elias LJ and Patten LJ agreed) and do not need further exposition here.

The importance of all this is that the consequence therefore was that the case was to proceed to trial on the same basis as it stood before 23^rd November 2010, on the footing that “the wider case, not linked to Mr Swain’s ill-health and his operation, is not open to the claimants”: paragraph 112 of the judgment of Lloyd LJ.

It should be added that Peter Smith J had rejected an application by the defendant for summary judgment on the originally pleaded amended case. The defendant had also renewed its argument on appeal against that ruling. However, the Court of Appeal rejected that, holding that there was at least an arguable basis for putting that case forward.

At the outset of the subsequent trial before Arnold J, the judge ruled, consequent upon the Court of Appeal’s decision and the procedural history, that the only case open to the claimants was one which was dependent on the defendant’s knowledge of the heart procedure. There is no appeal against that ruling.

This procedural history is of some relevance to the present appeal: as will appear in due course.

After very fully going through the facts and relevant documents the judge (at paragraphs 143 to 156 of the judgment) referred to a number of legal authorities. However, the legal principles in truth were not and are not really in dispute.

The judge rejected a suggestion that the defendant, by Mr Hodgson (a corporate finance specialist) who had received the e-mail of 16^th January 2007, should not be judged by the standards of a firm with a specialist tax department (this conclusion is challenged by way of a Respondent’s Notice on this appeal). He further found that the scope of the retainer extended to the defendant giving Mr Swain and his daughters advice as to the tax consequences flowing from the MBO but not to advising them on how the transaction fitted into their personal financial and tax planning positions (paragraph 167).

The judge noted that the principal issue in the case was whether, having regard to the scope of its retainer, the defendant came under a duty to advise Mr Swain and his daughters (i) as to the Tax Consequences if he were to die shortly after completing the MBO and (ii) to consider delaying completion of the MBO until after the heart procedure (paragraph 169). Given the pleaded case, the judge – rightly – identified the key question as being whether receipt by the defendant of the chain of e-mails of 16^th January 2007, which of course included the email of 13^th January 2007 relating to the forthcoming heart procedure, triggered any duty to give further advice (paragraph 173).

The central findings of the judge were these. He found that the defendant was under a continuing duty to advise the claimants in the light of changing circumstances. He further found that even prior to the 16^th January 2007 the defendant knew that Mr Swain was in his 60s and in ill health. He went on:

“176.

The third and crucial step in the Claimants' primary case is the contention that, given that Mills & Reeve were under a continuing duty to advise Mr Swain and his daughters in the light of changing circumstances, and given that they were already aware of Mr Swain's age and ill health, once they become aware of the planned heart procedure, then they came under a duty to give advice about the Tax Consequences, and hence to suggest that Mr Swain defer completion of the MBO until after the heart procedure. I am unable to accept this contention for the following reasons.

177.

First, it is important to have regard to the manner in which the information about the heart procedure was communicated to Mills & Reeve. It was in the second email up the chain from an email which Mr Swain blind copied to Mr Hodgson. Mr Swain had not sent the "heart operation" email itself to Mr Hodgson, still less had he asked for any advice arising out of it. Furthermore, there is nothing to suggest that Mr Swain had any particular intention to convey the information contained in that email to Mr Hodgson. On the contrary, it appears that the reason why Mr Swain sent Mr Hodgson a blind copy of the email dated 16 January 2007 was so that Mr Hodgson could see the line Mr Swain was taking with Mr Comer about the subordination issue. Thus it appears to be pure happenstance that the chain included the information about the heart procedure.

….

179.

Furthermore, although Mr Hodgson was the partner in charge of the relationship with Mr Swain, it is not the case that all of Mr Swain's communications were with him. On the contrary, Mr Swain had communicated directly with Ms Pooley in relation to the tax advice and continued to do so. Thus I accept that it is also relevant that Mr Swain did not himself send any information about the heart procedure to Ms Pooley, still less ask her for advice.

180.

