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Alright for SAAMco? Redefining Negligence for the Legal Profession

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About The Author

Mark O'Neill (Regular Writer)

Mark is a graduate of the Open University, where he recently graduated with a First Class Honours in his BSc (Hons) Open Degree. Mark is currently working full time for the Financial Ombudsman Service as an Adjudicator, while also undertaking an LLM in Sports Law in Practice at De Montford University with the aim of working as a solicitor specialising in sports law.

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The trouble with law is lawyers

Clarence Darrow

Any law student or legal professional worth their salt will be aware of the seminal case of Donoghue v Stevenson [1932], in which Lord Atkin expounded the existence of a duty of care that is owed to those who may be affected by a person’s acts or omissions.

Over time this principle has been developed and fine-tuned by cases such as Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964], which allowed claimants to recover purely financial losses caused by negligent misstatements, and Caparo Industries v Dickman [1990], in which it was made clear that in novel situations where a duty of care had not previously been imposed, doing so must satisfy a criterion of fairness. Importantly too, the House of Lords’ decision in Caparo was instrumental in modernising the special relationship criteria of professional advisers.

Indeed, principles drawn from this line of case law were key to the reasoning behind the decision in South Australia Asset Management Corporation (SAAMco) v York Montague Ltd [1997]: the case that authoritatively determined the ambit of liability of professional advisers such as valuers and solicitors for the past twenty years.

Until very recently; in BPE Solicitors and another v Hughes-Holland [2017], the Supreme Court held that the ratio of SAAMco had been wrongly applied by the courts in subsequent cases and sought to provide some guidance on its application. In light of this, this article will examine to what extent the decision set down a redirection of the law and whether it has narrowed the chance of solicitor incurring negligence liability, thereby allowing the legal profession can now breathe a sigh of relief.

The Historical Development of Negligence for Advice

Prior to 1964, it was not possible for a claimant to recover for purely financial losses incurred by a negligent misstatements or advice. In cases such as Candler v Crane Christmas Co [1951] 2 KB 164, courts would hold that no duty of care existed in such a situation unless there is a contractual or fiduciary relationship. However, obiter remarks included within the House of Lords’ judgment in Hedley Byrne changed this, creating a rule that a duty of care is owed if there is a ‘special relationship’ between the claimant and defendant. As subsequent decisions confirmed, a special relationship arises where there is an assumption of responsibility by the defendant (who is in possession of a special skill such as an accountant or solicitor), and the claimant reasonably relies upon advice made by the defendant.

This was the position until 1990, when the House of Lords used their decision in Caparo to further refine this rule. Lord Oliver in his judgment held that, for a duty of care to arise between the parties, four criteria must be met:

(1) the advice is required for a purpose… which is made known… to the [defendant] at the time when the advice is given;

(2) the [defendant] knows… that his advice will be communicated to the [claimant]

(3) it is known [by the defendant] that the advice… is likely to be acted upon by the [claimant]

(4) it is so acted upon by the [claimant] to his detriment.

There have also been further specific circumstances where the Hedley Byrne and Caparo criteria have been extended. For example, the House of Lords extended a solicitor’s fiduciary duty to a testator to cover the will’s beneficiaries in White v Jones [1995] – here, 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. It constitutes of 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, using as a basis the idea of an assumption of responsibility to the claimant.

Lord Hoffmann’s Decision in SAAMco

In SAAMco, the case centred around the provision of incorrect, or negligently provided, property valuations by a professional valuer to a property investment fund. Giving the lead judgment, Lord Hoffman stated liability is limited by analysing the scope of the duty owed: thus, the ambit of liability for the valuers in SAAMco should be limited to the consequences of the information they had provided being incorrect.

He then went to distinguish between the differing consequences arising in ‘no transaction’ and ‘successful transaction’ cases, drawing inspiration from Sir Thomas Bingham MR’s decision in Banque Bruxelles Lambert v Eagle Star Insurance [1995] 2 All ER 769.

This distinction holds that a ‘no transaction’ case occurs 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 the correct information at their disposal; the lender would have decided to lend a lower amount at a different interest rate if they possessed the full facts.

Lord Hoffman in SAAMco also identified a further distinction in the roles an adviser may play that could affect the scope of the duty applicable to those acting in an advisory capacity. In his view, a dichotomy existed between instances where an adviser acts as the sole driving force of the decision-making process, and where an advisor provides information that functions as but one of various considerations in the decision. It is to the latter that a more limited duty of care applies.

