21 Apr 2017
Supreme Court says SAAMCO misunderstood – so what losses is a professional adviser liable for when a transaction goes wrong?
If a client would not have entered into a commercial transaction but for advice given by a professional adviser, is the adviser liable for all the losses the client suffers as a result of entering into that transaction?
This question had been answered by the Supreme Court (then the House of Lords) 20 years ago in the case of South Australia Asset Management Corpn v York Montague Ltd  A.C.191 (“SAAMCO”). The answer is that it depends on the scope of the adviser’s duty:
- if the adviser’s duty was only to provide information which the client would use to decide upon a course of action, then the adviser is generally only liable for the consequences of that information being wrong and so would not be liable for losses which would have occurred even if the information he had given had been correct.
- if the adviser’s duty was to advise whether or not a course of action should be taken, then the adviser is responsible for all the foreseeable losses suffered as a result of that course of action being taken.
So why did the Supreme Court have to consider this issue again in March 2017 in BPE Solicitors v Hughes Holland  UKSC 21? Because, as Lord Sumption explains in this case, subsequent caselaw has shown that SAAMCO has been misunderstood.
In particular, Lord Sumption considered that it had not always been fully appreciated that if the adviser’s contribution is to supply material which the client will take into account in making his or her own decision on the broader assessment of the risks, then the adviser has no legal responsibility for that decision. This is the case even if the limited professional contribution was critical to the transaction in that without it the client would never have entered into the transaction. Otherwise it would be unfair – the adviser would become “the underwriter of the financial fortunes of the whole transaction by virtue of having assumed a duty of care in relation to just one element of someone else’s decision”. Lord Sumption felt that this misunderstanding was probably due to the “descriptive inadequacy” of the labels used in SAAMCO of ‘information’ and ‘advice’; information given by a professional adviser to a client is usually a specific form of advice, and most advice will involve conveying information.
Lord Sumption also considered that confusion had arisen because some had confused the SAAMCO principle with causation, which is a separate issue. In a negligence claim, the claimant must show that the adviser’s negligence caused the loss – what the SAAMCO principle does is to then limit the amount of the loss that can be recovered from the defendant to those losses which fell within the scope of the adviser’s duty. Lord Sumption helpfully made it clear that it is for the claimant to prove that his losses fell within the scope of the defendant's duty and are therefore losses for which the defendant is liable.
In BPE Solicitors v Hughes Holland, Mr Gabriel had instructed BPE to draw up a facility letter and charge in connection with a £200,000 loan which he thought was to be directly applied by a Mr Little to developing a property, but which turned out not to be the case although BPE had negligently affirmed this view. The development project failed and Mr Gabriel lost his money. If Mr Gabriel had known the true situation, he would never have lent the money. However the evidence showed that if even if the money had been used to develop the property, Mr Gabriel would still have lost all his money, as the development project was never a viable one. Was BPE was responsible for Mr Gabriel’s loss?
The Supreme Court asked itself two questions:
1.Did BPE solicitors assume responsibility for Mr Gabriel’s decision to lend money to Mr Little?
No - their instructions were just to draw up the facility agreement and the charge. BPE didn’t know about what had passed between Mr Gabriel and Mr Little, they didn’t know about the nature of the proposed development, its likely cost, the financial capacity of Mr Little to fund it without Mr Gabriel’s loan or the value of the property in its developed or undeveloped state, or Mr Gabriel’s assumption about the use to be made of the loan monies. BPE therefore was not legally responsible for Mr Gabriel’s decision to lend the money, but only for incorrectly confirming his assumption about one of a number of factors in his assessment of the project.
2.What, if any, loss was attributable to that assumption about this particular factor being wrong?
If it had been right, Mr Gabriel would still have lost his money because if the £200,000 had been applied directly to develop the property, it would not have enhanced the value of the property. The development would still have been left incomplete, the loan unpaid and the property substantially worthless when it came to be sold into a depressed market under the chargee’s power of sale. Therefore none of the loss which Mr Gabriel suffered was within the scope of BPE’s duty, as none of it was loss against which BPE was duty bound to take reasonable care to protect him. The loss instead arose from commercial misjudgements made by Mr Gabriel which were no concern of theirs.
The Supreme Court’s decision is welcome clarification on the issue of recoverable damages for professional negligence.