Solicitor was not the underwriter of the financial fortunes of a whole transaction
In a decision which has further clarified and reinforced the “SAAMCO test” the Supreme Court has held that a negligent solicitors’ firm who prepared documentation for a loan was not legally responsible for the client’s decision to lend.
BPE Solicitors v Hughes-Holland  UKSC 21 is the first time the Supreme Court has revisited the House of Lords’ landmark decision of South Australia Asset Management Corpn v York Montague Ltd  1 AC 191 (“SAAMCO”). It was noted that the case concerned “one of the main dilemmas of the law of damages”.
Mr Gabriel had lent £200,000 to his friend Mr Little but did so on the mistaken basis that Mr Little would use the funds to develop a property he owned. Mr Gabriel’s solicitors were unusually instructed by Mr Little who advised them of the real use of the funds. This was not communicated to Mr Gabriel and further an error was made when the loan documentation was drafted which incorrectly confirmed Mr Gabriel’s mistaken understanding. When the transaction failed Mr Gabriel bought a claim against his solicitors.
The Supreme Court had to consider what damages are recoverable in a case where:
- but for the negligence of a professional adviser his client would not have embarked on some course of action; but
- part or all of the loss which he suffered by doing so arose from risks which it was no part of the adviser’s duty to protect his client against.
Previously, in this case the Court of Appeal held that the solicitors did not owe a duty to advise Mr Gabriel on what course of action to take or the commercial risks of the loan. The Supreme Court upheld that decision and dismissed Mr Gabriel’s appeal as it found that his loss would have been suffered even if the transaction was exactly as Mr Gabriel thought. The investment he made would not have enabled development works to take place as he thought and the property in question would not have become more valuable.
The Court first considered the viability of the development project – unless the project was unviable damages had to be awarded subject only to abatement for contributory negligence. On the evidence the value of the property would not have been enhanced by the expenditure of the loan on the development and Mr Gabriel would have lost his money. This meant that the factual basis of the defendant’s argument that damages should be nil was sound. The Court then turned to the legal basis and considered the application of SAAMCO.
The Supreme Court noted that the following two important principles were often misunderstood when SAAMCO was considered:
- Where the contribution of the defendant is to supply 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.
- The SAAMCO principle has nothing to do with the causation of loss as that expression is usually understood in the law.
A variety of legal concepts serve to limit the matters for which a wrongdoer is legally responsible. The relevant filters are not limited to those which can be analysed in terms of causation. The “scope of duty” principle enshrined in SAAMCO is one of those filters. Ultimately, all of the filters depend on a “developed judicial instinct about the nature or extent of the duty which the wrongdoer has broken”. The question which SAAMCO poses is whether the loss flowed from the particular feature of the defendant’s conduct which made it wrongful. Where the defendant has supplied information or advice concerning only part of the factors relevant to the decision whether to proceed with the transaction, it must also be shown that protecting the claimant from loss of the relevant kind was within the scope of the defendant’s duty.
The Court considered the difference between “advice” and “information” cases. Those labels were said to be “inadequate descriptions”.
- In an “advice” case a professional is only liable for all the foreseeable consequences of a transaction entered into upon negligent advice where the professional owes a duty to consider all relevant matters. It is left to the adviser to consider what matters should be taken into account in deciding whether to enter into the transaction. His duty is to consider all relevant matters and not only specific factors in the decision. If one of those matters is negligently ignored or misjudged, and this proves to be critical to the decision, the client will in principle be entitled to recover all loss flowing from the transaction which he should have protected his client against.
- By comparison, in the “information” category, a professional adviser contributes a limited part of the material on which the client will rely in deciding whether to enter into a prospective transaction. The process of identifying the other relevant considerations and the overall assessment of the commercial merits of the transaction are exclusively matters for the client (or other advisers). In such a case the defendant’s legal responsibility does not extend to the decision itself. It follows that even if the material which the defendant supplied is known to be critical to the decision to enter into the transaction, he is liable only for the financial consequences of its being wrong and not for the financial consequences of the claimant entering into the transaction so far as these are greater. “Otherwise 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”. The fact that the material contributed by the defendant is known to be critical to the claimant’s decision whether to enter into the transaction does not itself turn it into an “advice” case. The professional is liable only for the financial consequences of the information or advice being wrong. Otherwise all “no transaction” cases would give rise to liability for the entire foreseeable loss flowing from the transaction, which was the proposition rejected in SAAMCO.
The “SAAMCO cap” which excludes loss that would still have been suffered even if the erroneous information had been true, 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.
Here the solicitors were instructed in relation to the loan documentation and were not responsible for the decision to lend money. Although the loan document was negligently drafted that did not influence the decision to lend. Even if it had been correct Mr Gabriel would have lent to Mr Little and would not have been able to recover his sum. The loss which had been suffered by Mr Gabriel was not within the scope of the solicitor’s duty. The loss was due to a commercial misjudgement.
This case confirms and provides additional guidance in relation to the distinction between the duty to give ‘information’ and ‘advice’. It clarifies the application of the SAAMCO cap and confirms that a negligent professional will not be liable where loss is caused by factors which fall outside of the scope of the duty. Negligent breaches by “advisers” will not necessarily be “advice” cases – They can be “information” cases which will greatly limit the scope for the recovery of damages.