Pegasus Management Holdings SCA & Anor v Ernst & Young (a firm) & Anor

On 10 November 2005 the two claimants, Mr Bradbury and Pegasus Management Holdings SA (“Pegasus”) issued a claim form against Ernst & Young (“E & Y”). The claim form claims damages for negligence in giving advice which led to Mr Bradbury subscribing for shares in Pegasus in April 1998. E & Y say that the claims are statute-barred and that, in any event, they owed no duty of care to Pegasus. These are the two questions I have to decide. It is conceded that any contractual claim is statute-barred; but the claimants argue that a claim in tort is still available. Whether this argument is correct depends on whether the claimants first suffered damage before 10 November 1999. It ought to be relatively straightforward to decide when a person has suffered damage. Unfortunately it is not.

Fortunately there is virtually no dispute about the facts; and I have borrowed extensively from Mr Salzedo’s careful summary of them. Mr Bradbury says that he has been advised by E & Y on his personal tax matters since at least 1980. In paragraph 15 of his witness statement he says:

“I have been advised by E & Y on corporate tax matters since 1985, when I set up my first company in Newcastle.”

In about April 1997, Mr Bradbury sold an electronics manufacturing business that he had built up for a very large amount of money. The sale consideration was paid in loan notes. The payment of the consideration for the sale of the business by way of loan notes was a well known way of deferring liability for capital gains tax until disposal of the loan notes themselves. Thus any consideration that Mr Bradbury might receive on a disposal of the loan notes would be potentially taxable in Mr Bradbury’s hands as a capital gain. The tax liability would also have been very large.

Understandably Mr Bradbury was keen to avoid or mitigate that liability. In 1997, the deferral of gains by use of loan notes could be extended beyond the disposal of the loan notes if the proceeds of such disposal were reinvested in a qualifying business in a way that satisfied the conditions of reinvestment relief. This relief was provided for under sections 164A to 164N of the Taxation of Chargeable Gains Act 1992 (“the 1992 Act”), supplemented by guidance given by the Inland Revenue. I shall look at this more closely in due course. By early 1998, there were discussions between Mr Bradbury, his lawyers (principally Mr Rhodes of Macfarlanes), his accountants (principally Mr Allan of E&Y) and the Inland Revenue about reinvestment options to take advantage of reinvestment relief. In particular, at a meeting with the Revenue in January 1998, Mr Bradbury said that he was considering reinvesting his gains in establishing clinics through which primary health care services would be supplied to the public.

In his paragraph 16 of his witness statement Mr Bradbury says:

“After the sale of my major company in 1997, Mr Allan became highly involved in all aspects of my tax affairs. He was of the view that it was impossible to distinguish me and my personal tax affairs from the companies that I was intending to set up and run. He wanted to ensure that I understood all the tax implications of everything that I was doing and not doing at that time. … [T]he practice between us was that E & Y would give comprehensive tax advice to me and my companies on all major business ventures, affairs and interests. From April 1997 Mr Allan would look to others about specific aspects of corporation tax but he insisted on being at the centre of things and involved with all tax related decisions.”

On 9 March 1998 Mr Allan produced a note on reinvestment relief which he gave to Mr Bradbury. The note suggested the setting up of a Luxembourg company which would trade in the UK and be resident in the UK for corporation tax purposes. It pointed out that the corporate structure could be a Luxembourg holding company and a Luxembourg trading subsidiary. The note continued:

“Assuming the more complex structure, money would be subscribed for shares in the holding company. It is recommended that the trading subsidiary is set up as quickly as possible. When the subsidiary requires funds to acquire a suitable trade, they could be borrowed from the holding company.

To be sure that reinvestment relief is given it would be advisable to transfer any trade and assets acquired by purchasing a company into the subsidiary. This is because s 164A TCGA 1992 allows reinvestment relief if a qualifying subsidiary is intending to “… Employ the money raised by the issue of the shares wholly for the purposes of a qualifying trade carried on by it.” (Emphasis added). There is a view that the qualifying subsidiary therefore has to exist before the acquisition of the trade and that the subsidiary must carry on the trade acquired. The Inland Revenue have stated that they do not see the perceived problem. In a letter to the Chartered Institute of Taxation, the Revenue stated:

“… It is not clear what prevents the holding company from lending money raised to its subsidiary which can then acquire the company in question. This would enable a group to retain a holding company and separate trading subsidiaries as required.””

The note concluded by saying that it was intended that a Luxembourg company would be established within the next few days and that the initial amount subscribed would be modest. At the end of the week beginning 9 March 1998 a second more substantial subscription would take place. The timetable was designed to fit in with the Budget, which was due on 17 March. On 17 March 1998, the Chancellor of the Exchequer announced in his annual Budget speech that reinvestment relief would in future be restricted to investments in companies which had gross assets of up to £10 million before investment or up to £11 million after investment. These changes were due to take effect at the beginning of the financial year in April 1998. Since Mr Bradbury’s potential gain exceeded these limits many times over, this announcement had a potentially dramatic impact on his ability to use reinvestment relief to defer further any taxable gain which he realised upon disposal of his loan notes. However, there was a window of opportunity to arrange matters between the Budget announcement and the end of the financial year.

On 20 March 1998, Mr Bradbury met with Mr Rhodes and Mr Allan. After discussion, Mr Bradbury decided that he would establish a new Luxembourg company with a view to investing a substantial sum before 5 April 1998. The monies invested in the Luxembourg company would later be applied to some business which he would select by experimenting with smaller companies within the £10/11 million limits.

Pegasus was incorporated as a new Luxembourg company (originally under a different name) on 26 March 1998. Mr Bradbury subscribed $40,000 capital in return for shares. Mr Bradbury sold some of the loan notes for about $150 million (equivalent at the time to about £90 million) and used this money to subscribe for further shares in Pegasus. The subscription was agreed by the company in a board resolution of 31 March 1998, and the transaction was completed on 2 April 1998. Following Mr Bradbury’s subscription, Pegasus’ only asset was the cash that he had subscribed.

Ernst & Young Luxembourg SA (which is a separate entity from E & Y, and is not a defendant to these proceedings) was appointed statutory auditor of Pegasus at the initial shareholders’ meeting on 26 March 1998. The initial directors of Pegasus were Mr Bradbury and two partners of Ernst & Young Luxembourg. The two Luxembourg accountants resigned on 23 November 1998, and were replaced by Mr Bradbury’s wife and Mr Rhodes of Macfarlanes.

For Mr Bradbury to qualify for roll-over relief, Pegasus needed to invest the £90m in “qualifying trades” in the UK, making the first investment before 1 April 2000 and investing the full amount by 1 April 2002 (time limits which had been negotiated with the Inland Revenue). Mr Bradbury took extensive advice on his options following the establishment of Pegasus, including consultations with leading tax counsel.

At a meeting of Pegasus on 1 December 1998, attended by Mr Bradbury, Mrs Bradbury and Mr Rhodes, Mr Bradbury discussed the fact that he had carried out research through another company, Primary Care Advisory Ltd, the result of which showed that there were no suitable healthcare businesses available for sale, and that it would not be possible to spend more than £40 or £50 million on pilot schemes in the 2 years remaining for investment within the reinvestment relief rules. Mr Bradbury thought that Pegasus should consider other trading opportunities, if necessary outside the field of healthcare. In relation to “Taxation matters” the minutes of the meeting on 1 December 1998 record:

“It was agreed to confirm the appointment of Ernst & Young as tax accountants and auditors for the company. JGR [Mr Rhodes] to correspond with Jeremy Allan on the paperwork required for this.

Ernst & Young should be asked to confirm that all appropriate filings relating to the company have or will shortly be made with the UK Revenue and to set out a schedule of anticipated dates for tax filings or payments of any estimated tax over the next three years.”

A further meeting of Pegasus was held on 29 April 1999 at which various investment options were discussed. In his witness statement Mr Bradbury draws attention to the following paragraph in the minutes:

“JGR to send a copy of these draft minutes to Jeremy Allan for confirmation that Ernst & Young are dealing with all appropriate filings in both Luxembourg and the UK in relation to the company. Also we are awaiting firm advice from E&Y on the tax status of the company and in particular that there is no risk of double taxation between Luxembourg and the UK.”

Mr Bradbury also draws attention in this statement to what he calls a characteristic letter from Mr Allan to Mr Bradbury, dated 25 June 1999. The letter is addressed to Mr Bradbury at his home address in London. It began:

“At our forthcoming meeting, I would like to clarify your intentions as regards the additional business opportunities you are considering as it is not clear to me that you are sufficiently aware of the tax consequences should you choose to do this.”

The letter continued by discussing the risk that if the funds in “the Luxembourg company” (i.e. Pegasus) were used for investments outside healthcare, this could jeopardise Mr Bradbury’s reinvestment relief. It concluded:

“… It is essential that the Luxembourg company does indeed commence trade at some date prior to 5 April 2000 otherwise there is total claw-back.

