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Professional negligence: redrawing the scope of duty

Times of uncertainty and economic challenge often witness a rise in professional negligence claims as clients reappraise business strategy and, in turn, the advice that they have received. Determining what loss falls within a professional adviser’s duty of care to their client becomes a key battleground. Defining the scope of that duty is critical to the fortunes of clients and advisers alike. It is a challenge that has occupied the courts for many years, coming to a head in the House of Lords decision in South Australia Asset Management Corp v York Montague Ltd (SAAMCO) ([1996] UKHL 10).
More recently, the Supreme Court addressed the duty in three rulings: BPE Solicitors and another v Hughes-HollandManchester Building Society v Grant Thornton UK LLP and Khan v Meadows ([2017] UKSC 21; [2021] UKSC 20; [2021] UKSC 21, see our article “Scope of an adviser’s duty of care: a purposive approach).
This article plots the courts’ twists and turns in defining the scope of duty in professional negligence, and considers the legal and practical implications for advisers and their clients of the Supreme Court’s most recent formulation of the duty.

The SAAMCO principle

In order to recover damages for the consequences of negligent advice, a claimant must prove that its loss was the reasonably foreseeable consequence of that advice. However, this alone is not enough. The crucial element that must be demonstrated in every case is that the damage suffered by the claimant falls within the scope of the adviser’s duty, being damage that the adviser was obliged to take care to prevent. The adviser is not liable in damages in respect of losses that fall outside the scope of their duty of care. This is referred to as the scope of duty or the SAAMCO principle.
The SAAMCO principle is easy enough to articulate: a professional adviser owes their client a duty to take reasonable care in carrying out the adviser’s activities, but that does not mean the duty extends to every kind of harm that the claimant may suffer as a result of a breach of that duty. The challenge comes when deciding where to draw the line.

The SAAMCO decisions

The question of whether a particular head of loss falls within an adviser’s duty of care came to prominence in a series of cases arising from the property crash of the 1990s, when claims in negligence ensued over valuations of property for mortgage purposes. Borrowers defaulted on secured advances and the lenders’ losses were exacerbated by the fall in the market between the time of the valuation and the time when the properties were sold. This gave rise to the leading case of SAAMCO.

High Court decision

The litigation in SAAMCO started in the High Court, including six cases that were heard together under the case name Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (unreported, 21 December 1993). The High Court held that a negligent valuer was not responsible for the element of a lender’s losses that was attributable to a fall in the property market after the valuation date. This was on the basis that the lender had deliberately assumed this risk and did not rely on the valuation to protect it from that risk. In consequence, the court held that the valuer did not owe the lender a duty to protect it from this type of loss. There were a number of different risks in the transaction and giving professional advice on one of those risks did not make the adviser the underwriter of the entire venture.

Court of Appeal decision

The Court of Appeal upheld the appeal, finding that the consequences of the failure to correctly value the property were foreseeable and had caused the lender to enter into the transaction, which it otherwise would have avoided ([1995] QB 375). It made a distinction between:
  • No transaction cases, where the transaction would not have proceeded but for the negligent advice.
  • Successful transaction cases, where the venture would have proceeded but on different terms.
It held that only in no transaction cases would the adviser be liable for the entire foreseeable loss flowing from the transaction.

