Keep Calm Talk Law Article – Alright for SAAMco? Redefining Professional Negligence for the legal profession
First published on Keep Calm Talk Law in April 2017
Any law student or legal professional worth their salt will be aware of the seminal case of Donoghue v Stevenson (1932), which laid out the principle of a duty of care to all that may be affected by our acts or omissions. Over time this has been developed and fine-tuned by the common law in cases such as Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) which allowed claimants to recover for purely financial losses caused by negligent misstatements; and Caparo Industries v Dickman (1990) which added the criteria of the fairness of imposing a duty upon a defendant in situations where a duty of care had not previously been imposed, in addition to modernising the special relationship criteria of professional advisers. These case law principles were key behind the decision in South Australia Asset Management Corp v York Montague Ltd (1997) (SAAMCO), which has been a key case in determining the ambit of liability of professional advisers such as valuers and solicitors for the past twenty years until the recent Supreme Court judgment in BPE Solicitors and another v Hughes-Holland (in substitution for Gabriel) (2017) UKSC 21 stated SAAMCO had been wrongly applied to subsequent cases. So, does this mean that the legal profession can breathe a sigh of relief following the Supreme Court decision?
Prior to 1964, it was not possible for a claimant to recover for purely financial losses incurred by a negligent misstatement, as previously courts have decreed that no duty of care exists in such a situation unless there is a contractual or fiduciary relationship, meaning that decisions such as Candler v Crane Christmas Co (1951) were commonplace. However, the decision of the House of Lords in Hedley Byrne & Co v Heller & Partners changed this, creating a rule that a duty of care is owed if there is a special relationship between the claimant and defendant. A special relationship is created where there is an assumption of responsibility by the defendant (in possession of a special skill such as an accountant or solicitor), and the claimant reasonably relies upon the defendant’s statement.
This was the position until 1990 when the House of Lords further refined the rule in Caparo Industries v Dickman (1990), where although the defendant was found to have owed a duty to the plaintiff, the Lords stated that for a duty to arise four criteria must be met; that the adviser knew of the purpose for the advice; the adviser knew the advice would be communicated to the advisee; that the advisee was likely to act upon that advice; and that the advice was acted upon by the advisee to his/her detriment. There have also been further specific circumstances where the Hedley Byrne and Caparo criteria have been extended. For example, in White v Jones (1995), the House of Lords found that a solicitor who negligently failed to prepare a will before the death of the testator was liable to the beneficiaries who would have benefited under the new will had it been prepared in time, extended a solicitor’s fiduciary duty to the testator to the beneficiaries. This is an example of how the courts have extended the duty of care beyond the original scope of negligent misstatements to the negligent provision of services based on the assumption of responsibility to the claimant.
In SAAMCO, the case centred around the provision of incorrect, or negligently provided property valuations by a professional valuer to a property investment fund. In this case, Lord Hoffman, in his leading judgment, stated liability is limited by analysing the scope of the duty owed. The valuers in SAAMCO had provided incorrect information and Lord Hoffman stated the ambit of liability for such instances should be limited to the consequences of that information being incorrect. He then went to distinguish between the differing consequences arising from ‘no transaction’ and ‘successful transaction’ cases, highlighting the decision in Banque Bruxelles Lambert Sa v Eagle Star Insurance Co Ltd and Others CA 24 Feb 1995 where the distinction was prominently made by Sir Thomas Bingham MR.
A ‘no transaction’ case is where the claimant states that ‘but for’ the provision of incorrect information by the defendant, they would not have acted as they did at that time, for instance, a lender may have decided not to extend a loan if they were in full possession of the facts about a borrower or lender. Alternatively, in a ‘successful transaction’ case, a claimant says they would have acted differently if they had the correct information at their disposal, to continue with the lender example, a lender would have decided to lend a lower amount at a different interest rate if they possessed the full facts. Lord Hoffman also made a further distinction in the roles an adviser may play between providing ‘advice’ and providing ‘information’, highlighting the scope of the duty applicable to those acting in an advisory capacity. Highlighting that where an adviser acts as the sole driving force of the decision-making process, opposed to where he provides information which is one of the various considerations in the decision distinguishes different scopes of duty.
A broadly similar ‘scope of duty’ test was used by the House of Lords in Caparo, where they held that although the auditors owed a duty of care to the shareholders of the target company, the auditors did not provide audits for purposes of providing investment information to potential investors or shareholders, and as such, they were not liable when such persons relied on that information to their detriment. In the House of Lords eyes, the auditors fell very much into the category of ‘information providers’ rather than advisors. In Stone & Rolls v Moore Stephens (2009), a bare majority in the House of Lords held that auditors held no duty of care to a company to detect fraud perpetrated by a Managing Director where the Managing Director was the ‘directing mind’ of the company. Chief amongst the concerns of the Lords was that they were concerned that the finding of such a duty would go against the decision in Caparo by further extending the duty of care to an insolvent company’s creditors.
