Introduction

This is an essential decision relating to the SAAMCo principle, named after South Australia Asset Management Company v York Montague [1996] UKHL 10. It is the first Supreme Court decision on what Lord Sumption’s sole judgment described as “one of the main dilemmas of the law of damages.” His description of Lord Hoffmann’s mountaineer analogy as “one of the most celebrated legal parables of modern times…[but which] over-simplifies the issue,” and attempts to clarify the issues, will hopefully reassure many practitioners who previously found this topic uncertain.

The Facts

Mr. Gabriel, a wealthy semi-retired businessman, and Mr. Little, a builder and developer were (until the events in question) friends. Mr. Little came to Mr. Gabriel with a proposal: he wanted to borrow £200k in connection with a disused heating tower on an airfield in Gloucestershire. There was a crucial misunderstanding. Mr. Gabriel assumed that Mr. Little owned the tower, which he would contribute to the enterprise, and would use the £200k loan to fund the development. In fact, the tower was owned by Mr. Little’s company High Tech Fabric Maintenance Ltd (“High Tech”) and was subject to a £150k charge. Mr. Little intended to use the money to pay off the charge, and to transfer the tower to a special purpose vehicle, Whiteshore Associates Ltd (“Whiteshore”). There would be no funds available for development and Mr. Little personally was putting nothing into the enterprise. If Mr. Gabriel had realised the true state of affairs he would not have lent the money.

Mr. Gabriel decided that the project was viable and agreed to loan the money. The project was not viable, stalled and then collapsed. The tower was eventually sold for £13k which only covered the costs of sale. Mr. Gabriel lost all of his money save for £8,191.56, which he received from Mr. Little personally.

Proceedings below

Mr. Gabriel sued Mr. Little, Whiteshore, High Tech for fraud and negligent misrepresentation unsuccessfully. He also sued BPE Solicitors (“BPE”), who acted for him in connection with the sale, for dishonest assistance unsuccessfully, and for negligence. By the time the case reached the Supreme Court only the negligence claim was in issue, and Mr. Gabriel’s place in the proceedings had been taken by his trustee in bankruptcy. (This explains the change in the case name.)

The claim in negligence had a solid basis in relation to liability. Mr. Spencer, an assistant solicitor at BPE, had drawn up the loan facility letter. Mr. Little had told Mr. Spencer that the money would be used for Whiteshore to purchase the tower. Mr. Spencer did not raise this with Mr. Gabriel. Moreover, he drew up the facility letter using a template from a previous, aborted transaction for Mr Gabriel, which included the statement that the loan was made as a contribution to the costs of the development. This conflicted with Mr. Little’s actual plans, but confirmed Mr. Gabriel’s misunderstanding about the arrangement. Mr Spencer’s drafting errors and failure to inform Mr Gabriel of the truth amounted, in the final analysis, to negligence. But for that negligence, Mr. Gabriel would not have lent the money.

At first instance, Mr. Robert Englehart QC found that, although BPE had no duty to advise Mr. Gabriel as to the commercial risks in the project, the project was not necessarily doomed from the outset. He found that the negligence had hidden the “true nature of the loan transaction” and so the whole loss was foreseeable and recoverable subject to contributory negligence and mitigation. This was an application of Chadwick J’s approach in Bristol and West Building Society v Fancy & Jackson [1997] 4 All ER 582, as applied by the Court of Appeal in Portman Building Society v Bevan Ashford [2000] PNLR 344 (often known as the “Steggles Palmer” principle, after the individual case that established the principle in the Bristol and West Building Society litigation, which covered a number of claims).

The Court of Appeal overturned the decision. Gloster LJ, giving the only substantive judgment, said that expenditure of £200k would not enhance the value of the tower. (Lord Sumption agreed, though on another basis.) The tower was an unattractive investment project: the land was contaminated and the development costs would far exceed the estimated £200k for a number of reasons. The Court of Appeal found that the loss was attributable to Mr. Gabriel’s misjudgements and so reduced the recoverable damages to nil.

Supreme Court Analysis

The Supreme Court – the other members of the panel agreeing unanimously, without further comment, with Lord Sumption’s analysis – upheld the Court of Appeal’s decision.

The key features of the decision:

  • Lord Sumption reiterated the point made in SAAMCo that where the “contribution” (or duty) of the defendant is (only) to supply material (i.e. information) which the client will take into account in making his own decisions then the defendant has no legal responsibility for the claimant’s decision as to whether to enter into a transaction (paragraph 35).
  • The SAAMCo principle is not about factual causation or remoteness; it is about scope of duty i.e. whether the loss flows from a matter actually within the defendant’s scope of duty (paragraphs 36 and 38).
  • In particular, Lord Sumption continued to emphasise the established distinction between “information” and “advice” cases, whilst noting the potential descriptive inadequacy of these labels (paragraph 39):
    • Information. Where the professional provides only “a limited part of the material on which his client will 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 are exclusively matters for the client (or possibly his other advisers)” then the professional’s legal responsibility i.e. scope of duty does not extend to the decision to enter into the transaction. They are liable only for the “financial consequences of [that information] being wrong” (paragraph 41). The professional does not, effectively, underwrite the whole transaction.