I have tried to set out what I believe the relative parameters are but I want us to get together and clarify your business plans so we can be sure what the tax consequences will be and that these are addressed.”

In or about October 1999, Pegasus had identified a possible target for acquisition, Lister Healthcare Group Limited (“Lister”). It seems that E&Y was aware of this by 12 November 1999, when a memorandum was composed setting out, among other things, that it would be beneficial for assets to be acquired rather than shares. Negotiations for the acquisition of Lister took some time. Despite E & Y’s advice to the contrary, the acquisition was agreed as a purchase of shares, not assets. On 9 March 2000, E & Y wrote to Mr Bradbury advising that, because the acquisition was a purchase of shares it would be necessary, in order to satisfy the requirements for reinvestment relief, for the assets and trading activities of Lister to be hived up to Pegasus after the acquisition. E & Y advised that the hive up would not give rise to immediate capital gains tax liabilities, but Pegasus would inherit the original base cost to Lister of each asset. They did not spell out exactly what the base cost was. In the same memorandum of 9 March 2000, E & Y said:

“We recommend that a full review of the corporation tax and VAT position of the group is carried out in order to consider the impact of the hive up arrangements. In view of the timescale envisaged this is unlikely to be possible before the hive up occurs. Hence we recommend that this occurs after the hive up has been implemented. This will have the benefit of ensuring that the position after the hive up can be clarified and any potential planning opportunities may be ascertained.”

This advice appears not to have been followed. The agreement for Pegasus to purchase the shares of Lister was made on 16 March 2000, which was two weeks or so before the deadline of 2 April 2000 for the investment to be made, after which all reinvestment relief would have been lost. There followed the hive up required to protect Mr Bradbury’s reinvestment relief position. In November 2000, Mr Bradbury reached agreement with the Inland Revenue compromising in his favour his claim to defer the gain made on the April 1997 disposal pending disposal of the loan notes. The settlement also included a provision that the time for Pegasus to invest the $150 million would be extended by a year until 31 March 2002.

The investment programme was completed through the purchase by Pegasus of more businesses in the health care sector and a property at a total cost of £90 million. One of the businesses (Westminster Healthcare Diagnostics) was bought by way of an asset purchase. The others were all acquired by buying the shares in the companies owning the businesses. In all these cases, the assets of the acquired businesses were “hived up” to Pegasus.

In October 2002, Pegasus discovered a problem. The problem was that when Pegasus bought the various businesses much of their value lay in the goodwill built up by each business during the course of its existence and before the acquisition by Pegasus. When the assets of the business were “hived up” to Pegasus, the “base cost” at which Pegasus was taken to acquire those assets for the purposes of corporation tax on capital gains was the original base cost to the acquired business. Since the goodwill had been built up by the acquired business itself, it had not paid anything for it. Thus the value of the goodwill (for which Pegasus had paid) did not form part of the base cost to the acquired business. When Pegasus then came to sell those assets, with their accompanying goodwill, its gain fell to be calculated as the excess of the sale price over the original base cost to the acquired business (not the gain over the purchase price paid by Pegasus). This had the consequence that if Pegasus were to sell one of the businesses for less than the amount that it itself had paid for it, but more than that base cost, it would still be making a capital gain for tax purposes and would be liable to corporation tax on that gain. The Particulars of Claim call this problem “the Adverse Consequence”; and I will do likewise. The Adverse Consequence could have been avoided if, instead of buying shares in the target businesses, Pegasus had bought the assets of the target companies (including goodwill). If that had been done then Pegasus would only be liable to pay tax on a gain over and above the whole price that it paid for the assets. It could also have been avoided if E&Y had timeously advised that Pegasus should incorporate and fund subsidiaries, which would in turn acquire the businesses. If this had been done, Pegasus would have been able to dispose of an acquired business by a sale of its shares in the subsidiary without triggering a liability for tax on capital gains (save insofar as it made an actual gain on the sale). One of the issues is the timing of the incorporation of subsidiaries in order to take advantage of the tax legislation.

On 10 November 2005 Mr Bradbury and Pegasus issued a claim form, claiming damages against E & Y. E & Y say that the claim is partially statute barred because (a) any breach of contract by E & Y occurred before 10 November 1999; and (b) any damage resulting from a breach by E & Y of its duty of care consisting of a failure to advise the incorporation of subsidiaries was suffered before 10 November 1999. Mr Bradbury and Pegasus concede that any claim in contract is statute barred; but assert that they suffered no damage before the limitation period began to run and that consequently they are still entitled to pursue a claim in tort. The question of limitation was ordered to be tried as a preliminary issue.

E & Y also say that they owed no duty of care to Pegasus either by way of an implied contractual term or in tort; and have applied for summary judgement against Pegasus.

The statutory provisions as to roll-over relief were found, at the material times, in sections 164A to 164N of the Taxation of Chargeable Gains Act 1992. These provisions were originally introduced by the Finance Act 1993. They were amended by the Finance Act 1997, but were repealed the following year by the Finance Act 1998. References below are to the provisions as they stood immediately prior to the enactment of the Finance Act 1998.

Section 164A provided for roll-over relief on re-investment by individuals. Section 164A(1) provided that such roll-over relief was available where:

“(a)

a chargeable gain would (apart from this section) accrue to any individual (“the re-investor”) on any disposal by him of any asset (“the asset disposed of”); and

(b)

that individual acquires a qualifying investment at any time in the qualifying period.”

A “qualifying investment” was defined as the acquisition of shares in a qualifying company. Section 164A(8A), which was added by the 1997 amendments, provided that:

“Where the eligible shares acquired by any person in a qualifying company are shares which he acquires by their being issued to him, his acquisition of the shares shall not be regarded as the acquisition of a qualifying investment unless the qualifying company, or a qualifying subsidiary of that company, is intending to employ the money raised by the issue of the shares wholly for the purposes of a qualifying trade carried on by it.”

Section 164A (8B) provided that the purposes of a trade “include the purpose of preparing for the carrying on of the trade”. This necessarily means that the phrase “for the purposes of a qualifying trade carried on by it” must be read as including “for the purposes of preparing for the carrying on of a qualifying trade to be carried on by it.” Section 164A (8A) is not a masterpiece of drafting. For one thing, if the shares are issued by the parent but it is envisaged that the trade will be carried on by a subsidiary, it is by no means clear how the subsidiary can “intend” (rather than “hope”) to use the money raised by the issue of shares in the parent, over which it will have no control.

Difficulties of interpretation led the Chartered Institute of Taxation to ask for guidance on the Revenue’s approach to section 164A (8A). The Revenue’s response was published in the July 1997 edition of the Taxation Practitioner magazine in Question & Answer format. The relevant questions and answers are as follows:

“Q. L.1.5(i). Is the implication of new section 164A(8A), introduced by paragraph 2 of the Schedule, that there will be a test at outset of the intentions of a company which issues new shares, as well as the time limits introduced by new section 164FA (in paragraph 3)? If so, what evidence will Inspectors require of the company’s intentions?

…

(iii)

We view new section 164A (8A) with concern generally since, as worded, it appears to prevent a company from qualifying if it is set up to acquire the shares of an existing trading company which will become a 100% subsidiary. We trust that this is not the intention. Similarly, the subsection appears to prevent the acquisition of the business and assets of another company.

You ask a number of questions about how the test of whether a company is intending to employ money raised will be applied. A statement by the company that the money raised by the share issue will be employed for the purposes of a qualifying trade carried on by that company or by a qualifying subsidiary, will normally be accepted unless on the facts that appears unlikely. The test will then be whether it does so within the time limits. If it does not do so, or does not wholly do so, any deferred gain will be recovered at the time the time limits expire.

Where a company intends to use funds in a subsidiary which has not yet been set up, there is no reason why the subsidiary should not be set up and the money passed on to the subsidiary to enable it to acquire or commence a qualifying trade.

Where a company uses the money raised to acquire the shares in a trading company in order to procure the transfer of the trade to itself, the money would be regarded as employed for the purposes of “preparing for the carrying on of a trade”… But where the company does not intend to procure the transfer of the trade, the use of the money to acquire the share capital will not satisfy Section 164A (8A).”

This is similar to (but not quite the same as) the guidance that E & Y quoted in their memorandum of 9 March 1998. The interpretation then accepted by the Revenue was such that:

Whether these distinctions were sensible is not for me to say.

However, the March 1999 edition of Taxation Practitioner announced that the Revenue had withdrawn its July 1997 guidance on section 164A (8A). That issue of the magazine published the text of a letter from the Revenue to the Chartered Institute of Taxation, the relevant parts of which read as follows:

“A correspondent has recently asked about our understanding of the effect of the reinvestment relief in section 164A(8A) and (8B) in circumstances where money which a company (“the issuing company”) raises through the issue of shares is used for the purpose of a qualifying trade carried on not by the issuing company itself but by a subsidiary.

Our response is that section 164A(8A) has effect to deny reinvestment relief in such circumstances except where the subsidiary in question was a subsidiary of the issuing company at the time the shares were issued. In particular, that means that the investment is not a qualifying investment for reinvestment relief purposes if the subsidiary comes into existence only after the share issue has taken place. ...

