Neutral Citation Number: [2011] EWHC 410 (Ch)
Case No: HC09C00727
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 1 March 2011

Before :

THE HON MR JUSTICE ARNOLD
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Between :

	(1) Claire Swain Mason
David Jonathan Berry
Neil Gordon Kirby	First Claimants	
	(2) Claire Swain Mason	Second Claimant	
	(3) Abby Swain	Third Claimant	
	(4) Gemma Swain	Fourth Claimant	
	(5) Christa Swain	Fifth Claimant	
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	Mills & Reeve (a firm)	Defendant	

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Robin Mathew QC and Alexander Learmonth (instructed by Berry & Walton) for the Claimants
Mark Simpson QC and Marianne Butler (instructed by Mills & Reeve LLP) for the Defendant

Hearing dates: 2-4, 7-8, 10 February 2011

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Judgment

MR. JUSTICE ARNOLD : 

Introduction
1.	This is a claim for professional negligence by the executors of the late Christopher Swain and by his four daughters Claire Swain Mason (“Claire”), Abby Swain (“Abby”), Gemma Swain (“Gemma”) and Christa Swain (“Christa”) against the Defendant firm of solicitors (“Mills & Reeve”). The claim arises out of tax advice given by Mills & Reeve to Mr Swain and his daughters in connection with a Management Buy-Out (“the MBO”) of their shares in Swains International plc (“the Company”), in particular in a letter dated 4 January 2007 (“the Letter of Advice”). The MBO, which was unusually complex for the level of consideration involved, was completed on 31 January 2007. Mr Swain had been suffering from ill health for some time before the MBO. On 17 February 2007 Mr Swain sadly and unexpectedly died immediately after an investigation carried out in preparation for a planned heart procedure. 
2.	The principal fiscal consequence of Mr Swain having died at that time, i.e. shortly after the MBO, was that the proceeds of the sale of his shares, held in his estate, were liable to inheritance tax (“IHT”). The amount charged was approximately £1 million. If, by contrast, he had died still owning his shares, they would not have been subject to IHT because they would have been covered by business property relief (“BPR”). Moreover, in that case there would have been a deemed disposal of the shares for capital gains tax (“CGT”) purposes on his death so that, on a later disposal of the shares (if, for example, the MBO had been entered into and completed by his executors), the only chargeable gain would have been any further increase in the value between the date of his death and the date of the disposal, whereas on the actual disposal there was a charge to CGT, albeit moderated by taper relief for business property. The amount charged was approximately £200,000. These two adverse fiscal consequences have been referred to in this litigation as “the Tax Consequences” and I will adopt that terminology.
3.	The essence of the Claimants’ claim is that the tax advice given by Mills & Reeve was deficient and that, had the correct advice been given, Mr Swain would have deferred completion of the MBO until after the heart procedure with the result that the Tax Consequences would have been avoided. It is common ground that Mills & Reeve did not advise Mr Swain or his daughters as to the Tax Consequences or to defer completion of the MBO. The first main issue in the case is whether Mills & Reeve were under any duty to give such advice having regard to the scope of their retainer. The second main issue is whether, if Mills & Reeve were under such a duty, their failure to give the advice caused the Claimants to sustain the losses claimed.
4.	It is important to note at the outset that this claim has had a unfortunate procedural history which was considered in detail both by the Court of Appeal in a judgment given on 20 January 2011 [2011] EWCA Civ 14 and in a ruling which I gave on the first day of the trial. The upshot is that, for the reasons I gave in that ruling, I ruled that the only case which it was open to the Claimants to advance having regard to their Particulars of Claim and the procedural history was one which was dependent on Mills & Reeve’s knowledge of the heart procedure. As I will explain below, even that ruling did not put an end to the dispute between the parties on this question.  
The witnesses
5.	I heard evidence from the following witnesses for the Claimants: Claire, Abby, Gemma and Christa; Neil Kirby of Kirby & Haslam, Mr Swain’s accountants, and one of the executors; Alan Comer, the leader of the management team that bought the Company; Gary Webb, a senior manager from National Westminster Bank plc (“NatWest”) which was one of the two funders of the MBO (the other being RBS Invoice Financing Ltd, “RBS”); and Kim Cairns, Colin Crickmore and Thomas Ryan, friends of Mr Swain. Claire was the main witness of the four daughters, and her sisters largely agreed with her evidence.
6.	I heard evidence from the following witnesses for Mills & Reeve: Craig Hodgson, Christopher Townsend and Isabel Pooley, all of Mills & Reeve. In addition Mills & Reeve adduced unchallenged evidence from a consultant cardiologist, Dr Simon Fynn.
The factual background
Mr Swain
7.	Mr Swain was a successful businessman. He built up the Company from a small concern into a substantial enterprise. By 2006 he had withdrawn from full-time management of the Company, however, and was spending most of his life in Thailand. His third wife was Thai, and after separating from her, he entered into a relationship with another Thai woman. Nevertheless, he was domiciled in England and was also, for UK tax purposes, resident and ordinarily resident in the UK.
8.	Mr Swain was 61 years old at the time of his death. He had had a history of ill health. He was overweight. He was diagnosed with Type 2 diabetes in 1995. He was prescribed insulin injections for this from 2001 onwards. From 2000 onwards he was prescribed Atorvastatin to treat hyperlipidaemia. Nevertheless, he had a mild heart attack in April 2001. In August 2001 he underwent coronary angioplasty and a coronary stent was fitted to one artery. This treatment appeared to be successful. At some point in June 2006, he was found to have an abnormal cardiac rhythm (atrial flutter), although without displaying any symptoms. On 22 July 2006 Mr Swain was admitted to the Bangkok Heart Hospital for a planned catheter ablation for the atrial flutter. An angiogram showed no re-stenosis of the artery. However, a pre-ablation transoesophageal echocardiogram (“TOE”) revealed the presence of a left atrial thrombus (clot). As a result, the ablation was postponed and Mr Swain was prescribed anti-coagulation drugs, namely Orfarin (warfarin) and Anoxyparin (low molecular weight heparin). Mr Swain described himself as having “had a rough time swallowing the camera and was fairly distressed” during the TOE. It appears that Mr Swain attended the Bangkok Heart Hospital periodically after this for his blood to be tested. In addition, as discussed below, he attended regularly for supervised exercise.   
The daughters
9.	At the relevant times Claire and Abby were both directors and employees of the Company, Claire being Director of Human Resources. Gemma was (to use her own description) a housewife and mother. Christa worked as a teacher. As I will discuss, Claire and, to a lesser extent, Abby were involved in the negotiations which led to the MBO. Gemma and Christa were not, although they agreed to the sale.
The Family Trusts
10.	In about 1992 three discretionary trusts for the benefit of Mr Swain’s daughters and grandchildren (“the Family Trusts”) were set up. Mr Kirby and David Berry of Berry & Walton were the trustees of each of these Trusts. Up until July 2001 each of the Trusts held a parcel of shares in the Company, but in July 2001 these shares were transferred to the daughters. Thereafter the Trusts’ only assets were small amounts of money held in three bank accounts. Accordingly, in March 2005 Mr Kirby suggested winding up the Trusts. Although Mr Swain and Mr Berry agreed to this suggestion, it does not appear to have been actioned until after 11 January 2007.
11.	The setting up of these Trusts appears to have constituted Mr Swain’s only attempt at tax or estate planning prior to the MBO. 
The Company
12.	The Company’s main business was as a photographic wholesaler. In addition, it had some subsidiaries in other fields. It had a turnover in the financial year ending 31 March 2006 of approaching £20 million and a profit before tax of approaching £700.000. It was founded by Mr Swain’s father in 1953. Mr Swain first acquired shares in the Company in 1975. He acquired most of his shares when his father died in 1978. At the time of the MBO, Mr Swain owned just over 72.4 % of the shares. Each of his four daughters owned some 5.3 % of the shares in the Company. 4.8 % of the shares were held by the Swains International plc Employees’ Discretionary Trust (“SWET”). The remaining 1.7 % were held by the three most senior members of the management team, namely Mr Comer, Ron Sealy and Danny Williams (“the MBO team”).
Kirby & Haslam
13.	At the time in question, Kirby & Haslam was a two-partner firm of chartered accountants, tax consultants and registered auditors based in King’s Lynn, Norfolk. Mr Kirby was one of the partners. The firm employed Bryn Thomas, a former tax inspector.
14.	Kirby & Haslam were responsible for preparing and filing the Company’s corporation tax returns, the Family Trusts’ tax returns and Mr Swain’s personal tax returns. They also filed Claire’s and Abby’s tax returns and, in some years, Gemma’s and Christa’s tax returns.
15.	There is a dispute as to the extent to which Kirby & Haslam provided tax advice to Mr Swain over and above preparing his tax returns, particularly in the three years prior to his death. Mr Kirkby accepted that his firm did advise Mr Swain after the event as to the tax consequences of transactions which Mr Swain had undertaken, but maintained that (with one minor exception) they did not give Mr Swain advice in advance of transactions and did not give Mr Swain tax planning advice at all. I accept that evidence.            
Berry & Walton
16.	Berry & Walton is a two-partner firm of solicitors with offices in King’s Lynn and Heacham, Norfolk. Mr Berry is the senior partner. Like Mr Kirby, he acted for Mr Swain for many years.
The Will
17.	On 17 January 2006 Mr Swain made a will, naming Mr Berry, Mr Kirby and Claire as executors and trustees. The principal beneficiaries under the will are Mr Swain’s four daughters.
Mills & Reeve
18.	At the time in question Mills & Reeve was a large full-service law firm whose principal offices were in Cambridge and Norwich. There were also smaller offices in Birmingham and London.
19.	The solicitors who were primarily involved in the events leading to the present dispute were Mr Hodgson, Alison Day, Ms Pooley and Mr Townsend. Mr Hodgson was a partner in the Corporate Finance Team based in Norwich. He was a specialist in corporate finance work, including management buy-outs and share purchase agreements. He had some general knowledge of the kind of tax issues that arise in such transactions, but he was not a tax specialist. He was assisted by Ms Day, an assistant solicitor in the same team. Ms Pooley was an assistant solicitor of three years’ post-qualification experience in the Tax, Benefits and Charities Team based in Cambridge. She was supervised by Mr Townsend, a partner in the same team, and assisted by Charlotte Wicks, another assistant in that team. Both Ms Pooley and Mr Townsend were corporate tax lawyers specialising in commercial tax matters. Neither of them was a private client tax lawyer, and compared to Mills & Reeve’s private client tax lawyers they had less knowledge of CGT and of IHT. On the other hand, Mr Townsend did have some knowledge of those areas of tax law.
20.	In addition, four other solicitors were more peripherally involved: Carina Clarke, an assistant solicitor specialising in property; Peter Furnivall, a partner specialising in trusts; Zak Virgin, an assistant solicitor specialising in banking; and Gregory Laming, a private client tax partner. I will discuss Mr Laming’s involvement below.      
The engagement of Mills & Reeve to advise upon and negotiate the MBO
21.	Prior to the events in question, Mills & Reeve had had no relationship with the Company or the Swain family. On 4 April 2006 Mr Swain and Claire attended a seminar held by Baker Tilly and Mills & Reeve regarding exit strategies, and in particular the flotation of companies on the alternative investment market. In their assessment form Mr Swain and Claire were not very complimentary. Mr Hodgson subsequently telephoned Claire to follow up, and she said that they would be interested in discussing a sale of their shares in the Company. This led to a meeting between Mr Hodgson, Mr Swain, Claire and Abby in the morning of 27 June 2006 and then a meeting between Mr Hodgson, Mr Swain, Claire, Abby and the MBO team in the afternoon of the same day. 
22.	Mr Hodgson subsequently prepared a single lengthy attendance note which covers not just the two meetings on 27 June 2006, but also subsequent telephone conversations down to 5 July 2010.
23.	Mr Hodgson’s attendance note records that Mr Swain opened the morning meeting by stating that his daughters were not interested in running the Company. The day before Mr Swain had had lunch with his bank manager, Paul Dick of NatWest, during which a possible sale of the Company to management had been discussed. They had briefly discussed valuation and come to a figure of about £5 million. Mr Dick had said that NatWest would be willing to fund the MBO. Although it is not mentioned in the attendance note, it appears from Claire’s and Abby’s evidence that Mr Dick indicated that NatWest would want a “top firm” of lawyers to deal with the MBO, and by coincidence one of the firms he recommended was Mills & Reeve. 
24.	Mr Swain then proceeded to explain in some detail to Mr Hodgson the background to the proposed sale. Mr Hodgson’s note includes the following passages which are relevant to the present dispute (emphasis added):
“Chris … generally makes 5 trips back to the UK per year of 10 days as a time but lives in Bangkok. He has been married and divorced three times.
… he doesn’t know [Gemma’s and Christa’s] intentions but would be pretty sure that they would want to sell their shares. In any event, Chris confirmed that on his death the shares would transfer through to them tax-free.
… His personal tax advisor was Neil Kirby and his solicitor was Mr Barry [sic].
In connection with Chris’ personal affairs, he has a pension fund that pays him £120,000 gross, he has a house in the UK which is worth £1-1.5 million, which is paid for, and he has an apartment in Bangkok which worth [sic] £200,000, which is again paid for.  Accordingly he does not need the money but appreciates that now is a good time to sell to management …
... [CH said that] there may be a shortfall in the purchase price, in which case the price could be met by the big element of deferred consideration, which for tax planning reasons could be helpful if the deferred consideration was payable by way of loan note. Alternatively, the shareholders could roll-over some of their shares into Newco. … 
… CH stated that in his view the transaction could be completed within 8 weeks and this is Chris’ preference to complete as soon as possible so that there is no uncertainty amongst the management team and the employees and also any leaks to customers. … CH confirmed that he would issue an engagement letter.”
25.	Mr Hodgson’s evidence was that, by the sentence I have italicised, he understood Mr Swain to mean that, if he and his daughters did not proceed to sell their shares in the Company, then Mr Swain’s shares would transfer to his children tax-free (i.e. because they would attract BPR). As counsel for the Claimants pointed out, however, that is not what the sentence says if read literally. It was also Mr Hodgson’s evidence that he thought it was quite obvious that a belief that the shares would transfer to the children tax-free would not hold good after the sale of the shares, and therefore he did not point this out to Mr Swain.