Secondly, the only knowledge which Mills & Reeve had about the heart procedure was that contained in the email dated 13 January 2007 itself. There was nothing in that email to indicate that the heart procedure was anything other than a routine procedure. The only adverse consequence which is identified in the email is that Mr Swain will not be able to take long-haul flights for four weeks. The Claimants contend that Mills & Reeve should have appreciated that any operation has risks, but I do not see why Mills & Reeve should have concluded that the procedure as described in the email carried any significant risk. The Claimants also contend that the email indicated that at least the pre-operative procedure (i.e. the TOE) would be carried out under general anaesthetic, but in fact it merely says that this is Mr Swain's preference. Finally, the Claimants contend that the information contained in the email has to be read against the background provided by Mills & Reeve's previous knowledge of Mr Swain's ill health. That I accept, but the only specifically relevant prior knowledge which Mills & Reeve had was that (i) Mr Swain had had a heart attack in 2001 and (ii) he exercised under medical supervision in the Bangkok Heart Hospital. I cannot see that this prior knowledge alters the way in which Mills & Reeve should have read the email of 13 January 2007.

…

182.

….Mr Swain did not ask for advice. The question, therefore, is whether Mills & Reeve were under a duty to provide such advice even though Mr Swain had not requested it. Counsel for the Claimants submitted that they were. His most persuasive argument in support of that submission was to rely upon the "rotten tooth" analogy accepted by Laddie J in Credit Lyonnais. He argued that a reasonably competent solicitor in possession of the information about the heart procedure would have appreciated that there was a risk of death, and therefore that Mr Swain should be advised about the potential tax consequences if Mr Swain were to die. I am unable to accept this argument, however. Given the manner in which the information about the heart procedure was conveyed to Mills & Reeve, and given that the information so conveyed did not suggest that the procedure was anything other than routine, I do not consider that receipt of the email can have triggered any duty on the part of Mills & Reeve to advise Mr Swain and his daughters as to the Tax Consequences if he were to die during the procedure.

183.

Furthermore, even if Mills & Reeve came under a duty to advise Mr Swain and his daughters as to the Tax Consequences, I do not consider that they would have come under a duty to advise them to defer the completion of the MBO until after the heart procedure. At most, Mills & Reeve would be under a duty to advise Mr Swain and his daughters as to the options available to them. Deferring completion of the MBO was by no means the only option, as I shall discuss below.”

As to the claimants’ alternative way of putting the case (as pleaded in paragraph 8.3A), the judge accepted that the Letter of Advice should have included a much clearer statement as to the limits of the advice it contained, in particular that it did not extend to IHT or CGT consequences. He also was prepared to accept that had the Letter of Advice contained such a warning, Mr Swain would probably have asked the defendant for further advice. But the judge went on to say this:

“200.

Although I accept the first two steps in the Claimants' alternative case, I consider that the third step suffers from similar problems to their primary case. Let it be supposed that the Letter of Advice had contained the warning that I consider it should have contained and that, as a result, Mr Swain and his daughters had asked Mills & Reeve for further advice. What would have happened then? In my judgment it is likely in those circumstances that Ms Pooley or Mr Townsend would have introduced Mr Swain to one of their private client tax colleagues for them to advise Mr Swain and his daughters.

201.

Even on that hypothesis, I do not accept that the receipt by Mills & Reeve of the information about the heart procedure gave rise to any duty on the part of Mills & Reeve to advise Mr Swain and his daughters as to the Tax Consequences, still less a duty to advise them to defer the MBO. It remains the case that Mills & Reeve learnt about the heart procedure essentially by chance and that the information they received did not suggest that the procedure was other than a routine one.

202.

It seems to me that the introduction of a reasonably competent private client tax team would have led to them (i) advising Mr Swain and his daughters that there could be potential tax consequences in the event of Mr Swain's death after completion of the MBO, particularly bearing in mind that some of the consideration was deferred for up to ten years, (ii) enquiring what tax mitigation and/or estate planning Mr Swain had undertaken, and (iii) upon receiving the answer "essentially none", offering to advise him as to his options. If one pauses there, that is in a nutshell the case the Claimants wanted to plead in the re-amendment to the Particulars of Claim which the Court of Appeal disallowed (although that pleading also specified particular options which it was said that Mr Swain should have been advised about). It is therefore not open to the Claimants to advance that case without more.

203.