House of Lords decision

The House of Lords upheld the further appeal and rejected the Court of Appeal’s approach. It adopted a different starting point: rather than looking at the measure of damages, the first step is to consider the claimant’s cause of action. It is here that Lord Hoffmann’s oft-cited parable of the mountaineer’s knee arose. A mountaineer is about to undertake a challenging climb and is concerned about the fitness of his knee. He consults a doctor who negligently tells him that his knee is fit and, as a result, he undertakes the climb. During the climb he suffers an injury, which is unrelated to his knee problem. While the injury is a foreseeable consequence of the climb, the mountaineer would not have undertaken the climb, and suffered the injury, if the doctor had not negligently advised him that his knee was fit.
Following the Court of Appeal’s line of reasoning, the doctor is responsible for the injury because it would not have occurred if the mountaineer had been given the correct information about his knee. However, Lord Hoffmann applied what he referred to as the “more usual” principle: that the law limits liability to the consequences that are attributable to that which made the act wrongful. In relation to liability in negligence for providing inaccurate information, this would mean liability arises only for the consequences of the information being inaccurate. Applying this principle to the mountaineer, his injury was not caused by the doctor’s bad advice because it would have occurred even if the advice had been correct.
Pinning liability on the doctor in this scenario would, in Lord Hoffmann’s view, offend against common sense. An adviser who is under a duty to take reasonable care in providing information on which another person would base their decision to take a course of action and who failed in that duty would not generally be regarded as responsible for all of the consequences of that course of action, only for the consequences of the information being wrong. Put another way, it would not be fair and reasonable to impose responsibility on an adviser for losses that would have occurred even if the information it had given was correct.

The SAAMCO counterfactual

In the House of Lords, Lord Hoffman settled on a distinction between information cases and advice cases; that is, between:
  • A duty to provide information for the purpose of enabling someone else to decide on a course of action. In this scenario, the adviser must take reasonable care to ensure that the information is correct. If negligent, they would be responsible for all of the foreseeable consequences of the information being wrong.
  • A duty to advise someone as to what course of action they should take. Here, the adviser would have to take reasonable care to consider all of the potential consequences of that course of action. If negligent, the adviser would be responsible for all foreseeable loss following from that course of action having been taken.
In information cases, the court may perform a counterfactual analysis to identify the extent of the claimant’s loss that falls within the scope of the defendant’s duty. This is done by considering whether the claimant’s actions would have resulted in the same loss if the information given by the claimant had been correct. This is known as the SAAMCO counterfactual.

Application of SAAMCO principle

The effect of SAAMCO was to limit the recoverability of damages. In the short term, this was particularly desirable due to the large volume of surveyor’s negligence cases going through the courts in the late 1990s. However, the SAAMCO principle became a general principle of the law of damages and was applied in a range of circumstances, including claims against:
  • Surveyors, such as in Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jonas ([2011] EWHC 2336).
  • Solicitors, such as in Credit & Mercantile v Nabarro ([2014] EWHC 2819).
  • Architects, such as in HOK Sport Ltd v Aintree Racecourse Ltd ([2002] EWHC 3094 (TCC)).
As a result, difficulties arose in applying the SAAMCO principle. Academics were critical of the fact that the SAAMCO principle seemed to introduce the concept of warranty by asking what position the claimant would have been in had the valuation been true and capping damages on that basis, rather than first determining the consequences of the information being given negligently and then the claimant’s position if non-negligent advice had been given.
Part of the problem in applying the SAAMCO principle was that it is often difficult to draw the line between different types of foreseeable “but for” consequences in terms of the consequences that would attract liability and those that would not. In addition, the distinction between information and advice cases often caused difficulties in cases that were unrelated to valuation issues, where the limits of a professional adviser’s responsibility may be less readily identifiable. In everyday life, the terms could be used interchangeably, and they risked obscuring the key question that the court had to determine; that is, the scope of the professional’s duty.
The SAAMCO counterfactual, meanwhile, lent itself to relatively simple valuer negligence scenarios but, beyond that, could be difficult to apply in practice due to the inputs and assumptions it required. Indeed, even in the valuation context, if the over-valuation was sufficiently large, a lender could in theory recover its entire loss. In SAAMCO, one of the valuers overstated the value of a property by a multiple of three, valuing it at £15 million rather than £5 million. The lender advanced £11 million and the property was sold for almost £2.5 million. The extent of the claimant’s loss according to the SAAMCO counterfactual was £10 million, which exceeded the actual loss.