26.	Mr Swain commenced the afternoon meeting by stating that he had intimated to the MBO team that he was prepared to sell the company and that Mr Hodgson had been instructed by the shareholders to advise the Company. He pointed out that the MBO team would need their own solicitors. Mr Hodgson recommended Eversheds (his previous firm), but in the event the MBO team instructed Taylor Vinters, while the SWET was represented by Berry & Walton. Mr Hodgson’s note of the afternoon meeting includes the following passages:
“CH explaining that [the MBO team’s] shareholders would need to form a new company which would then acquire the shares in Swains International Limited [sic] from the shareholder. From a tax perspective it may be appropriate for them to roll-over their shares in Swains International Limited into shares in Newco, but then they would be required to subscribe for some further shares and so put cash into the business. They would need to discuss with their bankers, Nat West, how much they would be prepared to fund the acquisition but they would need to expect to have to put in some money of their own, which is known as ‘hurt money’….
CH stated that on a Management Buy Out we would typically expect not to give any due diligence enquiries or warranties of commercial nature because the business is well known to the management team. We would probably give a tax covenant to Newco, however as we would not expect Newco to inherit any liabilities in connection with tax….”
27.	Claire’s and Abby’s evidence was that Mr Hodgson suggested during the course of these meetings that there would be tax implications on the sale of shares, whereas Mr Hodgson had no recollection as to whether he made such a statement or not. It is clear from Mr Hodgson’s attendance note that he did talk about the tax dimension of the share sale at least from the MBO team’s perspective. I consider it probable that he also said, or at least was understood by the three Swains to say, that there would be tax implications for them. It may be this was what prompted Mr Swain to make the statement attributed to him in the attendance note about the shares transferring to his daughters tax-free. 
28.	During the following days Mr Hodgson had a series of telephone conversations with Claire, Mr Dick and Neil Orford of Lovewell Blake, a valuer based in Norwich recommended by Mr Hodgson. Mr Hodgson recommended his involvement because Mr Comer had said that he was not happy with the valuation of £5 million, and it was agreed that each side should get its own independent valuation.
29.	On 30 June 2006 Mills & Reeve opened a client file entitled “Christopher J Swain, Claire Swain Mason & Abby Swain/Swains International plc” (file number 4011483-0001). On the same day Mr Hodgson sent Mr Swain a letter in which he summarised the main points of the advice he had given during the meetings and the progress he made since then. He also enclosed an engagement letter. The engagement letter stated:
“…
When you have read this letter and its enclosures, please sign and return the letter to my office. Your signature will be on behalf of all of the Swain shareholders of the Company and so please ensure that they agree to the terms of this letter.
….
Terms relating to this matter
1	The scope of the work
1.1	I anticipate that the following legal work will be required in connection with the Transaction:
…
1.1.3	Sale and purchase agreement 
o	Advising on and negotiating the agreement (to be drafted by Newco’s advisors)
o	Advising on and negotiating a tax indemnity 
o	Preparing a disclosure letter to qualify the warranties in the sale and purchase agreement and complete disclosure bundles 
…
1.2	Assumptions
In identifying the legal work to be undertaken as set out above we have assumed that:
…
1.2.6	we will liaise with you and/or Claire on behalf of all shareholders
….
1.3	In identifying the legal work required we have not included:
1.3.1	individual tax advice for shareholders;  
…
1.4	If, however, personal tax advice is required then this is something which we will be delighted to provide and we will give you a separate costs indication for this advice.
2	People responsible for your work
I will be in charge of the day to day handling of the matter and will carry out the majority of the work involved. I am solicitor and partner in the firm’s Corporate team specialising in work of this nature. ..
From time to time, specialist advice may be sought from other members of the firm. …
I will also be responsible for managing our overall working relationship. …
...
4	Estimates
4.1	I anticipate that if the matter proceeds then it should be concluded in 3 months.
On the basis of the anticipated timescale I would expect Mills & Reeve’s fees to be between £50,000 and £65,000 plus VAT.
…
6	General Terms
6.1	Billing
You will be sent a bill on Completion and our fees will be deducted from the sale proceeds …. 
6.2	Communications
We have agreed that we shall communicate by telephone and email to chris@swains.co.uk and Claire@home.swainsdsl.co.uk.
…”
30.	On 3 July 2006 Mr Swain sent Mr Kirby an email about the MBO saying:
“As you can see, I have offered the boys the chance to buy the business. It may well be you need to choose sides, in which case I would be very happy to retain you, although you may decide that your bread was better buttered by acting for the guys. As far as I’m concerned there should not be a conflict of interests, as you essentially produce facts, not opinion, but I leave it to you and your professional ethics.”
31.	On 5 July 2006 Mr Hodgson spoke to Claire twice by telephone. Mr Hodgson’s attendance note records that he advised her that “it may be tax efficient for them to take the consideration for their shares which would extend the business asset total relief”. In context this appears to be a reference to Claire’s and Abby’s shares. On the second occasion they discussed the engagement letter.
32.	Claire sent the signed engagement letter to Mr Hodgson on 7 July 2006. In her covering letter she stated:
“Although clause 6.1 is a standard procedure referring to costs being deducted from the proceeds of the sale, we reserve the right to change this through the negotiation with the MBO if we wish accepting, the tax implications, assuring you of our best interests in the payment of your fees.”
Although the syntax of this paragraph is somewhat garbled, it seems clear that Claire understood that tax issues could arise during the negotiation of the MBO.
Negotiation of the MBO to the first Heads of Agreement
33.	On 17 July 2006 Mr Hodgson spoke to Claire by telephone. Mr Hodgson’s attendance note of the conversation includes the following passage:
“CH also noted that she had only held the shares for less than two years and she was going to establish from her accountants how long she had held them. CH thought that there may be some advantages in her rolling over her shares into Newco to try and defer the gain but this is something she thought the purchasers may not want to entertain. Accordingly, we may well need to look at other ways to help with the tax and that may involve some loan notes but we would need to give this some further thought once the parties had had a further discussion on price.”
34.	On 20 July 2006 Mr Orford wrote to the Company giving a “desktop” valuation of the shares in the Company in the sum of £5.07 million.
35.	On 21 July 2006 Claire sent Mr Hodgson an email saying “fortunately time does fly and we have indeed had our shares in excess of two years, so we would be awarded full business taper relief”. It was suggested to Claire in cross-examination that this showed that she had an understanding of business taper relief, but she denied this. I accept her evidence: it seems likely that Mr Hodgson had given her a brief explanation during one of their conversations on 5 or 17 July 2006.
36.	On the same day Mr Swain sent Mr Comer an email, copied to Mr Hodgson, suggesting that they aim for a decision in principle by the week ending 5 September 2006 to enable them to wrap the deal up in September/October 2006.
37.	On the following day Mr Swain attended the Bangkok Heart Hospital with the results described above. He did not mention this to Mr Hodgson. Mr Comer’s evidence was that he did not think that Mr Swain had mentioned it to him either. Mr Swain did tell his daughters, however.
38.	On 8 August 2006 PKF, the accountants instructed by the MBO team, produced a desktop valuation of the shares in the Company at £3.4 – 3.8 million.
39.	On 12 August 2006 Mr Swain attended Bangkok Heart Hospital for a blood test. Although it appears to have been contemplated that, if the test was positive, he might undergo a TOE and possibly the catheter ablation the same day, this did not happen. 
40.	On 11 September 2006 the MBO team offered to buy the shares in the Company for £4.25 million, of which £1 million was deferred and conditional. This offer was rejected by Mr Swain on the same day, saying that he would instruct Mr Hodgson to prepare to offer the business to venture capitalists.
41.	On 12 September 2006 Mr Swain sent Mr Comer an email, copied to the rest of the MBO team and Mr Hodgson, explaining why he had rejected the offer. He then said “Anyway, we now need to move on, and make the biggest sale that I’ve ever been involved in – the sale of Swains International plc.” To this end, he offered the MBO team a bonus equal to 20 % of the net sale price over £4.25 million. He concluded:
“I would need to take some tax advice, how to make this tax efficient, but it might be that I do it as a gift – so that I am assured of your prayers for my good health for the next seven years!”
42.	On the same day Mr Hodgson suggested to Claire that he approach Invex Capital to see if it would be interested in acquiring the Company. On 13 September 2006 Mr Swain informed the MBO team that he would be talking to Invex. 
43.	Mr Swain was in the UK from 18 September to 20 October 2006, except for the period of 25-28 September 2006 when he attended a trade fair in Germany.
44.	On 20 September 2006 Mr Swain, Claire and Mr Hodgson met a representative of Invex at Invex’s offices in London. The following day Invex’s representative said that they would only offer to acquire the shares at net book value, which was not acceptable to Mr Swain. Accordingly, Mr Swain decided to resume discussions with the MBO team. 
45.	On 22 September 2006 Mr Swain, Claire and Mr Hodgson met the MBO team together with a representative of PKF at the Company’s offices. During the meeting terms were negotiated for the purchase of the shares by the MBO team. Following the meeting Mr Hodgson started preparing draft Heads of Agreement.
46.	On 27 September 2006 Mr Hodgson contacted Ms Pooley to ask how Mr Swain could extract a boat and shares in a company called Actionshield Ltd from the Company, as it had been agreed that these assets would be excluded from the sale in the most tax efficient manner for all parties. On 29 September 2006 Ms Pooley replied with a suggestion as to how this could be done.
47.	On 4 October 2006 Mr Hodgson met Mr Swain and Claire at the Company’s offices prior to a meeting with the MBO team and the representative from PKF. During the initial meeting Mr Swain informed Mr Hodgson that Mr Kirkby had been to see him the day before and indicated that a sale of the Actionshield shares would realise £150,000 and that dividends paid to the vendors of the Company in respect of profits prior to the sale would be subject to 40 % tax. Mr Swain explained to Mr Hodgson that the Company was Kirby & Haslam’s biggest account and that Kirby & Haslam also gave Mr Swain and his family personal tax advice. 
48.	During the second meeting the Heads of Agreement were negotiated and signed. The consideration for the sale of the shares was (1) £3.25 million in cash on completion, (2) £1 million deferred in loan notes and (3) a cash sum equivalent to a proportionate entitlement of the profits after tax of the company for the year ending 31 March 2007. The loan notes comprised £600,000 of Series A Loan Notes, which were to be guaranteed or insured and interest bearing, and £400,000 of Series B Loan Notes, redeemable on achieving certain profit and secured by a second charge and/or an associated warrant. In addition it was agreed that the Share Purchase Agreement (“the SPA”) would contain “anti-embarrassment” provisions, which included a “golden share preference” on the future sale of the Company or the main property owned by the Company. Mr Swain was to resign as director and be engaged as a non-executive Chairman for an initial term of 12 months. Claire and Abby were to resign as directors, but continue to work for the Company.
49.	Clause 9 of Heads of Agreement provided:
“The Buyer agrees to structure the Acquisition in any reasonable manner which accommodates the tax position and planning of the Sellers, providing that such structuring does not leave the Buyer in a worse financial position than other structuring options available to the Buyer.”
50.	The Heads of Agreement included a timetable for the deal leading to completion on 20 November 2006. The timetable provided for the Sellers to submit a tax clearance application to Her Majesty’s Revenue and Customs by 20 October 2006. The purpose of this was to obtain an acceptance by HMRC that the transaction was being undertaken for bona fide commercial reasons, and not with the objective of tax avoidance, pursuant to section 138 of the Taxation of Chargeable Gains Act 1992 and section 707 of the Income and Corporation Taxes Act 1988.
The engagement of Mills & Reeve to prepare the tax clearance application and to give tax advice
51.	On 12 October 2006 Mr Hodgson sent Claire and Mr Swain an email asking for the Company’s tax office and tax number for the tax clearance application. Mr Swain replied asking Claire to get the details from Mr Thomas at Kirby & Haslam.
52.	On 14 October 2006 Mr Swain sent Mr Hodgson an email, copied to Claire and Abby, asking whether it would be possible for his daughters to get fully paid for their shares in cash while he took the whole of the deferred consideration. He added:
“If there is some reason that I haven’t thought of that means this is a bad idea, then Abby or Claire, who I have copied in will ask you to hold the idea until they can talk to me on Monday.”
53.	On 16 October 2006 Mr Hodgson forwarded this email to Ms Pooley and asked if they could discuss the share sale when she had a moment. On 17 October 2006 Mr Hodgson emailed the Heads of Agreement to Ms Pooley for her to review. Later the same morning Mr Hodgson spoke to Ms Pooley to brief her on the transaction.
54.	During the conversation Ms Pooley made a manuscript note. She later prepared a neater version of the note. Both versions of the note include the following statements (I quote from the second version, but the first is almost identical):
“Sellers
72.5% - Chris Swain – 60s, ill, lives in Thailand - not involved in business for 3 years
…
4.8% Swains Employee Trust (SWET) – t’ee[s] – CS’s act Mr Kirby CS’s day-to-day lawyer Mr Berry”
55.	Mr Hodgson did not recall what, if anything he had said to Ms Pooley about Mr Swain’s health or why. I have no doubt that Mr Hodgson did say what Ms Pooley recorded him as saying, since Mr Townsend made a similar note later that day (see below). Ms Pooley’s evidence was that she thought that the reason why Mr Hodgson had said it was that he was explaining why Mr Swain was selling the Company. That explanation makes sense.
56.	This leads to the question of where Mr Hodgson got the information that Mr Swain was “ill” from, since it is not recorded in any of his attendance notes or in any of the emails or letters to which he was a party prior to this conversation. I shall have to consider Mr Hodgson’s knowledge of Mr Swain health in more detail below, but so far as the source of this statement is concerned it seems to me that there are two main possibilities. Either Mr Swain told Mr Hodgson something about his medical condition during one of their meetings or Mr Hodgson drew his own conclusion from his observations of Mr Swain. I consider that the former explanation is more likely.
