The Supreme Court provided important clarification of SAAMCO last month in BPE Solicitors and another v Hughes-Holland (in substitution for Gabriel). The issue on appeal was what damages are recoverable in a case where (i) but for the negligence of a professional adviser his client would not have embarked on some course of action, but (ii) 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.
Although this was a solicitors’ negligence case, the decision has much wider application to cases against all professionals. The judgment discusses the nature of the SAAMCO principle – a principle it said has often been misunderstood - and finds that it is a means of restricting a defendant’s liability for loss and not based in causation. The Supreme Court explained the distinction in SAAMCO between an “advice” case and an “information” case.
Mr Gabriel loaned £200,000 to Whiteshore Associates Ltd in 2007 on the incorrect understanding, following discussions with Mr Little (a director of Whiteshore), that the funds were to be used to develop a property. The property was a disused heating tower in Gloucestershire with existing planning permission for conversion into offices. The loan facility letter and charge were prepared by BPE Solicitors following instructions via Mr Little. Those instructions were not confirmed or clarified by the firm direct with Mr Gabriel.
Mr Gabriel was described by the first instance Judge as “astute”, a “hard-headed businessman” and “knowledgeable in the field of property and generally conversant with property dealing”. Mr Little, his personal friend at the time, was a builder and developer. Mr Gabriel understood that the property belonged to Mr Little, or to one of his companies, and that the £200,000 was required in order to develop it into offices with between 3,500 and 4,000 square footage (BPE seems to have been unaware of Mr Gabriel’s understanding). Mr Gabriel had visited the site and concluded that the property was worth approximately £150,000 (he did not employ a valuer), increasing to £400,000 once developed.
The property was owned by High Tech Fabric Maintenance Ltd (controlled by Mr Little) subject to a charge in favour of a bank securing £150,000. Mr Little’s true intention was to sell the property to Whiteshore, who would pay High Tech £150,000 (out of the £200,000 loaned by Mr Gabriel) enabling High Tech to discharge the £150,000 bank loan. The remaining £50,000 from Mr Gabriel’s loan was used to meet High Tech’s VAT liability, leaving nothing to fund the development.
BPE based the facility letter and charge on a prior template (from an earlier abortive transaction between Mr Gabriel and Mr Little), which contained incorrect statements to the effect that the loan monies would be available to contribute to the costs of the development. Unfortunately, these statements accorded with Mr Gabriel's misunderstanding. Mr Gabriel learnt at the completion meeting that the property was owned by High Tech and that its bank lending was to be discharged but he was not told that the loan discharge would be funded with his loaned money; he read the statements in the facility letter that his money would be used to fund the development. Mr Gabriel signed the letter and loaned the money. The first instance Judge found that he would not have done so if he had known the intended use of his loan.
The £200,000 was due to be repaid in March 2009 together with a £70,000 return. No repayment was made and, whilst expanded planning permission was obtained during the period of the loan, no significant development work had been carried out on the property. Mr Gabriel exercised his power of sale but the property only fetched £13,000 at auction, which was consumed by expenses. Mr Gabriel’s only recovery was a little over £8,000 paid by Mr Little personally.
First instance judgment
Mr Gabriel sued Mr Little, Whiteshore and High Tech for fraud and negligent misrepresentation. He also sued BPE for dishonest assistance in breach of an implied trust of the loan monies and for negligence. The action was tried in May 2012 in the Chancery Division; all the claims were dismissed save for the negligence claim against BPE. The Judge held that BPE should have explained to Mr Gabriel that the loan funds would be applied for Mr Little’s benefit such that he was not putting anything into the costs of the property development. In failing to do so, BPE negligently misled Mr Gabriel by allowing statements to appear in the loan documents that suggested the opposite.
