Symrise AG & Anor v Baker & McKenzie (a firm) & Anor

Factual and Procedural Background

This claim was brought by Company A and, alternatively, its Mexican sub-subsidiary, against Company B, arising from legal services provided by Company B to a predecessor in title of Company A in connection with steps taken following the acquisition in 2002 of another company and its subsidiaries. The claim concerns alleged breach by Company B of its duty as solicitors to the predecessor company, which Company A claimed entitlement to enforce.

Company A was formed in 2003 following the merger of two German parent companies operating worldwide in the production of flavours and fragrances. The merger was structured to achieve tax efficiency, involving a highly leveraged acquisition with significant debt pushed down to subsidiaries in various jurisdictions, including Mexico, as part of an aggressive tax mitigation strategy.

Company B was initially retained in July 2002 to advise on the acquisitions and post-acquisition restructuring, including the debt pushdown in Mexico. The pushdown involved an Intercompany Loan Agreement ("ICLA") entered into in June 2003, governed by English law, with specific terms relevant to the tax treatment of interest payments.

The Mexican Tax Authorities ("MTA") commenced investigations into the tax treatment of interest payments made by Company A's Mexican subsidiary for the years 2003 to 2005, challenging the deductibility of such interest under Mexican tax law, particularly Article 92(1) of the Mexican Income Tax Law ("ITL"). Company A paid the disputed taxes and initiated nullity proceedings in the Mexican Federal Tax Court, which were later withdrawn following a settlement with the MTA covering tax years 2003 to 2007.

The claimants sought to recover the total amount of tax payments made, together with mitigation costs, from Company B on the basis that Company B was negligent in its legal advice regarding the ICLA and the tax risks under Article 92(1).

Legal Issues Presented

1. Whether Company A had title to sue as successor in title to the original client of Company B.
2. The scope of Company B’s retainer and duty of care owed regarding Mexican law tax advice on the ICLA.
3. Whether Company A’s Mexican subsidiary had a separate right to sue and issues relating to limitation and derivative loss.
4. Whether Company B breached its retainer or was negligent in advising on the ICLA’s compliance with Article 92(1) of the ITL, including failure to warn of associated risks.
5. Causation: whether Company B’s negligence caused the MTA’s tax challenge and resulting losses.
6. Whether Company A mitigated its losses reasonably by settling with the MTA rather than pursuing litigation.
7. Quantum: the proper measure and valuation of loss suffered by Company A.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Court's Reasoning and Analysis

The court systematically addressed the principal issues remaining in dispute: breach of retainer/negligence, causation, mitigation, and quantum.

On breach of retainer, it was conceded that Company B was responsible for the legal advice given by its Mexican affiliate. The court found that the Mexican affiliate was negligent in approving the ICLA without proper consideration of the Intercreditor Deed ("ICD") which overrode problematic loan terms, specifically the on-demand repayment clause that risked contravening Article 92(1) of the ITL. Expert evidence supported that a reasonable Mexican tax lawyer would have warned of the risk posed by the on-demand clause.

Regarding causation, the court held that although the loan did not contravene Article 92(1), the wording of the ICLA, without proper consideration of the ICD, provided the Mexican Tax Authorities with a strong ground to pursue a tax challenge. The breach by Company B was therefore an effective and concurrent cause of the investigation and resulting losses.

On mitigation, the court evaluated the decision by Company A to settle with the MTA rather than continue litigation. The court found that the settlement was not a compromise but effectively a capitulation, abandoning a strong legal position. The independent tax advice obtained from Tron Abogados was found to be inadequate, lacking proper review of the merits and failing to consider key evidence and legal arguments. The court concluded that the steps taken by Company A were not within the reasonable range of responses expected of a claimant in mitigation, particularly given the significant sums that could have been recovered had litigation continued.

In relation to quantum, the court considered expert valuations of loss based on diminution in value of Company A’s shareholding in its Mexican subsidiary. It rejected the claimant’s simplistic approach of equating loss to the total tax payments made. Instead, the court accepted the defendant’s expert valuation methodology which accounted for the subsidiary’s financial position and applied a discounted valuation of potential dividends. The court preferred the defendant’s valuation approach as more consistent with established principles of valuation and corporate finance.

Holding and Implications

The court judged in favour of the Defendant, dismissing the claim for recovery of tax payments and associated mitigation costs.

The direct effect of the decision is that Company A is not entitled to recover from Company B the sums paid to the Mexican Tax Authorities or the mitigation costs incurred. The court found Company B negligent but held that Company A failed to mitigate its losses reasonably by settling prematurely with the tax authorities.

No new legal precedent was established; the decision applies established principles of negligence, causation, mitigation, and valuation in the context of professional legal advice and tax litigation.