57.	Ms Pooley discussed the matter with Mr Townsend, and later on 17 October 2006 they both spoke to Mr Hodgson on the telephone. They advised him that the share for loan note exchange had to take to take place as a “general offer” in order to obtain deferral of CGT, and this meant that each shareholder had to receive the same amount and type of consideration pro rata to his or her shares. During Ms Pooley’s briefing of Mr Townsend, Mr Townsend made a note which includes the statements “Chris Swains 72.5% In his 60s ?Not well”.
58.	It appears that during one of these telephone conversations, probably the first one, Mr Hodgson asked Ms Pooley to draft the tax covenant for the SPA. Later the same day Mr Hodgson emailed Mr Swain and Claire, with a copy to Ms Pooley, the first draft of the SPA. Mr Hodgson informed Mr Swain and Claire that the draft did not include the tax covenant and that Ms Pooley was drafting this. He continued (emphases added):
“Please can you also confirm that you are happy for my firm to submit the tax clearance application with the inland revenue as it needs to be filed with the revenue in the next few days so that we have the clearance back in time for 20 November. I think it would make sense for my firm to submit it as we are close to the detail and the cost will be in the region of £1500 to £2000.  
Chris, you enquired about whether your daughters can receive cash rather than the loan notes and the issue is tax driven which we would be happy to answer and please confirm if you would like my firm to give the Swain Shareholders personal tax advice in connection with the proposed transaction.  My tax colleague Isabel would be happy to give you a separate estimate for this advice and she could talk through what is required with you as the transaction is complex from a tax perspective.  Isabel would go through the swains shareholder history with you and then based on the terms of the transaction would give you an indication now as to the likely tax treatment and rates of tax you would each have to pay. This is important as Abby and Claire will be taxed differently to your other daughters. Your accountant would then deal with the tax returns and any issues regarding valuations post completion.”
59.	On 18 October 2006 Mr Hodgson asked Ms Pooley to open a new file in respect of the proposed tax clearance application to HMRC and any subsequent tax advice requested by their clients in relation to the MBO. Accordingly, Mills & Reeve opened a second client file entitled “Christopher J Swain, Claire Swain and Abby Swain/Tax Advice” (file number 4011483-0002).
60.	On 19 October 2006 Mr Swain replied to Mr Hodgson’s email of 17 Otcober 2006, and copied Claire and Ms Pooley, with his comments on the draft SPA prefaced by the observation “Boy, oh boy, I found this heavy going”. Near the end of the email he said:
“Regarding Tax Advice. Generally, Yes, please ask Isobel [sic] to act for me and the family. I normally use Kirby Haslam, and Bryn, a former Tax Inspector, looks after my affairs. Please liaise with him. Neil Kirby is the senior partner. I confirm that I am happy that your firm submits the Tax Clearance application.”
61.	Also on 19 October 2006 Ms Pooley sent Mr Townsend a first draft of a tax advice retainer email to Mr Swain. This included an estimate of the cost of giving the advice of £4,500 to £5,000 plus VAT. Mr Townsend amended the draft, including increasing the estimate to £7,500 to £12,500 plus VAT.
62.	On 20 October 2006 Ms Pooley sent Mr Hodgson an email stating:
“Chris and I have now had the chance to consider in detail the specific tax advice which will be needed and the other tax work needed in relation to the transaction.
Please find attached a draft e-mail to Chris Swains regarding the tax advice - you will see that given the amount of work involved and the complexities the estimate is substantial. This is in addition to the tax clearance application estimate which you already provided the client and the estimate for dealing with the SPA.
In relation to the SPA we see two areas in which the tax team will be involved: the tax covenant and the wider transaction. In relation to the tax covenant … the estimate is £1,000 to £1,250 plus VAT.
In addition, we have already taken quite a while to get to a starting position in terms of understanding the deal and identifying the minimum of issues which we cannot avoid addressing and have provided advice:
•	that the special share has to be issued to all the sellers pro rata to their respective entitlements to permit a s.135 TCGA 1992 rollover;
•	that it may be more desirable for the anti-embarrassment provisions in relation to the buildings in the form of an earnout/loan structure.
I expect as well that there may need to be tax input on the other parts of the SPA, e.g. vendor protection provisions and the completion accounts provisions.
The estimate for the additional work on the SPA to be £1000 to £1500 plus VAT.”
63.	Ms Pooley attached to her email to Mr Hodgson a second draft of the tax advice retainer email (i.e. as amended by Mr Townsend). On the same Mr Hodgson telephoned her to discuss the draft. Her note of his comments begins:
“- concerned that quote is high and that the range of the quote is very wide
-	risk losing work to accountants
-	can the range be reduced – eg £7500 - £9500?” 
The first tax clearance application
64.	Later on 20 October 2006 Ms Pooley sent Mr Swain an email, copied to Mr Hodgson, to which she attached a draft clearance letter to be sent to HMRC. In her email Ms Pooley stated that Mr Swain’s residence for tax purposes was an important point which the clearance letter would need to address and that this needed to include his intentions after completion of the MBO.
65.	On 25 October 2006 Mr Swain replied with some initial comments on the draft letter, including the following statements:
“I have other assets in the UK, which are possible [sic] worth more (together) than this business …
Generally as I get money outside of my needs, then I have passed it on to my four daughters who apply themselves to its fairly prudent disposal, and pray for my continued reasonable health – well for at least seven years.”
He concluded by suggesting that Ms Pooley sit on the application for a few days as the MBO team might be looking at a fundamental shift.
66.	It is common ground that Mr Swain’s statement in this email about his daughters praying for his health for at least seven years, like his earlier statement in his email to Mr Comer dated 12 September 2006, is a reference to the fact that lifetime gifts were Potentially Exempt Transfers which would not attract IHT if he were to survive for at least seven years. I agree with counsel for the Claimants, however, that this does not demonstrate any great knowledge of the IHT regime on Mr Swain’s part, since most of middle England is aware of the seven-year rule, which has existed in one form or another since 1894 (apart from 1975 to 1986).
67.	On 31 October 2006 Ms Pooley telephoned Mr Swain to discuss his residence. Ms Pooley’s note of the conversation includes the following statements:
“Long term intention – to move to Thailand. No intention to deprive UK authorities of tax due to them regarding UK income.
…
Nothing in the transaction has significantly to do with Thailand. The reason for the deferral is that the buyers can’t get the money together.
CS saying he thought he would get retirement relief on the sale – he is retiring from the business and will only stay on with the business as a consultant as a non-executive chairman for £5k per annum and required to attend 4 meeting a year – very close to retirement. IP would consider further.
CS was happy for IP to discuss current/previous position with Bryn Thomas at Kirby & Haslam and get back to CS.”
68.	Following this conversation, Ms Pooley telephoned Mr Thomas. Mr Thomas said that he would have to get Mr Swain’s authority to discuss Mr Swain’s tax affairs with her. Mr Thomas thereupon sent Mr Swain an email asking for his authority to do this. Mr Swain replied later that day, and copied Ms Pooley:
“She is advising specifically on the taxation situation that could arise out of the current activity so please afford her full co-operation.”
69.	It is clear that by the words “please afford her full co-operation”, Mr Swain was authorising Kirby & Haslam to disclose to Mills & Reeve any information regarding Mr Swain’s and his daughters’ tax affairs that Mills & Reeve might reasonably require in order to “advise on the taxation situation that could arise out of the current activity”. 
70.	Following receipt of this email Mr Thomas telephoned Ms Pooley and they discussed Mr Swain’s tax residence. Afterwards, Ms Pooley sent Mr Townsend an email reporting what Mr Thomas, to whom she referred as “the accountant”, had told her and attaching a draft email to Mr Swain and a revised draft of the tax clearance letter. Mr Townsend suggested some amendments to both documents.
71.	On 1 November 2006 Ms Pooley sent Mr Swain the email, copied to Mr Hodgson, attaching the revised draft tax clearance letter. In the covering email, she answered his question about retirement relief as follows:
“Retirement relief has been abolished for disposals in 2003/04 and subsequent years and will not be available on the disposal of your shares. Accordingly, in summary, when you sell your shares in the company, looking at two of the main components of the consideration, you will be treated as having disposed of the shares partly for cash and partly in exchange for loan notes. A capital gain will arise in relation to the disposal for cash, although taper relief should be available. However, the intention is that the capital gain on the disposal of the shares in exchange for loan notes will be ‘rolled-over’ into the loan notes so that a further capital gain will only be realised to the extent the loan notes are redeemed. A number of conditions must be satisfied for rollover relief to be available, one of which is the requirement that the disposal of shares partly in return for loan notes is for genuine commercial reasons and not for the avoidance of tax. As I explained previously, in light of recent case law it is important to address the issue of your residence in the tax clearance following recent case law. There is a good argument that clearance should be given because the purpose of the deferred consideration is to reflect the buyer’s inability to raise sufficient finance and to reflect the difference in opinion in the value of the company and, as we discussed, has not been driven by considerations of your tax residence.”
72.	She went on to say:
“Bryn has confirmed that your tax return for 2005/2006 tax year and previous were submitted on the basis that you are a UK tax resident and, whilst it is not possible to determine your tax residence status for the current tax year for certain at this stage, he thought it likely that you would be resident for the 2006/2007 tax year.
… In light of the reduction in the time you are spending in the UK on average each year, it is possible that you will cease to be resident in the UK tax purposes during the period in which the loan notes can be redeemed, or that you will be treated as resident in both countries (which is possible in certain circumstances) in which case the capital gains tax liability will need to be determined in accordance with the terms of the UK- Thailand double tax treaty.”
73.	The revised draft tax clearance letter which Ms Pooley attached included the following paragraph:
“We are advised that Christopher Swain intends to continue to spend a significant amount of his time in Thailand with a view to gradually moving his interests to Thailand. It is likely that the average number of days which he has spent in the UK during [the] last two years and the forthcoming tax years may fall below an average of 91 days per year over a four year period. Christopher Swain has recently invested in a business in Thailand, as a result of which he may become eligible to seek residency in Thailand. Accordingly, it is possible that Christopher Swain will cease to be resident and ordinarily resident in the UK for UK tax purposes during the period in which the deferred consideration payments are payable, and possibly as early as the tax year 2007/8.”
74.	Later the same day Mr Swain sent Ms Pooley a reply, copied to Mr Hodgson, attaching an amended copy of the draft letter in which he had added the following sentences to this paragraph:
“He has a Thai wife of over ten years, who also has British citizenship.
However, his continuing weak health, following the heart attack in 2001, which was subsequent to his contracting Type 2 diabetes in the early nineties, and which which [sic] precipitated his early departure from the Swains International plc business means that he will not be returning to active work, although he does hope to be pro-active as a consultant to the business in Thailand. He is not salaried in Thailand, and does not expect to be.”
75.	In his covering email Mr Swain said:
“A few more bits of information in blue. ... The bits about my health are all true, and I attend the Bangkok Heart Hospital 2/3 times a week for exercise – as I’m only allowed to do it under medical supervision. It sounds worse than it is, perhaps. Nothing really hurts (except the exercise!) and as regards ‘Wine Women and Song’ I regret to say I have slowed up terribly.”
76.	Shortly afterwards Ms Pooley sent Mr Townsend the amended draft tax clearance letter together with a third draft of the tax advice retainer email. In her covering email she set out a breakdown of the “time on the clock” on the tax issues. She also relayed Mr Hodgson’s comment that the quote for the tax advice was high, adding “Having said that, it seems Chris Swain has some issues with his accountants at present so may be less inclined to use them”.
77.	Mr Townsend annotated a print-out of Ms Pooley’s email in manuscript with his comments:
“I disagree with this breakdown of the time spent so far. A fair bit of time has been spent on structuring advice: e.g. ensuring s. 135 TCGA cond’ns fulfilled; e.g. suggesting an earn out structure for the ‘anti-embarrassment’ as regards the building. This could only be done by first understanding the deal structure AND has substantial value to the client.
[The residency issue] was an issue which needed to be explored in greater detail than was anticipated when the estimate was given.
[The quote for the advice] is not high given the complexity of these issue[s]. If CS wants to go to a decent accountant to get comparable quality of advice, he is welcome to do so.
That said, maybe we should go for £7.5k -£10k. …”
78.	On 2 November 2006 Mills & Reeve sent the tax clearance application to HMRC.
The Kodak problem and the second Heads of Agreement
79.	On 3 November 2006 Mr Swain forwarded to Mr Hodgson an email dated 2 November 2006 which he had received from Claire with a PS added by Abby containing their comments on the draft SPA. One matter which concerned both of them was “environmental issues being warranted for 10 years”. In relation to this Abby said:
“Just want to ask the question – heaven forbid we inherit things in the next 10 years where do we stand.”
80.	In his covering email Mr Swain reported that he had just heard that, as he put it, “Kodak are planning to renege on their distribution contract with us. The[y] will give us the opportunity to competitively tender for the business again …”. Kodak was one of the Company’s biggest customers. The result of this was that work the MBO was put on hold while this issue was dealt with.
81.	On 8 November 2006 Mr Hodgson spoke to Mr Swain on the telephone. During the conversation, Mr Swain said that, if the MBO did not got ahead, he would give his shares to his daughters and help them to run the Company.
82.	On 16 November 2006 Mr Swain spoke to Mr Hodgson on the telephone and informed him that a revised deal had been agreed with the MBO team. On the assumption that the Kodak business was lost, the revised purchase price would be £3.4 million, of which £2 million would be paid in cash on completion, £200,000 in cash 90 days after the end of the Kodak contract and £1.2 million deferred.
83.	On 20 November 2006 Mr Hodgson discussed the revised deal with Mr Townsend and Ms Pooley. They concluded that a revised tax clearance application would have to be submitted to HMRC.
84.	On 23 November 2006 the parties signed a second Heads of Agreement incorporating the revised terms which had been agreed. These provided for the deferred consideration to comprise £400,000 of Series A Loan Notes, which were to be guaranteed or insured and interest bearing, and £300,000 of Series B Loan Notes, redeemable on achieving certain profit and secured by a second charge and/or an associated warrant and £500,000 of Series C Loan Notes redeemable after 10 years or on earlier sale of the Company’s property or change of control of the Buyer or the Company. Completion was set for 20 December 2006.
The second tax clearance application
85.	From 23 to 27 November 2006 Ms Pooley and Mr Townsend worked on a revised tax clearance application to reflect the revised terms of the MBO, several drafts of which they sent to Mr Hodgson..
