The Supreme Court has reinforced the principles set out in the landmark professional negligence case of South Australia Asset Management Corporation v. York Montague Ltd [1997] A.C. 191 (known as SAAMCo), a case often misunderstood and misapplied. The Supreme Court found that, although a firm of solicitors had been negligent in failing to identify the correct purpose of the loan, the loss suffered did not flow from the solicitors’ negligence, but from a poor commercial decision to lend money for which the solicitors were not liable.

The facts of this matter were that Mr Gabriel had lent £200,000 to his friend, Mr Little, assuming that the purpose of the loan was to finance the redevelopment of a disused heating tower (the Tower). Mr Gabriel retained BPE Solicitors (BPE) to draft the loan documents for the transaction, but BPE was instructed by Mr Little, and did not seek confirmation or clarification from Mr Gabriel directly. Rather than using Mr Gabriel’s money for the development of the Tower, Mr Little used it to discharge an existing charge over the Tower. The transaction was a failure and Mr Gabriel lost all his money.

In a unanimous decision, with Lord Sumption providing the sole judgment, the Supreme Court found that although BPE had negligently drawn up the loan facility agreement by stating an incorrect purpose, its instructions were only to draw up the loan documents and it was only liable for losses which flowed directly from its negligence in this regard. Therefore BPE was not liable for the losses which flowed from Mr Gabriel’s own commercial decision to lend the money.

In coming to his decision, Lord Sumption clarified and reinforced the well-known SAAMCo principle, which arose from the House of Lords’ decision in SAAMCoSAAMCo concerned a negligent overvaluation of a property – damages were held to be limited to the difference between the negligent valuation and the true value at the time. The lender claimant was not entitled to recover more than the amount it would have lost had the valuation not been negligent.

As the SAAMCo principle has not always been correctly understood, Lord Sumption’s clarification of it is welcomed. Lord Sumption drew a distinction between advisers who advise on the merits of taking a particular course of action and those who provide information on a limited aspect of that course of action:

  • Adviser: in this situation, the adviser is responsible for taking into account all factors which will impact on the decision to take a particular course of action. If a factor is negligently ignored or misjudged, and proves to be paramount to the decision to take that course of action, the client will be entitled to recover all losses flowing from taking the course of action. The negligent Adviser of Action is liable for the overall riskiness of the transaction.
  • Provider of information: here the adviser is contributing a limited part of the information enabling the client to make a decision. The process of considering other relevant factors and assessing the overall commercial merits of the transaction are matters for the client. The adviser’s duty does not extend to the decision itself, and therefore the negligent adviser is only liable for the financial consequence of the particular information he or she is under a duty to provide being wrong.

Lord Sumption held that BPE had not assumed responsibility for Mr Gabriel’s decision to make the loan – its instructions were limited to drawing up the loan documents. BPE had negligently confirmed in the loan facility agreement that the intended purpose of the loan was the redevelopment of the Tower. Even if the loan had been used for that purpose, the evidence showed that Mr Gabriel’s loss would have been the same, as the value of the Tower would not have increased. Therefore, Mr Gabriel’s loss was the result of a poor commercial decision to lend Mr Little’s company £200,000. This was a decision taken by Mr Gabriel and fell outside the scope of BPE’s duty of care.

Although there are often difficulties in the mathematical calculation of the damages, as acknowledged by Lord Sumption, the SAAMCo principle nevertheless remains crucial in determining the quantum of damages in negligence cases against all types of professionals in commercial transactions.