The claimants appealed from Arnold J’s decision to dismiss their claim in professional negligence brought against the defendant firm of solicitors. The defendant cross appealed against the judge’s order that the claimants’ pay 50% of the defendant’s costs.
Mr Christopher Swain owned 72.4% of the shares in Swains International plc. By 2006, Mr Swain had withdrawn from full-time management and spent most of his time in Thailand. Mr Swain had a history of ill health, including diabetes and heart disease. Each of his four daughters (who, together with Mr Swain’s executors, were the claimants) owned 5.3% of the shares. Mr Swain and his daughters were interested in selling their shares and came into contact with Mr Craig Hodgson, a partner in the corporate finance department of the defendant. Mr Swain engaged the defendant to advise on a management buyout (MBO) in June 2006. Tax advice was provided by the defendant’s corporate tax department. A share purchase agreement was prepared with a proposed completion date of 27 January 2007.
On 13 January 2007, Mr Swain sent an e-mail with the subject line ‘Heart Operation’ to a number of individuals, but not to the defendant. The e-mail set out details of an operation Mr Swain was to undergo in Thailand on 17 February 2007, which would prevent him attending certain meetings in the United Kingdom. On 16 January 2007, a reply to Mr Swain’s e-mail (including the text of Mr Swain’s e-mail) was blind copied to Mr Hodgson, who read them. The MBO completed on 31 January 2007. Mr Swain died during the operation on 17 February 2007. The death of Mr Swain gave rise to tax consequences. The proceeds from the sale of the shares were liable to inheritance tax of approximately £1m. Had Mr Swain died still owning the shares, they would have been covered by business property relief. On a later disposal of the shares (if, for example, the MBO had been entered into by his executors) the deemed disposal on Mr Swain’s death would have meant capital gains tax (CGT) would only have been charged on any increase in value between his death and the fate of the disposal. On the transaction that took place, CGT of approximately £200,000 had been charged.
The claimants contended that the defendants’ advice had been negligent in failing to advise that the MBO should have been deferred until after the heart procedure had taken place. Arnold J rejected the suggestion that the defendant should not be judged by the standards of a firm with a specialist tax department and found that the scope of the retainer extended to giving Mr Swain and his daughters advice as to the tax consequences flowing from the MBO but not to advising them on how the transaction fitted into their personal financial and tax planning positions. The key question was whether receipt by the defendant of the chain of e-mails of 16 January 2007, including Mr Swain’s e-mail of 13 January 2007, triggered any duty to give further advice. Arnold J held that it did not. Although the defendant’s letter of advice should have contained a much clearer statement that it did not extend to IHT or CGT advice, the defendant had essentially learnt about the heart procedure by chance and the information received did not suggest the procedure was other than routine.
The claimants appealed on the basis that the information that had come into the possession of the defendant was information that the solicitor was under a duty to pass on to the client. The fact that Mr Swain had not specifically asked for such advice did not excuse the defendant from giving it, because it was within the scope of its retainer. It was analogous to a dentist asked to treat a patient’s tooth who notices the adjacent tooth is in need of treatment, who is under a duty to warn the patient accordingly (per Laddie J in Credit Lyonnais SA v Russell Jones and Walker  EWHC 1310 (Ch)).
The defendant cross appealed on costs and argued that the judge had erred in taking an issues-based approach and allocating costs accordingly, when it had been necessary for each of those issues to be explored as part of the whole background. Such a large reduction in costs was not justified by relatively peripheral issues. The defendant further argued that the judge was wrong to penalise the defendant for refusing to mediate.
Held (dismissing the appeal and allowing the cross-appeal in part):
- (1) The judge was right to dismiss the proceedings for the reasons he gave. It was right to attach great weigh to the fact that the e-mail indicating the heart operation only reached Mr Hodgson by Mr Swain subsequently copying him in at a time when Mr Swain was not seeking any advice concerning the heart operation. There was nothing to indicate the procedure carried significant risk and Mr Swain had expressed no concerns to the defendant. It is quite unlike the ‘rotten tooth’ example (paras -).
- (2) As to the cross-appeal on costs, the judge was entitled in his discretion to take the issues based approach and there is no proper basis for the appeal court to interfere (para ).
- (3) The judge’s decision to hold against the defendant on the basis of the defendant’s refusal to mediate was more troubling. Some professional defendants may, entirely reasonably, wish publicly to vindicate themselves at trial. On the core issue of breach of duty, the defendant’s assessment of the strength of its case had been vindicated, even if on some core issues its defence had proved to have weaknesses. The fundamental question remains whether it has been shown by the unsuccessful party that the successful party has acted unreasonably in refusing mediation. That cannot be shown here. If it were otherwise, there would be scope for a claimant to use the threat of costs sanctions to extract a settlement even where the claim is without merit (paras -).