86.	On 26 November 2006 Ms Pooley sent Mr Townsend a fourth draft of the tax advice retainer email. In this draft she reduced the estimated cost to £5,000 to £7,000. In her covering email she commented:
“Looking forward (and assuming that there is no further work in relation to tax clearance) there will be ongoing support in relation to ensuring the consideration is structured correctly and preparing a detailed letter of advice in relation to tax for the Swain shareholders. Given that a fair bit of the thought process has already happened I have reduced the ‘going forward’ quote but you may have a different view.”
87.	On 27 November 2006 Mills & Reeve sent the revised tax clearance application to HMRC. This letter also answered queries which had been raised by HMRC in relation to the first application. On 1 December 2006 HMRC duly gave the clearance requested.
The Tax Retainer Email
88.	On 5 December 2006 Mr Hodgson spoke to Mr Swain on the telephone to discuss with him amendments to the draft SPA which had been requested by Taylor Vinters on behalf of the MBO team. Mr Hodgson’s attendance note of the conversation includes the following paragraph:
“CH also was pleased to confirm that we had received tax clearance from the Inland Revenue and we had to revise our clearance letter and there would be some additional fees in connection with tax, together with fees for personal tax advice. Isabel Pooley would be writing to him separately to advise him of those likely fees.”
89.	While Mr Hodgson was on the telephone to Mr Swain, Ms Pooley sent Mr Hodgson a fifth draft of the tax advice retainer email, incorporating Mr Townsend’s comments on the fourth draft, for Mr Hodgson’s comments. The estimate for future advice had now been reduced to £3,000 - £3,500 plus VAT, but this draft also recorded that Ms Pooley proposed to submit an interim invoice for £7,000 plus VAT calculated in the manner set out below. Mr Hodgson asked Ms Pooley to send this to Mr Swain immediately.
90.	The tax advice retainer email as finally sent by Ms Pooley to Mr Swain on 5 December 2006 (“the Tax Retainer Email”) runs to an A4 page and a half of single-spaced type. I shall not set out in full, but it is necessary to quote the most important passages. Ms Pooley began by saying she was attaching the clearance letter received from HMRC and repeated her advice about the availability of rollover relief. She then summarised the tax work which had been carried out to date.
91.	Ms Pooley continued (emphases added):
“The time currently on the clock in relation to the two tax clearances and the general tax advice provided in relation to the structure of both the original and revised deals is £8,268.00 plus VAT. As there has been some duplication I propose to reduce this to, and submit an interim invoice for, £7,000 plus VAT (being £4,000 for the two tax clearances and £3,000 for the tax advice in relation to the structure of the transaction under both the original and revised heads of terms and the consideration of the issues surrounding your residency).
Looking ahead, there is a requirement for ongoing tax input in relation to the structure of the various elements of the consideration to ensure that the various conditions are met for roll over relief to be available in respect of those elements of the consideration which are to be satisfied by the issue of loan notes or shares. In addition, Craig has spoken to you previously regarding the general tax advice to be provided to you and your daughters in addition in relation to the tax liabilities arising in respect of the transaction structure. I estimate that the cost of providing this ongoing tax support and advising you and your daughters to be £3,000 - £3,500 plus VAT.
By way of summary, we would be advising yourself and your daughters (the ‘Swain Shareholders’) with regard to the transaction structure but we would not be able to advise on how this transaction fits into each of your own financial and tax planning positions.
We will need to consider and advise you and your daughters over the specific tax issues which arise in respect of the disposal of your shares and in particular:”
92.	Ms Pooley then set out a series of issues to be considered. This was structured in three parts. The first was an overview of how the tax position could be affected by Mr Swain living in Thailand. The second was “the different tax treatment of each of the following types of consideration [listing nine different types of consideration receivable or potentially receivable under the second Heads of Agreement]”. The third was a list of nine matters that this would involve consideration of “amongst other things”. This list included “Consideration/confirmation of whether and to what extent business asset taper relief is available…” and “The tax rates applicable to your daughters on the gain realised on the disposal of their shares …”.
93.	Ms Pooley concluded:
“Our final charges will, of course, depend on the degree to which you ask for additional detailed advice on specific issues after you have received our initial advice and will be based on the time spent in giving the advice. …
This estimate relates only to advice on the tax position of the Swain Shareholders and does not, therefore, include advising the management shareholders or the trustees on their tax liabilities. It assumes that there will not be particular issues in obtaining the information necessary to assist in providing the advice (for example, when the shares were required) and that your accountant will do with the preparation and submission of tax returns and any issues regarding valuations following completion.”
94.	15 minutes after Ms Pooley sent this email, Mr Swain replied thanking her for the advice and accepting the fees quoted. In the light of the evidence I heard about Mr Swain, I think it unlikely that he had read and digested the detail of what Ms Pooley had written in the time available. On the contrary, I consider it probable that he concentrated on the essentials, and in particular what she had said about fees.
95.	On 6 December 2006 Taylor Vinters for the MBO team sent Mr Hodgson an email proposing that completion should take place on 11 January 2007 because more time was needed to complete the financial due diligence. In the meantime work continued on preparing the necessary documentation. Some of the documents which were drafted by Mills & Reeve (in the person of Ms Day and Mr Virgin) during this period made provisions for what would happen in the event of Mr Swain’s death. 
96.	On 7 December 2006 Mr Swain sent an email to Mr Berry and Mr Kirby as trustees of the SWET an email copied to Gemma, Christa, Abby, Claire, the MBO team and Mr Hodgson, to advise them formally of the MBO and to request their approval to the SWET using its assets to assist the MBO team to fund the acquisition. In this email he said (emphasis added):
“Alan and I both agreed that if we used professional advisors, outside of our existing company advisors then neither would have the potential advantage of that selection, and we would also be in a position to use firms that specialise in such work. The funding providers for the boys insisted on their using such a company anyway, so our thoughts became somewhat academic. The family decided to use Mills and Reeve, because Claire and I had met, and liked, one of the partners at a seminar run by them. The boys chose Taylor Vintners [sic] as their lawyers, and PKF as their accountants. .... Both as a family and as a company we have needed some tax advice and to get some clearances from the Inland Revenue. Mills and Reeve have taken care of that, too, although they have not dealt with personal specifics….
…
In conclusion gentlemen, can I thank–you, most sincerely for the way you have looked after the affairs of Swains International plc whilst it has been in my care. I will wish you to continue to look after my personal affairs as you already do, and I am sure that you will continue to get some business from my daughters. After next month I cannot say what Alan and the MBO team will want to do, but as they have sought to retain my services as Chairman - then there may well be no change.  I cannot say, it is not my call.”
97.	On 10 December 2006 Mr Swain sent one Will Newman an email replying to an email Mr Newman had sent him on 8 December 2006. It appears that Mr Swain had given Mr Newman some advice about a patent, which Mr Newman had promised to reward with shares. This was something Mr Swain had briefly taken advice from Kirby & Haslam about the tax treatment of in February 2005. In his email to Mr Swain Mr Newman had said, among other things, “At some point we have to face the decision of whether to transfer you shares, with all the tax implications or hang on for a buy out”. Mr Swain replied to this follows:
“In terms of the shareholdings for Charles and I, then as I've said before, we can be too greedy with tax planning considerations. If we had done this years ago, rather than being busy scheming way to reduce the tax, then the tax would be on the tail end of taper relief by now. As it is you are now older, so premiums for your life insurance would have gone up while the tax went down. Sorry, it is one of those things I get hot and bothered about. People who devote too much of their creative time to working out how to avoid tax on the income they haven’t made yet, usually don't make it! Generally difficult to say to you, because it probably easily looks like self interest and greed. I think you know it isn't greed - although I confess to self-interest. The UK tax regime in many ways is not too bad, so I don't mind paying. Inheritance tax is one that is a bastard, but shares in private companies get a discretion, so they don't attract death duties, I believe.”
98.	Mr Swain blind copied his reply to Claire, who responded:
“Looks interesting although I'm not sure how you give tax advice, although I guess you do apologise for getting hot and bothered!! Also Gordon Brown is looking - if he hasn't sneaked it through already about inheritence [sic] tax on family shares.”
99.	On 12 December 2006 Mr Swain sent Ms Pooley an email saying:
“I have just been gratuitously informed by HSBC Private Bank in Jersey, who emphasize that they are not tax professionals, that as far as they are aware, unless there is a Treaty to the contrary, then if I spend 180 days or more a year in Thailand, then I am, de-facto, a Tax resident of Thailand.
 Can you please advise as this may be interesting.”
The Letter of Advice
100.	Between 7 and 15 December 2006 Ms Pooley prepared a draft letter of advice to Mr Swain and his daughters. On 17 December 2006 she sent the draft to Mr Townsend who suggested some amendments. On 3 January 2007 she sent a revised draft to Mr Hodgson who suggested some amendments. 
101.	On 4 January 2007 Ms Pooley sent Mr Swain and Claire by email the final Letter of Advice. In her covering email Ms Pooley said that she appreciated that the Letter of Advice was long and detailed, but said that “the tax issues arising on a the [sic] sale of a company are unfortunately rarely straightforward”. She asked him to let her know if he had any questions. The Letter itself extends to just over nine A4 pages of single-spaced type with two pages-worth of appendices. Again, I shall not set out in full, but it is necessary to quote the most important passages.
102.	The Letter begins, under the heading “Tax Advice”:
“This letter sets out my advice on the tax treatment of the sale of shares in Swains International plc (which is to be converted into a private company, Swains International Limited) (‘the Company’) by yourself and your four daughters.
As we have discussed previously, this letter relates only to the tax position of the sale of the shares by you and your four daughters. Your accountant will be able to assist with the preparation and submission of tax returns, and related issues regarding valuations, the ‘share identification rules’, and the apportionment of the base cost of your shares, each of which fall outside the scope of our advice.
This letter considers:
•	The extent to which, if at all, employment-related taxes could apply to any part of the consideration payable for your shares in the Company;
•	The principles of capital gains tax (CGT) applicable to the different components of this consideration;
•	The principles of computation to determine the amount of CGT payable;
•	The availability of taper relief;
•	The implications of your tax residence.
… ”
103.	The second section of the Letter is headed “Summary”, and as that suggests it contains a summary statement of the tax consequences of the sale considered in the remainder of the letter.
104.	The third section of the Letter, headed “Tax treatment of the various elements of consideration” is the longest. This section begins with a consideration of “whether the tax regimes for employee-held shares could be relevant” and says, in short, that they probably are not. It goes on to consider the tax treatment of each of the nine types of consideration. The analysis here is of the elements which attract CGT and when.
105.	The fourth section of the Letter is headed “Determining the amount of CGT payable”. This explains in outline how the CGT payable will be computed.
106.	The fifth section of the Letter is headed “Taper Relief”. Having explained the applicable principles, this says that “full business asset taper relief will be available on the disposal of your shares, which will reduce the effective rate of CGT to 10%.” It goes on to explain that the position regarding taper relief on the daughters’ shares was more complicated.
107.	The sixth section of the Letter is headed “Tax implications of Claire and Abby remaining as employees of the Company”. This says that the risks from this factor are low.
108.	The seventh and final section of the Letter is headed “Tax residence”. This section expands on the advice which Ms Pooley had previously given Mr Swain regarding the relevance of his tax residence, in particular with regard to future gains realised when the deferred consideration was paid. This section includes the following passage:
“You should keep your residence status actively under review and take advice as to the possible CGT consequences of any proposed change in residence.
Whilst there is no statutory redefinition of residence or ordinary residence, HM Revenue and Customs has a published guidance setting out the rules it uses for determining when a person is resident or ordinarily resident in the UK and those rules are summarised briefly in Appendix 2. It will be to those tests that your contact at the HSBC Private Bank in Jersey was referring. However, whilst the guidance provides a starting point for determining whether a person is resident or ordinarily resident in the UK, these guidelines are not definitive as recent case law has emphasised. … ”
109.	Strikingly, the Letter of Advice does not include a direct answer to Mr Swain’s original question in his email dated 14 October 2006. Nor is there any other documentary record of a direct answer to the question being given by Mills & Reeve. Mr Hodgson suggested for the first time in cross-examination that the answer was given by telephone soon after 17 October 2006, but I am sceptical as to whether that is correct. 
Completion of the MBO deferred
110.	On about 8 January 2007 the parties agreed to defer the completion date of the MBO since they wanted to await Kodak’s decision on the Company’s tender which was now expected in the week beginning 15 January 2007. On 10 January 2007 Mr Swain notified Mr Hodgson that Mr Comer had suggested 29 January 2007 for completion. 
111.	On 11 January 2007 Mr Hodgson spoke to Mr Swain and sent him an email regarding the position of NatWest regarding the deferred consideration. He explained that the terms of the MBO team’s facility with NatWest provided that the deferred consideration payable to the vendors of the shares be subordinated to the bank, and explained what the practical consequences were. Mr Swain’s reply the same day was “This may be a deal breaker … I may be green, but I don’t have cabbage for brains.” Mr Hodgson discussed the issue with Claire the following day.
The heart procedure and completion of the MBO
112.	On 13 January 2007 Mr Swain sent Mr Comer an email, copied to Abby, Claire, Mr Williams, Mr Sealey, another director of the Company Charles Wilson, Christa and Gemma, with the subject line “Heart Operation”. This is the central document in the case and I shall therefore quote it in full:
“Dear All,
I have finally been given a date for my Heart procedure, which is February 17th. Basically they do a pre-op. procedure to make sure the clots are gone, for which I would prefer to be put under, and then continue with the heart op. in the early evening – which can take about 4 hours. The bugbear is no long haul flights for four weeks after, which kills my attendace [sic] at Board Meetings of ‘International’ on Feb 22nd and Voice and Data on 26th. My apologies, but I really need to give the Heart treatment the priority.
The run in to the treatment starts on February 10th with a hospital visit in order that the week before is used to fine tune the body in readiness for the procedure.  This particularly applies to my warfarin doseage, as I need to get weaned off that otherwise I leak too much when they operate!
Al, you were going to advise me if Jan 29th was looking good for a UK meeting when you know. I will need to leave UK on February 8th, latest, in order to be back in time for Heart procedures. Please advise ASAP, so that I can get a travel agent working upon my ticketing needs.