One of the main issues considered was whether, if the £200,000 had in fact been spent on the development, it would have enhanced the value of the property. The Judge accepted that Mr Gabriel would not have entered into the transaction but for being misled regarding the proposed use of the loan. BPE had argued (unsuccessfully at first instance) that the project was never viable in any event and so Mr Gabriel would have suffered the same loss even if the transaction had proceeded as he expected. Notwithstanding that the works would cost far in excess of £200,000, the Judge was not persuaded that some development work (even if not to completion) could have been carried out making Mr Gabriel’s investment of £200,000 a viable option. Having concluded that Mr Gabriel might have recovered his money if the loan was to be used for development costs (as he thought it was), the Judge held that any resulting loss was foreseeable and recoverable. Mr Gabriel was awarded c. £192,000 plus interest.
Court of Appeal decision
BPE appealed the judgment. The appeal was granted as:
“There was no positive evidence to the effect that, if £200,000 had been spent on developing the property, its value would have been such as to ensure recovery of Mr Gabriel’s loan or, in other words, that the transaction was viable. On the contrary, such evidence as was before the judge suggested that expenditure in such amount would not have increased the value of the property.”
The Court of Appeal held that the losses were entirely attributable to Mr Gabriel’s misjudgements and the damages award was reduced to nil.
Issue before the Supreme Court
Mr Gabriel appealed the decision, via his Trustee in Bankruptcy, submitting that (i) the Court of Appeal was “not entitled to substitute its own assessment of the viability of the development project for that of the judge”; and (ii) Mr Gabriel was entitled in law to the whole loss flowing from the transaction as he would not have entered into it but for BPE’s negligence.
In reaching its decision, the Supreme Court considered two main elements: (a) the viability of the development project (the factual basis for damages); and (b) the SAAMCO principle and its applicability (the legal basis for damages).
Supreme Court decision
The Supreme Court dismissed the appeal and upheld the Court of Appeal decision.
Lord Sumption gave the only judgment (which was unanimously agreed). It was held that the evidence before the Court “sufficiently showed” that the value of the property would not have been enhanced by spending £200,000 on its development. The property was by all accounts an unattractive investment prospect, contaminated by hydrocarbons, poorly located, old and run-down. Expenditure on its development would only have enhanced value if the development had been substantially completed and on the evidence, £200,000 was not enough to do so, the works having been valued at up to £667,805.
The Judgment goes into some depth in considering the SAAMCO principle (found to be a means of restricting a defendant’s liability for loss and not based in causation) whereby “a defendant is not necessarily responsible in law for everything that follows from his act, even if it is wrongful”.
Lord Sumption finds “the essential distinction which underlies the whole of [Lord Hoffman’s] analysis is between the assessment of the loss caused by the breach of duty and the extent of the defendant’s duty to protect the claimant against it”. Lord Sumption highlighted that Lord Hoffman’s distinction between providing “information” and “advice” has given rise to confusion because of the descriptive inadequacy of the labels - the labels not being mutually exclusive - but found the distinction to still be important. He explained the cases falling within the two categories as:
- “advice” category – 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;
- “information” category – a professional advisor contributes a limited part of the material on which his client will rely in deciding whether to enter into a prospective transaction, but 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 possibly his 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.
The burden of proof was on Mr Gabriel as the claimant to prove that the losses claimed fell within the scope of the defendant firm’s duty.
It was found that BPE did not assume responsibility for Mr Gabriel’s decision to lend the money. The firm’s instructions were only to draw up the facility letter and charge (i.e. it was an “information” case). Mr Gabriel would have taken into account other information when deciding whether to lend and how much, for which BPE had no responsibility, such as valuation of the property and the borrower’s covenant strength. The Supreme Court found, therefore, that no loss was attributable to BPE’s negligence. Mr Gabriel would have lost his money even if the loan had been used to develop the property.
This case restates and further explains the SAAMCO principle. It helpfully discusses common criticisms and misunderstandings and, ultimately, confirms that a defendant is not necessarily responsible for every consequence of his wrongful act. On a claim for damages, it is generally a necessary condition for the recovery of loss that it would not have been suffered but for the breach of duty, but it is not always a sufficient condition. In “information” cases, the loss claimed must flow from a responsibility assumed by the professional and be of a kind within the scope of the professional’s duty in order for that professional to be held liable for it. Confirmation and clarification of a professional’s instructions (and record of those instructions) remain of vital importance in this arena.