In SAAMCO, this scope of duty test was applied to state that where the law normally limits liability to those consequences which are attributable to that which made the act wrongful. Where this involves the negligent provision of information which later turns out to be incorrect, the ambit of liability would be limited to the consequences of the information being incorrect. Out of this was the creation of a general duty which stipulated that a person is under a duty to take reasonable care to provide information on which someone else will provide a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. Lord Hoffman then went further to separate this general duty into a duty on professional advisers, and a duty of information providers in a professional capacity. In terms of advisers, an adviser must take reasonable care to consider all the potential consequences of that course of action which he recommends. Whereas an information provider must take reasonable care to ensure that the information is correct and if he is negligent, will be responsible for the foreseeable consequences of that information being incorrect.
This now brings us to the present day and the recent case in the Supreme Court of BPE Solicitors v Hughes-Holland. The facts of this case were that in late 2007, Mr Gabriel agreed to loan £200,000 to an SPV company (Special Purpose Vehicle) controlled by a friend of his, Mr Little. The loan was advanced by Mr Gabriel on the premise that the monies were to be used for redeveloping a disused building into an office block. BPE, Mr Gabriel’s solicitors were instructed by Mr Little to draw up a loan facility agreement stating that the loan was to be used to acquire the disused building, contrary to the impression given to Mr Gabriel. However, when the loan facility documents were drawn up by BPE, they incorrectly stated that the loan was for redeveloping the site, not acquiring it which helped to confirm the initial impression given by Mr Little to Mr Gabriel. However, the loan monies were not used to redevelop the property, and no redevelopment ever took place as Little grossly under-estimated the project costs which independently estimated to be around £650,000, which if it had proceeded to completion would have meant that the redevelopment project would make a loss of more than £400,000. After this came to light, Gabriel enforced his power of sale over the building but only recovered around £9,000 of his money at auction. Gabriel stated that had he been aware of the true purpose of the loan he would not have advanced the money.
Gabriel sued various parties such as Little, and Whiteshore (the SPV used to purchase the building) which were both insolvent, as well as BPE; but was only successful against BPE. In the initial trial, the trial judge found that BPE’s duty fell within the scope of an adviser and awarded Gabriel around £190,000 on the Livingstone v Raywards Coal Co. (1880) principle of returning the claimant to the position he would have been in had the breach not occurred. On appeal by BPE, this was overturned by ruling that the loss fell outside the scope of BPE’s duty, holding that BPE had not been under a duty to advise as to the course of action or the inherent commercial risks of making the loan. The principle of ‘caveat emptor’ applied. Gabriel, now declared bankrupt, appealed to the Supreme Court through his trustee-in-bankruptcy.
Gabriel’s appeal was dismissed by the court who agreed with the Court of Appeal’s judgment. Lord Sumption, who in his leading judgment (with no dissenting judgments) restated the distinction between where an advisor acts as a decision-maker, and where an adviser provides information that provides only an influencing factor upon the decision. It was here that Lord Sumption emphatically held that the SAAMCO principle had been wrongly interpreted over the past 20 years in cases such as Bristol & West Building Society v Fancy & Jackson (1997) 4 All E.R. 582, and Portman Building Society v Bevan Ashford (2000) P.N.L.R 344, due to the fact they wrongly applied the ‘no transaction’ principle by assessing the gravity of the breach instead of the scope of the breach which had been discredited in SAAMCO. In such cases, the burden of proof lies with the claimant to prove that the losses it incurred fell within the scope of the defendant’s duty and would not have been suffered even if the information provided had been correct. The question that should have been asked is “what are the consequences of the information being wrong?”.
In application to the BPE case, Gabriel would not have recovered a penny more had the loan monies been used for their true purpose as the project would still have been uneconomic and would not have enhanced the value of the property to a level to make the project economically viable. The loss was attributed to Gabriel’s commercial misjudgement and not the negligence of BPE in providing incorrect information.
In relating this to professional negligence and for the law of damages in a general sense, Lord Sumption underlined that a defendant under obligation to provide information to a client, even information of a fundamental nature to the decision, was only liable for the consequences that followed from the information being wrong. Although applying the ‘but for’ test is necessary in such claims, it is not sufficient by itself. Only claimants who retained an adviser to act in a decision-making capacity are likely to recover their full losses. To apply this to a practical setting, this may mean that claimants are more likely to recover in full from financial advisers who are likely to be in the position of making investment decisions on behalf of their clients; but solicitors and other professionals who provide information in an advisory capacity and act purely upon client instructions are likely to have their liability restricted by the SAAMCO principle. This could well apply even in ‘no transaction’ cases.
In this respect, Lord Sumption has provided a narrow protection for the legal profession in regards to the consequences of their professional negligence, which will limit their potential liabilities but will not provide total protection to them. For an industry that has taken a battering over the past few years, this may well provide a welcome boost but does not provide them ‘carte blanche’, and still places a heavy emphasis upon advisers to uphold their duty of care to clients to provide clients with correct and honest information. Importantly it recognises that it is not the role of advisers to underwrite the commercial risk of a transaction, as well as the role of market forces in the world of commerce.