Once, again, apologies for the disruption to plans. It also wrecks a big trip I had planned for eight days away in Thailand on Water Projects, when I would have seen the installation of the Swains International site.
Regards,
Chris”
113.	On 16 January 2007 Mr Comer replied saying that 29 January 2007 was still convenient for a completion meeting assuming everyone was agreeable to complete, but that he understood that there was an issue over the bank continuing to have first charge over future borrowings. On the same day Mr Swain replied to Mr Comer explaining why he was concerned, but expressing the view that “It’s sortable”. Mr Swain copied his reply to Claire. He also blind copied it to Mr Hodgson.
114.	As a result, Mr Hodgson also received copies of the two emails further up the chain, that is to say, Mr Comer’s email dated 16 January 2007 and Mr Swain’s email dated 13 January 2007 quoted above. Mr Swain did not specifically draw Mr Hodgson’s attention to the email dated 13 January 2007, but on the other hand the subject line in the email chain continued to read “Heart Operation”. Mr Hodgson read the chain of emails, including Mr Swain’s email dated 13 January 2007; but his evidence was that Mr Swain did not discuss the matter with him during any of their subsequent telephone conversations prior to the completion of the MBO. Mr Hodgson did not forward the chain of emails to Ms Pooley or Mr Townsend, nor did he relay the information about the heart procedure to them in any other way.
115.	On 18 January 2007 Mr Hodgson spoke to Mr Swain on the telephone to discuss a number of issues, and in particular the question of subordination. At the end of the conversation, Mr Swain mentioned that he was going to China for a few days and would be back on 22 January 2007. Later that day, Mr Swain sent Mr Hodgson an email saying that he had agreed with Mr Comer that the Company’s borrowing would be limited to £1 million against the property without further agreement in order to protect his interests. This enabled the parties to resolve the subordination issue, although the figure of £1 million was soon increased to £1.25 million.
116.	On 19 January 2007 it was confirmed that the Company had lost the Kodak business.
117.	On 22 January 2007 Mr Hodgson spoke to Mr Swain on the telephone, who said that he had a good time in China.
118.	On 24 January 2007 it was agreed that the parties would aim to complete the MBO no later than 31 January 2007. 
119.	Also on 24 January 2007 Mr Swain sent Mr Hodgson an email noting that the Company’s sale of its shares in Actionshield and the boat would increase its profits, to part of which the sellers of the shares would be entitled under the proposed agreement if they accrued in the current year. This caused Mr Hodgson to consider how to ensure that the sellers would benefit if Actionshield was not sold during the current year. Mr Hodgson thought that one possibility was an option arrangement. He spoke to Mr Townsend about this, who said that the grant of such an option might give rise to an immediate IHT liability (Mr Townsend had in mind section 94 of the Inheritance Tax Act 1984). Mr Hodgson therefore spoke to Mr Laming over lunch. The next morning Mr Laming sent Mr Hodgson an email, copied to Ms Pooley, setting out in some detail his IHT analysis of the situation. It transpired, however, that Mr Laming had misinterpreted the question which Mr Hodgson had asked him.
120.	It also emerged that the MBO team’s funding model had assumed that the Actionshield shares would have been sold prior to completion. It was therefore agreed that the cash consideration payable on completion of the MBO would be reduced by £200,000 and the shareholders would have an option to acquire the Actionshield shares if they had not been sold by 16 March 2007, prior to the Company’s financial year end.
121.	On 25 January 2007 Mr Swain flew to England.      
122.	On 29 January 2007 Mr Webb on behalf of NatWest and Mr Comer on behalf of the MBO team’s corporate vehicle CWS Holdings Ltd signed an agreement setting out the terms on which NatWest would lend CWS £775,000 to fund the acquisition. Clause 2.3 provided that NatWest was entitled to cancel the agreement if the loan was not drawn down within three months. Mr Webb’s evidence was that the MBO team’s agreement with RBS, which was straightforward invoice discounting arrangement, would have had a similar term.
123.	Also on 29 January 2007 Ms Pooley sent Mr Swain an email, copied to Mr Hodgson, advising that the change of the structure of the transaction since the second tax clearance application meant that HMRC might be able to argue that it was not bound by the clearance it had given, but the risk was relatively low. The next day Mr Swain replied saying that he accepted the warning.
124.	The MBO was completed during a lengthy meeting on 31 January 2007 at Taylor Vinters’ offices which was attended by Mr Swain, Claire and Mr Hodgson. During the day Mr Hodgson said to Claire that he hoped that Mr Swain would be all right after the heart procedure. Mr Hodgson’s evidence was that this was nothing more than a polite enquiry. Claire replied that he had had the procedure previously and his health had visibly improved. This was a misunderstanding on her part: the procedure he had had before was angioplasty and the fitting of a stent.
125.	Also on 31 January 2007 Mills & Reeve sent Mr Swain an invoice for “Provision of Legal Services Relating to: Tax Advice 5 December 2006 to 29 January 2007” in the sum of £3,636 plus VAT. Ms Pooley explained to Mr Hodgson how this figure had been calculated in an email the next day. The work-in-progress on the tax file was £5,843.50. Since the estimate given in the retainer email had been £3000 to £3500, they would bill £3500. But there had been a small amount of extra advice not provided for in the retainer (relating to the possibility of Mr Swain becoming an employee rather than a consultant and re-conversion of the Company to a plc after completion), the cost of which amounted to £136.50.    
126.	On 1 February 2007 Mr Swain flew back to Thailand. 
127.	On 8 February Mr Hodgson sent Mr Swain and Claire an email attaching a letter summarising the key post-completion matters for them to diarise and saying “I really hope your op goes well Chris”. Similarly, the attached letter concluded: “I also hope that your forthcoming operation is a success”.
128.	On 15 February 2007 Mr Swain sent Claire an email in response to a request for feedback on Mills & Reeve’s service, saying “… I felt [Mr Hodgson] was very good. I was less impressed with the Tax advisor who did not stay in touch or give any real life discussion”. 
129.	Mr Swain attended the Bangkok Heart Hospital as planned on 17 February 2007. The TOE was performed under sedation, and it was found that the clot was still present. Shortly after the TOE Mr Swain suffered a catastrophic circulatory collapse. Resuscitation was attempted, but it was unsuccessful and Mr Swain was pronounced dead. The ablation was never attempted. The precise cause of the circulatory collapse is unknown. 
130.	On 19 February 2007 Adam Bradley of Taylor Vinters, the MBO team’s solicitors, sent Mr Hodgson an email saying:
“I was sad to hear about Chris’ sudden death just now. It is hard to believe that he is no longer here as he looked in good health at completion, and it was clear from that meeting what an engaging character he was.”
131.	On 20 February 2007 Mr Comer sent Mr Hodgson an email saying “We are naturally devastated at the news which was so unexpected”.
Summary of the parties’ cases 
132.	The Claimants’ case in summary is as follows: (1) Mr Swain and his daughters retained Mills & Reeve to give them personal advice as to the tax consequences of the MBO; (2) the MBO had tax consequences for Mr Swain and his daughters in that it involved exchanging property that benefited from BPR to IHT (shares) for property that did not (cash and loan notes) and it involved a disposal giving rise to CGT (on the cash consideration, not the loan notes, and subject to taper relief); (3) Mills & Reeve were under a continuing duty to advise Mr Swain and his daughters having regard to his changing personal circumstances, including his health; (4) once Mills & Reeve became aware of the heart procedure planned for 17 February 2007, they should have advised Mr Swain to consider delaying completion of the MBO until after that because of the Tax Consequences if he were to die during the procedure; (5) given Mr Swain’s own concerns about the procedure and his attitude to saving tax, if he had been given that advice, he would have decided to defer completion of the MBO; and (6) the MBO team would have been happy to agree to a short postponement. As discussed below, the Claimants also advance an alternative case which starts from the proposition that, at the very least, Mills & Reeve should have made it clear to Mr Swain and his daughters in the Letter of Advice what that advice did not cover.
133.	Mills & Reeve’s case in summary is as follows: (1) Mr Swain and his daughters retained Mills & Reeve to give them personal advice as to how to structure the MBO in a tax efficient manner; (2) Mr Swain and his daughters did not retain Mills & Reeve to given them wider tax advice, and in particular did not ask for estate planning or tax mitigation advice; (3) Mills & Reeve were aware that Kirby & Haslam were Mr Swain’s personal tax advisors and were entitled to assume that Mr Swain had obtained or would obtain any estate planning or tax mitigation advice he wanted from them; (4) the receipt by Mr Hodgson of the blind copy email containing information about the planned heart procedure did not give rise to any duty on the part of Mills & Reeve to advise Mr Swain as to the Tax Consequences, particularly given that it appeared to be a routine procedure, still less to suggest deferment of the MBO; (5) the Tax Consequences were not in truth consequences of the MBO, but of the fact that Mr Swain undertook no steps to mitigate his tax position; and (6) the Claimants’ claim is driven by hindsight when at the time no one expected Mr Swain to die.     
Issues regarding Mr Swain
134.	There are three areas of factual dispute between the parties regarding Mr Swain’s knowledge and attitudes and how he appeared to others. The first concerns Mr Swain’s state of heath prior to the heart procedure, and in particular how his health appeared to others. The second concerns his knowledge of, and attitude to, the risks of the heart procedure. The third concerns his knowledge of, and attitude to, tax. I will deal with these in turn.
135.	The evidence of Mr Swain’s daughters, and that of Messrs Cairns, Comer Crickmore and Ryan, was that Mr Swain was visibly unwell. On their account, he was obese, unable to walk far without becoming breathless and looked older than his years. Furthermore, they said that he was quite open about his condition (although more so with his friends than with his daughters). Thus a number of witnesses mentioned that he was wont to say that he would not “make old bones”. He would also take his tablets and inject himself with insulin during meetings. The evidence of Mr Hodgson, on the other hand, was that Mr Swain appeared to be in reasonable health, that he was able to climb a couple of flights of stairs without getting out of breath and that various things Mr Swain told him in conversation led Mr Hodgson to understand that he was leading an active life. (Mr Townsend and Ms Pooley never met Mr Swain and thus were not in a position to comment.) Mr Hodgson’s evidence is supported by Mr Bradley’s email dated 19 February 2007.
136.	In my judgment these apparently conflicting accounts can be reconciled to a considerable extent. The evidence of Messrs Cairns, Comer, Crickmore and Ryan relates particularly to the period around Christmas 2006, when Mr Swain was described as having been grey and sweaty. Mr Hodgson did not meet Mr Swain between 4 October 2006 and 31 January 2007, however. Furthermore, the six occasions on which Mr Hodgson did meet Mr Swain were all business meetings which involved more intellectual than physical effort on the part of Mr Swain. I accept that Mr Swain gave Mr Hodgson the impression that he was leading an active life; and in at least some respects Mr Swain was, for example, taking regular long-haul flights. On the other hand, I have no doubt that Mr Hodgson knew that Mr Swain had health problems. There is simply no other explanation for the statements in Ms Pooley’s and Mr Townsend’s notes of 17 October 2006. As discussed above, I consider it likely that Mr Swain told Mr Hodgson something about his medical condition during one of their meetings. For their part, Mr Townsend and Ms Pooley were aware that he was in “weak health” following a heart attack and contracting diabetes, as it was put in the tax clearance letter. Ms Pooley was also aware that he was required to exercise under medical supervision from Mr Swain’s email dated 1 November 2006.   
137.	As for the heart procedure, Dr Fynn’s evidence is that the risk of a typical patient dying during or as a result of a catheter ablation is less than one in a thousand, and so too is the risk of a typical patient dying during or a result of a TOE. It is also Dr Fynn’s evidence that there is no reason to think that Mr Swain was at any increased risk from either a TOE or an ablation than a typical patient. Finally, Dr Fynn says that a catheter ablation is properly described as a heart procedure rather than a heart operation (which is why I have used that terminology in this judgment, although it may be noted that Mr Swain used both terms in his email dated 13 January 2007 and Mr Hodgson used the term operation in his letter dated 8 February 2007). 
138.	On the other hand, neither Mr Swain nor Mills & Reeve had the benefit of Dr Fynn’s evidence at the time. So far as Mr Swain is concerned, there is hearsay evidence from Dr Ngarmukos, who treated Mr Swain on 17 February 2007, that he advised Mr Swain that the risk of death was less than 1%. This is an order of magnitude greater than the actual risk according to Dr Fynn’s evidence. More strikingly, however, Mr Ryan gave evidence that Mr Swain had told Mr Ryan that he only had a 50/50 chance of survival while Mr Cairns gave evidence that Mr Swain said that there was a 60/40 chance of the clot breaking up with fatal consequences. Even allowing for some self-dramatisation, it seems clear from this evidence that Mr Swain was subjectively rather concerned about his prospects, even if objectively the risks were low. This may be because of the distress he experienced during the TOE on 22 July 2006.  
139.	So far as tax is concerned, it is clear that Mr Swain did have some knowledge about this. On the evidence, this was general knowledge acquired over time through his business activities and making his personal tax returns and through reading newspapers such as The Sunday Times. This knowledge was, as counsel for the Claimants submitted, patchy. For example, he had heard of retirement relief, but didn’t know that it had been abolished. It is clear that his knowledge extended to the fact that, on his death, his shares in the Company would pass to his daughters tax-free; but it does not appear that it extended to knowing even in outline why that was so, namely due to the operation of BPR. It is telling, to my mind, that in his email to Mr Newman dated 10 December 2006, Mr Swain referred to shares in private companies getting a “discretion” when he meant an exemption or, more accurately, a relief. Nowhere did Mr Swain refer to BPR as such. In my view, the evidence strongly suggests that he may not have appreciated that no such relief was available in respect of the proceeds of sale of his shares, even though that would appear to be obvious. Similarly, in relation to CGT, it is clear that he had some understanding of the availability of taper relief; but equally I do not think he knew any of the details of this. In short, his tax knowledge was superficial and inaccurate.    