A broadly similar ‘scope of duty’ test had previously been applied in Caparo: here, the House of Lords held that while auditors owed a duty of care to shareholders of a target company, the auditors did not provide audits for purposes of providing investment information to potential investors. Therefore, the auditors were not liable when potential investors relied on the audit to their detriment: the auditors fell very much into the category of ‘information providers’ rather than advisors.

Furthermore, a bare majority of the Law Lords in Moore Stephens v Stone Rolls Ltd [2009] held that auditors owed 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 court’s concern in this case was that the finding of such a duty would contradict the decision in Caparo by further extending the duty of care to an insolvent company’s creditors.

Lord Hoffmann in SAAMco also employed the scope of duty test to impose limits on liability for the negligent provision of information, highlighting that the law normally limits liability to those consequences which are attributable to that which made the act wrongful. For example, in cases of 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.

From this stemmed the principle that a defendant who has breached their duty to take reasonable care to provide information is not generally regarded as responsible for all the consequences of the action taken by those who rely on it; instead, the defendant is liable only for the consequences of the information being wrong.

Lord Hoffman then went further to separate this general duty into two duties – one for professional advisers, and one for professional ‘information providers’. While the former must take reasonable care to consider all the potential consequences of the course of action they recommend, the latter must ‘merely’ take reasonable care to ensure that the information is correct – their liability in the event of negligence will be limited to the foreseeable consequences of that information being incorrect.

BPE Solicitors v Hughes-Holland

The Facts

In late 2007, Richard Gabriel (G) agreed to loan £200,000 to a SPV company (Special Purpose Vehicle) controlled by a friend of his, Peter Little (L). The loan was advanced by G on the premise that the monies were to be used for redeveloping a disused building into an office block. BPE, G’s solicitors, were instructed by L to draw up a loan facility agreement stating that the loan – contrary to what G had been told – was to be used to acquire the disused building. However, when drawing up the loan facility documents, BPE incorrectly stated that the loan was for the redevelopment of the site rather than its acquisition, thereby confirming L’s initial misrepresentation.

Ultimately, the loan monies were not used to redevelop the property: L grossly under-estimated the project costs by a figure of over £400,000. After this came to light, G enforced his contractual power of sale over the building but only recovered around £9,000 at auction. G stated that, had he been aware of the true purpose of the loan, he would not have advanced the money. He sued various parties such as L and the SPV – both of which were insolvent – as well as BPE, but was only successful against BPE.

The Decision

In the initial trial, Robert Englehart QC, sitting as a Deputy High Court Judge, found that BPE’s duty fell within the scope of an adviser and – with the purpose of returning G to the position he would have been in had the breach of duty not occurred – awarded around £190,000 in compensation.

This decision was overturned by the Court of Appeal, where it was held that the loss fell outside the scope of BPE’s duty: 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’ was applied. G, now bankrupt, appealed to the Supreme Court through his trustee-in-bankruptcy.

G’s appeal was dismissed and the Court of Appeal’s judgment upheld. Lord Sumption, delivering the unanimous judgment on behalf of the court, restated the distinction identified by Lord Hoffmann in SAAMco between instances where an advisor acts as a decision maker, and where an adviser provides information which provides only an influencing factor upon the decision.

He also confirmed that the SAAMco principle had been wrongly interpreted over the past 20 years. He noted in cases such as Portman Building Society v Bevan Ashford [2000] All ER (D) 1467, the ‘no transaction’ principle had been wrongly applied as a method of assessing the gravity of the defendant’s breach instead of the scope of the duty of care owed by the defendant.

In such cases, Lord Sumption explained, the courts had been failing to recognise that burden of proof lies with the claimant to prove that the losses it incurred fell within the scope of the defendant’s duty. Furthermore, he noted, it was crucial that the claimant shows that the loss would not have been suffered even if the information provided had been correct. In short, Lord Sumption explained, it was concerning that courts had been failing to ask the key question: “what are the consequences of the information being wrong?”. For example, in application to the BPE case, G would not have recovered a penny more had the loan monies been used for their true purpose – the project would still not have enhanced the value of the property to a level to make the project economically viable. The loss was attributed to G’s commercial misjudgement and not the negligence of BPE in providing incorrect information.

Comment

The most crucial aspect of the Supreme Court’s decision is how it relates to professional negligence and the law of damages in a general sense. In this respect, 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 for such claims, he held, 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. In contrast, however, 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.

Ultimately, therefore, 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.

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Tagged: Legal Business, Supreme Court, Tort Law

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