On 22 March 2017, the Supreme Court handed down its judgment in BPE Solicitors v Hughes-Holland.
In it, the Supreme Court has restated the important principle limiting the extent of a claimant's recoverable damage in professional negligence actions laid down in the SAAMCO case (South Australia Asset Management Corp v York Montague Ltd [1997] A.C. 191), and has overruled cases establishing a potential exception to the principle.
The SAAMCO principle
The SAAMCO principle concerns the relationship between scope of a defendant's duty and the claimant's loss. SAAMCO was a case of valuers negligently providing advice to lenders which overstated the value of the security offered by the borrowers. The lenders took their own decision whether or not to lend, but in making their decision relied upon the valuers' advice. The lenders would not (at least in some cases) have lent any money at all if they had known the true value of the security. The House of Lords nevertheless refused to award damages representing all the money lost in the transaction, and limited the recoverable damages to the difference between the true value of the security at the time the advice was given and the negligent valuation. The House of Lords held that the rest of the loss was due to a fall in the market value of the security, and the valuers had never accepted responsibility to protect the lenders against such a risk. The amount of the overvaluation (which has subsequently become known as the "SAAMCO cap"), and not the entirety of the loss, is in law regarded as the consequence of the valuation being incorrect. The loss from changes in market values are regarded as risks the lender would have taken upon itself if the valuation had been correct.
The SAAMCO principle is a general feature of the law of damages, not confined to valuation. Prior to the Supreme Court's recent decision, a potential exception to the SAAMCO principle, permitting claimants to recover all losses suffered on a transaction, had grown up in cases where solicitors have in the course of their retainer failed to provide information which tends to reveal an actual or potential fraud by a party which would lead the solicitor's client to refuse to enter the transaction. Bristol & West Building Society v Steggles Palmer was such a case. There, Chadwick J held that if the solicitors had acted competently, the lender would have decided that the borrower "was a borrower to whom it did not wish to lend", and that the solicitors should therefore be responsible for the consequences of the lender not being in the position to take the decision which it would have taken if the solicitors had done what they should have done. In Portman Building Society v Bevan Ashford the solicitors failed to report to a lender who was to take a first charge on a property the existence of a proposed second mortgage. That failure meant that the lender did not discover that the borrowers had falsified their mortgage application. The Court of Appeal held that the lender could recover the whole of its loss.
BPE in the Supreme Court
The Supreme Court has now overruled the Steggles Palmer and Bevan Ashford decisions. Lord Sumption (with whom the other members of the court agreed) held that it is only where a professional advises a client to enter into the transaction and, in doing so, comes under a duty to protect against the full range of risks associated with the transaction (so-called "advice" cases) that his client is in principle entitled to recover the whole of his loss. On the other hand, where the professional provides only a limited part of the information taken into account by the client in making his own decision whether or not to enter into the transaction (so-called "information" cases), the professional is liable only for the financial consequences of the specific information provided being wrong, and not all the consequences of the transaction. The gravity of the professional's breach, the importance of the information to be provided by the professional, and the reasons for which the client would refused to proceed with the transaction if the professional had acted competently are irrelevant to the question of whether the SAAMCO limitation on damages should apply.
Whether a case is an "advice case" or an "information case" is, as Lord Sumption confirmed (at [44]), fact-sensitive:
A valuer or a conveyancer, for example, will rarely supply more than a specific part of the material on which his client's decision is based. He is generally no more than a provider of…"information". At the opposite end of the spectrum, an investment adviser advising a client whether to buy a particular stock, or a financial adviser advising whether to invest self-invested pension fund in an annuity are likely…to be regarded as giving "advice". Between these extremes, every case is likely to depend on the range of matters for which the defendant assumed responsibility and no more exact rule can be stated.
Furthermore, Lord Sumption expressly confirmed that if a claimant wishes to recover the entirety of the loss suffered in a transaction on which a professional advised, the burden is on the claimant to plead and prove, as well as his loss, a relevant duty of care under which the professional is responsible for all the risks that the claimant runs in entering the transaction.
Background to BPE v Hughes Holland
The importance of that rule is illustrated by the facts in BPE v Hughes-Holland itself. There, a lender instructed a firm of solicitors to prepare a loan agreement in connection with a loan to a property developer. The solicitors did not recommend the transaction to the lender or advise on the commercial aspects. The lender assumed and believed he was providing finance for development costs in relation to a property the borrower already owned, whereas in fact the borrower intended to use the money to fund the purchase of the property. The solicitors negligently recorded in the draft agreement that the loan was to be used to fund development costs – confirming ("by an unhappy chance", as Lord Sumption called it) the lender's mistaken assumption about the purpose of the loan. As a result, the lender signed the loan agreement and advanced the monies. The money was spent on purchase, not development. The solicitors were held to be responsible for an accurate description of the purpose of the loan. In assessing the recoverable damages, the question was therefore whether the lender would have suffered a loss if the loan had been used for development as the loan agreement had said it would be. The trial judge approached the question on the basis that it was for the solicitors to prove that the transaction was doomed from the start; i.e. that the expenditure of the loan monies on developing the property would not have increased its market value. The Court of Appeal and the Supreme Court held that (although it was not determinative of the factual question) the burden of proof was on the lender to show that the expenditure of the loan monies on development would have enhanced the value of the property.
Comment
Overall, the Supreme Court decision will be welcomed by professional advisers and their insurers, in re-establishing the primacy of the SAAMCO principle and in providing certainty by overruling the anomalous cases on which claimants have in practice frequently sought to rely. For advisees, whose decisions to transact are normally based on multiple considerations (of which the advice of a particular adviser will normally cover only one), there remains a burden in pleading and proving either a duty wide enough to capture all the losses suffered in a transaction, or that losses suffered come within the specific field for which an adviser has expressly accepted responsibility (for example, in its terms of engagement). Except perhaps in cases of financial advice to retail clients, that burden is very considerable and may involve proving some difficult counter-factual scenarios.
