In a landmark judgment, the Supreme Court has brushed away much of the gloss that has accumulated around the now 20-year old SAAMCO principle, taking the principle back to its roots and dismissing a claimant's appeal in professional negligence proceedings against his former solicitors.
Mr Gabriel lent Mr Little £200,000 to, as he understood it, develop a property for profitable sale. Mr Little in fact intended to (and ultimately did) use the money to discharge existing debt secured against the property. Mr Gabriel instructed BPE Solicitors to prepare the loan documentation. In error, BPE’s documentation indicated that the loan was to be used to fund the development, thereby confirming Mr Gabriel's mistaken assumption as to the purpose of the loan.
Sadly, the development was unrealistic from the outset, both in terms of cost and likely profits. No development was ever undertaken and Mr Gabriel lost his investment. He therefore sued BPE, alleging negligence in failing to alert him to Mr Little's true intentions. Had he known, he claimed, he would not have made the investment at all and would have suffered no loss. At first instance, he was successful and recovered the full loan amount. On appeal, Mr Gabriel's damages were reduced to nil on the basis that, even if the money had been used to develop the land (rather than to repay a loan), the development would still have failed and Mr Gabriel would still have lost his investment.
Mr Gabriel appealed to the Supreme Court. His appeal was dismissed, with the Law Lords restating the SAAMCO principle.
What is SAAMCO?
In a nutshell, SAAMCO limits recovery of damages from a negligent advisor to losses which fall within the scope of the advisor’s duty. The principle distinguishes between two types of duty, namely to provide advice and to provide information:
- If an advisor is instructed to advise on the decision to enter into a transaction, and is negligent in doing so, the client will be entitled to recover all losses flowing from entering into the transaction.
- If however the advisor is providing information (which can include standalone advice) which is merely one of many factors taken into account by the client before it makes its own decision to commit to the transaction, the advisor is only liable for the financial consequences of that piece of information being wrong – irrespective of the individual importance of that information to the final decision to commit.
If a claim is brought, it is for the claimant client to demonstrate that the loss suffered falls within the scope of the advisor's duty. Effectively, where the advisor is providing information only, the claimant has to prove that it would not have suffered loss had the information provided been correct.
In Mr Gabriel's case, the court concluded that the scope of BPE's duty did not include providing advice on Mr Gabriel's decision to lend. Rather, it was limited to providing information. Although that information was incorrect, in that BPE had included the wrong text in the loan documents and had therefore confirmed Mr Gabriel’s misunderstanding as to the purpose of the loan, the firm was only liable for any loss attributable to his understanding being wrong. On the facts, the Supreme Court concluded that, even if the money had been spent on developing the land, Mr Gabriel would still have lost all of his money – the development was not a sound investment prospect. Mr Gabriel's loss arose from his own commercial misjudgement; none of it was within the scope of BPE’s duty.
There is no doubt that this judgment will be central to all current and future professional negligence claims. Professionals and their insurers will welcome the decision – in situations where they only provide part of the 'information' needed on a transaction, liability will be limited.
Institutional clients may wish to revisit standard retainer terms to ensure adequate protection in the event of an advisor’s negligence, as increased clarity on retainer terms may assist in demonstrating to the Court that loss suffered falls within the scope of the negligent advisor's duty.