Even if one assumes that Mr Hodgson was under a duty to forward the information about the heart procedure to the private client tax team in this scenario, I do not think it would have affected the advice that they gave Mr Swain and his daughters. At most, it would have confirmed what they would already have appreciated simply from the terms of the deal, namely that Mr Swain was at risk of dying prior to receipt of all the consideration due under the SPA.

204.

Furthermore, if one then asks what options Mr Swain would have been advised by the private client tax team were open to him, I accept the submission of counsel for Mills & Reeve that those would have included reinvesting the cash proceeds of the sale of his shares in shares traded on the alternative investment market or unquoted shares in companies which qualified for enterprise investment scheme reliefs Both of those types of shares qualified as business property for the purposes of BPR. Thus if Mr Swain had replaced his shares in the company with shares of those kinds, he could have rolled over that relief. Similarly, if the proceeds of sale had been reinvested in newly-issued EIS shares, Mr Swain would also have been able to defer the chargeable gain he incurred on the sale for CGT purposes. In addition, there were options available for mitigating the IHT on the loan notes, the details of which it is not necessary to go into. Thus Mr Swain could have avoided, or at least significantly reduced, the tax consequences without deferring the MBO. It is pure speculation as to what he would have chosen to do if presented with these options. As counsel for Mills & Reeve pointed out, the claimants have no coherent case on this point.”

As was the judge, we were referred (in the skeleton arguments) to a number of authorities. I do not myself think it necessary to dwell on them further in any great detail here. Mr Mathew before us repeated his reliance on the passage from the judgment of Laddie J in Credit Lyonnais SA v Russell Jones and Walker [2002] EWHC 1310 (Ch); [2002] PNLR 2 at paragraph 28, where Laddie J said this:

“… A solicitor is not a general insurer against his client's legal problems. His duties are defined by the terms of the agreed retainer. This is the normal case although White v Jones [1995] 2 A.C. 207 suggests that obligations may occasionally arise outside the terms of the retainer or where there is no retainer at all. Ignoring such exceptions, the solicitor only has to expend time and effort in what he has been engaged to do and for which the client has agreed to pay. He is under no general obligation to expend time and effort on issues outside the retainer. However if, in the course of doing that for which he is retained, he becomes aware of a risk or a potential risk to the client, it is his duty to inform the client. In doing that he is neither going beyond the scope of his instructions nor is he doing 'extra' work for which he is not to be paid. He is simply reporting back to the client on issues of concern which he learns of as a result of, and in the course of, carrying out his express instructions. In relation to this I was struck by the analogy drawn by Mr Seitler. If a dentist is asked to treat a patient's tooth and, on looking into the latter's mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. So too, if in the course of carrying out instructions within his area of competence a lawyer notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him. I do not need to consider what would be the consequences if the lawyer does more than asked for, for example reads documents which he was not asked to read, and discovers a risk to the client.”

In Hall v Meyrick [1957] 2QB 455, one issue was whether, where an unmarried couple were proposing to make mutual wills, a duty arose on the solicitors to advise as to the consequence (revocation) if they subsequently married: in a case where the son of one had jocularly referred to the possibility of marriage during a meeting between the solicitor and the clients. It was indicated by the Court of Appeal that a solicitor was not under a duty in all cases to draw the attention of a person seeking to make a will as to the effect of marriage on a will: and such a duty did not necessarily arise merely because the question of marriage had been casually mentioned. All depended on the circumstances: see at p.475 per Hodson LJ and p.482 per Ormerod LJ.

In Mortgage Express Ltd v Bowerman and Partners [1996] 2 All ER 836 – on facts very different indeed from the present and in a context where the defendant solicitors acted both for lender and for purchaser in a property transaction – it was held that information received by the solicitors in the course of their investigating title was, in the circumstances, information which should have been passed on to the lender as directly affecting its interests as lender.

Really what these cases, and other cases cited to us, show is that the scope of the retainer, and the nature and extent of the duty arising, depend on the particular documentation and the particular facts of the particular case.