Redrawing the line

The Supreme Court first revisited SAAMCO in BPE Solicitors. Mr Gabriel lent £200,000 to Mr Little on the understanding this was to be used to finance the development of a disused heating tower on an airfield. The building belonged to a company controlled by Mr Little and it was his intention to transfer the building to a special purpose vehicle (SPV) for the purpose of carrying out the development. The £200,000 would fund the purchase by the SPV. BPE Solicitors (BPE) acted for Mr Gabriel and, when drafting a facility letter and charge, inadvertently confirmed Mr Gabriel’s misunderstanding of the arrangement by using a document from an earlier abortive transaction as a template.
The transaction was a failure and Mr Gabriel lost all of his money. The High Court awarded damages against BPE, representing the whole of Mr Gabriel’s losses arising out of the transaction ([2012] EWHC 1193). The Court of Appeal reduced the damages to nil on the basis that the project was never viable and the loss was attributable to Mr Gabriel’s commercial misjudgements ([2013] EWCA Civ 1513).
The Supreme Court dismissed the appeal. The court observed that SAAMCO has often been misunderstood. The SAAMCO principle has nothing to do with legal causation; on the facts of SAAMCO, the whole loss suffered by the claimant lenders was properly attributable to them having entered into the transaction on the “but for” test. The crux is the scope of the duty. The starting point is the proposition that the valuer was responsible only for the lender having too little security and the lender was responsible for the decision as to whether or not to lend.
The court defended the SAAMCO counterfactual as a tool for giving effect to the distinction between loss flowing from the defendant’s wrong and loss flowing from the decision to enter into the transaction at all. As a tool for relating the recoverable damages to the scope of the duty, it noted that, while the SAAMCO counterfactual can be mathematically imprecise, precision is not always attainable in the law of damages.
The court rejected the distinction between information cases and advice cases, stating that neither label accurately corresponds to what it is describing. Lord Hoffmann’s distinction was clear in being the difference between the adviser who takes responsibility for guiding the whole decision-making process for their client and the adviser who contributes a limited part of the material on which their client will rely in deciding whether to enter a transaction. In the latter scenario, responsibility for the decision is the client’s alone. While the material contributed by the adviser may be critical to the decision, this does not necessarily turn it into an advice case.
In BPE Solicitors, BPE had not assumed responsibility for Mr Gabriel’s decision to lend money. Its instructions were confined to drawing up the facility agreement and the charge. The firm knew nothing about the other circumstances, such as the nature of the proposed development or Mr Little’s own financial position. BPE was responsible only for confirming Mr Gabriel’s assumption about one of a number of factors in his assessment of the project and he would still have lost his money because the expenditure would not have enhanced the value of the property. The loss arose from commercial misjudgements that were no concern of BPE.
It may have been thought that BPE Solicitors would be the first and last port of call when considering the scope of duty and the identification of recoverable damages in professional negligence cases. However, two cases followed soon after.

Further clarification

In Manchester Building Society v Grant Thornton UK LLP and Khan v Meadows, which were heard by the same expanded constitution of the court, the Supreme Court set out to clarify the correct approach to the assessment of causation, loss and damage in relation to negligence.

In Khan, Ms Meadows visited her GP practice to see whether she was a carrier of the hereditary disease haemophilia. The GP practice arranged for blood tests to be carried out to determine whether she had haemophilia but did not carry out tests to establish whether she carried the haemophilia gene. At a follow-up appointment with Dr Khan, Ms Meadows was told that the blood test results were normal, which led her to believe that any child she might have would not have haemophilia. Several years later, Ms Meadows gave birth to a child who had haemophilia but was also autistic. The fact the child was autistic was unrelated to having haemophilia but created significant complications in how the child’s haemophilia could be managed.
Dr Khan admitted negligence and liability for the costs associated with the child’s haemophilia but denied that she was liable for the costs associated with the child being autistic. The Supreme Court held that Dr Khan was not liable for these costs.