    • Advice. On the other hand, “if the adviser has a duty to protect his client (so far as due care can do it) against the full range of risks associated with a potential transaction, the client will not have retained responsibility for any of them. The adviser's responsibility extends to the decision. If the adviser has negligently assessed risk A, the result is that the overall riskiness of the transaction has been understated. If the client would not have entered into the transaction on a careful assessment of its overall merits, the fact that the loss may have resulted from risks B, C or D should not matter”. If the professional sets the agenda, decides what factors are relevant and advises in relation to those factors, then they can be liable for the full losses caused by the transaction.

  • Lord Sumption gave continued support for the SAAMCO ‘cap’ / restriction on recoverable loss (as he prefers to describe it) as a tool for stripping out irrecoverable loss (paragraphs 45 to 46).
  • One of the most notable aspects of the judgment is that it swept away the Steggles Palmer principle (paragraphs 47 to 52). Lord Sumption considered that the Steggles Palmer case concerned just another variant of negligence as to information rather than advice. The fact that in Steggles Palmer (and in Portman Building Society v Bevan Ashford (a firm) [2000] PNLR 344, in which the Court of Appeal followed the same approach) the unreported information would have revealed the dishonesty or possible dishonesty of the borrower, and was therefore fundamental to the lender’s view of the transaction, did not matter.

  • On the particular facts:

    • This was an information case – BPE did not assume responsibility for Mr Gabriel’s decision to loan money, and were only responsible for negligently omitting to correct his erroneous assumption about what his £200k loan was to be used for.

    • What loss was attributable to that uncorrected assumption? Nothing: because the same losses would have followed even if it was right. The development was always unviable, and the precise use that the loan monies were put to did not affect that.

Discussion: is the application of SAAMCo now clearer?

It is, in one sense, helpful to have the SAAMCo principles restated and affirmed, some two decades after it was first elucidated. But will the terms of its restatement avoid the difficulties many litigators have had with the applying the principles before?

On the facts of Gabriel v Little, the principle and the decision produces what may be thought of as fairness Mr Gabriel entered into a bad transaction, on which he could have undertaken better due diligence, and protected himself. It would seem unfair to pin his total loss on one solicitor’s error which actually made no difference in terms of the viability of the project. One must also consider the work asked of the solicitor, presumably for modest fees, and compare that with the scale of losses claimed.

But how does one apply the principle in other cases? By his “descriptive inadequacy” comment, his observation (paragraph 43) that Aneco Reinsurance Underwriting Ltd v Johnson & Higgins [2002] PNLR 8 “fell on the other side of the line”, and reference to a “spectrum” (paragraph 44), Lord Sumption implied that the advice/information dividing line is not always easy to draw. But it does not necessarily follow that his comments will help practitioners to draw the dividing line in specific cases.

Moreover, he noted (paragraph 44) that categorisation is “inevitably fact-sensitive” but introduced a type of categorisation for some types of professionals: “a valuer or a conveyancer, for example” stated Lord Hoffman (paragraph 44) “will rarely supply more than a specific part of the material on which his client's decision is based. He is generally no more than a provider of what Lord Hoffmann called "information" but “an investment adviser advising a client whether to buy a particular stock, or a financial adviser advising whether to invest self-invested pension fund in an annuity are likely, in Lord Hoffmann's terminology, to be regarded as giving ‘advice’.” It may be that those generalisations are unhelpful and on the one hand embolden defendant valuers and conveyancers in resisting claims, yet on the other encourage claims against financial advisers. Valuation, for example, is a diverse field; a valuer’s role could be more or less fundamental in different kinds of transactions. A layman might be surprised that valuers and conveyancers are often responsible for far larger sums of money than investment advisors, and yet the investment adviser seems to be more likely to be held liable for the full loss. Conveyancers, in particular, may be privy to information which is critical to the client’s view of the transaction but which has limited discrete financial value. Very few professional-client relationships fit the SAAMCo principle as neatly as the archetypal negligent over-valuation does.

