The Supreme Court yesterday handed down its judgment in BPE Solicitors and another v Hughes-Holland (in substitution for Gabriel) (previously known as Gabriel v Little). The decision had been keenly anticipated and Lord Sumption, delivering the unanimous judgment of the Court, did not disappoint.
In what will be seen as a landmark decision, Lord Sumption confirmed and re-stated the application and effect of the well-known but often misunderstood 'SAAMCo principle'. In doing so, in a move that will be especially welcomed by solicitors and their professional indemnity insurers, the Court overruled the decisions in Bristol & West v Steggles Palmer (1997) and Portman Building Society v Bevan Ashford (2000), which had previously, in effect, provided authority to depart from the ordinary SAAMCo position in cases where a solicitor's negligence had resulted in the lender client not being made aware of information indicating that the lending was not viable or which revealed fraud or dishonesty on the part of the borrower.
The case concerned a deal struck in 2004 between two friends, Richard Gabriel and Peter Little. Mr Gabriel agreed to lend Mr Little, a builder and property developer, the sum of £200,000 in the belief that Mr Little would use that money to develop a property owned by one of Mr Little's companies.
In fact, however, Mr Little intended to use the money to facilitate the purchase of the property by another company in which he had an interest and, in the course of doing so, discharge a £150,000 bank loan secured over the property, together with his company's VAT liability. In reality, therefore, none of Mr Gabriel's loan was to be applied towards developing the property and the transaction was substantially for Mr Little's benefit.
BPE Solicitors were retained by Mr Gabriel to prepare the loan documentation and were made aware by Mr Little that the purpose of the loan was to fund a purchase of the property. However, BPE failed to advise Mr Gabriel of this. That oversight was compounded by the fact that the loan documentation prepared by BPE also contained misleading statements suggesting the monies would in fact be used for development of the property.
As a result, the loan proceeded on the basis of a misunderstanding on Mr Gabriel's part as to the purpose of the loan. Significantly, it was found by the trial judge (and not challenged on appeal) that had he known the true position - namely, that the loan monies would not be put towards the development costs of the property - he would not have made the loan.
As matters subsequently transpired, the property was never developed and Mr Gabriel received no repayments in respect of his loan. Further, a forced sale of the property by Mr Gabriel failed to achieve any recovery and, save for a modest payment received from Mr Little personally, Mr Gabriel lost the whole of the loan monies.
Mr Gabriel pursued claims against various parties involved in the transaction but (apart from the purchaser company to which he had made the loan, which was insolvent) succeeded at first instance only against BPE, which the Court found had acted negligently in failing to advise Mr Gabriel that the loan monies would be used for Mr Little's benefit in discharging the bank loan secured over the property, with the result that Mr Little was not in reality contributing anything to the project.
The trial judge accepted that BPE would not be liable if it could be shown that Mr Gabriel would have suffered the same losses even if the loan monies had been utilised in the way he had understood (namely, for development of the property). However, the judge was not satisfied that that was the case and, on that basis, awarded Mr Gabriel his full losses against BPE.
The Court of Appeal reversed the trial judge's decision, on the basis that there was no evidence demonstrating that Mr Gabriel would have recovered the loan had the loan monies been applied towards development of the property. In doing so, the Court emphasised that the burden of proof was on Mr Gabriel as claimant to show that this was the case and that he had failed to discharge that burden. In the circumstances, the losses suffered by Mr Gabriel were the result of commercial risks inherent in the transaction of which Mr Gabriel was aware and took upon himself in making the loan, and for which Mr Gabriel, not BPE, had to bear full responsibility.
The trustee in bankruptcy of Mr Gabriel pursued an appeal to the Supreme Court.
