A negligent accountancy firm has been found liable to pay damages for three failed loans, despite two of the loans having been repaid. The Appeal Court decision, in Swynson Ltd v Lowick Rose LLP, indicates how the courts may assess damages in some future professional negligence cases.

Accountancy firm Hurst Morrison Thomson, now named Lowick Rose LLP, was appointed by an investment business, Swynson, to conduct due diligence into medical device distribution company, Evo Medical Solutions Ltd (Evo). As a result of the due diligence report, Swynson lent £15m to Evo to fund a management buyout in 2006. Evo performed poorly and Swynson made further loans to Evo in 2007 and 2008.

In 2008 Swynson’s owner Michael Hunt, made £18m available to Evo. It used the money to repay Swynson’s first two loans, leaving £3m outstanding from the third loan. Evo continued to perform badly and eventually the decision was taken to wind the company down. Swynson then commenced an action against Lowick Rose, claiming that the due diligence had been conducted negligently and seeking damages for the recovery of all three loans.

In the High Court, Lowick Rose accepted that it had prepared the due diligence report negligently. In assessing damages, the judge Mrs Justice Rose decided that the repayment of the loans by Evo was a “collateral matter which did not go to reduce the damages recoverable”. She ordered Lowick Rose to pay £15m in damages in respect of the three loans, equivalent to the cap on liability as set out in the firm’s letter of engagement.

Lowick Rose appealed, arguing that it was not liable for the first two loans as they had been repaid by Evo to Swynson. The Court of Appeal rejected the firm’s case by a two to one majority. Lord Justice Longmore agreed with the trial judge that the repayment was a collateral matter. He said that the repayment of the loans was only possible because Michael Hunt had become Evo’s majority owner and that as a result Evo and Swynson had become connected parties. “The majority of the loan was repaid by utilising money lent to the borrower by the owner of the lending company,” he said.

The Swynson case could indicate how the courts assess damages in some future professional negligence cases says James Burgoyne, Director – Claims & Technical, Brunel Professional Risks. “It shows that the courts will look at the loss caused by the negligence, rather than only the final cost which could have been mitigated by events outside the negligent party’s control. This however is unlikely to be the final word on this matter. The decision was made with a dissenting judgement and the courts could interpret future cases differently.”

The case has been reported by Accountancy Live and law firms Weightmans and DWF.