If the “Cap” Fits? Zero damages for negligent advice
Q: What’s the difference between “Advice” and “Information”?
This is the result of a landmark decision by the Supreme Court in a case that will be of interest to all professional advisers, insurers and potential claimants where professional negligence is alleged (BPE Solicitors v Hughes-Holland  UKSC 21[i]). The previous line of cases has now been overruled, providing welcome clarity as to the operation and effect of “the SAAMCo cap”[ii]. Professionals were often held liable to compensate clients (such as lenders) for all their losses where the professionals had been negligent. The distinction between advice and information cases has now been firmly reinstated.
- Whether the losses suffered by the client were losses which his solicitors owed a duty to protect him against;
- Whether the losses suffered by the client are otherwise recoverable from his solicitors.
Lord Sumption gave the single judgment of the Supreme Court, upholding the Court of Appeal’s decision in favour of BPE Solicitors. Zero damages were awarded to Mr Gabriel, a businessman who made a commercially unwise loan to his friend Mr Little, which would not have been made without BPE Solicitor’s negligence. The Supreme Court held that where advisers are not responsible for the decision on whether to enter into a transaction, they are only liable for the damage resulting from the fact that the information they provided negligently was not correct. This applies even where the correct information may have revealed an actual or potential fraud.
Mr Hughes-Holland is the trustee in bankruptcy of Mr Gabriel, a semi -retired businessman and friend of Mr Little. In November 2007, Mr Little told Mr Gabriel that he was looking to borrow £200,000 in connection with the development of a disused heating tower in Gloucestershire. Mr Little gave Mr Gabriel to understand that the property belonged to him or to a company that he controlled. He added that planning permission had been granted for development of the property as offices, which would cost in the region of £200,000, on the basis that he would carry out the building work himself. Mr Gabriel assumed that the £200,000 would be used to finance the development, although this was not expressly stated by Mr Little.
In fact, the building belonged to a company, High Tech, subject to a charge in favour of a bank, securing a loan of £150,000. Mr Little intended to transfer the property to a special purpose vehicle (SPV), which would use Mr Gabriel’s funds to pay High Tech, which would use them to discharge the loan and charge. The judge subsequently held that Mr Gabriel knew nothing of these plans, and he would not have signed the loan documentation had he done so.
Mr Spencer was an assistant solicitor at BPE Solicitors, whom Mr Gabriel instructed to draw up a facility letter and a charge over the building. The instructions in fact reached Mr Spencer from Mr Little, who told him that he intended to sell the building to the SPV and that Mr Gabriel would lend him the money. Mr Spencer did not clarify or confirm these instructions with Mr Gabriel and used a template from an earlier abortive transaction, stating that loan moneys would be used to assist with development costs. He thereby unintentionally confirmed Mr Gabriel’s incorrect understanding of Mr Little’s plans. The transaction failed and Mr Gabriel lost all his money.
Mr Gabriel sued Mr Little, High Tech and the SPV for fraud and negligent misrepresentation; and BPE for dishonest assistance in a breach of an implied trust and for negligence. The judge in the lower court dismissed all the claims against all the parties with the exception of those in negligence against BPE. He held that BPE should not have included the reference to the proposed use of the loan money in the documentation and should have explained to Mr Gabriel that in reality the money would be applied for the benefit of Mr Little or his companies.
The judge accepted Mr Gabriel’s case that he was entitled to damages representing the entire loss which he had suffered by entering into the transaction, on the ground that he would not have done so had he not been misled about the proposed misuse of the loan moneys. He did not accept that the venture was doomed from the outset. The Court of Appeal however, allowed BPE’s appeal and held that the whole loss was attributable to Mr Gabriel’s misjudgements and reduced to the damages to nil.
Reasons for the judgment
1. Viability of the development project.
The Court concluded that the evidence sufficiently showed that the value of the property would not have been enhanced by the expenditure of £200,000 on its development.
2. The claim for damages
It is generally (but not always) a necessary condition for the recovery of a loss that it would not have been suffered but for the breach of duty.
The SAAMCO principle
In cases where the defendant is supplying information or advice concerning only part of the factors relevant to the decision whether to proceed with the transaction, it must also be demonstrated that protecting the Claimant from loss of the relevant kind was within the scope of the Defendant’s duty. As subsequently elaborated in Nykredit and Platform Home Loans, Lord Hoffmann limited the damages in SAAMCO to the difference between the valuation and the true value, on the ground that the recoverable loss could not exceed what the lender would have lost if the valuation has been correct, commonly Referred to as the ‘SAAMCO cap’.
In Nykredit, it was held that there were two stages to the enquiry. The first was directed to ascertaining the loss which the claimant would have avoided if the defendant had performed his task carefully; and the second to awarding only that part of the loss which was in the scope of the defendant’s duty.