Decision of the Supreme Court
In a unanimous decision, the appeal was dismissed. The Court found that BPE was not responsible for Mr Gabriel's decision to lend, having only been asked to prepare the loan documentation and nothing more. Whilst BPE was responsible for Mr Gabriel having entered into the transaction in the mistaken belief that the loan monies would be used to fund the development of the property, no part of the loss suffered by Mr Gabriel was attributable to that mistaken belief, since, on the facts, the full loss would have been suffered even if the loan monies had been used to fund the development.
In other words, the loss suffered by Mr Gabriel fell outside the scope of BPE's duty. It resulted from commercial risks against which BPE was not under a duty to protect Mr Gabriel.
The SAAMCo principle
In delivering the sole judgment, Lord Sumption considered the development and application of the SAAMCo principle, as well as what he described as the various misunderstandings in relation to it. The key points emerging from his analysis are as follows:
- The SAAMCo principle is a general principle of the law of damages, which requires an analysis of the scope of the professional's duty to protect their client against risks associated with a transaction. It is not a matter of causation.
- The principle distinguishes between so called 'advice' cases and 'information' cases. Whilst criticising the descriptive adequacy of those labels, Lord Sumption clarified that:
- 'Advice' cases are those where the professional provided advice to their client whether or not to enter into the transaction and, in so doing, was under a duty to consider all relevant matters and protect the client against the full range of risks associated with the transaction. In such cases, the professional was legally responsible for the decision to enter the transaction and, if negligent, the client would in principle be entitled to recover all losses flowing from the transaction.
- 'Information' cases are those where the professional provided only a limited part of the range of information (which could include advice in the way that word is commonly understood) taken into account by the client in forming their own decision whether or not to enter into the transaction. In such cases, the professional is not legally responsible for the decision to enter the transaction and will only be liable for the financial consequences of the specific information provided by him/her being wrong. Furthermore, that is the case even if the material provided by the professional was known to be critical to the client's decision to enter the transaction. The fact that the client would not have entered the transaction had the professional provided correct information is not sufficient to establish liability.
- The decisions in Steggles Palmer and Portman Building Society were therefore wrong. The fact that the information which the solicitor defendants in those cases negligently failed to provide would have revealed dishonesty on the part of the borrowers did not make the solicitors legally responsible for the lender's decision to enter into the transaction.It was wrong that the measure of damages should depend not on the scope of the duty but on the gravity of the breach and an assessment of the quality of a claimant's reasoning as to why it would not have proceeded.
- The SAAMCo "cap", which operates to exclude loss that would have been suffered even if the incorrect 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 the transaction at all.
- Lord Sumption also confirmed that the burden of proving that that the losses claimed fell within the scope of the defendant's duty rests with the claimant. As stated by Lord Hoffman in the SAAMCo case, the "cap" is actually the result of the claimant having to satisfy two requirements: first, to prove that he has suffered loss, and, secondly, to establish that the loss fell within the scope of the duty owed.
The decision provides welcome clarity as to the operation and effect of the SAAMCo principle and firmly restates the distinction between advice and information cases.
In practice, as Lord Sumption observed, solicitors and valuers will typically only provide part of the 'information' (which may include specific legal advice) on a transaction and will rarely therefore assume overall responsibility for the decision to enter into the transaction. One would expect therefore that a negligent solicitor or valuer will rarely 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.
In this respect, the overruling of Steggles Palmer and Portman Building Society will be particularly well-received by solicitors and their insurers. Those cases have long been relied on by lender claimants in seeking 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. They will no longer be able to do so. Rather, lenders will need to demonstrate that losses claimed were suffered specifically as a consequence of information provided by the solicitor being wrong. If they cannot do so, the solicitor will have no liability.
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.
It will be very interesting also to see how claimants deal with the Court's confirmation that it is for them to prove that claimed loss fell within the scope of the defendant professional's duty. In a sense, it would appear to require claimants to prove a negative – namely, that they would not have suffered loss had the information provided by the professional been correct. Depending on the facts, this could be difficult to do, and the placing of the burden of proof on claimants in this way will therefore assist professionals and their insurers.