140.	Mr Swain’s daughters and friends all gave evidence that Mr Swain was very keen not to have pay more tax than necessary. Their evidence broadly chimes with what appears from Mr Swain’s email to Mr Newman: he was prepared to pay tax that he thought was fair, and was conscious of the fact that elaborate tax avoidance schemes could be more trouble than they were worth, but he was resentful about IHT. That is not surprising for a successful entrepreneur who wanted to pass his accumulated wealth to his daughters.     
141.	Finally, it is important to note that there is no dispute that Mr Swain was in the habit of making it clear to advisors such as Mr Kirby that he was not prepared to pay for advice which was volunteered, but only for advice which he had asked for.
Retainer
142.	The next issue is as to the scope of Mills & Reeve’s retainer to give tax advice. The Claimants contend that Mills & Reeve were retained to give Mr Swain and his daughters general personal advice as to the tax consequences of the MBO. Mills & Reeve contend that they were retained to advise only as to (i) structuring the deferred/contingent consideration in the SPA in order, where possible, to avoid the risk of immediate charges to CGT, and (ii) on the basis of the transaction as ultimately structured, the tax liabilities arising in respect of that transaction structure. 
The law
143.	There is no real dispute between the parties as to the applicable legal principles, but since there is a dispute as to how those principles should be applied to the facts of this case it is nonetheless necessary to set out them out.
144.	As Lord Walker of Gestingthorpe said in Hilton v Barker Booth & Eastwood [2005] UKHL 8, [2005] 1 WLR 567 at [28]:
“A solicitor’s duty to his client is primarily contractual and its scope depends on the express and implied terms of his retainer”
145.	In the present case, the express terms are set out in the Tax Retainer Email.
146.	The key implied term of any solicitor’s retainer is that the solicitor has a duty to exercise reasonable care and skill. The classic statement of this duty remains that of Oliver J in Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 484 at 402H-403C:
“The extent of his duties depends upon the terms and limits of [the] retainer and any duty of care to be implied must be related to what he is instructed to do. Now no doubt the duties owed by a solicitor to his client are high, in the sense that he holds himself out as practising a highly skilled and exacting profession, but I think that the court must beware of imposing upon solicitors – or upon professional men in other spheres duties – which go beyond the scope of what they are requested or undertake to do. It may be that a particularly meticulous and conscientious practitioner would, in his client’s general interests, take it upon himself to pursue a line of inquiry beyond the strict limits comprehended by his instructions. But that is not the test. The test is what the reasonably competent practitioner would do having regard to the standards normally adopted in his profession, and cases such as Duchess of Argyll v Beuselinck [1972] 2 Lloyd’s Rep 172, Griffiths v Evans [1953] 1424 and Hall v Meyrick [1957] 2 QB 455 demonstrate that the duty is directly related to the confines of the retainer.”
147.	The scope of the duty to exercise reasonable care and skill depends on the circumstances of the case. As Lord Scott of Foscote explained when delivering the opinion of the Privy Council in Pickersgill v Riley [2004] UKPC 14, [2004] PNLR 31 at [7]:
“It is plain that when a solicitor is instructed by a client to act in a transaction, a duty of care arises. But it is also plain that the scope of that duty of care is variable. It will therefore depend, first and foremost, upon the content of the instructions given to the solicitor by the client. It will depend also on the particular circumstances of the case. It is a duty that it is not helpful to try to describe in the abstract. The scope of the duty may vary depending on the characteristics of the client, in so far as they are apparent to the solicitor. A youthful client, unversed in business affairs, might need explanation and advice from his solicitor before entering into a commercial transaction that it would be pointless, or even sometimes an impertinence, for the solicitor to offer to an obviously experienced businessman.”
148.	Thus one of the relevant circumstances is the nature of the client. Even in the case of an intelligent layman, it should not be assumed that he will spot points that would be obvious to a lawyer, a point well made by Rimer J (as he then was) in Summit Financial Group Ltd v Slaughter & May (unreported, 12 March 1999) at p. 72.
149.	Another of the relevant circumstances is the degree of expertise which the solicitor (or other legal advisor) holds himself out as possessing. Thus in Matrix-Securities Ltd v Theodore Goddard [1998] STC 1 at 27 Lloyd J (as he then was) held that the defendant solicitors were to be judged by the standard of competence of firms of solicitors with specialist tax departments, which was a high standard.
150.	Where the retainer involves different areas of specialisation, an aspect of the duty of care involves coordination between the specialists. Thus in Summit Rimer J held at 75-76 that:
“… it is inherent that if the drafting of the two parts of a document is split between different departments, there is a potential for a mismatch between the two parts. To avoid this, it is essential for someone with a sufficiently general legal experience to have overall responsibility for reviewing the document as a whole with a view to seeing that it works and that it achieves the commercial bargain that it is intended to achieve.”
151.	It is the solicitor’s responsibility to ensure that it is clear what the solicitor is being asked to advise about. Thus in Gray v Buss Murton [1999] PNLR 882 Rougier J held at 892-893:
“It must, surely, be up to the solicitor to take the appropriate steps to clarify precisely the extent of his retainer, and this, sadly, Mr Lightfoot failed to do when, in my judgment, the circumstances demanded that he should. This view is, if not analogous, at least consonant, so it seems to me, with that line of cases such as Crossley v. Crowther (1851) 9 Hare 384, and Re Payne (1912) 28 T.L.R. 201, to the effect that, where there is a dispute between solicitor and client as to the terms of any retainer, prima facie it is the client's version which should prevail. It seems to me that the underlying basis for this principle must be that it is the client who actually knows what he wants the solicitor to do, and so it is the solicitor's business to ascertain the client's wishes accurately, bearing in mind the possibility that the client, through ignorance of the correct terminology, may not have correctly expressed it”
152.	There can be circumstances in which the solicitor’s duty extends to advising upon matters that lie beyond the express instructions he has been given by his client. As Lawton LJ accepted in Boyce v Rendells [1983] 2 EGLR 146 at 149H:
“… if, in the course of taking instructions, a professional man like a land agent or a solicitor learns of facts which reveal to him as a professional man the existence of obvious risks, then he should do more than merely advise within the strict limits of his retainer. He should call attention to and advise upon the risks.”
153.	Lightman J put it this way in a case involving an omission to give tax advice, Hurlingham Estates Ltd v Wilde & Partners [1997] STC 627 at 634:
“The test to be derived from the authorities is whether, having regard to the terms of the retainer in all the circumstances which were know or should reasonably have been known by [the solicitor], [the solicitor] should reasonably have appreciated that [the client] needed his advice and guidance in respect of the tax liabilities which entry into the transaction would expose it.”
154.	From Boyce and other authorities Laddie J concluded in Credit Lyonnais SA v Russell Jones & Walker [2002] EWHC 1310 (Ch), [2002] PNLR 2 at [28] as follows:
“… A solicitor is not a general insurer against his client's legal problems. His duties are defined by the terms of the agreed retainer. This is the normal case although White v Jones [1995] 2 A.C. 207 suggests that obligations may occasionally arise outside the terms of the retainer or where there is no retainer at all. Ignoring such exceptions, the solicitor only has to expend time and effort in what he has been engaged to do and for which the client has agreed to pay. He is under no general obligation to expend time and effort on issues outside the retainer. However if, in the course of doing that for which he is retained, he becomes aware of a risk or a potential risk to the client, it is his duty to inform the client. In doing that he is neither going beyond the scope of his instructions nor is he doing ‘extra’ work for which he is not to be paid. He is simply reporting back to the client on issues of concern which he learns of as a result of, and in the course of, carrying out his express instructions. In relation to this I was struck by the analogy drawn by Mr Seitler. If a dentist is asked to treat a patient's tooth and, on looking into the latter's mouth, he notices that an adjacent tooth is in need of treatment, it is his duty to warn the patient accordingly. So too, if in the course of carrying out instructions within his area of competence a lawyer notices or ought to notice a problem or risk for the client of which it is reasonable to assume the client may not be aware, the lawyer must warn him. I do not need to consider what would be the consequences if the lawyer does more than asked for, for example reads documents which he was not asked to read, and discovers a risk to the client.”
155.	On the other hand, a solicitor is not under a duty to advise his client in respect of matters in relation to which he reasonably believes the client to be receiving advice from another advisor. As Lightman J said in Hurlingham  at 634:
“A solicitor retained on a transaction may not be under a duty to advise on some legal aspect of the transaction, e.g. taxation, because it may be reasonably apparent to him that advice on that aspect is not need by the client and accordingly is not within his remit, but within the remit of someone else, e.g. a substantial client’s expert tax department (see e.g. Virgin Management Ltd v De Morgan Group plc (24 January 1996, unreported) CA).”
156.	If the solicitor wishes to place limits upon the scope of his duty of care, then he must ensure that the client has clearly understood and consented to this. Lightman J explained what was required in Hurlingham at 630 as follows:
“Any such agreement [to limit the solicitor's duties] must plainly, if it is to have any legal effect, be clear and unambiguous: the client must be fully informed as to the limited reliance he may place on his solicitor and the reason for it (i.e. the solicitor’s lack of any basic knowledge or competence), that this limitation is not a normal term of a solicitor’s engagement, and that this client may be better advised to go to another solicitor who is not so handicapped and can be retained with no such limitation on his duties. Common sense requires that all these matters should also be recorded in an attendance note of the meeting where they discussed and agreed, and should subsequently be recorded in a letter to the client. The letter is required, not merely to evidence what has been agreed, but to ensure that, after receipt of the letter, the client can consider (and discuss with others) the position and its implications away from, and free from any constraints imposed by, the presence of the solicitor. These are elementary precautions to ensure that the client gives a fully informed consent to a potentially disadvantageous arrangement where there is an obvious potential conflict between the interest of the solicitor (in retaining his client’s work) and the client (in obtaining the best, or least competent, service and advice).”
The present case
157.	It is convenient to begin with what Mills & Reeve knew about their clients. As Mills & Reeve knew, they had five clients: Mr Swain and his four daughters. They knew that Mr Swain was a successful businessman, but they also knew that he had no legal training. They knew that he had some general knowledge of tax, but they also knew that he had no detailed knowledge or understanding. So far as the daughters were concerned, they knew that Claire and Abby worked for the Company, but that Gemma and Christa did not. Mills & Reeve must have appreciated that Claire and Abby would be likely to have less knowledge and understanding of tax than Mr Swain, and Gemma and Christa less still.
158.	Turning to Mills & Reeve, counsel for Mills & Reeve submitted that the blind copy email containing the information about that the heart procedure had only been received by Mr Hodgson, who was a corporate finance specialist and could not be judged by the standard of competence of a tax solicitor. I do not accept that submission. It is true that Mills & Reeve’s original retainer in relation to the MBO involved the skills of a corporate finance specialist. It is also true that, as the retainer expanded, Mr Hodgson remained the partner with overall conduct of the matter (and, as such, he had a duty to ensure proper coordination between the different teams). Nevertheless, what this case is about is the tax advice which Mills & Reeve gave Mr Swain and his daughters. That was a something in relation to there was a separate retainer, a separate file and a separate team of solicitors. In my judgment, it follows that Mills & Reeve are to be judged by the standard of competence of firms of solicitors with specialist tax departments.
159.	The next factor in the equation is the involvement of Kirby & Haslam. Mills & Reeve have conceded that Kirby & Haslam were not under a duty to advise Mr Swain and daughters as to the Tax Consequences. Counsel for the Claimants submitted that, that concession having been made, the involvement of Kirby & Haslam was largely irrelevant. I do not accept that submission. Mr Hodgson’s evidence was that he was always conscious that Kirby & Haslam (and Berry & Walton) were the incumbent advisors to the Swain family, and as he put it, he was “anxious not to tread on their toes”. I accept that up to a point; but it is clear from the evidence that Mills & Reeve, including Mr Hodgson, were keen to secure the Swain family’s instructions to give tax advice in relation to the MBO and not to lose that work to Kirby & Haslam. That was one of the factors that went into the fees estimate that Mills & Reeve ultimately gave in the Tax Retainer Email.
160.	The key question is what role Mills & Reeve reasonably understood Kirby & Haslam to be playing. Mr Hodgson emphasised the fact that Mr Swain described Mr Kirby to him as his “personal tax advisor” on 27 June 2006 and 4 October 2006. He also used similar language in his email dated 19 October 2006 Nevertheless, it is noticeable that the Mills & Reeve representatives frequently referred to Mr Kirby and Mr Thomas in their internal notes and communications as “the accountant” and Kirby & Haslam as “the accountants”. I think that reflects how the Mills & Reeve representatives saw Kirby & Haslam.
161.	There is no evidence that Mills & Reeve were aware of the precise extent to which Kirby & Haslam did, or did not, provide tax advice to Mr Swain  beyond that which was necessary in connection with filing his tax returns. In my judgment it was reasonable for Mills & Reeve to proceed on the understanding that Mr Swain looked to Kirby & Haslam for such general tax advice as he required. I consider that it was also reasonable for Mills & Reeve to proceed on the assumption that Mr Swain’s daughters would look to Kirby & Haslam for such general tax advice as they required. But it does not follow that Mills & Reeve were entitled to assume that Kirby & Haslam were advising Mr Swain and his daughters as to any tax consequences of the MBO. On the contrary, Mills & Reeve proceeded on the basis that, as Mr Hodgson said in his email dated 17 October 2006 and as Ms Pooley said in the Letter of Advice, Kirby & Haslam’s role was to deal with tax returns and related post-transaction issues concerning valuations and so on. 
162.	Furthermore, if and in so far as there was any uncertainty as to who was responsible for advising Mr Swain and his daughters about what, then in my judgment Mills & Reeve were under a duty clearly to delimit their own area of responsibility from that of Kirby & Haslam.      
163.	Although the language of the Tax Retainer Email is important, that email must be interpreted having regard to the matters discussed above and the other background facts known to the parties. Counsel for the Claimants took me through the five drafts of this email, and sought to rely upon some of the language in the early drafts. In my judgment that evidence is inadmissible as an aid to interpretation of the Tax Retainer Email since those drafts were purely internal to Mills & Reeve.