The correspondent has pointed out that this is inconsistent with the interpretation given in the Finance Act 1997 Supplement published by the Taxation practitioner in the second paragraph of the responses the CIOT received to the point raised in paragraph L.1.5 of its representations on the 1997 Finance Bill. …

Unfortunately, as you will have gathered from my earlier remarks in this letter, we have belatedly realised that this statement is incorrect. We regret that an error was made and should be grateful if you were to bring our revised view to the attention of your members.

If, in any particular case, money has been raised through a share issue with the intention that it would be used by a subsidiary which did not exist at the time of the share issue, we shall apply the reinvestment relief in section 164A (8A) and (8B) in accordance with the interpretation given in the [July 1997 guidance] where it is clear that the directors of the company and their advisers relied upon it.”

In order to take advantage of the earlier guidance, it was therefore necessary for a company to establish that:

Paragraph 53.1 of the Particulars of Claim alleges that E & Y knew or ought to have known that the Adverse Consequence could have been avoided and the requirements of roll-over relief would have been satisfied if Pegasus had incorporated and funded subsidiaries to make purchases and to hive the businesses up to those subsidiaries rather than to Pegasus itself. If that were done, Pegasus could (if it wished) dispose of the acquired business by a sale of the subsidiary without triggering a liability for tax on capital gains (save in so far as it made an actual gain on the sale). Paragraph 53.2 alleges that under section 164A (8A) subsidiaries could be used for the purpose if they existed at the time of a subscription for shares in their parent; and paragraph 53.3 refers to the 1997 Inland Revenue guidance. Paragraph 53.4 refers to the withdrawal of that guidance and its replacement with the 1999 guidance.

In general terms, paragraph 52 alleges that E & Y failed to advise at any time before the acquisition of Lister (i.e. before March 2000) that the structuring of the purchase as a share purchase followed by a hive-up of assets to Pegasus carried the Adverse Consequence with it. It is not contended that this part of the claim is statute barred. But paragraph 52.1.5 alleges that E & Y failed to advise that there existed an alternative share purchase structure which would not entail the Adverse Consequence. That alternative structure is the one described in paragraph 53.

The key allegation of breach of duty for present purposes is in paragraph 54 of the Particulars of Claim which alleges:

“… E & Y ought to have advised Pegasus and [Mr Bradbury] in and after April 1998, as to the advisability of incorporating subsidiaries of Pegasus through which businesses could be acquired. E & Y ought to have advised that Pegasus should incorporate a range of subsidiaries before the subscription by [Mr Bradbury] or, if E & Y chose to advise Pegasus to rely upon the July 1997 Revenue Guidance (which would have been reasonable), then:

54.1

E & Y ought to have advised Pegasus to incorporate subsidiaries after the subscription by [Mr Bradbury] but before the change in the Revenue’s guidance in March 1999; or

54.2

when the Revenue changed its guidance in March 1999, E & Y ought to have advised Pegasus and [Mr Bradbury] to take prompt advantage of the concession allowed by the Revenue to anyone who had relied on its earlier guidance.”

The relevant allegations of loss are contained in paragraph 59 of the Particulars of Claim which alleges:

“Had E & Y informed Pegasus and/or [Mr Bradbury] that a share purchase of the respective Acquisition Businesses could be structured in the manner outlined in paragraph 53.1 above and the Adverse Consequence thereby avoided, that solution would have been adopted and implemented.”

Thus what is alleged is that if E & Y had given the correct advice, Pegasus would have incorporated and funded subsidiaries to make purchases and to hive the businesses up to themselves.

E & Y’s defence to the claim alleges that at the time of Mr Bradbury’s subscription for shares in Pegasus it was not foreseeable that there would be any benefit in the incorporation of subsidiaries. Paragraph 17 explains that that was because the Adverse Consequence of not having subsidiaries would only arise when and to the extent that five conditions were fulfilled:

The consequence of these allegations (if correct) appeared to lead to the conclusion that the Adverse Consequence had not yet matured into a loss or had not yet arisen. This appeared to be confirmed by what E & Y’s solicitors said in the allocation questionnaire; namely:

“The Claimants’ claim, in summary, is that they were negligently advised and may ultimately pay up to an additional £15m approximately in tax. Currently however no additional tax has been paid, and it may well be that no additional tax is ever paid. The claim therefore is largely presented as a claim for contingent loss which has not arisen as yet, and which may well not arise by the time of trial or ever. The Defendants do not believe that, as a matter of law, the Claimants have a right to claim contingent loss in that way, and would wish the claim for contingent loss to be considered as a preliminary issue.”

However, at the same time as saying that the claimed loss was a contingent loss which might never arise, E & Y also alleged that the claim was statute barred. So E & Y’s case appears to be that one the one hand the claim has been brought too early; and on the other hand it has been brought too late. The thought would no doubt have appealed to Erwin Schrödinger, whose famous thought experiment proposed a cat that was simultaneously alive and dead. Not surprisingly in the light of the Defence which appeared to allege that no damage had yet been suffered, the claimants asked E & Y to explain what events they relied on in saying that the claimants had suffered damage before March 1999. E & Y replied:

“The events relied on are (a) the subscription by Mr Bradbury for shares in Pegasus in late March or early April 1998 … and/or (b) the issuance and/or publication of the Inland Revenue’s revised guidance in or about March 1999…

The incorporation of Pegasus, and Mr Bradbury’s subscription for shares in it, were part of a reinvestment relief scheme for Mr Bradbury. If … subsidiaries could and should have been established by Pegasus in order to make that scheme more valuable, and thus make the shares in Pegasus more valuable to Mr Bradbury, that had to be done before Mr Bradbury subscribed for shares in Pegasus. Once Mr Bradbury subscribed for shares in Pegasus, any subsequent establishment of subsidiaries of Pegasus would not have been effective for reinvestment relief purposes. Accordingly, if the Claimants are right that such subsidiaries were something which it was valuable for Pegasus to have for this purpose, then loss was suffered by the Claimants on the date when Mr Bradbury subscribed for shares in Pegasus without them having been established. As at that date the shares for which he subscribed were less valuable than, on the Claimants’ case, they should have been.”

The alternative plea is that when Mr Bradbury subscribed for shares in Pegasus, he did not do so with the intention that the money would be used by a subsidiary yet to be incorporated; and that there was no reliance on the 1997 guidance. Moreover, it is said that any opportunity to establish subsidiaries was removed by the 1999 guidance which was itself issued more than six years before the claim form was issued.

The preliminary issued was ordered to be tried by Deputy Master Farrington on 26 October 2007. It is as follows:

“Whether the claim by the Claimants for damages for the alleged failures by the Defendants to advise as to an alternative share purchase structure as set out in paragraphs 52.1.5, 53, 54 and 59 of the Amended Particulars of Claim and Responses 30, 31 and 35 of the Further Information of the Claimant is time barred

(i)

in respect of the claim in contract and

(ii)

in respect of the claim in tort.”

As I have said, it is common ground that any claim in contract arising out of those paragraphs of the Particulars of Claim is statute barred. It follows that question (i) must be answered “Yes”.

Logically, this is the first of the issues I must decide. If, as E & Y argue, they owed no duty to Pegasus, then Pegasus has no claim; with the consequence that the question of limitation does not arise. This issue arises on E & Y’s application for summary judgment. The approach which I adopt is as follows:

It is common ground that any duty that E & Y owed to Pegasus must have arisen either out of a contract made between E & Y and Pegasus or out of an assumption by E & Y of responsibility to Pegasus.

Pegasus did not exist before its incorporation on 26 March 1998. Mr Davies QC did not argue that Mr Bradbury had entered into a pre-incorporation contract on behalf of Pegasus. The share issue took place on 2 April 1998. By that date, in order for Mr Bradbury to take advantage of section 164A (8A) in a way that did not expose him to the risk of the Adverse Consequence, Pegasus must either have incorporated subsidiaries, or formed the intention to do so. Any breach of contract by E & Y consisting of a failure to advise Pegasus to take one or other of those causes of action must have been complete by 2 April 1998. It follows that if a contract came into existence it must have come into existence between those dates. Apart from the appointment of Ernst & Young Luxembourg SA (which is a different entity) as statutory auditors on 26 March 1998, there is no evidence of any communication between Pegasus (or Mr Bradbury acting on behalf of Pegasus) and E & Y between 26 March and 2 April. In those circumstances I find it impossible to see how a contract between E & Y and Pegasus can have been made between those dates.

