Double recovery, mitigation, and Part 36 offers on appeal

United Kingdom

On 4 October 2002, the Court of Appeal gave an important judgment in the case of Primavera v. Allied Dunbar Assurance Plc. The case was concerned with the assessment of damages in professional negligence actions, and also raised issues of double recovery, mitigation, and the applicability of Part 36 offers to appeal judgments.

Primavera v. Allied Dunbar Assurance Plc
Court of Appeal, Civil Division
4 October 2002

Facts
In 1987, after a series of meetings with an agent of Allied Dunbar, Mr Primavera took out a loan of £500,000. He also took out an Executive Retirement Plan ("ERP") with Allied Dunbar which was supposed to produce a tax free lump sum of £500,000, to be used to pay off the loan. In order to take the tax free lump sum, Mr Primavera needed £334,000 schedule E earnings per annum to be paid to him by his company for at least 3 years.

Mr Primavera attempted to take the tax free lump sum in March 1995 but he had not had (or had not awarded himself) the requisite earnings. The first-instance trial judge found that Allied Dunbar were negligent as they did not advise Mr Primavera that in order to obtain the tax free lump sum of £500,000 he needed to have earned the requisite £334,000 schedule E earnings in at least three separate years.

Mr Primavera had made up the requisite earnings by November 2000 and was then able to (although he did not) take the £500,000 tax free lump sum at that time.

The trial judge awarded Mr Primavera damages under two heads of loss:

(i) £101,000, being the difference in value between the fund in March 1995 (when Mr Primavera should have had the ability to take a tax free lump sum of £500,000) and the fund with a cap on the lump sum of £125,875 (which, because of the amount he had earned/paid himself, was all Mr Primavera could have taken at that time).

(ii) £140,000, being the interest payments on the loan between March 1995 (when the lump sum should have been available to pay of the loan) and November 2000 (when the money became available).

Issues on appeal
Allied Dunbar appealed the trial judge's assessment of damages on two grounds:

(i) The award of both £101,000 and £140,000 involved double counting;

(ii) Mr Primavera had mitigated his loss and ultimately suffered no loss as, by November 2000, when the tax free lump sum became available, the gain in the value of his pension fund exceeded any loss suffered.

Held
Double Counting: The Court of Appeal held that the trial judge should not have allowed both the £101,000 and the £140,000. Once £101,000 had been awarded for the diminution in value of the fund, by reason of the inability to take a £500,000 lump sum, Mr Primavera should not have been able to, at the same time, "recover for future loss on some other basis arising out of the very same shortfall".

Mitigation: This was the real issue on appeal, and the Court of Appeal found it a difficult issue to resolve. The problem for the court was to decide the date or period in time when Mr Primavera's loss fell to be assessed. If it was 1995, then the loss would be £101,000, the reduced value of the fund through having lost the tax advantage that would have come from making qualifying schedule E income payments. If, however, the date was November 2000 when finally a lump sum of £500,000 became available tax free, it was an agreed fact that all the benefits accrued (namely the £500,000 tax free and the substantially larger annuity) extinguished the losses sustained during the pervious 5 ½ years whilst Mr Primavera received no annuity and had to continue servicing his debt.

Simon Brown LJ, who gave the lead judgment, analysed earlier cases (between 1912 and 2002) and the leading texts on damages, and adopted the approach taken in earlier cases, which was to ask "Did the negligence which caused the damage also cause the profit?" Was the increased value of the fund "consequent on its retention part of a continuous transaction of which [Allied Dunbar's] negligence was the inception"?

After some deliberation, he held that Allied Dunbar's negligence produced an immediate loss in 1995 by way of a less valuable fund and one from which Mr Primavera's debt could immediately be satisfied. Further, the writ had been issued in October 1996, which was "another indication that the respondent regarded the negligence as by then spent and the loss as already crystallised."

The steps taken by Mr Primavera from 1995 to make the payments in order to obtain the lump sum, were not to be regarded as steps reasonably taken in mitigation of his loss, but rather, the choice of how to deal with the situation which confronted him in 1995 as a result of Allied Dunbar's negligence was his, and the "speculation from that point on was on his own account". Latham LJ held that the actions taken by Mr Primavera subsequent to 1995 "only had an historical connection with the original scheme" and that, had those actions proved disadvantageous, he would not have had any claim for such loss against Allied Dunbar.

The Court of Appeal decided in favour of the respondent, and held that he was entitled to damages of £101,000 together with interest from 1995.

Costs
Mr Primavera had refused to follow the trial judge's recommendation of appeal by mediation. In view of this fact, and the fact that Allied Dunbar had reduced the judgment by more than a half, the Court awarded Allied Dunbar 75% of its costs on appeal.

Allied Dunbar had made a pre-trial Part 36 offer. In the first-instance trial Mr Primavera recovered more than the offer, and could therefore recover his legal costs from Allied Dunbar. In the appeal, Mr Primavera once again recovered more than the offer, even though the original judgment was significantly reduced (on which basis the costs award had been made against him). Counsel for Mr Primavera argued that he should be protected from paying Allied Dunbar's costs because the Part 36 offer was still open for acceptance with the leave of the court after the first instance trial.

The Court of appeal made it very clear, to the point of saying that the suggestion of it was "nothing short of absurd", that a pre-trial Part 36 offer could still be accepted after judgment. A pre-trial Part 36 offer had no effect on the costs of any appeal.

Comment
The effect of the Court of Appeal's judgment is that Mr Primavera was awarded £101,000 for the diminution in the value of his pension fund in 1995 (by reason of his inability to take £500,000 as a tax free lump sum) even though, five years later, he was able to take the £500,000 tax free and his pension fund had swelled by more than £600,000.

As a result of this judgment, any arguments that a Claimant has mitigated his loss, or must give credit for benefits caused by the Defendant's negligence will require a close analysis of the steps actually taken by the Claimant. If the steps taken by the Claimant are detached from the original transaction, or involve some risk or speculation on the part of the Claimant, then it may be seen that the Claimant's ultimate position only had an historical connection with the original transaction.

The Court of Appeal made it clear that pre-trial Part 36 offers or payments into court could not be accepted after trial, and could therefore have no effect on the costs on appeal. This would seem to accord directly with Part 36 of the Civil Procedure Rules, which not only requires the Court's permission for an offer to be accepted after 21 days of it being made, but also requires the Court's permission for an offer to be accepted after the trial has commenced. The Civil Procedure Rules are silent on whether a separate Part 36 offer is required to obtain costs protection on appeal, but the Court of Appeal has made it clear that a separate Part 36 offer is required. The moral of the story is that the issue of costs protection should be considered and reconsidered throughout the course of a dispute, even where an earlier judgment is appealed.

If you would like any further information, please contact Phillip Carnell at [email protected] or on +44 (0)20 7367 2430.