164.	On the other hand, I consider that it is important to take into account the communications between the parties that led up to the Tax Retainer Email. The starting point was Mr Swain’s request in his email dated 14 October 2006 for advice as to whether his daughters could get fully paid in cash while he took all the deferred consideration i.e. a request about whether the transaction could be structured in an advantageous manner. Mr Hodgson’s reply on 17 October 2006, however, was that “the issue is tax driven” and to ask whether Mr Swain would like Mills & Reeve “to give the Swain Shareholders personal tax advice in connection with the proposed transaction”. That invitation is expressed in quite general terms. Mr Swain’s acceptance of the invitation in his email dated 19 October 2006 is even more generally expressed. In any event, Mr Swain’s understanding of the advice that Mills & Reeve were going to be giving emerges most clearly from his email dated 31 October 2006, in which he said that Ms Pooley was “advising specifically on the taxation situation that could arise out of the current activity”. Ms Pooley accepted that that encapsulated in a nutshell what Mr Swain understood she was doing for him. She also accepted that it was an accurate description provided that “the current activity” was understood as meaning “the tax situation that arose on the sale of [the] shares”.
165.	Read against that background, how should the Tax Retainer Email be interpreted? This says that Mills & Reeve will provide “general tax advice ... to you and your daughters … in relation to the tax liabilities arising in respect of the transaction structure”. It also says that Mills & Reeve will advise Mr Swain and his daughters “over the specific tax issues which arise in respect of the disposal of your shares and in particular” various things. In my judgment it would have been reasonable for Mr Swain and his daughters to understand from this that Mills & Reeve were advising them as to the tax consequences of the MBO, including but not limited to how to structure it most advantageously from a tax perspective.
166.	On the other hand, the Tax Retainer Email also says that Mills & Reeve “would not be able to advise on how this transaction fits into each of your own financial and tax planning positions”. It is clear that Mr Swain read this and understood that it meant that there was a limitation on the extent of the advice that Mills & Reeve were providing, since in his email dated 7 December 2006, which was copied to his daughters, he said that Mills & Reeve “have not dealt with personal specifics”. But what is the limitation? In my judgment, there is no reason to interpret the limitation as extending any further than the literal meaning of the words I have quoted, that is to say, all that was excluded was advice as to how the transaction fitted into the financial and tax planning positions of Mr Swain and his daughters.
167.	I therefore conclude that Mills & Reeve’s 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.
168.	I would add that in my judgment the opening paragraphs of the Letter of Advice are entirely consistent with this analysis, referring as they do to “the tax treatment of the sale of shares in [the Company]” and “the tax position of the sale of shares”. Indeed, the only things that the Letter of Advice explicitly identifies as falling outside the scope of Mills & Reeve’s advice are “the preparation and submission of tax returns, and related issues regarding valuations [etc]”, although it does also advise Mr Swain to “take advice as to the possible CGT consequences of any proposed change in residence”.        
Breach of duty
169.	As noted above, the principal issue in this case is whether, having regard to the scope of their retainer, Mills & Reeve came under a duty to advise Mr Swain and his daughters (i) as to the Tax Consequences if he were to die shortly after completing the MBO and (ii) to consider delaying completion of the MBO until after the heart procedure.   
170.	It is clear from Claire’s evidence that Mr Swain and his daughters understood that Mills & Reeve’s advice as to the tax consequences flowing from the MBO would include any IHT and CGT consequences of the sale of the shares which they needed to know. The cross-examination is too long to quote in full, but it includes the following key passage:
“Q.  But you didn't ask Mills & Reeve to provide Inheritance Tax advice at any point?
 A.   We asked for personal tax advice and thought that we were given any necessary personal tax advice we needed.
  Q.  You thought Inheritance Tax was covered, did you?
  A.  I thought personal tax advice, whatever that came under, was covering us for the sale for those shares, yes.
 Q.  …. It's right to say though, isn't it, Mrs Swain Mason that in none of the documents that follow is Inheritance Tax even mentioned in respect of you asking for advice?
 A.   No, I didn't.
 Q.  You didn't ask?
 A.  (The witness shook her head)
 Q.  And neither did your father or your sisters?
 A.  I don't know, but I know that personal tax advice was asked for.
 Q.  I will come back to that in a moment.
 A.  So it's taken in the --
 Q.  It's also true --
 A.  It's taken in the broad --
 Q.  Sorry, I didn't mean to interrupt.
 A.  It's taken in the broad -- you are perhaps assuming or giving me too much credit for my knowledge, you know. When we were asking for personal tax advice that umbrella now, looking back, should have been Inheritance Tax, should have been Capital Gains, should have been, you know, that's what our belief was, that, you know, any tax linked to those shares we would be advised on.
Q.   Even though the letter of advice of 4 January doesn't mention Inheritance Tax at all?
A.   Assuming that we have had all the advice we need to have for the sale of those shares.”
171.	This evidence has to be approached with a degree of caution both because it represents Claire’s subjective understanding of the scope of the retainer and because it is admittedly given with the benefit of hindsight. I found Claire to be a witness of manifest sincerity, however, and I have no hesitation in accepting this evidence.
172.	Furthermore, Mr Hodgson said that, since he was not a tax specialist, he could not comment on whether the advice outlined in the Tax Retainer Email was not comprehensive or not. As counsel for the Claimants submitted, if an experienced corporate lawyer with some knowledge of tax couldn’t tell, what chance did Mr Swain and his daughters have?  
173.	Nevertheless, this evidence does not get the Claimants home. As stated above, I ruled on the first day of trial that, because of the procedural history of the matter, it was not open to the Claimants to advance any case which was not dependent on Mills & Reeve’s knowledge of the heart procedure. Accordingly, the key question is whether the receipt by Mills & Reeve on 16 January 2007 of the chain of emails which included Mr Swain’s email dated 13 January 2007 giving details of the heart procedure triggered any duty to give Mr Swain and his daughters further advice and, if so, what advice? As noted above, the Claimants put their case on this question in two ways.
The Claimants’ primary case
174.	The first step in the Claimant’s primary case is the contention that Mills & Reeve were under a continuing duty to advise Mr Swain and his daughters in the light of changing circumstances, including Mr Swain’s personal circumstances, until completion of the MBO. I did not understand counsel for Mills & Reeve to dispute this as a general proposition. In any event, I accept it. In my view it is inherent in the nature of the retainer. Furthermore, Mills & Reeve did in fact update their advice when the circumstances changed, and in particular when aspects of the MBO changed.
175.	The Claimants’ second step is to contend that, even prior to the 16 January 2007, Mills & Reeve were aware that Mr Swain was a man who was in his 60s and in ill health. I have dealt with Mills & Reeve’s knowledge of Mr Swain’s health above. I therefore accept this contention. The Claimants accept, however, that, in the light of my ruling, it is not open to them to contend that this knowledge in and of itself gave rise to a duty on the part of Mills & Reeve to advise Mr Swain and his daughters as to the Tax Consequences. 
176.	The third and crucial step in the Claimants’ primary case is the contention that, given that Mills & Reeve were under a continuing duty to advise Mr Swain and his daughters in the light of changing circumstances, and given that they were already aware of Mr Swain’s age and ill health, once they become aware of the planned heart procedure, then they came under a duty to give advice about the Tax Consequences, and hence to suggest that Mr Swain defer completion of the MBO until after the heart procedure. I am unable to accept this contention for the following reasons.
177.	First, it is important to have regard to the manner in which the information about the heart procedure was communicated to Mills & Reeve. It was in the second email up the chain from an email which Mr Swain blind copied to Mr Hodgson. Mr Swain had not sent the “heart operation” email itself to Mr Hodgson, still less had he asked for any advice arising out of it. Furthermore, there is nothing to suggest that Mr Swain had any particular intention to convey the information contained in that email to Mr Hodgson. On the contrary, it appears that the reason why Mr Swain sent Mr Hodgson a blind copy of the email dated 16 January 2007 was so that Mr Hodgson could see the line Mr Swain was taking with Mr Comer about the subordination issue. Thus it appears to be pure happenstance that the chain included the information about the heart procedure.
178.	Counsel for Mills & Reeve argued that (a) Mr Hodgson did not have the requisite expertise to advise about the Tax Consequences and (b) the Claimants did not allege that he should have passed the information about the heart procedure to Ms Pooley or Mr Townsend. I do not accept either of these points as thus framed. So far as the first point is concerned, the relevant aspect of Mr Hodgson’s duty was his duty of supervising the client relationship and not his duty as a corporate finance specialist. As to the second point, the Claimants’ case is pleaded generally against Mills & Reeve and not against any solicitor individually. Nevertheless, I do accept that, in considering what the reasonably competent solicitor standing in Mr Hodgson’s shoes would have done upon receipt of the email dated 16 January 2007, it is extremely pertinent that what is now said to be the crucial information appears to have been conveyed to him by chance. 
179.	Furthermore, although Mr Hodgson was the partner in charge of the relationship with Mr Swain, it is not the case that all of Mr Swain’s communications were with him. On the contrary, Mr Swain had communicated directly with Ms Pooley in relation to the tax advice and continued to do so. Thus I accept that it is also relevant that Mr Swain did not himself send any information about the heart procedure to Ms Pooley, still less ask her for advice.       
180.	Secondly, the only knowledge which Mills & Reeve had about the heart procedure was that contained in the email dated 13 January 2007 itself. There was nothing in that email to indicate that the heart procedure was anything other than a routine procedure. The only adverse consequence which is identified in the email is that Mr Swain will not be able to take long-haul flights for four weeks. The Claimants contend that Mills & Reeve should have appreciated that any operation has risks, but I do not see why Mills & Reeve should have concluded that the procedure as described in the email carried any significant risk. The Claimants also contend that the email indicated that at least the pre-operative procedure (i.e. the TOE) would be carried out under general anaesthetic, but in fact it merely says that this is Mr Swain’s preference. Finally, the Claimants contend that the information contained in the email has to be read against the background provided by Mills & Reeve’s previous knowledge of Mr Swain’s ill health. That I accept, but the only specifically relevant prior knowledge which Mills & Reeve had was that (i) Mr Swain had had a heart attack in 2001 and (ii) he exercised under medical supervision in the Bangkok Heart Hospital. I cannot see that this prior knowledge alters the way in which Mills & Reeve should have read the email of 13 January 2007.  
181.	I have commented above that neither Mr Swain nor Mills & Reeve had the benefit of Dr Fynn’s evidence at the time. In that sense, Dr Fynn’s evidence as to the risks of the procedure is as much hindsight as the fact that, in the event, Mr Swain died. Counsel for Mills & Reeve nevertheless submitted that Dr Fynn’s evidence was relevant in another way. This was that, if Mr Swain had asked for advice as to what to do in the light of the planned heart procedure, a reasonably competent solicitor would have asked what the risks were, and that would have led to Mr Swain being advised that the risks were as described by Dr Fynn. I accept the first stage of this argument, but not the second stage. In my view Mr Swain would have responded to this query by relating his own knowledge and attitude to the procedure. Thus he would have said that Dr Ngarmukos had advised him that the risk of death was less than 1%, but that he was concerned that the risk was higher (though I doubt that he would said as high as 50/50 to a solicitor).
182.	This does not assist the Claimants, however, since Mr Swain did not ask for advice. The question, therefore, is whether Mills & Reeve were under a duty to provide such advice even though Mr Swain had not requested it. Counsel for the Claimants submitted that they were. His most persuasive argument in support of that submission was to rely upon the “rotten tooth” analogy accepted by Laddie J in Credit Lyonnais. He argued that a reasonably competent solicitor in possession of the information about the heart procedure would have appreciated that there was a risk of death, and therefore that Mr Swain should be advised about the potential tax consequences if Mr Swain were to die. I am unable to accept this argument, however. Given the manner in which the information about the heart procedure was conveyed to Mills & Reeve, and given that the information so conveyed did not suggest that the procedure was anything other than routine, I do not consider that receipt of the email can have triggered any duty on the part of Mills & Reeve to advise Mr Swain and his daughters as to the Tax Consequences if he were to die during the procedure.
183.	Furthermore, even if Mills & Reeve came under a duty to advise Mr Swain and his daughters as to the Tax Consequences, I do not consider that they would have come under a duty to advise them to defer the completion of the MBO until after the heart procedure. At most, Mills & Reeve would be under a duty to advise Mr Swain and his daughters as to the options available to them. Deferring completion of the MBO was by no means the only option, as I shall discuss below.                 
Is it open to the Claimants to advance their alternative case?
184.	The Claimants’ alternative case is pleaded in paragraph 8.3A of the Amended Particulars of Claim, which forms part of their particulars of negligence, as follows:
“In the further alternative, the Defendants at the very least ought in their letter of advice dated 4 January 2007 to have advised Mr Swain and the Daughters as follows: ‘This letter does not include advice on the effects of the MBO for Inheritance Tax purposes, including the potential liability to Inheritance Tax on the consideration (in particular the loan notes) which you will receive for the shares. Whilst we advise on what we consider to be the relevant CGT consequences of the sale of the Shares and redemption of the loan notes, the advice about CGT is not comprehensive’. The Defendants did not so advise. Had they done so, Mr Swain and the Daughters would have sought such advice from the Defendants. The Defendants would then have either (a) advised Mr Swain and the Daughters in summary as to Tax Consequences, or (b) informed them that would not be able to provide sufficient advice on the other tax effects of the MBO in the time available prior to the scheduled completion of the MBO, and therefore suggested that completion of the MBO be delayed until such advice could be given.”
185.	It can be seen that this case proceeds in three stages: (1) Mills & Reeve should have, but did not, advise Mr Swain and his daughters in the Letter of Advice that their advice did not include IHT advice or comprehensive CGT advice; (2) if Mills & Reeve had done so, Mr Swain and his daughters would have requested such advice; and (3) this would have led to Mills & Reeve advising as to the Tax Consequences, or that there was insufficient time to do so prior to the MBO. 
186.	To my surprise, counsel for Mills & Reeve submitted in his closing submissions that this case was not open to the Claimants in the light of my ruling on the first day of trial that it was not open to the Claimants to advance any case which was not dependant on knowledge of the heart procedure.  He argued that that ruling debarred the Claimants from relying upon any allegation of breach of duty prior to 16 January 2007, including any breach of duty in the Letter of Advice. I do not accept this submission for the following reasons.