So far as an assumption of responsibility is concerned Mr Davies relies on Mr Bradbury’s evidence of the “practice” contained in paragraph 16 of his witness statement. In order to lay the ground, he pointed to Mr Bradbury’s evidence in paragraph 15 of his witness statement that E & Y had advised on corporate tax matters since 1985. However, as Mr Salzedo pointed out, Mr Bradbury’s evidence was that E & Y had advised him on corporate tax matters; not that E & Y had advised his companies. No doubt it would be wrong to read Mr Bradbury’s words as if they were a statute, but given that the witness statement was produced in order to respond to the specific allegation that E & Y owed no duty to Pegasus, the way in which Mr Bradbury expressed himself in that paragraph is striking. Mr Bradbury has produced no documentary evidence to show that E & Y ever advised his companies at any time since 1985; and that omission is also striking if what Mr Bradbury meant to say was that E & Y advised his companies as well as himself.

So far as the “practice” is concerned, E & Y read the evidence in paragraph 16 of Mr Bradbury’s witness statement as relating to the period following the sale of Mr Bradbury’s major company in April 1997. Mr Davies QC objected that this was not what that paragraph said; and that Mr Bradbury’s description of the practice was entirely general. The sentence in which Mr Bradbury describes the practice is immediately preceded by a sentence which begins “After the sale of my major company in 1997” and is immediately followed by a sentence which begins “From April 1997”. If E & Y misunderstood Mr Bradbury’s evidence the misunderstanding was a perfectly reasonable one. More to the point E & Y’s solicitor, Mr Schooling, himself made a witness statement in which he said:

“My understanding is that Mr Bradbury is alleging that a “practice” was established between about April 1997 (when he sold his major business) and about March 1998 (when Pegasus was incorporated).”

If Mr Schooling had got the wrong end of the stick, it would have been easy for Mr Bradbury to have put him right. But Mr Bradbury chose not to reply to Mr Schooling’s evidence. Mr Schooling’s researches at Companies House revealed that Mr Bradbury was the director of only one company between those dates; and that the documents relating to that company gave no hint that E & Y gave it any tax advice. Mr Bradbury did not reply to that evidence either. He gives no concrete example of E & Y having given tax advice to any of his companies before April 1998. In the light of the evidence, I do not consider that Mr Bradbury has a real prospect of establishing the practice he alleges. Although it is true that the court must take into account the evidence that might be available at trial, I do not consider that this means that the court must discount the evidence given by the protagonist in the hope that something might turn up.

Mr Davies also had a slightly different way of putting the case. He submits, and Mr Salzedo agrees, that there is no legal impediment to a professional adviser owing concurrent duties both to a company and to its members or to its directors. RP Howard Ltd v Woodman Matthews [1983] BCLC 117 is an example of the former; and Coulthard v Neville Russell [1998] 1 BCLC 143 is an example of the latter. In both those cases, however, the company and the human to whom the duties were owed were in existence at the time that the advice was given. Mr Davies says that underlying these cases is the principle that a person giving advice owes a duty to a person directly affected by the advice. As he put it in his skeleton argument:

“Pegasus is the entity that was to acquire the qualifying businesses. It is Pegasus (not Mr Bradbury) that stood to incur an additional capital gains tax liability if the Adverse Consequence materialised. As between Mr Bradbury and Pegasus, therefore, it is Pegasus that would be more directly affected by a failure on E &Y’s part to give careful advice. Once it is accepted that advice on the desirability of incorporating subsidiaries ought to have been given to Mr Bradbury, it is impossible to see why such advice should not have been given to Pegasus, as the party more directly affected.”

If E & Y had given advice to Mr Bradbury in the brief period between 26 March 1998 and 2 April 1998, there might have been more force in this point. But they did not. E & Y gave no advice to anyone between 26 March 1998 and 2 April 1998. It is difficult to see how E & Y could have assumed responsibility to Pegasus before it was incorporated; and equally impossible to see how they assumed a responsibility to Pegasus by silence. Moreover, as Mr Salzedo submits, this argument puts the cart very squarely before the horse. Many people and corporations have potential tax liabilities; that fact alone does not impose on E&Y a duty to advise them.

It is also the case that as far as Pegasus was concerned, it was a matter of indifference whether it incorporated subsidiaries or not. If it did not, and acquired existing trading subsidiaries by simple share purchase, it would have suffered no adverse tax consequences. In those circumstances, it would have been Mr Bradbury alone who would have suffered the consequences, because his reinvestment relief would have been withdrawn. Whether its shareholder retained reinvestment relief on his shareholding would have been of no concern to Pegasus. This, too, militates against the assumption by E & Y of a responsibility to advise Pegasus.

Mr Davies also relied on the fact that at a meeting of the board of Pegasus on 1 December 1998 it was agreed “to confirm the appointment of Ernst & Young as tax accountants and auditors for the company”. Mr Davies suggests that this will throw light on what the position was immediately on the incorporation of Pegasus. However, the chasm that he still has to cross is that there was no communication between E & Y and Pegasus (or for that matter between E & Y and Mr Bradbury) between 26 March and 2 April. In addition, the minutes of the meeting of 1 December seem to me to contemplate that the appointment which was to be confirmed was not that of consultants on tax planning; but was altogether more ministerial.

For these reasons Mr Salzedo has persuaded me that Pegasus has no real prospect of establishing that E & Y owed it any duty either in contract or in tort. E & Y is therefore entitled to summary judgment against Pegasus.

It is common ground that a cause of action for breach of contract arises as soon as the contract is broken. E & Y failed to give the advice they should have either before Mr Bradbury’s subscription for shares or before the Inland Revenue withdrew the 1997 guidance in March 1999. Both these events were more than six years before the date of the claim form: hence the agreement that any contractual claim arising out of the relevant paragraphs of the Particulars of Claim is statute barred.

It is also common ground that no cause of action in the tort of negligence will arise unless and until the claimant has suffered relevant and measurable damage. The difficulty is to understand what this means, and to apply it to the facts.

It is common ground that Saville LJ accurately summarised the law in First National Commercial Bank plc v Humberts (a firm) [1995] 2 All ER 673, 676:

“It is the law that a cause of action for the tort of negligence only arises when there has been a breach of duty resulting in actual (as opposed to potential or prospective) loss or damage of a kind recognised by the law.”

So the inquiry is whether there has been actual damage. This question has been considered no less than three times in recent years by the House of Lords; and on countless occasions by the Court of Appeal. Unfortunately this concentration of judicial firepower does not give easy answers for the first instance judge. I will begin by describing some of the decisions of the Court of Appeal because they have subsequently been discussed and commented on by the House of Lords.

In Forster v Outred & Co [1982] 1 WLR 86 Mrs Forster signed a mortgage by which she charged her farm to secure money which her son was borrowing to buy a hotel. The mortgage was executed on 8 February 1973. The business was a failure and on 21 January 1975 Mrs Forster was called upon to pay about £70,000, which she paid on 29 August 1975. In March 1980 she issued a writ against the solicitors who had advised her in connection with the mortgage, alleging negligence in not explaining the transaction. The question was whether the action was statute-barred; and that depended upon whether she suffered damage when she executed the deed (more than six years before the writ) or when she was called upon to pay.

Stephenson LJ approved the submission that the meaning of the “actual damage” needed to complete a cause of action in negligence was:

“any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases.”

This was approved by Lord Nicholls in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] 1 WLR 1627; and also approved by Lord Hoffmann in Law Society v Sephton & Co [2006] 2 AC 543, although he explained the circumstances in which a contingency could count as damage for this purpose. I shall return to this in due course.

On the facts the court held that Mrs Forster suffered damage when she encumbered her farm, because she then had only the equity of redemption after taking into account the liability secured by the mortgage. Consequently, her claim was statute barred. It is important to note that before the transaction Mrs Forster owned a farm that was unencumbered; and that immediately after the transaction she had a farm that was encumbered by an immediate liability secured by a mortgage. She received nothing from her son in return. She simply undertook a liability and received nothing in exchange.

In Baker v Ollard & Bentley (unreported May 12, 1982, but referred to in Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172) the claimant and Mr and Mrs Bodman agreed to buy a house. The claimant was to live on the first floor and the Bodmans on the ground floor. What ought to have happened was the solicitor should have advised them that the house as a whole should be conveyed into their joint names and then separate long leases granted of the first floor to the claimant and the ground floor to the Bodmans respectively. Instead the solicitor simply had the house conveyed into their joint names on trust for sale. The result of this was that the claimant obtained neither security of tenure nor any interest which she could separately dispose of and, when subsequently the Bodmans decided to move out and sell the house by enforcing the trust for sale, she had to expend further money purchasing the freehold. The Court of Appeal held that her cause of action accrued at the time of the original transaction rather than at the later time when the Bodmans decided to enforce the trust for sale. Templeman LJ said:

“Damages were suffered on that date because the plaintiff did not receive the long lease and joint tenancy which the solicitors should have secured for her. She secured instead some other different interest. She has suffered damage because she did not get what she should have got.”

It will be seen that the court did not compare the value of the interest that the claimant in fact received with the amount that she paid for it. The mere fact that “she did not get what she should have got” was sufficient to amount to damage.

