In the case of Pegasus v Ernst & Young [2012] EWHC 738 (Ch) the High Court has considered whether, following an assignment of a cause of action for a nominal value, an assignee can claim the losses suffered by the assignor. The Court was concerned not to allow losses to disappear into a “black hole” just because of an assignment and held that the losses suffered by the assignor could and should be treated as the losses suffered by the assignee.

Background

In November 2005 Pegasus brought a claim against a well-known firm of accountants, Ernst & Young (“EY”), for negligence in respect of tax advice that it had received from EY. The claim included damages in relation to an amount of extra tax which was not yet apparent and was unlikely to be known definitively at the trial. In other words, the losses of Pegasus were not yet ascertainable.

Pegasus went into liquidation in February 2010 and transferred substantially all of its assets to Inhealth UK Holdings Limited (“IHUK”). The assets included the cause of action on which the claim against EY was based. The cause of action was transferred for nominal consideration. Pegasus applied to amend the claim to substitute IHUK for Pegasus as claimant. However EY defended the application to amend the claim on the basis that the result of the transfer to IHUK meant that Pegasus could no longer show any loss from the original alleged negligence, and, since IHUK could only sue for Pegasus’s losses (as opposed to its own), the action was no longer sustainable.

At first instance, Master Bowles held that EY’s argument had failed. Master Bowles ruled that the assignments and transfers by Pegasus did not have the effect that Pegasus could no longer be said to have suffered losses. If it was held otherwise, the effect would be that the losses which previously existed would have disappeared into a “black hole”, which, as demonstrated by various authorities, was not an acceptable result.

Judgment

The Court was faced with the key question of whether Pegasus could still be said to have suffered a loss which could now be claimed by IHUK following the assignment of Pegasus’s cause of action.

EY argued that any loss which is suffered will not be suffered by Pegasus but will be suffered by IHUK as its own loss. Accordingly, Pegasus’s loss will be nil and an action to claim those losses will therefore be unsustainable.

The Judge, Mr Justice Mann, dismissed EY’s arguments and held that the appeal of Master Bowles’ decision should be dismissed.  The amendment to substitute IHUK as claimant was therefore allowed.

In reaching his decision, Mr Justice Mann referred to numerous authorities which have considered assignments of causes of action. He cited the cases of GUS Property Management Limited v. Littlewoods Mail Order Stores Limited and Linden Gardens Trust Limited v. Lenesta Sludge Disposals Limited, both of which established that a person with a cause of action based on damage to property did not lose that cause of action, or deprive himself of the right to argue that he had still suffered loss, by giving away the property. Pegasus argued that to conclude otherwise would allow a “perfectly good damages claim to fall unjustifiably into a “black hole” which authority demonstrated did not exist”. Mr Justice Mann also cited the case of Technotrade v. Larkstore in which the Court of Appeal held that what was assigned was a cause of action for breach of contract; it was not an assignment of “a loss”. The Court in that case held that the purpose of the principle that an assignee of a cause of action cannot recover more than the assignor of a cause of action is not intended to enable the contract breaker to rely on the fact of the assignment to escape legal liability for breach of contract; the Courts are concerned to ensure that wrongdoers do not escape from their liabilities.

In agreeing with the Court of Appeal in Technotrade v. Larkstore, Mr Justice Mann emphasised that the Courts would not allow technical arguments to the effect that losses disappear on assignments to triumph, because it would be unjust and contrary to common sense to allow them to do so.  He held that “the courts have sought to apply the law as to causation of loss in a manner which reflects justice and reality, in particular where the application of pure logic would, unfairly, lead to the “disappearance” of a loss which would, absent an assignment, have been plainly recoverable.” Where a wrong has been committed in relation to property, and loss is capable of arising as a result, the fact of an assignment, whether gratuitous (as in the present case), for part value or for full value, does not mean that it thenceforth has to be acknowledged that the assignor no longer can be said to have suffered loss. The law says that the loss flowing from the breach can and should still be treated as a loss of the assignor which the assignee can recover. Mr Justice Mann commented that “black holes are to be (as all black holes should be) avoided where possible”.

Comment

This case once again highlights the Courts unwillingness to allow wrongdoers to escape liability where there has been an assignment of a cause of action. It also emphasises that the price paid for that cause of action does not impact upon the amount which may be recovered from the wrongdoer.

This is of particular interest to those involved in buying secured or unsecured debt who is seeking to pursue claims against third party wrongdoers involved in the debt origination process. The fact that the debt, and any related cause of action, was purchased at a discount would not prevent the purchaser from recovering the full extent of the losses which flow from the third party’s breaches.

For further information please contact James Walton or the partner with whom you usually deal.