What a negligent professional adviser is liable for depends on the scope of the duty of care, and a recent decision of the Privy Council illustrates the required approach which was set out by the Supreme Court in Manchester Building Society v Grant Thornton and Meadows v Khan.
It also shows how the counterfactual test used for this issue can sometimes be unhelpful.
The principle that the liability of a negligent professional adviser depends on the scope of its duty of care was established in South Australia Asset Management Corpn v York Montague Ltd (SAAMCO)  AC 191). The Supreme Court in Manchester Building Society v Grant Thornton UK LLP  UKSC 20 and Meadows v Khan [20210) UKSC 21 said that in determining the scope of the duty of care, it is particularly important to consider the purpose of the advice or information being given – the courts should look to see what risk the duty was supposed to guard against and then look to see whether the loss suffered represented the fruition of that risk (see our report here).
Facts of case
As the Privy Council said, the facts in Charles B Lawrence & Associates v Inter-commercial Bank Ltd (Trinidad and Tobago)  UKPC 30 were unusual.
A firm of surveyors negligently valued property for the purposes of a USD3m loan provided by Inter-commercial Bank Ltd (the Bank) at USD15m by wrongly giving a commercial value rather than the correct residential value. They also failed to adequately to draw attention to the fact that there were occupiers on the property so that it was not a cleared site. A correct valuation would have been USD2,375,000. However, after the negligence became known, it was also discovered that the borrower did not have good title to the property, so in fact the mortgage was worthless.
The Bank sued its lawyers for negligently failing to advise about the title, and settled that claim for USD2.4m. However it still wanted to pursue the surveyors for their negligence on the basis that had the valuation not been negligent they would not have made the loan.
The first instance court and the appeal court said that all the Bank’s loss was factually caused by the surveyors’ negligence. Damages were calculated by taking the loan amount, adding interest, deducting the settlement sum, and deducting 20% for the Bank’s contributory negligence in failing to inspect the property which would have revealed the presence of the occupiers. This gave a damages figure of USD2,070,379.
The surveyors appealed to the Privy Council saying that this was contrary to the “scope of duty principle” established in SAAMCO and recently explained in Manchester Building Society v Grant Thornton UK LLP and Meadows v Khan. The loss suffered by the Bank due to the defective title was outside the scope of their duty of care but the way the lower courts had calculated damages included loss attributable to the defective title. They said that the residential value of the land at the date of the loan (assuming good title) should have been deducted from the loan amount, then the 20% deduction for contributory negligence, and interest should then run on the remaining amount. This would give a damages figure of USD833,204.
Scope of duty
The Privy Council agreed with the surveyors. The purpose of the valuation report was to value the property on the assumption that there was good legal title to it, not to advise about title to the property as this was a matter for the lawyers. Only the loss due to the property being valued on commercial rather than residential use was within the scope of the surveyors’ duty of care, as this was the risk that was being guarded against.
This meant that the element of loss attributable to the defect in title should be excluded from the damages calculation. This was properly done by deducting the residential value of the land at the date of the loan (assuming good title) from the loan amount. Although the lower courts had deducted the settlement sum from the lawyers, interest was being applied to the wrong amount of loss. By correctly applying the scope of duty principle, the settlement with the lawyers was irrelevant, because the loss attributable to the defective title had already been excluded.
In SAAMCO, Lord Hoffman said a counterfactual test should be used to check the scope of the duty of care, which involved asking whether the claimant would still have suffered the same loss if the information or advice had been true? If the answer is “yes”, the scope of the duty does not extend to the recovery of that loss. If the answer is “no”, the scope of the duty does extend to the recovery of that loss.
The Supreme Court in Manchester Building Society v Grant Thornton UK LLP and Meadows v Khan had said that the counterfactual test was a useful cross-checking tool, but it was subordinate to the purpose of the advice analysis. The Privy Council said that this was one case where it was in fact unhelpful. Had the surveyors’ valuation of USD15m been correct, the Bank would still have entered into the loan, taking the mortgage over the property as security, but it would not have suffered the same (or indeed any) loss. This is because, as the property would have been worth USD15m (assuming no defect in title), the Bank would have had adequate security to cover the guarantor’s default in repaying the loan. The Privy Council said that although it might be possible to modify the counterfactual test in order to reach the “correct” result, this just reinforced the point that it is of second-order importance as regards establishing the scope of the duty.