Negligence – Solicitor – Liability – Respondent firm of solicitors drawing up facility letter and charge in relation to loan made in connection with proposed development of property by borrower – Development project failing and lender losing all of money advanced – Claim in negligence against respondent – Whether lender entitled to recover entirety of loss on basis that he would not have entered into loan if given correct information – Whether nil damages recoverable on ground that development project unviable and lender’s loss entirely due to his own misjudgement – Appeal dismissed
In 2007, G, a businessman, agreed to lend £200,000 to L, a friend who was a builder and developer, in connection with the development of a disused heating tower at Kemble Airfield, Gloucestershire. G agreed to the loan after visiting the site and forming the view that the building was worth about £150,000 and would be worth over £400,000 once developed. Although L did not say so in terms, G assumed that the loan would be used to finance the development.
In fact, L’s intention was that his company, which owned the building, would transfer it to a special purpose vehicle (SPV) in return for a payment of £150,000, which it would use to discharge an outstanding loan and charge over the property. The £150,000 payment was to come from the funds supplied by G.
G instructed an assistant solicitor at the respondent firm to draw up a facility letter and a charge over the building. The instructions came not from G directly but through L, who told the solicitor that he intended to sell the building to the SPV and that G would lend him the money. The solicitor did not clarify or confirm those instructions with G and, when drawing up the facility letter and charge, used a template from an earlier, aborted transaction which referred to the loan funds being used to assist with the costs of development of the property.
Ultimately, the transaction failed and G lost his money. He brought various claims against L, the company, the SPV and the respondent, all of which were dismissed save for a claim in negligence against the respondent.
Allowing that claim, the judge held that the solicitor should have explained that the funds would be applied for L’s benefit and should not have allowed the loan documentation to state that the funds would be used to finance the development. He awarded damages representing the entire loss that G had suffered by entering into the transaction, on the ground that he would not have done so had he not been misled about the proposed use of the loan funds.
That decision was reversed by the Court of Appeal, which found that expenditure in the amount of the loan would not have increased the value of the property and that the transaction was never viable in the first place. It concluded that G’s loss was entirely due to his own misjudgement and reduced the damages to nil: see [2013] EWCA Civ 1513.
G was adjudged bankrupt in 2014. The appellant, as his trustee in bankruptcy, appealed to the Supreme Court, arguing that regardless of the viability of the development project, G was entitled in law to the whole loss flowing from a transaction into which he would not have entered but for the solicitor’s negligence.
Held: The appeal was dismissed.
(1) On the evidence, the value of the property would not have been enhanced by the expenditure of £200,000 on its development.
(2) It was generally a necessary condition for the recovery of a loss that it would not have been suffered but for the breach of duty, but it was not always a sufficient condition. A defendant was not necessarily responsible in law for everything that followed from his act, even if it was wrongful. Liability was limited according to the nature or extent of the duty that he had broken. It was therefore necessary to consider the extent of the defendant’s duty to protect the claimant against the relevant loss.
(3) Where a lender would not have entered into the transaction but for the breach of duty, it was necessary to conduct a two-stage enquiry: first, ascertaining what loss the claimant would have avoided had the defendant performed his task carefully; and, second, awarding only that part of the loss which was within the scope of the defendant’s duty: South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 (SAAMCO), Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627 and Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190; 1999] PLSCS 42 applied. The recoverable loss could not exceed the sum that the lender would have lost even if the advice given to him had been correct (the SAAMCO principle).
The SAAMCO decision was often misunderstood owing to a tendency to overlook two fundamental features of the reasoning: (i) where the contribution of the defendant was to supply material that the client would take into account in making his own decision on the basis of a broader assessment of the risks, the defendant had no legal responsibility for that decision; and (ii) that principle had nothing to do with the causation of loss as that expression was usually understood in the law. Questions of causation were normally concerned with identifying the consequences that flowed from the breach. The SAAMCO principle was not directed to that question, but instead to the question of whether the loss flowed from the particular feature of the defendant’s conduct which made it wrongful.
(4) There was a distinction between information and advice in that regard. In the “advice” category, it was left to the adviser to consider what matters should be taken into account in deciding whether to enter into the transaction. His duty was to consider all relevant matters and not only specific factors in the decision. If one of those matters was negligently ignored or misjudged, and that proved to be critical to the decision, the client would in principle be entitled to recover all loss flowing from the transaction against which he should have protected his client. The adviser’s responsibility extended to the decision. By contrast, in the “information” category, a professional adviser contributed a limited part of the material on which his client would 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 were exclusively matters for the client. In such a case, the defendant’s legal responsibility did not extend to the decision itself. Even if the material that the defendant supplied was known to be critical to the decision to enter into the transaction, he was 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 were greater. The fact that the material contributed by the defendant was known to be critical to the claimant’s decision whether to enter into the transaction did not, of itself, turn it into an “advice” case: SAAMCO, Nykredit and Haugesund Kommune v Depfa ACS Bank (Wikborg Rein & Co, Part 20 defendant) (No 2) [2011] EWCA Civ 33; [2011] 3 All ER 655 applied.
(5) Nor was there any exception to that rule in cases where the defendant failed to provide information showing that the transaction was not viable or that tended to reveal an actual or potential fraud on the part of the borrowers: Bristol & West Building Society v Steggles Palmer (a firm) [1997] 4 All ER 582 and Portman Building Society v Bevan Ashford (a firm) [2000] PNLR 344; [1999] PLSCS 304 wrongly decided.
(6) The SAAMCO principle was therefore simply a tool for giving effect to the distinction between, on the one hand, loss flowing from the fact that as a result of the defendant’s negligence the information was wrong; and, on the other, loss flowing from the decision to enter into the transaction at all.
(7) The Court of Appeal had been correct in considering that the burden of proving facts that engaged the SAAMCO principle lay on the claimant. The SAAMCO principle was an essential part of the claimant’s case that he was owed a relevant duty. In the instant case, the respondent had not assumed responsibility for G’s decision to lend money to L. Its instructions were to draw up the facility agreement and the charge and nothing more. The respondent was not legally responsible for G’s decision to lend the money, but only for confirming his assumption about one of a number of factors in his assessment of the project. Even if that assumption had been correct, G would still have lost his money because the expenditure of £200,000 would not have enhanced the value of the property. The development would 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. None of the loss suffered by G fell within the scope of the respondent’s duty. It arose from commercial misjudgements which were no concern of the respondent’s. It followed that the respondent was not liable for G’s loss.
David Halpern QC and Adam Chichester-Clark (instructed by Roose + Partners) appeared for the appellant; Roger Stewart QC and Scott Allen (instructed by Beale & Co Solicitors LLP) appeared for the respondents.
Click here to read transcript: BPE Solicitors and another v Hughes-Holland
