Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jonas – SAAMCo www.bailii.org/ew/cases/EWHC/Comm/2011/2336.html
The first claimant (Capita) was trustee of an investment vehicle created in connection with the development of a factory outlet shopping centre (FOC) at Chatham Historic Dockyard in the former North West Kent Enterprise Zone (Dockside). The second claimant (Matrix) was responsible for establishing and promoting the investment. In 2001 they engaged the defendant firm of chartered surveyors and property consultants to advise them in relation to the acquisition of Dockside.
The defendant valued Dockside at £62,850,000, with the benefit of Enterprise Zone tax allowances, and at £48,150,000 without. It received more than £500,000 for its work on the project.
The project was not a success. In 2010 the market value of Dockside was £7,200,000 and the profit from operating the FOC was about £27,143,000. The claimants claimed that the defendant had substantially overstated the commercial prospects and value of Dockside and sued it for damages in respect of their losses incurred as a result of acquiring and owning Dockside. These losses totalled about £63,870,000. Once credit was given for tax relief obtained by the investors, the claim totalled about £42,322,500.
The claimants contended that this was an “advice” case rather than an “information” case, using the South Australian Asset Management Corp v York Montague (SAAMCo) shorthand: the defendant was effectively advising them whether or not to proceed with the transaction and not just providing them with information. They argued that this entitled them to recover the entirety of their loss and not just the difference between the actual value of Dockside in 2001 and the defendant’s valuation.
The judge allowed the claim. The following findings are central to his decision to award the claimants damages of £18.05 million.
Scope of duty and retainer
There was no letter of retainer. The judge found that the claimants had established all the pleaded terms of the retainer which included providing wide-ranging commercial investment advice as to the viability and prospects of Dockside.
Breach of duty
The defendant was negligent. The valuation provided by the defendant was far outside any relevant range of competency. The figure of £48,150,000 was almost 50 per cent above a competent valuation. The actual value in 2001 was £34,375,000 and the permissible range was £31,955,250 to £36,795,000. The higher valuation allowing for Enterprise Zone tax allowances was almost 30 per cent higher than the correct figure.
The defendant raised several complex arguments concerning causation and reliance including challenges to Capita’s locus to bring the claim involving issues of Guernsey law. The judge rejected these arguments and held that the claimants had relied on the defendant’s advice and valuations and would not have completed the purchase of Dockside in any event.
Quantum – the SAAMCo issue
The House of Lords in SAAMCo held that where the defendant has agreed to advise on the course of action the claimant should take, the defendant will be liable for all of the foreseeable loss suffered as a result of the claimant following that course. It is, however, exceptional to make the wrongdoer liable for all of the consequences of his wrongful conduct. It is more usual to limit liability to the consequences which are attributable to the wrongful act. The claimants argued that this was a case where the defendant should be held liable for all of their loss. The judge rejected this argument. He concluded that although the defendant provided commercial investment advice, this was done in the context of providing a valuation. The contract between the parties did not entitle the claimants to place reliance on the commercial advice provided by the defendant separately from the valuation. Accordingly, damages were limited to £18.05 million which was the difference between the cost of acquisition of Dockside of £62.85 million and the cost had the information provided by the defendant been correct of £44.8 million.
The defendant argued that several of the claims were time-barred since the standstill agreement concluded between the parties in 2006 only protected claims relating to the defendant’s final report and not to others such as . those relating to the defendant’s role as a commercial investment adviser. The judge said that some of the points of construction raised by the defendant concerning the agreement “might, wearing nineteenth century lunettes, be regarded as having some flicker of life” but were founded on the kind of semantic and syntactical analysis strongly deprecated by more recent decisions of the House of Lords. There would be no commercial sense for the standstill agreement to relate only to claims concerned with a single report and valuation when the defendant’s involvement extended beyond the provision of a single report. None of the claims was time-barred.
The above summary greatly simplifies the complex nature of the transaction being undertaken by the claimants, the difficulties of estimating the value of a FOC, let alone one in an Enterprise Zone (Dockside was the first) and the range of issues between the parties. The point of greatest general interest must, however, be the SAAMCo issue – when will a negligent professional be held liable for all the claimant’s losses, whether these be caused by a fall in markets or the impecuniosity of other parties?
The breadth of Drivers Jonas’s brief does, on the face of it, make this argument a runner here. Where a professional, whether it be a surveyor providing commercial investment advice about the viability of a project or a solicitor advising his client as, in the quaint but apt expression, an homme d’affaires, steps outside the narrow role of providing a valuation or legal advice on a particular point and is negligent, there is a risk that all the losses incurred by the claimant could be visited upon him.
In practice, as this case illustrates, it rarely happens. In lender claims, the cause of the loss is usually the borrower’s inability to repay the loan. In those cases where a negligent solicitor has been held liable for the entirety of the loss, the solicitor has failed to pass on information about the borrower’s ability to repay the loan – see the Steggles Palmer case (Bristol & West Building Society v Fancy and Jackson) and Portman Building Society v Bevan Ashford as discussed more recently in Broker House Insurance Services Ltd v OJS Law.
The impecuniosity of a third party was also held to have been the cause of the claimant’s loss in Haugesund Kommune v Depfa ACS Bank. The Court of Appeal upheld the defendant solicitor’s appeal against the decision that it was liable for the whole of the claimant bank’s loss following the defendant’s negligent advice about the capacity of the other party to the bank’s proposed swap contract. Gross LJ candidly admitted, to the relief no doubt of others who have grappled uncomfortably with Lord Hoffman’s judgment in SAAMCo, that he did not think it mattered whether it was a “category 1” or “category 2” case, a distinction which he thought easier to state than to apply in practice. What mattered was whether the bank’s losses which were attributable to enforcement and credit risks were within the scope of the solicitor’s duty. The Court of Appeal held that the loss had not been caused by the invalidity of the transaction about which the defendant solicitor had negligently advised, but was caused by the risk that the other party to the swap contract might default because it could not repay the sums in question. This was not within the scope of the solicitor’s duty and was not a risk it had assumed.
The risk may be greater for negligent insurance brokers who, as noted in Haugesund, operate in the same market as their clients and are typically involved in the negotiation and conclusion of their clients’ deals on that market. Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd is one of few examples where a professional has been liable for the entirety of the claimant’s loss. It was relied upon heavily by the claimants in Capita but disregarded by the judge as being too far removed from the lender/valuer relationship or even the client/professional adviser relationship.
As a postscript, SAAMCo also reared its head in the context of a claim against brokers in the long-awaited appeal judgment in Jones v Environcom Ltd discussed above. Environcom argued that the brokers were responsible for causing the fire at their premises because of their failure to ensure that Environcom’s working practices were such as to render cover unnecessary. They relied on Aneco to cap their claim by the amount of recovery which unimpeachable insurance cover would have produced. The Court of Appeal disagreed with this analysis. Aneco teaches that if a negligent defendant is responsible not merely for negligent advice without which a transaction would not have been entered into, but for advising that a transaction be entered into, then that defendant is liable for the whole of the ensuing loss and not merely for the more limited SAAMCo consequences. This applies all the more so where the claim is not for financial loss but for physical loss, such as the fire in the Environcom case.