Solicitors and their insurers will welcome the recent Supreme Court decision on the scope of solicitors’ duties (BPE Solicitors v Hughes-Holland). Previously the Court of Appeal had decided that the investor's whole loss was attributable to his commercial misjudgments, and as such the solicitors were not liable for the loss. The Supreme Court has upheld this decision and provided useful guidance on analysing the scope of solicitors' duties in claims of this nature.
Background to the Appeal
Mr Gabriel made a loan of £200,000 to his friend, Mr Little. Mr Gabriel assumed that this loan would be used for the development of a disused heating tower. In fact, Mr Little intended to use the money to discharge an existing loan.
Mr Gabriel instructed BPE solicitors to draft the loan documentation. These documents incorrectly stated that the loan would be used to assist with development costs, and thus confirmed Mr Gabriel’s incorrect assumption. In fact, BPE had been told by Mr Little that he was not going to use the loan for this purpose.
The loan was not secured or repaid and Mr Gabriel (and subsequently his trustee in bankruptcy) brought proceedings against Mr Little, his associated companies and against BPE for negligence.
At first instance the judge rejected the allegations against Mr Little but found that as BPE knew the purpose of the loan, they should have warned Mr Gabriel of this and found them negligent.
BPE’s appeal was allowed by the Court of Appeal. It confirmed that BPE’s duty did not extend to advising Mr Gabriel on what commercial action to take or to advise on the commercial risks involved.
Further, the Court of Appeal held that the losses were not “foreseeable consequences of the information [provided by BPE] being wrong”. Mr Gabriel’s trustee in bankruptcy appealed to the Supreme Court.
The Supreme Court decision
The Supreme Court has confirmed that the ‘but for’ test is not always sufficient to determine damages. Where a professional provides advice only in respect of one factor relevant to whether or not a transaction should proceed, it must be demonstrated that the professional had a duty to protect the claimant against the alleged loss. The Court has provided a helpful consideration on the leading cases concerning this point, including discussion of the established SAAMCO principle which the Court considered has often been misunderstood.
The Court confirmed that the SAAMCO cap is a tool to distinguish between:
- loss flowing from the fact that due to the defendant’s negligence wrong information was provided; and
- loss flowing from the decision to enter into the transaction at all.
The burden of proving facts which engage the SAAMCO principle falls to the claimant and it is for him to prove that he was owed the relevant duty.
The Court also commented on the application of this principle in typical lender claims against solicitors. Where a solicitor provides limited information to a lender (such as title information) this is one of many factors (including, for example, the borrower’s ability to repay the loan and the valuation of the property) which the lender takes into account in deciding whether or not to proceed with the loan. The solicitor does not assume responsibility for identifying all the relevant factors and advising whether to proceed. This case is no different.
BPE did not assume responsibility for Mr Gabriel’s decision to make the loan. Their instructions were to draft the relevant documents. Their negligent act was confirming Mr Gabriel’s incorrect assumption about the purpose of the loan. If that assumption had been right, Mr Gabriel would have still lost his money as the development was never a viable proposition. As such, the loss was not within the scope of BPE’s duty.
This is a good outcome for professional indemnity practitioners and provides useful guidance on the SAAMCO principles which will have wider application.
This decision follows a number of judgments on solicitors’ retainers where the courts have rejected attempts by clients to extend the scope of the duty of care. This case continues this welcome trend and it would appear that the tide is now turning in favour of the professionals.