Mr Mathew, in his submissions, emphasised that the judge had (rightly) found that there was a continuing duty on the defendant. He further emphasised that the defendant was a “full service” firm and that Mr Hodgson, although not himself a tax specialist, had responsibilities as partner supervising the transaction with regard to the coordination and liaison between the various departments involved.

He went on to submit that information which came into the possession of the solicitor which might affect the clients in their consideration of the transaction in question was information which the solicitor was under a duty to pass on to the client. He submitted that the means by which the information came to the solicitor was not of significance. He also relied on the “rotten tooth” example given by Laddie J in the Credit Lyonnais case.

Mr Mathew thus submitted that the receipt of the chain of e-mails (and read by Mr Hodgson) should have alerted Mr Hodgson, who in general terms knew that Mr Swain suffered ill-health, to the risk accompanying the heart procedure; and accordingly he should have advised, or asked his tax department to consider advising, delaying the MBO because of the Tax Consequences. Mr Mathew said that the fact that Mr Swain had not specifically asked for any advice on this did not excuse the defendant from not giving it: it was, he said, a matter within the scope of its retainer. He submitted that the first thing a private client tax solicitor would say, if apprised of such circumstances, would be “of course if the operation goes wrong he will have to pay 40% inheritance tax on the proceeds”. Accordingly the defendant had wrongly discounted the relevance of the “heart operation” email in fulfilling its duties under its retainer. In effect, therefore, Mr Mathew repeated his submissions made at trial.

In his written submissions, Mr Simpson QC (appearing with Ms Butler for the defendant) said that the judge reached the right conclusion; albeit he relied also, if necessary, on the Respondent’s Notice challenging the Judge’s findings as to the extent of the duty on Mr Hodgson as a corporate finance (not tax) specialist.

I have set out the principal conclusions of the judge on the issue of breach of duty at some length. I have done so because it seems to me that they are entirely justified. He was, in my view, right to dismiss these proceedings for the reasons which he gave.

In such circumstances there is little purpose in giving extensive reasons for dismissing this appeal when to do so only replicates, using other words, the judge’s own reasons.

In essence, my view is that the judge was entirely right to attach great weight to the fact that the e-mail indicating the forthcoming heart procedure only reached Mr Hodgson by Mr Swain subsequently copying him in on it, and when Mr Swain was not seeking or asking for any advice in the light of the forthcoming heart procedure. On the contrary, as the judge expressly found, Mr Hodgson was only copied in on the e-mail chain because of the point about the possible bank subordination. There was simply nothing from it to cause or require Mr Hodgson to give further advice, or to seek further consideration from his tax department.

Mr Mathew stressed that the defendant knew that Mr Swain had a history of ill-health. That may be so; but there was nothing to indicate to them that the procedure mentioned in the email carried any significant risk, as the judge observed: indeed Mr Swain had sent the email to explain possible impediments in his subsequent availability and travel restrictions. There was, in fact, unchallenged medical evidence at trial that the risk of death from such a procedure was of the order of 1 in 1,000. Mr Swain had himself apparently been advised that the risk was less than 1%, although his own concerns and anxieties may have been significantly greater. But he never expressed such concerns to the defendant, let alone sought advice about any implications; and it is impermissible speculation for Mr Mathew to say that the defendant should have appreciated that Mr Swain was down-playing the matter so as not to alarm his daughters.

The position is thus wholly different from the situation contemplated in Hall v Meyrick or as occurred in Bowerman. It also does not begin to correspond to the “rotten tooth” example of Laddie J in Credit Lyonnais.

As to the alternative way of putting the claim, the judge in my view was plainly right to consider that, at the final stage of the argument, it suffered from similar problems to the primary case.

In truth, I think that on this last aspect the judge put his finger on the difficulty. By formulating the case in this way the claimants were seeking, in effect, to reintroduce an approach which was forbidden to them in the light of the Court of Appeal decision as summarised above. In reality, what the claimants were saying under this way of putting the claim was that advice should have been given as to the potential tax consequences in the event of Mr Swain’s death (however arising) after completion of the MBO. But that case was not open to them.

I would therefore dismiss the appeal.

