[2012] CSOH 96



in the cause







Pursuers: Borland, advocate, A McKenzie, advocate: Harper Macleod LLP

Defenders: Hanretty, QC, Marney, advocate: Biggart Baillie LLP

18 May 2012

[1] In this action the pursuers seek substantial damages on the basis of various alleged deficiencies in respect of professional services provided to them by the defenders, all in connection with the pursuers' intention to sell their holding in a unit trust to Anglo Clough Limited for £28.7 million. The unit trust consists of a portfolio of commercial property interests, including the tenant's interest in a property in Coatbridge. The agreement with Clough envisaged a property due diligence exercise, which would include a review of the titles by Clough's solicitors. It is averred that in April 2007 the pursuers instructed the defenders to assist in that exercise.

[2] The summons narrates detailed allegations of misrepresentations and other blameworthy conduct, including fraud, on the part of the defenders in the course of carrying out their instructions, all of which it is said led to the collapse of the sale of the units to Clough. The background is explained elsewhere in the summons in that, when asked in 2006 by the trustees to deal with the conveyancing of the Coatbridge leasehold property (which is worth some £1.5 million), the defenders failed to apply for registration of the tenant's interest in the land register in the name of the trustees.

[3] In essence the pursuers' claim is that when, in the course of the due diligence exercise, questions arose as to the Coatbridge property, rather than admit and cure the problem the defenders embarked upon a fraudulent cover‑up of the earlier default, and that as a result the sale to Clough fell through. It is averred that the pursuers were deprived of a real and substantial chance that the sale would have been concluded no later than August 2007 with a resultant loss of almost £4.6 million. That loss represents the difference between the sale price and borrowings owed to the Bank of Scotland.

[4] At a debate, Mr Hanretty QC asked the court to uphold one or both of the defenders' pleas-in-law relating to no title to sue and the irrelevancy of the pursuers' averments, and thereafter to dismiss the action. The same argument was presented in respect of both pleas. It was submitted that the claim for £4.6 million is reflective of loss suffered by the trustees of the unit trust. Mr Hanretty drew attention to the averments in the summons which narrate that in 2006 the trustees asked the defenders to deal with the conveyancing aspects of the assignation of the tenant's interests in the Coatbridge property. As a result of admitted failings on the part of the defenders, the trustees failed to obtain a valid title to the subjects. Counsel then submitted that the trust entered into an agreement to sell the portfolio of property held by the trust to Clough. He referred to the draft heads of terms, 6/7 of process. However, according to Mr Borland, counsel for the pursuers, the agreement discloses that

(a) the sale was not of the trust's property, but of the pursuers' units in the trust

(b) the seller's were the pursuers, not the trustees.

It was submitted that this misconception or mischaracterisation fundamentally undermined the rest of Mr Hanretty's submissions on the no reflective loss principle.

[5] Mr Hanretty's submission was that the trustees suffered the loss flowing from the alleged defaults by the defenders. Any loss sustained by the pursuers simply reflected and was consequential upon the diminution in the value of the property held by the trust. According to Mr Borland, whatever loss the trustees might have suffered in respect of the conveyancing failures regarding the Coatbridge property, that is wholly separate and distinct from the pursuers' claim. The trustees cannot sue for the £4.6 million. He stressed that the action is based on a later and separate agreement between the pursuers and the defenders. It concerns different instructions to and different duties upon the defenders. The key complaints relate to the defenders' responses to the instructions received from the pursuers in respect of the due diligence exercise, all in the context of the sale of the units. The trustees were not involved in that. The claim occurs in the context of the proposed sale of the holding in the unit trust, not in the context of the conveyancing of the Coatbridge property. It involves a wholly different loss, namely loss of the profit on a £28.7 million contract, said to be £4.6 million, as opposed to losses on the conveyancing of the Coatbridge subjects, which at that time were worth about £1.5 million. Mr Borland stressed that at no time were the trustees involved in the contract with Clough. That is apparent from the pleadings and from the draft heads of terms. Had the sale gone ahead the trustees would still have owned the property portfolio. At no time did the trustees sustain any loss flowing from the collapse of the sale. That loss fell on the pursuers alone. Only they would have benefited from any profit on the sale.