In UBAF Ltd v European American Banking Corpn [1984] 1 QB 713 the claim was brought in misrepresentation. The claimant bank alleged that it had been induced by misrepresentations to participate in loans to two shipping companies, having been led to believe that the two companies were members of a large and profitable group. The borrowers subsequently defaulted. It was argued by the defendant that the claim for negligent misrepresentation was statute barred, because the damage had been suffered when the claimant bank advanced the money rather than the later date when the borrowers defaulted. The Court of Appeal refused to strike out the claim on that ground, holding that a trial was needed in order to ascertain when the damage occurred. Ackner LJ said that it was not self-evident that the claimant suffered loss at the date when the loan was made, because it was possible that the chose in action that they received in exchange for the money was worth as much as the money that had been lent. He pointed out that if someone is induced by negligent misrepresentation to buy a chattel which he later sells at a profit, he will have suffered no loss and will have no cause of action. UBAF, then, is a case in which the claimant parted with money in exchange for a bundle of rights. Whether damage was suffered would depend on whether the value of the bundle of rights was worth less than the money for which it was exchanged.

In DW Moore & Co Ltd v Ferrier [1988] 1 WLR 267 the claimant was an insurance broker which had agreed to engage a new director and employee. They consulted solicitors whom they instructed to draft an agreement containing a restrictive covenant. The solicitors drafted an agreement, which was duly executed. Subsequently it turned out that the restrictive covenant was inadequate. The Court of Appeal held that damage occurred when the agreement was executed and not at the later date when the claimant attempted to enforce the covenant. Neill LJ said ([1988] 1 WLR 267, 278) that there was no presumption that where a solicitor gives negligent advice, damage occurs when the advice is acted upon. It was a question of fact in each case. He held, however, that on the facts a valid restrictive covenant was obviously more valuable than a defective covenant; and that the claimants’ rights under the agreement “were demonstrably less valuable than they would have been had adequate restrictive covenants been included”. Bingham LJ said ([1988] 1 WLR 267, 279):

“On the plaintiffs' case, which for purposes of this issue may be assumed to be wholly correct, the covenants against competition were intended, and said by the defendant solicitors, to be effective but were in truth wholly ineffective. It seems to me clear beyond argument that from the moment of executing each agreement the plaintiffs suffered damage because instead of receiving a potentially valuable chose in action they received one that was valueless.”

He also added that if a contractual claim for negligence would have resulted in an award of more than nominal damages, then an action in tort arising out of the same negligence would not fail for want of damage.

This is another case, like Baker, in which the comparison was not a comparison between the value of what the claimant parted with and the value of what he received in exchange. Rather, it was a comparison between what the claimant received and what he ought to have received if the duty had not been broken. This comparison, like the comparison made in Baker, assimilates the usual contractual measure of damages (what the claimant would have received if the contract had been performed) and the tortious measure of damages. Indeed in Nykredit Lord Nicholls commented, without any hint of disapproval ([1977] 1 WLR 1627, 1634), that in Moore:

“the measure of damages was the measure sometimes loosely referred to as the contract or warranty measure.”

In Bell v Peter Brown & Co [1990] 2 QB 495 Mr Bell was the joint owner of a house, together with his wife. The house was worth £12,000 and subject to a mortgage of £8,000. Thus the equity was £4,000, of which Mr Bell was entitled to half. His beneficial entitlement, therefore, was one sixth of the gross value of the house at that time. In the course of divorce proceedings he agreed to defer the realisation of his interest by transferring title to his wife, while retaining an interest in one sixth of the net proceeds of sale in the future. His solicitors took no steps to protect his entitlement to a portion of the proceeds of sale, either by preparing a declaration of trust, or a mortgage, or even by registering a caution against the property. The Court of Appeal held that he suffered damage when he transferred title, rather than the later date at which his wife sold the house and dissipated the proceeds. Nicholls LJ said that at the point when Mr Bell parted with title he became subject to the practical inconvenience of not having his wife’s signature on a formal document. If he had attempted to enforce his entitlement he would have had to rely on solicitors’ correspondence and part performance. He added that “To the extent that this was less satisfactory than a formal document recording the deal, the plaintiff suffered prejudice.” Beldam LJ approached the question by considering what Mr Bell parted with and what he received in exchange. He said ([1990] 2 QB 495, 510):

“Due to the defendants' negligence, the plaintiff parted with his legal estate in the property conveyed to his wife in exchange for an equitable interest in the proceeds of sale. That equitable interest until secured by a charge or acknowledged by a deed of trust was clearly less valuable to the plaintiff. Unprotected against the interests of third parties by registration of a charge or of a caution, it was less valuable still. I consider therefore that the plaintiff's cause of action arose when he parted with his property or at the latest at the time when the careful solicitor would have affected registration either of a charge or of a caution.”

Nicholls LJ seems to me to have compared what Mr Bell received with what he should have received, whereas Beldam LJ compared what he parted with and what he received in exchange.

First National Bank plc v Humberts [1995] 2 All ER 673 was a case of lending following a negligent valuation. In July 1983 the lenders had advanced £2.6 million against a valuation of £4.4 million. In fact the true value of the security was only £2.7 million. The borrower subsequently defaulted, and the lender issued a writ in March 1990. The judge held that the claim was statute barred, and the Court of Appeal allowed an appeal against his decision. Saville LJ said ([1995] 2 All ER 673, 677):

“To my mind it would be wrong simply to take the debit side of the deal and to describe it as loss or damage flowing from the breach of duty without taking into account the credit side of the deal. The reason for this is that the inquiry is as to what loss or damage (if any) has been sustained through making the deal and when such loss or damage has been incurred. On this basis, on the evidence, I am quite unpersuaded that in July 1983 the plaintiffs were, to put it colloquially, out of pocket in respect of these expenses as a result of making the deal. They had no doubt incurred some expenditure but they had also received some benefit and there is nothing to show that the former exceeded the latter.”

Thus the comparison he carried out was one between what the claimant parted with and what he received in exchange. However, turning to the previous cases Saville LJ said:

“At the hearing and in the judgment much reliance was placed on the cases where the claimant entered into a transaction which through a breach of duty owed to the claimant provided the claimant with less rights than should have been secured, or imposed liabilities or obligations on the claimant which should not have been imposed. Examples of these cases are: Forster v Outred & Co (a firm) [1982] 1 WLR 86, Iron Trade Mutual Insurance Co Ltd v J K Buckenham Ltd and Bell v Peter Browne & Co (a firm), [1990] 2 QB 495. In all those cases, however, the court was able to conclude that the transaction then and there caused the claimant loss, on the basis that if the injured party had been put in the position he would have occupied but for the breach of duty, the transaction in question would have provided greater rights, or imposed lesser liabilities or obligations than was the case; and that the difference between these two states of affairs could be quantified in money terms at the date of the transaction. By contrast, in the present case, as in UBAF Ltd v European American Banking Corp [1984] QB 713 (and indeed Wardley Australia Ltd v State of Western Australia (1992) 109 ALR 247) it seems to me that whichever of the legally recognised kinds of loss is examined, it is impossible on the material available to conclude that the plaintiffs suffered such loss at any time more than six years from the date of their writ. For the reasons given, it has not been shown that they lost the amount of their advances at that time, or incurred expenses in respect of which they were out of pocket at that time; or at that time lost other transactions or the opportunity to make other transactions of a value greater than the deal they made.”

The explanation of cases in the first category is not that the claimant parted with something that was worth more than that which he received in exchange. The “two states of affairs” to be compared, therefore, are not the “before” and “after” positions in reality. Rather, the comparison was between what the claimant actually received and what he would have hypothetically received if the duty had been performed. Saville LJ did not suggest that either comparison was wrong. In Law Society vSephton & Co Lord Walker ([2006] 2 AC 543, 557) described Saville LJ’s observations as “helpful”.

The final decision of the Court of Appeal to which I need to refer at this stage is Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172. Insurance brokers had placed cover for the claimant, and the claimant had paid the premium. However, the broker had negligently failed to disclose a number of material facts to the insurers, and when, subsequently, the claimant made a claim on the policy the insurers repudiated liability. The cause of action against the broker was held to have arisen when the cover was placed rather than at the later time when the insurers repudiated liability. Hobhouse LJ reviewed the authorities and said ([1998] PNLR 172, 184):

“From these authorities it can be seen that the cause of action can accrue and the plaintiff have suffered damage once he has acted upon the relevant advice “to his detriment” and failed to get that to which he was entitled. He is less well off than he would have been if the defendant had not been negligent. Applying this to the present case, the plaintiffs paid their renewal premium without getting in return a binding contract of indemnity from the insurance company. They had acted to their detriment: they did not get that to which they were entitled. The fact that how serious the consequences of the negligence would be depended upon subsequent events and contingencies does not alter this; such considerations go to the quantification of the plaintiffs' loss not to whether or not they have suffered loss. The risk of loss existed from the outset and in the absence of better evidence would have to be evaluated and assessed as a risk and damages awarded accordingly.”