In such circumstances, I need not deal with the Respondent’s Notice. Mr Simpson further submitted that the judge’s conclusions in paragraph 204 of his judgment were in truth conclusions on causation and were also fatal to the claim. Mr Mathew disputed that, saying that the claimants’ case was entirely coherent and consistent on the point. In view of my conclusion reached above, I do not think it necessary to express a view on that either.

I turn then to the cross appeal on the question of costs. Clearly costs will have been very significant indeed in this case.

The relevant provision of CPR Rule 44.3 are as follows:

“(1)

The court has discretion as to –

(a)

whether costs are payable by one party to another;

(b)

the amount of those costs; and

(c)

when they are to be paid.

(2)

If the court decides to make an order about costs –

(a)

the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but

(b)

the court may make a different order.

….

(4)

In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including –

(a)

the conduct of all the parties;

(b)

whether a party has succeeded on part of his case, even if he has not been wholly successful; and

(c)

any payment into court or admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which costs consequences under Part 36 apply.

(5)

The conduct of the parties includes –

(a)

conduct before, as well as during, the proceedings and in particular the extent to which the parties followed the Practice Direction (Pre-Action Conduct) or any relevant pre-action protocol;

(b)

whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(c)

the manner in which a party has pursued or defended his case or a particular allegation or issue; and

(d)

whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim.

(6)

The orders which the court may make under this rule include an order that a party must pay –

(a)

a proportion of another party’s costs;

(b)

a stated amount in respect of another party’s costs;

(c)

costs from or until a certain date only;

(d)

costs incurred before proceedings have begun;

(e)

costs relating to particular steps taken in the proceedings;

(f)

costs relating only to a distinct part of the proceedings; and

(g)

interest on costs from or until a certain date, including a date before judgment.

(7)

Where the court would otherwise consider making an order under paragraph (6)(f), it must instead, if practicable, make an order under paragraph (6)(a) or (c).

….”

It is elementary that a trial judge has a discretion on costs with which the appeal court will not readily interfere; a costs order will, generally speaking, stand unless it is vitiated by an error of principle or the failure to take into account a relevant matter or the taking into account of an irrelevant matter; or unless it is simply plainly wrong. There is thus a generous margin of discretion available to the trial judge: who also has the important advantage not only of knowing the details of the case but also of having the “feel” of the case.

The hearing on costs took place some time after the judgment was handed down. Lengthy written arguments, supplemented by oral argument, were presented to the judge. The claimants went so far as to submit that, notwithstanding that they had lost at trial and the claim had been dismissed, they should have 80% of the costs of the proceedings. It is wholly unsurprising that the judge rejected so unrealistic a submission. For its part, the defendant sought payment of all its costs (on a standard basis), as the successful party.

The judge duly referred to the provisions of CPR Rule 44.3. He elected to follow an issues based approach – understandably not leaving such aspects to the costs judge on assessment, which could only have added further expense and delay. In the event the judge elected to break down the issues to (in some cases) some quite precise areas, no doubt reflecting those issues on which the claimants asserted they had succeeded at trial. He identified seven such issues. On each he considered whether the defendant should recover costs or whether it should notionally pay costs.

(1)

The first concerned the state of Mr Swain’s health at the relevant time. The judge found that aspects of the evidence favoured both sides; and it was a “score draw”. Thus he concluded that it was not an issue in respect of which the defendant should be deprived of any of its costs. The defendant can have no complaint on that issue, therefore.

(2)

The second was the perceived prospect of Mr Swain dying at the relevant time. The judge thought the outcome on this had favoured the claimants and was a matter “which I think must be reflected in costs”. But he found that it was reasonable for the defendant to have explored the matter and so it should not notionally have to pay the claimants’ costs on that issue.

(3)

He reached the like conclusion on a third issue, relating to Mr Swain’s knowledge and understanding of tax. In substance the claimants had succeeded but the issue “was part of the necessary background to the finding of the absence of breach of duty”.

(4)(5) He then dealt with the two issues of causation: how would Mr Swain have reacted to the advice if the claimants established the duty to give advice and then what the MBO team’s response to a requested deferment of completion would have been. On these two issues the claimants were “unequivocally successful” (the judge had helpfully set out his findings on these aspects of causation in paragraph 205 to 208 of his judgment, notwithstanding that he had found the alleged breach of duty not established). The judge said that causation was a matter the defendant “simply did not have to contest”. He considered that the defendant should notionally bear the claimants’ costs of those issues; albeit that taken together “that issue was not a particularly large issue”.

