On 22 March 2017, the Supreme Court handed down judgment in BPE v Hughes–Holland (also known as Gabriel v Little).
The case was another look at the SAAMCo principle and the scope of a professional’s duty for claimed losses; here, it was in the context of a solicitor advising on the financing of a property development.
It seems to us a clear and useful judgment (essentially confirming the SAAMCo reasoning), and helps clarify those cases in which an adviser:
- is providing material (however critical) on which the client bases its decision to embark on a particular transaction: the adviser will then be liable for the consequences of the material being wrong, but not the consequences of the transaction; and
- is advising the client on all of the risks of the transaction: the adviser will then be responsible for all of the consequences.
Although this case related to advice provided by solicitors, the SAAMCo principle is an issue which crops up not infrequently in claims against accountants and auditors: say, a report on security on which a bank then decides to make a bad loan; or advice as part of an audit on the back of which the client then embarks on particular transactions. (There is also discussion of the operation of the SAAMCo cap, as it applies in negligent valuation cases.)
Mr Gabriel lent Mr Little £200,000. Mr Gabriel thought that the purpose of the loan was to finance the development of a property (a disused heating tower); in fact, the loan was used to help fund the acquisition of the property. The solicitors, the judge found, negligently failed to correct Mr Gabriel’s misunderstanding.
Mr Gabriel sued (amongst others) the solicitors for the whole of his loss on the transaction, arguing he would not have proceeded with the loan had he known the true position.
BPE, on the other hand, (on the basis that the £200,000 would have been irrecoverable anyway) argued that all of the losses were attributable to Mr Gabriel’s commercial misjudgements about the viability of the development scheme, and so irrecoverable.
The first instance judge agreed with Mr Gabriel, concluding that Mr Gabriel might have recovered his money if the transaction had been as he thought it was.
The Court of Appeal agreed with BPE, and allowed the appeal. The Court of Appeal found that there was no 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 the loan; the whole of the loss was attributable to Mr Gabriel’s commercial misjudgements.
The Supreme Court dismissed the further appeal by Mr Gabriel. Lord Sumption delivering the agreed judgment of the court (the confusion of multiple judgments has been avoided this time), found that, in Mr Gabriel’s case, BPE did not assume responsibility for the decision to lend to Mr Little. BPE was negligent in failing to correct an assumption about one of the factors in the assessment of the project. If BPE had been right, that the loan was to be used for the development, Mr Gabriel would still have lost all of his money. So, none of the loss fell within the scope of BPE’s duty.
The Supreme Court’s view on SAAMCo
The Supreme Court judgment starts with Lord Hoffmann’s well-known mountaineer’s knee example (elevated now to the status of “parable”) and goes onto set out a detailed analysis of the SAAMCo principle.
One can take the following points from the decision:
- It is usually a necessary condition for the recovery of a loss that it would not have been suffered but for the breach, but that is not always a sufficient condition.
- It must also be shown that the loss falls within the scope of the defendant’s duty. Lord Sumption refers to the familiar quotes from Caparo Industries v Dickman (1990); so – if this was in doubt – this is an analysis which applies to audit too. He also notes (helpfully) the reasoning in Galoo.
- Two fundamental features of SAAMCo have been overlooked. First, that where the contribution of the defendant is to supply material which the client will take into account in making his own decision on the basis of a broader assessment of the risks, the defendant has no legal responsibility for his decision. Second, the SAAMCo principle is not about causation in the usual sense since, factually, the whole loss will have been caused by the defendant’s error in any “no transaction” case.
- There is a helpful clarification of the distinction between “advice” and “information”.
- An advice case is one where the adviser takes on a duty to protect the client against the full range of risks associated with a potential transaction, such that the client will not have retained responsibility for any of them. The adviser’s responsibility then extends to the decision, and its consequences.
- An information case is where a professional adviser contributes a limited part of the material on which the client will rely in deciding whether to enter into a prospective transaction. Here, the adviser’s responsibility does not extend to the decision.
- So, even if the material provided by the adviser is critical to the decision, the professional is only liable for the consequences of the material being wrong and not for the consequences of the transaction. The fact that the material is known to be critical to the claimant’s decision to enter into a transaction does not turn it into an advice case.
- SAAMCo is a general principle of the law of damages which is not limited to negligent valuation cases.
- The court also (usefully) overrules two solicitors mortgage cases (Bristol & West v Steggles Palmer (1997) and Portman Building Society v Bevan Ashford (2000)) which suggested a different approach where the information goes to the viability of the transaction or the honesty of the counterparty.