187.	First, paragraph 8.3A was introduced into the Particulars of Claim by amendment with the consent of Mills & Reeve. Mills & Reeve have never applied to strike it out, and they could hardly do so when they consented to its introduction. It featured in the argument before Peter Smith J on 23 November 2010 and before the Court of Appeal, and Lloyd LJ described it in his judgment at [19] as “the most important new allegation” introduced by the amendments. Nowhere did either Peter Smith J or Lloyd LJ say that it was not open to the Claimants to advance the case pleaded in paragraph 8.3A.
188.	Secondly, paragraph 8.3A clearly and explicitly begins with an allegation of a negligent omission from the Letter of Advice. As has always been common ground, that letter was sent prior to Mills & Reeve acquiring any knowledge of the heart procedure. That allegation therefore cannot depend on the subsequently acquired knowledge of the heart procedure. On the other hand, paragraph 8.3A does not stop there: as set out above, the alleged negligent omission from the Letter of Advice is merely the first of three steps.
189.	Thirdly, the essence of the dispute which I ruled upon during the first day of trial was whether it was open to the Claimants to advance a case, as they sought to do, which was not dependent on knowledge of the heart procedure at all, but merely upon Mills & Reeve’s knowledge of Mr Swain’s general ill health. I ruled that it was not open to the Claimants to advance such a case, but only a case dependent on knowledge of the heart procedure. 
190.	Fourthly, I dealt with paragraph 8.3A in my ruling as follows:
“8.	Paragraph 8.3A begins by making an allegation of an omission from the defendant's letter of advice dated 4 January 2007.  That of course was before the date upon which the defendant became aware of the prospective heart operation or procedure that was to take place in Thailand in February.  It might therefore be thought that that was an allegation of a breach of duty arising prior to, and therefore independent of, knowledge of the heart operation.  However, paragraph 8.3A goes on to allege what the consequences would have been if the limitation which, it is suggested, should have been placed upon the advice had been placed upon it, namely that in those circumstances Mr Swain and his daughters would have sought further advice from the defendant.  It is then alleged that, if such further advice had been sought, the defendant would have either advised Mr Swain and his daughters as to the Tax Consequences, or at any rate have informed them that they could not do so in time before the scheduled completion of the MBO.
…
45.	Having considered the rival contentions, I have come to the conclusion that I accept the submissions made by Mr Simpson for the defendant.  Taking them in turn, so far as the amended Particulars of Claim are concerned, it seems to me, coming to the case afresh, that the only suggestion of a case not tied to knowledge of the heart operation that can be found in the Amended Particulars of Claim is paragraph 8.3A. As I observed earlier, that paragraph does begin with a plea about an omission from the letter of advice dated 4 January 2007, prior to the date on which the defendant is alleged to have acquired the knowledge of the heart operation.  That, as I have observed, might start one down the road of thinking that an allegation was being made of a breach of duty based only upon the defendant's state of knowledge at that point in time. That would encompass knowledge about Mr Swain's ill health, but not knowledge of the prospective heart operation or procedure.  However, it seems to me, upon reflection, that there is force in the submission made by Mr Simpson that that matter does not end there, because the pleading goes on, in essence, to say that, if the warning as to the limitation on the advice which the claimants say should have been given had been given, then the consequence would have been that advice as to the Tax Consequences would have been given.  Alternatively, there would have been advice to the effect that time was not available.  As Mr Simpson put it to Peter Smith J and to me, there is therefore a degree of circularity in the pleading in the sense that it takes one back to the failure to provide advice as to the Tax Consequences, which really depends upon knowledge of the heart operation.”
191.	It can be seen from this that I accepted the argument that, although paragraph 8.3A began with an allegation of a negligent omission in the Letter of Advice, it proceeded from there to a further allegation which implicitly depended on knowledge of the heart procedure. Thus I proceeded on the basis that paragraph 8.3A advanced a case which was ultimately dependant on knowledge of the heart procedure even though it began with an allegation of breach of duty which did not depend on that knowledge.
192.	Fifthly, I see no inconsistency between my ruling that it was not open to the Claimants to advance a case which was not dependent on knowledge of the heart procedure, namely a case based solely upon knowledge of Mr Swain’s general ill health, and the Claimants being permitted to advance the case in paragraph 8.3A as analysed above.
193.	Counsel for Mills & Reeve informed me during the course of his closing submissions that he had understood my ruling as preventing the Claimants from advancing any allegation of any breach of duty prior to 16 January 2007, and in particular any breach of duty in the Letter of Advice, at all. It is fair to say that, looking back, I can now see that, both in his second skeleton argument dated 28 January 2011 and in a letter to me he sent to me dated 1 February 2011, but which for some reason I did not receive until he handed a copy up to me during the course of argument on 2 February 2011, he asked for rulings which could be understood as going that far. I have to say, however, that I did not understand him as going quite that far during the course of his oral submissions on 2 February 2011. I certainly did not understand him to submit that it was not open to the Claimants to advance the case pleaded in paragraph 8.3A; and if I had understood him to make that submission, I would ruled against it.     
194.	Be that as it may, however, I did not rule that it was not open to the Claimants to advance any allegation of any breach of duty prior to 16 January 2007, and in particular any breach of duty in the Letter of Advice. On the contrary, I expressed my conclusion at [52] as follows:
“... for the reasons I have given, I have come to the conclusion that it is not open to the claimants to advance any case that is not dependent upon knowledge of the heart operation or procedure.”
195.	Furthermore, I consider that the analysis of paragraph 8.3A contained in my ruling quoted above is inconsistent with my having made a ruling which precluded the Claimants any allegation of any breach of duty prior to 16 January 2007, and in particular any breach of duty in the Letter of Advice.
196.	Finally, I would add that in my view it ought to have become apparent that I had not made a ruling which extended that far from the following exchanges during Claire’s evidence on the second day of the trial:
“MR JUSTICE ARNOLD: Mrs Swain Mason, you were asked  quite a lot of questions by Mr Simpson just before lunch about the advice that you asked for and didn't ask for.  The point was put to you that you didn't specifically ask for Inheritance Tax advice, to which your response was, well, you asked for personal tax advice and thought you had received it. Just to try and put this into a little bit of context, could you go in bundle A3 to page 192.  You recognise that as being the letter of advice of 4 January 2007?
A.  Yes, my Lord.
MR JUSTICE ARNOLD:  Now, let us imagine that on the first page that letter had contained a statement that said, ‘This letter does not contain any advice about the Inheritance Tax consequences of this transaction’, and it also contained a similar statement about the limitation on the Capital Gains Tax advice.  Now imagine that that statement appeared in the letter and you had seen that statement when you received it, what would you and your sisters and father have done in those circumstances?
A.  Dad, as the lead, would have certainly followed it up.
MR JUSTICE ARNOLD:  But followed it up with whom and  in what way?
A.  I would have said he would have followed it up with Mills & Reeve, in the first instance.”
The merits of the Claimants’ alternative case
197.	So far as the first step in the Claimants’ alternative case is concerned, I agree with the Claimants that the Letter of Advice ought to have included a much clearer statement as to the limits of the advice it contained, and in particular a statement that it did not include any advice as to the potential IHT consequences of the MBO nor comprehensive advice as to the potential CGT consequences, and that Mills & Reeve were in breach of their duty in failing to include such a statement.
198.	My reasons for reaching this conclusion are as follows. First, Mills & Reeve are to be judged by the standard of competence of the firms of solicitors with specialist tax departments. Secondly, Mills & Reeve knew that their clients were relatively unsophisticated, particularly in the case of the daughters. Thirdly, although Mills & Reeve had placed a limitation on their scope of advice they were going to give in the Tax Retainer Email, that limitation did not clearly exclude advice as to potential IHT and CGT consequences of the sale of the shares. Fourthly, not only was that limitation not repeated in the Letter of Advice, but also the only limitation contained in the Letter of Advice was the exclusion of the work to be done by Kirby & Haslam. In those circumstances, it is not surprising that Mr Swain and his daughters thought they were getting all the personal tax advice with regard to the sale of the shares that they needed, as Claire testified. Fifthly, in so far as Mills & Reeve rely on the involvement of Kirby & Haslam, it was their duty clearly to delimit their area of responsibility from that of Kirby & Haslam. Although the Letter of Advice did make it clear that Mr Swain and his daughters should look to Kirby & Haslam for tax returns and valuations etc, it did not suggest that they should look to Kirby & Haslam for advice as to potential IHT or CGT consequences of the sale of the shares. 
199.	Turning to the second step, I have no hesitation in accepting Claire’s evidence that, had the Letter of Advice contained such a warning, Mr Swain would probably have asked Mills & Reeve for further advice. I do not think it likely that, faced with such a warning, he would not have asked for further advice. He had already spent a lot of money on advice from Mills & Reeve, and I am confident that he would have been prepared to pay an additional sum for additional advice. Nor do I think it likely that he would have asked Kirby & Haslam for such advice. Mills & Reeve were the firm that knew all about the MBO and they had handled all the tax aspects of the matter to date, namely the tax covenant in the SPA, the tax clearance application, the structuring of the MBO to minimise CGT and the tax advice contained in the Letter of Advice. It would have made sense to ask them to provide further advice about the potential IHT and CGT consequences of the sale of the shares.
200.	Although I accept the first two steps in the Claimants’ alternative case, I consider that the third step suffers from similar problems to their primary case. Let it be supposed that the Letter of Advice had contained the warning that I consider it should have contained and that, as a result, Mr Swain and his daughters had asked Mills & Reeve for further advice. What would have happened then? In my judgment it is likely in those circumstances that Ms Pooley or Mr Townsend would have introduced Mr Swain to one of their private client tax colleagues for them to advise Mr Swain and his daughters.
201.	Even on that hypothesis, I do not accept that the receipt by Mills & Reeve of the information about the heart procedure gave rise to any duty on the part of Mills & Reeve to advise Mr Swain and his daughters as to the Tax Consequences, still less a duty to advise them to defer the MBO. It remains the case that Mills & Reeve learnt about the heart procedure essentially by chance and that the information they received did not suggest that the procedure was other than a routine one.
202.	It seems to me that the introduction of a reasonably competent private client tax team would have led to them (i) advising Mr Swain and his daughters that there could be potential tax consequences in the event of Mr Swain’s death after completion of the MBO, particularly bearing in mind that some of the consideration was deferred for up to ten years, (ii) enquiring what tax mitigation and/or estate planning Mr Swain had undertaken, and (iii) upon receiving the answer “essentially none”, offering to advise him as to his options. If one pauses there, that is in a nutshell the case the Claimants wanted to plead in the re-amendment to the Particulars of Claim which the Court of Appeal disallowed (although that pleading also specified particular options which it was said that Mr Swain should have been advised about). It is therefore not open to the Claimants to advance that case without more. 
203.	Even if one assumes that Mr Hodgson was under a duty to forward the information about the heart procedure to the private client tax team in this scenario, I do not think it would have affected the advice that they gave Mr Swain and his daughters. At most, it would have confirmed what they would already have appreciated simply from the terms of the deal, namely that Mr Swain was at risk of dying prior to receipt of all the consideration due under the SPA.
204.	Furthermore, if one then asks what options Mr Swain would have been advised by the private client tax team were open to him, I accept the submission of counsel for Mills & Reeve that these would have included reinvesting the cash proceeds of the sale of his shares in shares traded on the Alternative Investment Market or unquoted shares in companies which qualified for Enterprise Investment Scheme reliefs. Both of those types of shares qualified as business property for the purposes of BPR. Thus if Mr Swain had replaced his shares in the Company with shares of those kinds, he could have rolled over that relief. Similarly, if the proceeds of sale had been reinvested in newly-issued EIS shares, Mr Swain would also have been able to defer the chargeable gain he incurred on the sale for CGT purposes. In addition, there were options available for mitigating the IHT on the loan notes, the details of which it is not necessary to go into. Thus Mr Swain could have avoided, or at least significantly reduced, the Tax Consequences without deferring the MBO. It is pure speculation as to what he would have chosen to do if presented with these options. As counsel for Mills & Reeve pointed out, the Claimants have no coherent case on this point.                   
Causation
205.	In the light of my conclusions on the primary issue of breach of duty, the secondary issue on causation does not arise. I will nevertheless deal with it in case I am wrong about breach of duty.
206.	In the light of the evidence, I am satisfied that, if Mr Swain and his daughters had been advised to consider deferring completion of the MBO until after the heart procedure because of the risk of adverse tax consequences if Mr Swain were to die during or a result of the procedure, then they would have decided to delay the MBO. As at 31 January 2007 it had taken them over seven months (i.e. since 27 June 2006) to get to the point of being ready to complete. Completion had already been postponed several times. There was no particular urgency to complete on 31 January 2007, and no reason why completion could not have been delayed for, say, another three weeks. I accept the Claimants’ evidence that Mr Swain would have wanted to avoid even a small risk of a large IHT bill and a substantial CGT bill. Counsel for Mills & Reeve argued strenuously that it would not have been rational for a man in Mr Swain’s position to delay such an important transaction because of such a small risk. In my view this argument is based on the fallacy that Mr Swain would have approached the matter on the basis of a cold, mechanical calculation of probabilities. I am quite sure that he would not have approached the matter in that way. As studies of the psychology of risk perception show, human beings rarely do.     
207.	Mr Comer’s evidence was clear that the MBO team would have agreed to such a postponement if Mr Swain had requested it. As Mr Comer explained, it was not their idea to enter into the MBO at all, but Mr Swain’s, and they were far from desperate to complete it. Nor would they have sought to renegotiate the terms. Equally, it is clear from Mr Webb’s evidence that, not only would there have been no difficulty with the MBO team’s financing whatsoever if completion had been deferred for up to three months from 29 January 2007, but also there would in all probability have been no problem in the event of a longer delay. 
208.	Accordingly, if the Claimants were to succeed on their primary case of breach of duty, I would accept that the losses claimed were caused by that breach of duty. As for the Claimants’ alternative case, if the Claimants succeeded in establishing a duty which included a duty to suggest deferral of the MBO by that route, then again I would accept that the losses claimed were caused by that breach of duty.  
Conclusion
209.	It would be entirely understandable if, at the end of this case, Claire, Abby, Gemma and Christa were left with a strong feeling that they had been ill-served by the legal profession. Nevertheless, for the reasons I have given, I conclude that the Claimants’ claim must be dismissed.