(6)

The sixth issue related to Kirby & Haslam. The defendant had at one stage been asserting that there was a breach of duty on the part of Kirby & Haslam; and at trial apparently had still maintained that firm’s role was of potential significance. In consequence, disclosure of their files had been sought and granted: a “vast quantity of documents”, as the judge described it, being disclosed. The judge acknowledged that “the rights and wrongs are not all on one side”, as he put it. But at the end of the day the exercise had resulted in zero benefit, as the judge found, for the defendant. The judge said: “It seems to me those who engage in large scale disclosure exercises which amount to fishing expeditions and catch nothing must pay for them.” The judge considered that the whole exercise had been very costly and the defendant thus should pay for it.

(7)

The seventh issue related to the construction of the retainer letter. The judge considered that the claimants had been successful on that but it had to be investigated and was not an issue in respect of which the defendant should notionally pay the claimants’ costs.

The judge then turned to consider what he styled “an entirely separate matter”, which was in respect of the parties’ conduct. At various stages the claimants had proposed mediation or any other appropriate form of alternative dispute resolution. At two of the hearings before him, furthermore, Peter Smith J had encouraged the parties to consider mediation. At all stages, however, the defendant declined to participate, taking the stance that the claim was entirely without merit. The defendant had in fact offered a “walk away” shortly prior to proceedings and had also responded to a Part 36 offer made shortly before the first trial by offering only to negotiate over its own costs if the proceedings were withdrawn. The defendant had been prepared to move, and had moved, no further.

The judge referred to the Court of Appeal decision in Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002; [2004] EWCA Civ 576. There, in deciding whether a party had acted unreasonably in refusing alternative dispute resolution, the Court of Appeal identified factors that could be relevant, including (a) the nature of the dispute (b) the merits of the case (c) the extent to which other settlement methods had been attempted (d) whether the costs of alternative dispute resolution would have been unreasonably high (e) whether delay would have been prejudicial and (f) whether the alternative dispute resolution would have had a reasonable prospect of success. It was stressed by the Court of Appeal this was not an exhaustive check-list. The judge duly considered these factors. In addressing the merits of the case, the judge said this:

“So far as the merits of the case are concerned, it seems to me that the Defendant has been vindicated in its assessment of the strength of the Claimants’ case so far as breach of duty is concerned, but as will be clear from my analysis of the issues earlier in this judgment, I do not agree that the Defendant’s assessment of the merits of the Claimants’ case was universally accurate. On the contrary, it seems to me that the Defendant’s assessment of the Claimants’ prospect of success was at variance with the result in the judgment in a number of respects. ”

It was not really disputed that the matters identified in (a), (c), (d) and (e) of the “check-list” were consistent with mediation being appropriate. In this context, however, the judge said that one of the advantages of mediation would be that, if successful, there was avoided the risk to the defendant of being exposed to what the judge called “collateral reputational damage”. He described that as a “relevant factor in the present case”. He also noted that in a “minor respect” he had found the defendant in breach of duty.

On the question of whether alternative dispute resolution would have had a reasonable prospect of success, his conclusion was that there was a real possibility that, had there been a mediation, both parties would have gained a “better understanding of the weaknesses in their own case”; and that it was “not unrealistic” to suppose that mediation might have produced a settlement although he concluded that it was more likely than not that it would have been unsuccessful. He considered that the prospect of a successful outcome was not so unrealistic as to justify “the defendant’s intransigent refusal at every stage even to contemplate the possibility of mediation.” He then said this:

“It seems to me that the Defendant’s attitude in simply refusing even to contemplate the possibility of mediation on the grounds that the claim was utterly hopeless was an unreasonable position to take. Accordingly, I consider that the Defendant’s attitude to mediation is a factor that should be brought into account in making an overall assessment of what costs order should be made.”