The decision in SAAMCO has often been misunderstood, often from a tendency to overlook two fundamental aspects of the reasoning:
(a) where the contribution of the defendant is to supply part only of the material which the client will take into account in making his own decision on the basis of a broader assessment of the risks, the defendant has no legal responsibility for his decision; and
(b) the principle has nothing to do with the causation of loss as that expression is usually understood in the law.
The ‘SAAMCO cap’ is simply a tool for giving effect to the distinction between:
(i) loss flowing from the fact that as a result of the defendant’s negligence the information was wrong; and
(ii) loss flowing from the decision to enter into the transaction at all. There is no exception to proposition (i) above, for cases where the Defendant fails to provide information which shows that the transaction was fraudulent or not viable or otherwise fundamental to the decision to proceed.
- Lord Sumption provided welcome clarity as to the operation and effect of the SAAMCo principle, robustly restating the distinction between cases where an advisor has responsibility for the decision to take a course of action, and cases where an advisor only provides information upon which the client will decide what to do. Lord Hoffmann's advice/information distinction was said to have given rise to confusion because of the descriptive inadequacy of the labels. Lord Sumption explained the relevant distinction as follows:
- An "advice" case: where a professional will be liable for all the foreseeable consequences of a transaction entered into upon negligent advice. This only occurs where the professional owes a duty to consider all relevant matters and not only specific factors within a client's decision: i.e. a case where the professional is responsible for guiding the whole decision-making process, and is responsible for the decision itself.
- An "information" case: where the professional contributes a limited part of the material on which their client will rely when making a decision, but the overall assessment of the commercial merits of the transaction is for the client. Here, the professional will be liable only for the financial consequences of the information which he provided being wrong, even if the information was critical to the decision of whether to enter into the transaction. Limiting the professional's liability this way is essential, as "….[o]therwise the defendant would become the underwriter of the financial fortunes of the whole transaction by virtue of having assumed a duty of care in relation to just one element of someone else's decision…".
- On the basis of a proper understanding of the advice/information distinction, Lord Sumption held that the following solicitors' cases were incorrectly decided and are overruled:
- Steggles Palmer, one of the conjoined decisions reported under the title Bristol & West Building Society v Fancy & Jackson  4 All ER 582; and
- Portman Building Society v Bevan Ashford  PNLR 344.
5. He held that these cases effectively applied the "no transaction" rule which the House of Lords had discredited within the SAAMCo decision. There is no basis for making the assessment of a claimant's damages dependent, not on the scope of the defendant's duty, but on
- the gravity of the particular breach; and
- the judge's assessment of the quality of a claimant's reasons as to why, in possession of certain information, it would not have entered into a transaction.
6. That line of cases has supported lender claimants suing for their full losses suffered on a transaction on the basis that the defendant solicitor failed to provide information which would have revealed fraud or dishonesty on the part of the borrower. This is no longer good law. Instead, so as to establish the solicitor is liable, lenders will need to prove that losses claimed were suffered specifically as a consequence of information provided by the solicitor being wrong
7. This is likely to have a major impact in cases where the hypothetical question of what would have happened if the defendant was not in breach of duty isn’t straightforward.
8. Information: Practically speaking, solicitors and valuers will frequently only provide part of the 'information' (which may include specific legal advice) on a transaction. They will rarely go further and take on responsibility for the decision to proceed. The outcome may therefore be that a negligent solicitor or valuer is unlikely to be liable for all the losses suffered on a transaction, unless it can be shown that the entirety of the losses flowed specifically from the fact of the information provided by the solicitor being wrong.
9. Advice: The decision will have a wide impact. For example, Lord Sumption gave the example of investment advisers as professionals whose communications with clients may well fall into the 'advice' category. They may thus assume responsibility for the client's decision to enter into a transaction and, if the advice is negligent, risk liability for the full loss suffered as a result of their client entering into the transaction. However, whether or not that is the case – i.e. the scope of the duty assumed by a defendant professional – will naturally depend on the specific facts in each case.
- Only claimants who retained an adviser to make the decision on their behalf are likely to recover their full losses where professional negligence is proven. In practice, the claimant may for example retain prospects of a full recovery against financial advisers, but will face hurdles against many valuers and solicitors.
- The decision will be welcomed by insurers and professional advisers, limiting the potential liability of the adviser. Even where an adviser should have provided information that may have shown an actual or potential fraud, the adviser may not be liable for all, or indeed any of the losses suffered by a client.
- The burden of proof is on the claimant / client to prove breach of duty, causation and loss.
For further information relating to the points raised in this article, please contact Director J Paul Sykes, or a member of the Professional Services Team.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.