The last sentence of this quotation may need reconsideration in the light of Sephton; but otherwise the passage remains good authority. Buxton LJ applied the test laid down by Templeman LJ in Baker ([1998] PNLR 172, 188); i.e. that the claimant did not get what he should have got, and thereby suffered damage. Although the case could have been decided on the basis that the claimant had paid the premium and received a worthless insurance policy in exchange (or at least a policy that was not worth the premium), that was not the court’s reasoning. Rather, it again compared what the claimant actually received and what he would have hypothetically received if the duty had been performed.

As a result of these authorities it can be seen that it is firmly established at the level of the Court of Appeal that, in a professional negligence case, the client suffers damage if he does not get what he ought to have got. Although one might have thought that, applying orthodox principles of assessing damages in tort (e.g. Watts v Morrow [1991] 1 W.L.R. 1421), a claimant who exchanged money for property or rights of equal value had suffered no loss, that does not appear to be the law in the context of professional negligence.

The first of the cases in the House of Lords is Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1997] 1 WLR 1627. This appeal was a follow-on appeal from a previous ruling in which the House of Lords considered the scope of a valuer’s duty to an intending lender; and the correct measure of damages for negligent advice. The appeal in Nykredit concerned the date from which interest on damages should begin to run. That in turn involved considering when the lender’s cause of action in tort had accrued. Two of their Lordships gave reasoned speeches: Lord Nicholls and Lord Hoffmann. It is necessary to examine both.

First, the facts. A surveyor had negligently overvalued certain property provided as security to the bank for a loan. The bank alleged that it would not have proceeded with the loan if it had been given an accurate valuation. The borrower defaulted on the loan very quickly; and the property was sold at a loss. In the earlier proceedings the House of Lords had considered the scope of the valuer’s duty and the applicable measure of damages: South Australia Asset Management Corpn v York Montagu Ltd [1997] AC 191. In discussing the measure of damages Lord Hoffmann re-emphasised the difference between the measure of damages in contract and the measure of damages in tort. The distinction is, to my mind critical. His Lordship said ([1997] AC 191, 216):

“The measure of damages in an action for breach of a duty to take care to provide accurate information must also be distinguished from the measure of damages for breach of a warranty that the information is accurate. In the case of breach of a duty of care, the measure of damages is the loss attributable to the inaccuracy of the information which the plaintiff has suffered by reason of having entered into the transaction on the assumption that the information was correct. One therefore compares the loss he has actually suffered with what his position would have been if he had not entered into the transaction and asks what element of this loss is attributable to the inaccuracy of the information. In the case of a warranty, one compares the plaintiff's position as a result of entering into the transaction with what it would have been if the information had been accurate. Both measures are concerned with the consequences of the inaccuracy of the information but the tort measure is the extent to which the plaintiff is worse off because the information was wrong whereas the warranty measure is the extent to which he would have been better off if the information had been right.”

In Nykredit, this theme was taken up by Lord Nicholls. He said ([1997] 1 WLR 1627, 1630):

“Take first a simple case which gives rise to no difficulty. A purchaser buys a house which has been negligently overvalued or which is subject to a local land charge not noticed by the purchaser's solicitor. Had he known the true position the purchaser would not have bought. In such a case the purchaser's cause of action in tort accrues when he completes the purchase. He suffers actual damage by parting with his money and receiving in exchange property worth less than the price he paid.”

In such a case, therefore, the debit side of the balance is the amount of money that the claimant has laid out; and the credit side is the actual value of the property he has received in exchange. If the debit is greater than the credit, he will have suffered a loss; if not, not. This is the usual measure of damage in tort. In a contractual claim however, the claimant may recover damages if the property he acquired was worth less than it was warranted to be worth, even if the amount he paid was no more than the property was actually worth. This is the concept underlying damages for loss of bargain.

Lord Nicholls went on to apply the same principle for assessing damages in tort to a case where money was lent on security. He said ([1997] 1 WLR 1627, 1631):

“The first step in answering this question is to identify the relevant measure of loss. It is axiomatic that in assessing loss caused by the defendant's negligence the basic measure is the comparison between (a) what the plaintiff's position would have been if the defendant had fulfilled his duty of care and (b) the plaintiff's actual position. Frequently, but not always, the plaintiff would not have entered into the relevant transaction had the defendant fulfilled his duty of care and advised the plaintiff, for instance, of the true value of the property. When this is so, a professional negligence claim calls for a comparison between the plaintiff's position had he not entered into the transaction in question and his position under the transaction. That is the basic comparison. Thus, typically in the case of a negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower's covenant and the true value of the overvalued property.”

Again the basic comparison is one between what the claimant has laid out on the one hand, and what he has received in exchange on the other. As Lord Nicholls pointed out the basic comparison gives rise to issues of fact. The moment at which the comparison first reveals a loss will depend on the facts of each case. Such difficulties as there may be are evidential and practical difficulties, not difficulties in principle. The damage is suffered when the value of the rights received by the lender was worth less than the money he has lent (and interest).

Lord Nicholls then examined many of the earlier authorities. As I have said he described Moore as having applied the measure of damages “sometimes loosely referred to as the contract or warranty measure”. He described Bell (where he himself had given the leading judgment) as a “similar type of case”. Having referred to two cases involving the placing of insurance, and also to UBAF he commented that in First National Commercial Bank Saville LJ had drawn the distinction between the “two different measures of damages”. I can detect no hint of disapproval of the existence of the two measures, even if one of them can be described as the contractual or warranty measure.

Lord Hoffmann began by saying that he agreed with Lord Nicholls. His speech, therefore, cannot be taken as laying down any different principle. He said ([1997] 1 WLR 1627, 1638):

“Proof of loss attributable to a breach of the relevant duty of care is an essential element in a cause of action for the tort of negligence. Given that there has been negligence, the cause of action will therefore arise when the plaintiff has suffered loss in respect of which the duty was owed. It follows that in the present case such loss will be suffered when the lender can show that he is worse off than he would have been if the security had been worth the sum advised by the valuer. The comparison is between the lender's actual position and what it would have been if the valuation had been correct.”

I confess to some difficulty in understanding the latter part of this passage; but I think that what Lord Hoffmann means is that the lender must show that he is worse off than he would have been if the valuer had given correct advice (i.e. if his advice had been different). I do not think that he meant to compare the claimant’s actual position with the position in which he would have been if the property had in fact been worth what the valuer said it was worth (i.e. if the value of the property had been different).

Mr Davies QC submits, and I agree that Nykredit makes clear that, even where a claimant enters into a transaction which he would not have entered into but for the negligent advice, there is no general rule or presumption in English law for the purposes of the law of tort that loss is suffered by the claimant at the date of the advice or of the relevant transaction. While the claimant may, in a general sense, feel a detriment in entering into the transaction, this does not necessarily constitute actual damage for the purposes of the law of tort. It is necessary to examine, on the facts of the case, whether the negligent advice has actually caused a loss; and if so when.

However, in my judgment the cases in the Court of Appeal show that where the client has engaged professionals in connection with a transaction to secure for him some property or rights, and because of the negligence of those professionals, the client acquires less valuable property or rights than he would have done if he had been given correct advice, he suffers damage at the time of the transaction, even if the property or rights are worth no less than he actually paid for them. Those cases were not criticised in Nykredit.

The second of the cases in the House of Lords is Law Society v Sephton & Co [2006] 2 AC 543. In examining a solicitor’s accounts Sephton & Co had negligently failed to see that the solicitor was misappropriating his clients’ money. In due course clients made claims on the Law Society’s compensation fund; and the Law Society paid those claims. The question was whether the Law Society had suffered damage when the monies were misappropriated or when a claim was made against the fund. The House of Lords held that the latter was correct.

In reaching his conclusion Lord Hoffmann examined a number of earlier authorities. He referred with approval to the statement of Brennan J in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514, 536 where Brennan J said:

“A plaintiff may suffer economic loss or damage in a number of ways: by payment of money, by transfer of property, by diminution in the value of an asset or by the incurring of a liability. Whether loss or damage is actually suffered when any of these events occurs depends on the value of the benefit, if any, acquired by the plaintiff by paying the money, transferring the property, having the value of the asset diminished or incurring the liability. If the plaintiff acquires no benefit, the loss or damage is suffered when the event occurs. At that time, the plaintiff's net worth is reduced. And that is so even if the quantification of that loss or damage is not then ascertainable. But if a benefit is acquired by the plaintiff, it may not be possible to ascertain whether loss or damage has been suffered at the time when the burden is borne-that is, at the time of the payment, the transfer, the diminution in value of the asset or the incurring of the liability. A transaction in which there are benefits and burdens results in loss or damage only if an adverse balance is struck.”

