Overpaid Tax – Damages for Loss of Use of Money in Professional Negligence Claim v. Accountants

Overpaid Tax – Damages for Loss of Use of Money in Professional Negligence Claim v. Accountants



Overpaid Tax – Damages for Loss of Use of Money in Professional Negligence Claim v. Accountants

The case of Hungerfords & Ors v Walker & Ors involved a successful claim for professional negligence and breach of contract, brought against the plaintiffs’ accountants for causing their overpayment of tax for several years. Rather than suing to recover the debt, the plaintiffs sued for damages for the professional negligence for the amount of overpaid tax as calculated by their accountants and additionally for the loss of use of the money (in the same notion as compound interest). This award for the loss of use was given at trial and the accountants then appealed. The issue to be decided was whether this amount could be awarded when ordinarily, damages for the late payment of damages would not be recognised by law.

The Law Regarding Damages

As stated above, the issue in this case was that the plaintiffs were not just suing to recover an amount owed to them by the defendants (that being the wrongfully paid amount of tax). They were also seeking an award of damages against the accountants for the loss incurred as a result of not having this amount at the time when they should have (that being the extended period during which the accountants negligently caused it to be paid in tax). This claim regarding the loss of the money was therefore essentially a claim in damages for a delay in receiving damages. As stated in the appeal, the law never usually allows an increase in damages in a claim in tort (professional negligence and/or breach of contract/duty) when there is a delay in receiving damages, such as from delays in litigation or negotiation, as the loss from that kind of delay is not directly related to the negligence or breach of contract itself and is therefore not recoverable.

Decision at Trial

At the initial trial, the court held that the loss of the use of the money was within reasonable contemplation of the parties (a contractual test) and should therefore be taken into consideration when assessing damages. They concluded that had the money not been lost, it would have been put toward the business shared by the partners, most likely through the paying off of expensive loans. Therefore the value of this loss was assessed as the interest rate on the most expensive loan which was 20%. However to accommodate for the possibility that not all of the lost money would have been put towards the business, this figure was reduced.

Result of the Appeal

The defendants appealed the decision regarding the payment of damages for the loss of use of money. In the appeal, the court stated that the obligation on the part of the accountants was to “exercise reasonable skill and care in the preparation of the respondents’ income tax returns.” Following on from that, any loss suffered as a result of that obligation was payable in damages, but any delay in the payment of those damages was not a breach of that obligation.

Therefore the question to be answered was whether the loss was “sufficiently foreseeable and therefore not too remote.” It was held that the accountants clearly, through their own professional negligence, caused overpayments of tax by the respondents. Consequently it was a direct and foreseeable consequence of that negligence that money which otherwise would have been available were it not for those overpayments and could have been used on repayments of significant loans by the business. Therefore in this case, the loss suffered was “so directly related to the wrong that the loss cannot be classified simply as due to the late payment of damages.”

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