Manchester Building Society
In Manchester Building Society, Manchester Building Society (MBS) brought a claim against its auditor, Grant Thornton, for advice concerning the accounting treatment of interest rate swaps relating to its lifetime mortgage portfolio. As a result of the advice turning out to be incorrect, MBS was required to close out the swaps, incurring a mark-to-market loss of £32.7 million.
Grant Thornton had accepted that the advice was negligent but contested its liability for the losses claimed. While causation was established, the High Court held that Grant Thornton had not assumed responsibility for MBS being “out of the money” on the swaps, which instead flowed from market forces ([2018] EWHC 963; see news brief “Responsibility for losses: liability of professional advisers). The Court of Appeal agreed but with different reasoning, stating that the correct approach is not to look at whether responsibility had been assumed, but instead whether the case was one of advice or information by looking at the purpose and effect of the advice given ([2019] EWCA Civ 40). As this was an information case, Grant Thornton’s responsibility did not extend to the mark-to-market losses.
The Supreme Court upheld MBS’s appeal. It held that descriptions of information cases and advice cases should be dispensed with as terms of art since, even in a true information case, the professional could properly be characterised as an adviser and the so-called information could almost invariably be presented as advice. The distinction should not become a rigid straitjacket. The focus instead should be on seeking to identify the purpose that is served by the duty of care assumed by the adviser.
On the facts, the court held that MBS had sought advice on whether it could use hedge accounting to implement its proposed business model and Grant Thornton advised that it could. As a result, MBS adopted the business model, entered into further swap transactions, and was exposed to the risk of loss from having to break the swaps when it was realised that hedge accounting could not, in fact, be used. The court held that the loss fell within the scope of the duty of care assumed by Grant Thornton.

A new roadmap
As part of its analysis in both Khan and Manchester Buliding Society, the court set out a new six-stage roadmap to analyse a claimant’s claim for damages in accordance with the general principle that the damages awarded should seek to place the claimant in the position it would have been in absent the defendant’s negligence (see “The six-stage roadmap” below).
The roadmap offers a simplified approach to considering the scope of a professional’s duty and, at the same time, a widening of the circumstances in which claimants may be able to recover compensation from professional advisers. While many of the questions considered in the roadmap are not new, the court emphasised the importance of the order of the questions and where the scope of duty test is located. The roadmap is therefore designed to reduce the misapplication of the law.
It is important to first look at what risk the duty was supposed to guard against and then consider whether the loss suffered represented the fruition of that risk. This was the point of the mountaineer’s knee example given by Lord Hoffmann in SAAMCO and can be illustrated by the contrasting fortunes of the parties in Khan and Manchester Buliding Society. In Khan, Ms Meadows’ appointment was concerned with the specific risk of haemophilia, so the risk of the child being autistic was not within the scope of Dr Khan’s duty of care; whereas in Manchester Building Society, the loss suffered by MBS was the very loss it had sought to guard against when seeking Grant Thornton’s advice.
Significantly, the court did not say that SAAMCO had been wrongly decided or that the SAAMCO counterfactual should no longer be applied. Instead, the SAAMCO counterfactual should be regarded only as a tool to cross-check the result given after analysing the purpose of the professional adviser’s duty: it is subordinate to that analysis and should not be allowed to supplant or subsume it. While it was an important element of the approach in SAAMCO, the court was clear that it should not be regarded as indispensable and that it risks litigation through elaborate hypothetical scenarios advanced by each party. Nonetheless, it can still offer a useful cross-check.