The judge’s overall conclusion was to this effect:

“Standing back and viewing all of the matters which I have considered in the round, the result as it seems to me is this. There are issues upon which I consider that the Defendant, despite being overall the successful party, should not recover its own costs. There are also issues in respect of which I consider that it should notionally pay the Claimants’ costs. Furthermore, there is the additional factor of the unreasonable refusal of the Defendant to mediate. Taking all of those factors into account, and giving most weight to what I regard as being the overall degree of success which I consider that the Defendant achieved in my judgment, I consider that a fair and just order to make is that the Claimants should pay 50% of the Defendant’s costs.”

Mr Simpson complained that the judge erred in his approach. On all the seven issues identified by the judge these were, he submitted, matters that in effect had to be explored as part of the whole background: and in any event were relatively peripheral such as not to justify so large a reduction in the costs award to the defendant as successful party. He also said that the judge had been entirely wrong to hold against the defendant its refusal to mediate. For his part, Mr Mathew submitted that the judge had exercised his discretion in a way in which the appellate court should not interfere.

The seven issues

Mr Simpson said that the defendant was constantly facing a moving target in the way in which the claimants were seeking to formulate their case. Further, the whole background had to be explored. In such circumstances all these particular matters, he said, were properly in issue. He particularly complained about the attribution of costs on the causation issues. He said that – as illustrated by paragraph 204 of the judgment – the defendant had succeeded on one major aspect of causation and on the other aspects the defendant inevitably had to join issue on the pleaded case, and there was nothing unreasonable in it so doing.

Mr Simpson throughout much emphasised that the defendant had not acted unreasonably in defending any of these matters as raised and in joining issue with them. Obviously if a party does unreasonably take a position which increases costs that will be material in deciding on the award of costs to the party if he is successful overall at trial. But reasonableness, although of course relevant, is not the only yardstick here. As stated by Longmore LJ in Summit Property Ltd v Pitmans [2001] EWCA Civ 2020 at paragraph 16 of his judgment (with which Tuckey LJ and Chadwick LJ agreed):

“In my judgment it is also no longer necessary for a party to have acted unreasonably or improperly before he can be required to pay the costs of the other party of a particular issue on which he (the first party) has failed.”

There are a number of other authorities to like effect. As put by Sir Robin Jacob in MMI Research Ltd v Cellxion Ltd [2011] EWHC 426 (Pat) at paragraph 9:

“A defendant cannot take as many “reasonable” points as it likes and not have to pay for any of them if they are unsuccessful.”

Of course, it does not follow that a successful defendant necessarily will be deprived of costs on issues on which it has not succeeded. It is a matter of evaluation and discretion by reference to the circumstances of each case and there is no automatic outcome.

In the present case, I can see that some judges, in a case such as this and acknowledging that it is a rare litigant who wins on every single issue, may well not have adopted quite the approach which the judge did here. For example, on the second and third issues the judge himself accepted that these were part of the necessary background relevant to the findings as to whether or not there was a breach of duty. One can also be sympathetic to Mr Simpson’s observations concerning the causation issues. But on all these matters one has to remember that this was the exercise of discretion by the trial judge, who had the feel of the case. I would also reject the suggestion by Mr Simpson of there being an element of “double counting”. The judge was, I conclude, entitled to approach matters as he did and I can see no proper basis for the appellate court to interfere.

I would, however, like to make one particular observation on the Kirby & Haslam costs: clearly a very significant item. The judge was perfectly entitled to style this as a fishing exercise yielding no benefit to the defendant, for which it should pay. Mr Simpson took what, with respect to him, was a thoroughly bad point in relying on the fact that the claimants had ultimately consented to an order for such disclosure of the Kirby & Haslam documents and so (he asserted) could not be heard now to say the exercise was unreasonable or unnecessary. That is quite wrong. A party should not ordinarily in this context be, as it were, penalised for agreeing to an order sought by the other party: so to consent avoids increasing interlocutory costs. Consent was pragmatic. Anyway, had the claimants resisted I suspect the defendant would immediately have accused them of being unhelpful or obstructive or of having something to hide. In my view the judge’s approach on this issue was fully justified.

Refusal by Defendant to agree to mediation

I am much more troubled by the judge’s approach as to conduct and in particular by his holding it against the defendant, in terms of costs, that it declined to enter into mediation or any other form of alternative dispute resolution.