[6] Mr Borland observed that the conveyancing of the Coatbridge subjects was completed in 2008, thus any loss sustained by the trustees in that regard crystallised at that time. However that loss bears no relation to the claim now made by the pursuers. According to Mr Borland, the defenders' submission is based on a misunderstanding. The defenders assume that there was a proposed sale by the trust of its property assets and that the pursuers' claim is reflective of a loss sustained by the trust caused by the failure of that bargain. However the only proposed sale was by the pursuers of their holding in the unit trust. The defenders owed duties to the pursuers, and the claim is directly that of the pursuers. It is not reflective of anything else. It is not a derivative claim. It is a personal claim of the pursuers. Mr Borland submitted that in these circumstances the no reflective loss principle has no application.

[7] I now turn to my decision on this matter. The essence of the no reflective loss principle, as explained in Prudential Assurance Company Ltd v Newman Industries Ltd (No.2) [1982] Ch 204, is that if the most that a claimant can prove is a loss which is reflective of damage done to another, for example regarding a fall in the value of shares caused by a wrong done to the company, then the claim falls to be dismissed. Amongst other things the principle is aimed at preventing double recovery. Both counsel referred to the decision of the House of Lords in Johnson v Gore& Wood Company [2002] 2 AC 1. The case concerned an action by a company for damages for breach of duty and a subsequent action by a majority shareholder in respect of personal losses sustained. It was argued that the shareholder's claim was merely a reflection of the loss suffered by the company and should be struck out. Their Lordships carried out a comprehensive survey of the relevant authorities. Lord Bingham of Cornhill articulated three propositions which he considered were vouched by the authorities. The third proposition is as follows:-

"Where a company suffers loss caused by a breach of duty to it and a shareholder suffers a loss separate and distinct from that suffered by the company, caused by a breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by the breach of the duty owed to it, but neither may recover loss caused to the other by breach of the duty owed to that other."

Mr Hanretty did not quarrel with that proposition, nor with its potential application to units in a unit trust. Thus the question comes to be: have the pursuers averred a relevant case of a loss caused to them by a breach of duty independently owed to them by the defenders, which is separate and distinct from any loss suffered by the unit trust? It matters not whether one approaches this as a question of title or of relevancy. I can only answer the question in the negative if I am satisfied that after an inquiry, and even if the pursuers prove all their averments, they are bound to fail. Suffice to say that, for all the reasons put forward by Mr Borland, I am not so satisfied. Other case law was cited but I do not consider it necessary to refer to it. Both counsel approached the matter on the basis that they key principles are set out in Johnson.

[8] In the course of a brief reply to Mr Borland's address, Mr Hanretty adhered to the no reflective loss argument. However he embarked on certain additional submissions. Mr Hanretty submitted that if the no reflective loss principle does not apply, there are no relevant averments of any recoverable loss sustained by the pursuers. As I understood it the proposition was that, despite the explanation given by Mr Borland, the pursuers' averments, and in particular those at article 12.3 of the summons, demonstrate that the reality is that the sale was a sale by the trustees of the property held by the trust to Clough. It was not a sale by the pursuers of their units. Mr Hanretty submitted that it is clear that the loss falls on the trust, not on the pursuers. In any event, given that they still hold all the units and the trust still owns the properties, the pursuers have not averred a relevant measure of any loss sustained by them. The pursuers should take into account the current value of the properties or units, and the income enjoyed. Thus, whatever the loss may be, it is not £4.6 million.

[9] In a short response to the new arguments Mr Borland submitted that they were wrong, or at least they raised issues of fact which would require investigation at a proof. The pursuers offered to prove a case, all as explained in Mr Borland's first address, based on a sale by the pursuers of their units to the purchasers. Again he drew attention to the draft heads of terms. As to the averments at article 12.3, Mr Borland accepted that a convoluted mechanism was involved, no doubt for tax reasons, but none of it altered the fundamentals. As to the suggestion that the loss is not £4.6 million, counsel observed that there are no counter averments by the defenders. The pursuers are offering to prove that, on the collapse of the sale, they lost almost £4.6 million and that there is no reasonable prospect of it being recovered. Mr Borland submitted that the pursuers had presented a relevant case which should be allowed to proceed to a proof before answer.

[10] Insofar as the new arguments were put forward in support of the motion for dismissal, and again largely for the reasons given by Mr Borland, I am not persuaded that they justify dismissal of the action. I am not satisfied that if the pursuers prove their averments they will be bound to fail to prove that they have suffered a loss as explained in the summons. They might prove it or they might not, but I am of the opinion that they are entitled to a proof before answer.

[11] In the course of his submissions Mr Borland invited the court to repel the plea relating to title to sue, however I consider that the appropriate course is to allow a proof before answer with all pleas outstanding.

Post script

[12] After delivery of this opinion orally at the close of the debate, the court refused a motion for leave to reclaim and fixed a proof before answer.