Applying the roadmap

The six-stage roadmap has since been referred to in a range of cases without being an operative part of the judgment. These include:
  • Knights v Townsend Harrison Ltd, where the High Court held that accountants who had introduced clients to tax schemes or investment opportunities had not assumed a duty of care in relation to advising the clients on the tax schemes or carrying out due diligence on the investments ([2021] EWHC 2563). 
  • Cunningham v Rochdale Metropolitan Borough Council, where the Court of Appeal held that an assault on a teacher represented a breach of the school’s duty of care but causation was not established as the claimant had not demonstrated that, in the absence of the breach, the assault would not have occurred ([2021] EWCA Civ 1719).
  • Rushbond Plc v The JS Design Partnership LLP, where the Court of Appeal held that the High Court had erred in striking out a property developer’s claim in negligence against an architecture firm for damage caused to an empty property when an architect performing a building inspection had left a door unlocked while he was on the premises, thereby enabling a third party to enter and to later start a fire ([2021] EWCA Civ 1889).
The roadmap also formed a central part of the court’s approach to determining liability in BDW Trading Ltd v URS Corporation Ltd and another ([2021] EWHC 2796 (TCC)). BDW Trading Ltd discovered structural defects in a building around 14 years after its construction and brought a claim alleging professional negligence against the structural designers, URS Corporation Ltd. In determining preliminary issues about the recoverability of loss, the High Court held that the correct starting point was to consider the roadmap. Having applied the roadmap, the court concluded that:
  • URS owed no duty of care to avoid damage to BDW’s reputation. There was no authority to support the view that a structural engineer assumes responsibility for loss of reputation on the part of a developer. In addition, the imposition of such a duty would give rise to practical difficulties, including that it would detrimentally affect an adviser’s ability to obtain professional indemnity insurance.
  • URS’s duties did extend to the other alleged losses, including remedial costs and related expenses. The court considered that these losses were entirely conventional, within the expectation of both parties, not too remote, and actionable in negligence.
The Privy Council’s decision in Charles B Lawrence & Associates v Intercommercial Bank Ltd is particularly notable for its discussion on the use of the roadmap and the SAAMCO counterfactual ([2021] UKPC 30) (see “Privy Council applies the six-stage roadmap” below). In similar fashion to the Supreme Court in Manchester Building Society, the Privy Council emphasised that the SAAMCO counterfactual should only ever be used as a secondary cross-check in assessing the scope of duty. In fact, Charles B Lawrence was a case where the SAAMCO counterfactual was positively unhelpful.

A new landscape

The Supreme Court’s introduction of the six-stage roadmap represents a significant change to the landscape of the scope of duty in professional negligence. It is clear that the distinction between information cases and advice cases, and the SAAMCO counterfactual, have been subordinated in favour of a focus on the purpose of the advice sought. Given the difficulties that these concepts have presented, this should be seen as a positive step and should do away with attempts to shoehorn a case into one category or another, or letting the SAAMCO counterfactual take centre stage.
Some may have hoped that the Supreme Court would go further and dispense with them altogether. After all, the division between information cases and advice cases obscures the fact that a professional’s role usually sits on a spectrum of responsibility, while the SAAMCO counterfactual can clearly produce misleading results, as illustrated by Charles B Lawrence. That said, there may remain cases where the use of the SAAMCO counterfactual will prove more help than hindrance.
The shift in focus has important practical implications when it comes to drawing up terms of engagement between clients and advisers. Following BPE Solicitors, professional advisers would no doubt have been quick to draft their terms and conditions with express statements that they were not guiding the whole decision-making process and that the decision to enter the transaction was made by the client alone.
Following Manchester Building Society and Khan, and as reinforced by Charles B Lawrence, advisers will need to revisit their terms and conditions once more, this time to ensure that the purpose of their advice and duty, and what they are retained to do, is set out clearly. The Supreme Court did not explore whether this would place any definitive limit on the purpose of the professional’s advice, and a professional engagement can be a fluid one where the purpose changes over time. Advisers would therefore do well to keep the engagement under review, be alive to “mission creep”, and give careful consideration to express caps on liability.
On a procedural level, the courts are likely to place greater emphasis on understanding the purpose and commercial rationale for which a party has sought advice and identifying the potential risks against which the party was relying on an adviser to protect it. This means that parties can expect the evidential burden to increase, particularly where engagements are not documented properly and fully, and with clear agreement as to how the professional’s advice and work will be used by clients.
Some have speculated whether the reformulated test for assessing the loss arising from a professional’s scope of duty could give rise to new battles between co-defendants around contribution claims. Section 1 of the Civil Liability (Contribution) Act 1978 allows a party to seek contribution from another where they are both liable for the same damage. With the increased focus on establishing a nexus between the negligent act and the cause of loss, there appears to be greater scope to argue that the damage suffered is different. This may mean that it will take longer to settle claims involving multiple defendants.
New battlegrounds will inevitably emerge. The focus on the purpose of a professional’s advice and the risk to be guarded against is likely to admit many an argument on the ambit of that purpose, the identification of the risk, and the nexus between the purpose and loss suffered. A new roadmap, then, but not the end of the road.