This approach contrasts the “before” and “after” position in the real world. In other words it compares what the claimant parted with and what he received in return. This approach is what I believe to be the orthodox approach to assessing damages in tort. In Sephton Lord Hoffmann clearly stated that Nykredit was an application of this principle. He pointed out that Nykredit decided that in a transaction in which (1) there are benefits (covenant for repayment and security) as well as burdens (payment of the loan) and (2) the measure of damages is the extent to which the lender is worse off than he would have been if he had not entered into the transaction, the lender suffers loss and damage only when it is possible to say that he is on balance worse off. But Lord Hoffmann went on immediately to discuss cases in which the client has entered into a transaction intended to secure for him rights or benefits which, by reason of the professional’s negligence, were not secured. Of these he said ([2006] 2 AC 543, 551):

“It is only necessary to observe that in such bilateral transactions the answer to the question of whether damage has been suffered may be different according to whether the liability is for the consequences of the defendant not performing his duty or (as is usual in claims for misrepresentation) the consequences, or some of the consequences, of the plaintiff entering into the transaction. If the liability is for the difference between what the plaintiff got and what he would have got if the defendant had done what he was supposed to have done, it may be relatively easy, as Bingham LJ pointed out in D W Moore & Co Ltd v Ferrier [1988] 1 WLR 267, to infer that the plaintiff has suffered some immediate damage, simply because he did not get what he should have got. Thus in Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172, where the plaintiff paid a premium for a voidable fire insurance policy because his insurance broker had failed to disclose material facts, the Court of Appeal held that he had suffered immediate damage because he "did not get what he should have got", namely a policy binding on the insurers. On the other hand, if the damage is (as it was in the Nykredit (No 2) case [1997] 1 WLR 1627 and First National Commercial Bank plc v Humberts [1995] 2 All ER 673) the difference between the defendant's position after entering into the transaction and what it would have been if he had not entered into the transaction, the answer may be more difficult. Despite the breach of duty, the transaction may on balance have originally been advantageous to the plaintiff and some evidence may be necessary to show when he was actually in a worse position.”

In my judgment Lord Hoffmann refers to these cases as representing the law; and that when the facts are that the client did not get what he should have got, he will have suffered damage at the time of the transaction. He continued ([2006] 2 AC 543, 552):

“Thus cases like Bell v Peter Browne & Co [1990] 2 QB 495 and Knapp v Ecclesiastical Insurance Group plc [1998] PNLR 172 are readily explicable as cases in which the damage was the difference between the plaintiff's position as it was and as it would have been if the defendant had performed his duty and in which it was possible to infer that the plaintiff's failure to get what he should have got from a bilateral transaction was quantifiable damage, even though further damage which might result from the flaw in the transaction was still contingent. The plaintiff had paid money, transferred property, incurred liabilities or suffered diminution in the value of an asset and in return obtained less than he should have got. But these authorities have no relevance to a case in which a purely contingent obligation has been incurred.”

Again there is no hint of disapproval of these cases. Lord Hoffmann seems to me to recognise that where the client does not get what he should have got from a bilateral transaction, the relevant comparison is between what he in fact got and what he should have got, rather than a comparison between what he parted with and what he received in exchange.

Lord Hoffmann expressed his reason for allowing the appeal as follows ([2006] 2 AC 543, 554):

“A contingent liability is not as such damage until the contingency occurs. The existence of a contingent liability may depress the value of other property, as in Forster v Outred & Co [1982] 1 WLR 86, or it may mean that a party to a bilateral transaction has received less than he should have done, or is worse off than if he had not entered into the transaction (according to which is the appropriate measure of damages in the circumstances). But, standing alone as in this case, the contingency is not damage.”

The question in the present case is, therefore, whether the Adverse Consequence is a contingent liability “standing alone”; or whether this is a case in which the contingent liability means that a party to a bilateral transaction “has received less than he should have done”.

Lord Walker also gave a fully reasoned speech. He said ([2002] 2 AC 543, 557):

“In the Nykredit (No 2) case [1997] 1 WLR 1627 the expression “worse off” was used by Lord Nicholls (in discussing the authorities mentioned, at p 1634d and h) and by my noble and learned friend, Lord Hoffmann (at pp 1638c and 1639c: in the last reference the phrase is “financially worse off”). This latter formulation seems to me to be preferable, if I may respectfully say so, since the colloquial phrase “worse off” (like “detriment”) is imprecise. A bank or building society which (in reliance on a negligent valuation) lends £1m on a property said to be worth £1.5m but actually worth £1.25m is in a sense worse off (or has suffered a detriment) in that it has a margin of security of only one-fifth of the sum secured, rather than one-third. But so long as the borrower's covenant is good, it has suffered no loss.”

If I may respectfully say so, there is another imprecision in the expression “worse off” (and even in “financially worse off”). The expression is a comparative; and it is critical to identify what the correct comparator is. As the authorities show, although the orthodox comparison in assessing damages in tort is a comparison between the “before” and “after” positions in the real world, in professional negligence cases the correct comparison will often be a comparison between what the client acquired and what he ought to have acquired. Lord Walker went on to make precisely this comparison when, having considered the earlier authorities, he said ([2006] 2 AC 543, 559):

“In all these cases the claimant has as a result of professional negligence suffered a diminution (sometimes immediately quantifiable, often not yet quantifiable) in the value of an existing asset of his, or has been disappointed (as against what he was entitled to expect) in an asset which he acquires, whether it is a house, a business arrangement, an insurance policy, or a claim for damages.” (Emphasis added)

Lord Walker also commented on an earlier decision of the Court of Appeal in Gordon v JB Wheatley [2000] Lloyd’s Rep PN 605. Mr Davies relied heavily on the way in what Lord Walker approached that case. In that case the claimant operated a private mortgage scheme through a number of companies which he controlled. His solicitors had failed to advise properly about the requirements of the Financial Services Act 1986. The regulators began an investigation into his scheme and alleged that it was unlawful. The claimant was advised to sign an indemnity making personally liable for any losses suffered by investors under the scheme, and in due course he became liable for over £676,000. The Court of Appeal held that the claimant had suffered loss when each investor made an investment rather than when he was called upon to indemnify them. Although Lord Walker criticised the reasoning of the Court of Appeal he said that the decision was “more sustainable”:

“on the basis that the claimant had got from his solicitor a defective scheme rather than one which was proof against regulatory attack. Even so, it seems to me close to the borderline. I see no good reason to stretch the “defective product” analogy to cover every situation in which a professional or commercial adviser carelessly gives inadequate advice and so produces a state of affairs which carries the risk of future loss…”

Lord Mance also examined the earlier authorities. He said ([2006] 2 AC 543, 565):

“In all these cases except Forster v Outred & Co [1982] 1 WLR 86 the defendant failed to preserve or procure for the claimant an asset (including a particular chose in action) which could and should have been preserved or protected by proper performance of the defendant's duty in relation to the transaction affecting the claimant's legal position. In Forster v Outred & Co the claimant's case was that, but for the defendant's negligence, she would never have entered into the transaction at all. But in that case, by doing so, she clearly depreciated the value of her house in a measurable way. However, while a defendant's failure to preserve or protect a particular asset by proper performance of his duty in relation to a particular transaction may readily be seen to have caused measurable loss, negligence causing a claimant to enter into a transaction which he would not otherwise have entered may not immediately, or indeed ever, cause measurable loss to any particular asset.”

It seems to me that Lord Mance also accepted that in a case where the professional fails to “procure” for the client a particular asset, damage is sustained when the transaction in question takes place (although it is true that the word “procure” does not reappear in the latter part of this quotation). However, he also approved the reasoning of the High Court of Australia in Wardley to the effect that if the value of what the client has acquired is no less than what he parted with, no loss will have been sustained. He also said that a cause of action should not be regarded as having accrued before any change in the legal position of the claimant; and that the mere fact that the risk of future loss could be assessed did not alter that. He concluded ([2006] 2 AC 543, 568):

“But I do not consider that the law should treat purely contingent loss assessed on so remote a basis as sufficiently measurable, in the absence of any change in the claimant's legal position and of any diminution in value of any particular asset. Even where negligence brings about a specific transaction and thus a change in the claimant's legal position, Lord Nicholls observed in the Nykredit (No 2) case [1997] 1 WLR 1627, 1631c-d in the passage cited in para 73 above, that the mere entry into the transaction under which "Financial loss is possible, but not certain" is not sufficient detriment.”

In Watkins v Jones Maidment Wilson [2008] PNLR 23 Arden LJ said of that passage from Lord Mance’s speech that it confirmed the legal position as set out by Lord Hoffmann and Lord Walker and was consistent with earlier authorities such as Moore. Moore, it will be recalled, was a case in which the warranty measure of damages was applied.

The third case in the House of Lords is Rothwell v Chemical & Insulating CoLtd [2008] 1 AC 281. That was a case of alleged personal injury. The House of Lords held that the development of pleural plaques, which gave rise to no symptoms, did not shorten life expectancy and did not increase risk of contracting other diseases did not count as damage for the law of tort. The mere fact that a risk of loss existed was not itself a loss. In the context of a claim for professional negligence being dealt with at first instance, I do not consider that there is much help to be derived from this case.