Lord Sumption, in finding that Steggles Palmer was wrongly decided, rejected any scope to focus on the kind of failure. Claimants can no longer argue that certain acts of negligence – those hiding the true nature of the transaction from the client – are worse than others. Arguably this was a less linear, less two-dimensional way of approaching damages that led to fairer outcomes in certain cases: the more negligent an adviser, the greater the scope of damages. Why is it not fair for a professional who has made a sufficiently grave error, fundamental to the transaction, to be deemed to have accepted responsibility for its full factual consequences? This was plainly a difficult test to apply, and may have had subjective and objective elements, but it was not necessarily unworkable. The Supreme Court could have taken the opportunity to set out a clear test that appropriately limited the exception to the information/advice distinction. It would also have been useful if Lord Sumption had set out his view on the proper analysis on the quantification of recoverable loss in Steggles Palmer and Bevan Ashford. For example, does a failure to provide information revealing the borrower’s dishonesty restrict damages to the difference in value between the covenant as the lender thought it was and the same covenant given by a dishonest person? If so, how can the reduction in the value of the covenant be reliably calculated?

On the other hand, a two-tiered approach to damages for professional negligence is hard to justify analytically, and is not replicated in other spheres of negligence or breach of contract or statutory duty cases. If a professional is guilty of something more than incompetence then there are other, admittedly more difficult to prove, causes of action available: claims for deceit, dishonest assistance, breach of fiduciary duty. Put differently, if a claimant could make good the subjective element of the test referred to above i.e. a sufficiently grave kind of failure, then they may well have an alternative cause of action to deploy (being one usually having other advantages, such as the unavailability of a contributory negligence defence). Judicial attempts to ‘paper over’ analytic difficulties frequently have unintended consequences: hard cases make bad law.

The Gabriel v Little decision shines a light on another area. In many scope of duty cases there is often an imbalance between the professional’s fee and their potential exposure. Mr. Spencer’s fee for drafting the facility letter, for example, would have likely been paltry in comparison with the potential £200k liability. In reality any rule on the limit of recoverability of loss necessarily involves an element of policy: an attempt to fit the punishment to the crime. The House of Lords and now the Supreme Court, consciously or not, has allocated the risk of certain types of transactions onto the client and away from the professional. There is an arguable practical justification for this to allocate risk this way; most conveyancing and valuation services attract a relatively low fee (responding to competition and client demands) and are process-driven, and professional indemnity premiums are already high. For the typical valuer or conveyancer to be able to stay in business, they must avoid exposure to too many claims or many which are large in quantum. On the other hand, it is questionable whether this would be a valid justification: the law of damages ought not to be driven by a need to counteract difficulties in the service provider market.

It could be argued that consumers and businesses are paying too little, ‘dumbing down’ conveyancing and valuation, and making negligence more likely. Perhaps it is impossible to reverse that trend. But using the SAAMCo ‘cap’ to limit exposure and keep the industries afloat could mean that the ‘tail is wagging the dog.’ It could be better to incentivise non-negligent, careful conveyancing and valuation, and properly compensate claimants or relieve defendants in appropriate cases, by focusing on factual causation and remoteness rather than the SAAMCo principle. Defendants remain able to protect themselves with contractual exclusions, limitation of liability clauses, or extra-contractual notices and disclaimers. This could achieve much the same result as the SAAMCo principle in the majority of cases but with greater certainty for all parties.

Practical impacts

  • There remains scope for lots of negligent errors to be made by a professional in a transaction, which errors may only have a low or negligible attributable financial value but which lead to the transaction going ahead that otherwise would not. Professionals are likely to escape full, or at least substantial, liability in these situations. For example, the house purchaser who is misinformed by their solicitor about the nature or extent of a right of way; or the lender who is not told of the sub-sale or of some point about the borrower which renders them inherently untrustworthy and a credit risk. Following the SAAMCo analysis, it would seem that many such errors could be made within one transaction, the cumulative factual effect of which cannot be doubted, but which would not enable the claimant to recover its full transaction loss.
  • It could be that the numbers of claims decreases in the aftermath of this decision. Certainly claimant solicitors need to give their attention to the damages aspect of the analysis – more so than previously. It is possible that, at least until the practical aspects of this decision are seen, defendants and their insurers will be more bullish in settlement discussions.
  • There may be greater scope for defendant strike out/summary judgment applications as to scope of duty/recoverable loss: will claimants be able to play the ‘mini-trial card’ i.e. that scope of duty needs full exploration of the facts? Another possibility in some cases will be a trial of preliminary issues on these points, which may lead to earlier resolution though, of course, overall costs will often be increased if claimants win such preliminary issues.
  • It is likely that alternative causes of action will become more fashionable: the conveyancing cases brought in negligence but that were really dishonesty or at least breach of fiduciary duty claims; or cases that previously might have been brought only in negligence to avoid evidential difficulties or to reduce the risk of insurance coverage difficulties.
  • As discussed above, much of these arguments could potentially be avoided by the drafting of proper retainer letters, whatever the professional field – a good thing if it focusses minds at an early stage as to who is responsible for what. If a client wants a professional to take responsibility for the whole decision then this should then be clear from the outset: and a professional can make a conscious decision and, if accepting responsibility for the decision to enter a transaction, charge a premium.