The six-stage roadmap

In Manchester Building Society v Grant Thornton UK LLP and Khan v Meadows, the Supreme Court formulated a six-stage roadmap to determine the scope of duty principle in the tort of negligence ([2021] UKSC 20; [2021] UKSC 21, see our article  “Scope of an adviser’s duty of care: a purposive approach). The roadmap analyses the following six questions in sequence:
  1. Whether the harm (that is, the loss, injury and damage) that is the subject matter of the claim is actionable in negligence (the actionability question).
  2. What the risks of harm are to the claimant against which the law imposes on the defendant a duty to take care (the scope of duty question).
  3. Whether the defendant breached their duty by an act or omission (the breach question).
  4. Whether the loss for which the claimant seeks damages is the consequence of the defendant’s act or omission (the factual causation question).
  5. Whether there is a sufficient nexus 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 (the duty nexus question)
  6. Whether a particular element of the harm for which the claimant seeks damages is irrecoverable because:
    • it is too remote;
    • there is a different effective cause, including a new intervening act;
    • the claimant has mitigated its loss; or
      the claimant has failed to avoid loss that it could reasonably have been expected to avoid (the legal responsibility question).

Privy Council applies the six-stage roadmap

The most significant decision in the relatively short time since the Supreme Court’s judgments in Manchester Building Society v Grant Thornton UK LLP and Khan v Meadows were handed down is that of the Privy Council in Charles B Lawrence & Associates v Intercommercial Bank Ltd ([2021] UKSC 20; [2021] UKSC 21; [2021] UKPC 30). Although this was an appeal from the courts of Trinidad & Tobago, the applicable law was English.
Intercommercial Bank lent $3 million to Singapore Automotive Trading Ltd (SAT). The loan was guaranteed by a corporate guarantor, Rafferty Development Ltd, which was to provide security by way of a legal charge over a parcel of development land. Charles B Lawrence & Associates valued the land at $15 million on the basis that planning would be granted for commercial development. It stated that it assumed that there was good title for the land.
SAT defaulted on the loan almost immediately and Rafferty failed to meet its obligations. The bank looked to enforce its security and discovered that the land was suitable only for residential development, so the true value was only around $2.3 million. Making matters worse for the bank, Rafferty did not have good title so the security was worthless.
The bank succeeded against Lawrence at trial, with both the first instance and appeal courts assessing the damages at around $2 million on the basis of the amount lent, plus interest, less the settlement figure received from the lawyers for negligently advising on title. Lawrence appealed to the Privy Council on the assessment of damages, principally by reference to the scope of duty that it owed to the bank.
The Privy Council upheld the appeal, applying Manchester Building Society and Khan but focusing in particular on Khan. Without directly addressing the duty nexus question of the six-stage roadmap, the Privy Council held that losses suffered by a lender as a result of the valued property having a defective title are outside the scope of duty of a negligent valuer. The purpose of the valuation report is to value the property on the assumption that it has good title, rather than to advise on or give information about the title to the land. Although the bank would not have entered the loan but for the negligent valuation, the valuer could not be liable for the land not in fact having good title; this was a matter for the lawyers to have protected against.
The Privy Council also highlighted that, on the facts of this case, applying the SAAMCO counterfactual would contradict the conclusion that the defective title loss was outside the scope of the valuer’s duty of care (see above “The SAAMCO counterfactual” in the main text). This was because, on the counterfactual and assuming no defect in title, the land would have been worth $15 million and the bank’s security would have been sufficient to cover the borrower’s and the guarantor’s default.
This article first appeared in the March 2023 issue of PLC Magazine and is reproduced with the kind permission of the publishers.

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