The final case to which I should refer is the recent decision of the Court of Appeal in Shore v Sedgwick Financial Services Ltd [2008] PNLR 37. The claim concerned negligent advice about pensions. Mr Shore claimed that SFS failed to advise him in early 1997 to remain in his occupational pension scheme (“the Avesta scheme”) and defer drawing his pension until the age of 60 rather than to transfer his accrued benefits into a personal pension income withdrawal scheme with Scottish Equitable (the PFW scheme). He transferred his accrued benefits under the Avesta scheme into the PFW scheme in April 1997; but it was not until 2000 that it became certain that his rights under the PFW scheme would be less valuable than his former rights under the Avesta scheme. The Court of Appeal held that he suffered damage when he made the transfer in April 1997. Dyson LJ said (§ 27) that there was a clear distinction between transactions which give rise to pure contingent liabilities and transactions where the claimant has “obtained less than she should have got”. He referred to Moore and Bell with approval. He pointed out (§ 32) that in transferring his benefits from the Avesta scheme to the PFW scheme Mr Shore did not incur a contingent liability or indeed any liability. The scheme gave him rights but imposed no liability on him. So he posed the question: did Mr Shore suffer damage as soon as he gave up his rights under the Avesta scheme in favour of the PFW scheme?

Mr Soole QC, on Mr Shore’s behalf, submitted that there were a number of reasons why he did not suffer damage at that time. The first of those reasons is of particular interest. Dyson LJ recorded the submission as follows (§ 34):

“First, it is common ground that the benefits surrendered in the Avesta scheme were properly valued at £637,507. Secondly, that sum was used to invest in the PFW scheme. The price paid for this investment was its then current market price. That price reflected the market perception of the risks inherent in the PFW scheme. The performance of the scheme was subject to the vagaries of the market and the investment skills of the managers of the fund as well as the amount drawn down as income by Mr Shore. The amount available for drawdown as income would depend on the figure at which the GAD rates were fixed triennially as well as the performance of the fund. Mr Soole submits that all these risks were reflected in the price that Mr Shore paid. It is, therefore, irrelevant that the PFW scheme was riskier than the Avesta scheme. To adopt the example suggested by Keene L.J. in the course of argument, if a person invests £100 in shares rather than in Government bonds, he does not suffer any loss when he buys the shares, because when he pays £100 for the shares, that is what they are worth in the market.”

On the face of it, this is a powerful submission. Mr Shore parted with £637,507 and in exchange he received an asset worth £637,507. Carrying out the balancing process described by Brennan J in Wardley (and approved by Lord Hoffmann in Sephton) his “net worth” had not been reduced. Where, then, is the loss? Dyson LJ, however, rejected the submission. His primary reason (§ 37) was as follows:

“It is Mr Shore's case (assumed for present purposes to be established) that the PFW scheme was inferior to the Avesta scheme because it was riskier. It was inferior because Mr Shore wanted a secure scheme: he did not want to take risks. In other words, from Mr Shore's point of view, it was less advantageous and caused him detriment. If he had wanted a more insecure income than that provided by the Avesta scheme, then he would have got what he wanted and would have suffered no detriment. In the event, however, he made a risky investment with an uncertain income stream instead of a safe investment with a fixed and certain income stream which is what he wanted.” (Emphasis in original)

It is, I think, fair to say that Dyson LJ’s emphasis on the subjective value to Mr Shore of the PFW scheme is an unusual way to measure whether someone is financially worse off; and it is also fair to say that Dyson LJ spoke of “detriment”, an expression that Lord Walker had criticised in Sephton. But since Dyson LJ had just quoted that passage from Lord Walker’s speech, he must have had well in mind the principle that the inquiry was whether the claimant was financially worse off. He also referred later in his judgment (§ 47) to cases in which the inquiry is whether the value of the rights acquired “are worth less in the open market than they would have been” if the duty had not been broken. But he distinguished that situation from that under consideration because:

“Mr Shore obtained a bundle of rights which, from the outset, were less advantageous to him than the benefits that he enjoyed under the Avesta scheme. On the facts of this case, it was not necessary to wait to see what happened to determine whether Mr Shore was financially worse off in the PFW scheme than he would have been in the Avesta scheme.” (Emphasis in original)

So far as the analogy with a share purchase was concerned he said (§ 38):

“In my judgment, an investor who wishes to place £100 in a secure risk-free investment and, in reliance on negligent advice, purchases shares does suffer financial detriment on the acquisition of the shares despite the fact that he pays the market price for the shares. It is no answer to this investor's complaint that he has been induced to buy a risky investment when he wanted a safe one to say that the risky investment was worth what he paid for it in the market. His complaint is that he did not want a risky investment. A claim for damages immediately upon the acquisition of the shares would succeed. The investor would at least be entitled to the difference between the cost of buying the Government bonds and the cost of buying and selling the shares.”

Mr Salzedo would add that the investor would also be entitled to the difference between the buying price and the selling price if he extricated himself from the mistaken investment.

The transaction into which Mr Bradbury entered was the purchase of shares. Before the purchase he had $150 million in cash. After the purchase he had shares in Pegasus. On one view, applying the orthodox rules of tort relating to the measure of damages (in other words, what Lord Nicholls described in Nykredit as the “basic comparison”), unless it can be shown that the shares in Pegasus were worth less than the price that Mr Bradbury paid for them, Mr Bradbury suffered no loss. There is no expert evidence before me that values the shares. Since Pegasus’ assets immediately following the subscription consisted of $150 million in cash, it is certainly not self-evident that the value of Mr Bradbury’s shares was less than the amount that he paid for them. However, both Mr Davies QC and Mr Salzedo agreed that this was an over-simplification of the position.

Typically a claim for professional negligence will arise both in contract and tort. The contractual duty and the tortious duty are, by and large, the same: viz. to carry out the professional’s instructions with reasonable skill and care. The damage for which the professional is liable is the damage attributable to a failure to exercise reasonable skill and care. In a case in which the purpose of engaging the professional is to secure some right or benefit for the client in connection with a contemplated transaction, and because of a failure to exercise reasonable skill and care the client does not secure that right or benefit, the cases consistently hold that the client sustains damage when the transaction takes place.

Mr Salzedo submitted that the close relationship between this way of determining loss in the context of professional negligence and the usual contractual measure of damages was justified because the nature of a professional’s duties both in contract and in tort was the same. He may well be right. But whether or not this method of characterising damage is a departure from the orthodox method of assessing damages in tort, it is well-established by authority binding on me.

On the facts of this case there can be no real doubt, in my judgment, that Mr Bradbury entered into a bi-lateral transaction: he parted with cash and Pegasus issued shares. I do not consider that Mr Bradbury can escape this conclusion merely because he is the sole shareholder in Pegasus. He and Pegasus have separate legal personalities; and indeed they had to have separate legal personalities in order for the tax saving scheme to get off the ground. By becoming a shareholder in Pegasus, Mr Bradbury also changed his legal position.

The pleaded complaint is that E & Y ought to have advised Mr Bradbury “in and after April 1998” that Pegasus should incorporate a range of subsidiaries. The loss alleged to flow from that breach of duty is that Pegasus did not incorporate and fund subsidiaries to make purchases, with the result that the Adverse Consequence ensued. An alternative way of formulating the breach (which is not explicitly pleaded, but is hinted at in paragraph 54 of the Particulars of Claim) is that E & Y ought to have advised Mr Bradbury that Pegasus should form an intention before the share subscription to incorporate and fund subsidiaries. In order to take advantage of the reinvestment relief either the subsidiaries would have had to have been incorporated before the share issue (on the strict interpretation of section 164A (8A)) or the intention to incorporate them would have had to have been formed before that date (on the basis of the 1997 Inland Revenue Guidance). Thus the advice (whichever form it took) would have had to have been given before completion of the share issue on 2 April 1998.

Once the share issue had taken place it was too late to retrieve the situation. This is in itself a strong indication that the damage was sustained at the date of the share issue. In addition I consider that the nub of the complaint is that if Mr Bradbury had been given the correct advice he would have bought shares in a company which was the parent of a group (or at least had already resolved to become the parent of a group). That would have enabled the Adverse Consequence to be avoided. Instead he bought shares in a stand-alone company. Thus the company whose shares he in fact bought had different characteristics from the company whose shares he would have bought but for the breach of duty. On the footing that the correct comparison is between what the client in fact acquired and what he ought to have acquired (or would have acquired if he had been given the correct advice), it is, in my judgment, impossible to say that what Mr Bradbury acquired was no less advantageous to him than what he ought to have acquired. Just as Mr Shore did not invest in the kind of pension scheme he ought to have been advised to invest in, so Mr Bradbury did not subscribe for shares in the kind of company he ought to have been advised to invest in.

This is not just a matter of subjective value. Mr Bradbury could not have disposed of his shares in Pegasus without forfeiting his tax relief; so that even objectively, his shares in Pegasus were worth less to him than shares in a company which could have preserved his entitlement to reinvestment relief without suffering the Adverse Consequence. To that extent, therefore, Mr Bradbury’s case differs from the gilts/shares example discussed in Shore.

For those reasons, and I confess contrary to my first impression, I have come to the conclusion that the claim in tort against E &Y for having failed to advise about the incorporation of subsidiaries is statute barred.