There are, I think, three objections to the judge’s approach:

I also have concerns at the judge’s assessment that the possibility of a mediated settlement was “not unrealistic”. At all stages the parties in reality were a hundred miles apart. The claimants had sought £750,000 and costs by a Part 36 offer served shortly before the first trial. The defendant’s best offer had never been more than a “drop hands” approach (before proceedings). Its assessment of the strength – or rather weakness – of the claimants’ pleaded case on breach of duty never altered. It is difficult to see, given the circumstances, how a mediation could have had reasonable prospects of success. Moreover, in such circumstances I do not think it right to style critically the defendant’s refusal to agree to a mediation as “intransigent”. Nothing changed in this particular case (unlike many cases) to necessitate a re-evaluation on the question of liability. A reasonable refusal to mediate does not become unreasonable simply by being steadfastly, and for cause, maintained.

In Halsey, the Court of Appeal was concerned to make clear that parties are not to be compelled to mediate. Further, as stated by the Court of Appeal at paragraph 16 of the judgment delivered by Dyson LJ: “mediation and other ADR processes do not offer a panacea and can have disadvantages as well as advantages; they are not appropriate for every case.” The Court of Appeal was also concerned to point out the relevance of the fact where a party reasonably believes that he has a strong case; otherwise there is scope for a claimant to use the threat of costs sanctions to extract a settlement even where the claim is without merit: “courts should be particularly astute to this danger” (at paragraph 18). It was thus emphasised that where a party reasonably believes that he has a watertight case that may well be a sufficient justification for a refusal to mediate. That has obvious resonance here, given the judge’s finding that on the core issue of breach of duty the defendant’s assessment of the strength of its case and weakness of the claimants’ case had been vindicated. That, to my mind, remains very much in point: even if on some (non-core) issues the defence case proved to have weaknesses. After all, it is indeed a relatively rare case where a party succeeds on every issue raised.

The fundamental question remains as to whether it had been shown by the unsuccessful party (the claimants) that the successful party (the defendant) had acted unreasonably in refusing to agree to a mediation. In my view, that could not be shown here; and I therefore think that the judge was wrong to bring into account, adversely to the defendant, the defendant’s attitude to mediation in deciding what costs overall should be awarded.

Given this, and given the other matters mentioned in paragraph 74 above, I think that the judge’s exercise of discretion on costs was, with respect, flawed.

It thus falls to this court to exercise the discretion afresh. The judge did not ascribe any particular percentages to the various issues which he had identified as relevant: nor, indeed, did he ascribe any particular percentage to “the defendant’s attitude to mediation” as a factor to be brought into account on the question of costs. Neither party, however, has sought to say that the matter should be remitted to the trial judge for further determination.

Mr Mathew submitted that, if the judge did err on the issue of refusal to agree to mediation, it amounted – as he put it – only to a small amount of tarnish on the corner of the mirror and should involve an adjustment of no more than 5%. Mr Simpson submitted, on the other hand, that a far greater adjustment was called for: and 5% was effectively, in the circumstances, de minimis.

The detail with which the judge addressed the mediation point indicates that it had importance to him in the overall assessment that the claimants should pay 50% of the defendant’s costs. On the other hand, the claimants had the benefit of the judge’s conclusion on the other issues which, as I have indicated, this court should respect and which taken together were clearly significant. In all the circumstances, and necessarily painting with a broad brush, I would, exercising the discretion afresh, award the defendant 60% of its costs of the proceedings.

Accordingly I would allow the cross-appeal on costs by substituting a figure of 60% payable by the claimants for that of 50% indicated by the judge.

The trial, and its outcome, will have been disastrous for the four daughters of Mr Swain: not only in costs terms but also (it is not difficult to apprehend) in terms of anxiety, pressure and emotional upset. The trial judge himself indicated at the end of his own judgment concerns at their likely feelings at the outcome. One feature, at all events, that seems to me to shine through the evidence is Mr Swain’s evident long term wish, as a father, to make as handsome financial provision as he could for his daughters. I anticipate that this will not, in the result, have been achieved: his wish will have been frustrated.

I agree.

I also agree.