A surveyor negligently overvalues a property. The purchaser pays too much as a result of that overvaluation and sues the surveyor to recover the losses it has suffered. However, since the property was purchased, there has been an economic downturn and the property has fallen in value as a result. Can the purchaser recover all of the loss it has suffered (which could include the fall in value because of the economic downturn so long as that was foreseeable) or are its damages limited to the (lesser) amount by which the surveyor overvalued the property?
That is the question that the House of Lords answered in South Australia Asset Management Corporation v York Montague Ltd [1996] 2 EGLR 93 (universally referred to as SAAMCO), where the well-known leading judgment was given by Lord Hoffmann. Lord Hoffmann held that the answer depended on whether the surveyor was under a duty of care to (i) provide information which the purchaser would use to help it make its decision (an “information case”) or (ii) advise the purchaser as to what course of action it should take (an “advice case”). Damages in an information case were limited to the consequences of the information being wrong. So losses for the fall in value would not be recoverable because the purchaser did not enter into the transaction solely because of the negligent valuation information. Whereas damages in an advice case cover all of the losses which were reasonably foreseeable as a consequence of the advice being wrong. These could include the fall in value.
In order to assess the extent of loss suffered by a claimant in an information case, Lord Hoffmann posed a question, which became known as the SAAMCO counterfactual: would the claimant’s actions have resulted in the same loss if the information given by the defendant had been correct? If they would have, then that loss was not recoverable as against the defendant, a concept initially known as the SAAMCO cap and, more recently, as the SAAMCO or scope of duty principle.
Applying the principle
Although the principle seemed a relatively simple one, which made a sensible distinction in relation to the duty of care owed by professionals and the losses which flowed from breaches of those duties, it is fair to say that it was incredibly difficult to apply in practice, especially in relation to cases involving breaches of duty by other professionals. What worked when considering negligent surveyors in a falling property market, did not apply so easily elsewhere.
Arguably, some of those difficulties with the principle should have been resolved when the Supreme Court assessed it in BPE Solicitors and another v Hughes-Holland [2017] UKSC 21; [2017] PLSCS 70 (Legal notes: Does the SAAMCO cap still fit?).
Lord Sumption, who gave the decision of the court, stressed two points:
- SAAMCO was relevant to information cases and not advice cases. It avoids the professional who has provided incorrect information from becoming “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”.
- Referring to the SAAMCO principle as a cap was wrong. The principle underlying the case was “a tool for giving effect to the distinction between (i) the loss flowing from the fact that as a result of the defendant’s negligence the information was wrong and (ii) loss flowing from the decision to enter into the transaction at all”.
Cases still troubled the courts following Hughes-Holland. This ultimately led to the two recent appeals, heard by the same seven-strong panel of the Supreme Court – Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 40; [2021] PLSCS 108 and Khan v Meadows [2021] UKSC 21. The court prefers seven judges where it might overturn earlier House of Lords or Supreme Court authority (in this case, SAAMCO).
The appeals
Manchester was a negligence action brought by a building society in relation to advice given by its accountants that it could use an approach called hedge accounting in relation to its valuation of interest rate swaps. The accountants admitted negligence and the society closed out the swaps, incurring break costs of £32.7m. It sued for that loss. It was unsuccessful at first instance and on appeal, with the Court of Appeal (following Hughes-Holland) deciding that the society had provided information, not advice, and was not therefore liable for the decision to break the swaps, since that was not a foreseeable consequence of the information provided by Grant Thornton being wrong.
Khan was a professional negligence action arising from a failure by a GP (K) to refer the claimant (M) for genetic testing to see if she carried the haemophilia gene before she became pregnant. Had M been advised properly, she would have undergone foetal testing for haemophilia. This would have revealed that the foetus was affected and M would have terminated her pregnancy. M’s son was subsequently born with severe haemophilia. It was accepted that K should meet the costs incurred by M raising her son with haemophilia. The issue for the court was whether K should also be liable for the costs of dealing with M’s son’s autism, a medical condition entirely unrelated to his haemophilia. At first instance, the judge awarded M those costs. The Court of Appeal disagreed, with K only being held liable for the costs associated with the haemophilia. The court held that there was no reason to exclude the scope of duty principle from applying to clinical negligence.
Did all of the judges agree?
Although all seven judges reached the same ultimate conclusion, they did not all follow the same reasoning. It was only a majority of five (Lords Hodge and Sales, who delivered a joint opinion, supported by Lord Reed, Lady Black and Lord Kitchin) who gave the leading judgment. Lords Leggatt and Burrows gave what are described as concurring judgments, although phrases like “but we find ourselves, with respect, unable to support Lord Leggatt’s approach to SAAMCO and the question of the scope of duty of the accountants” and “our approach in the present case is closer to, but not fully aligned with, that of Lord Burrows” show that our leading judges can use “concur” with a certain opacity of meaning.
The majority opinion
The court did not overturn SAAMCO. Rather, it acknowledged the distinction between advice and information cases “has not proved to be satisfactory” because, agreeing with Lord Sumption in Hughes-Holland, “the distinction is too rigid and, as such, it is liable to mislead”.
Instead, it considered the scope of duty of principle in the wider context of the tort. Whenever a claimant seeks damages from a defendant for negligence, a series of six questions (each with their own title) arise:
1) The actionability question: is the harm which is the subject matter of the claim actionable in negligence?
2) The scope of duty question: what are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care?
3) The breach question: did the defendant breach their duty by their act or omission?
4) The factual causation question: is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission?
5) The duty nexus question: is there a sufficient nexus or connection between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant’s duty of care as analysed by the scope of duty question?
6) The legal responsibility question: is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote, or because there is a different effective cause (including novus actus interveniens) in relation to it, or because the claimant has mitigated their loss or has failed to have avoided loss which they could reasonably have been expected to avoid?
The decisions
Applying these six questions, the court held that Grant Thornton was liable for the loss the building society suffered as a result of the hedges (they were within the scope of Grant Thornton’s duty) but that K was not responsible for the costs associated with M’s son’s autism (this was outside of K’s duty to advise M whether or not she carried the haemophilia gene).
The Supreme Court appears to have replaced a deceptively simple test that was fiendishly difficult to apply with what seems a far more complicated one, which I can only hope turns out to be simpler to apply in practice. We will keep you informed of developments.
Stuart Pemble is a partner at Mills & Reeve
