Property finance disputes - what can be recovered from negligent advisors?
Manchester Building Society v Grant Thornton UK LLP – Clarification of the SAAMCO test by the Supreme Court
In the property finance arena, as in many other commercial walks of life, businesses and individuals rely on professional advice. This could relate to, for instance, accountancy expertise in relation to financial products, tax specialists on the implications of different property structures, valuation guidance and legal advice.
An important Supreme Court decision was released on 18 June 2021.The judgment is of significance as it reformulates the ‘scope of duty of care’ assessment when considering professional negligence claims.
The Supreme Court has moved away from a strict imposition of the SAAMCO cap and instead the focus is now much more on the purpose of the duty of care owed by the professional.
The SAAMCO Principle
When assessing loss arising as a consequence of a professional’s negligence, a comparison is typically made between what the claimant’s position would have been had there been no breach of duty against the actual position the claimant finds itself in.
The SAAMCO principle places restrictions on the losses that can be recovered by a claimant:
"It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong….The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong."
A distinction has therefore been drawn between “advice” and “information” cases. The SAAMCO cap was applicable in an “information” case so that the recoverable damages exclude losses which would have been suffered even if the incorrect information had been right.
The Supreme Court
The majority of judges in the Supreme Court concluded that when assessing those losses which are recoverable from a negligent professional, one must focus on what is the scope of the duty of care assumed by the advisor. To ascertain this, one must consider the purpose of that duty. This is to be judged by reference to the reason why the advice was being given. It is an objective assessment.
The Supreme Court clarified that the distinction between “advice” and “information” is less relevant and should not be treated as a rigid rule. The focus instead should be on identifying the purpose to be served by the duty of care assumed by the defendant. The SAAMCO cap for “information” cases is simply a tool to cross-check the analysis of the purpose of the duty. The SAAMCO cap is subordinate to that analysis.
In professional negligence cases involving economic loss, the parties would often spend much time arguing over the ‘counterfactual analysis’. These arguments were often complex and detracted from the main substance of the dispute. The reason this was argued is that defendants will typically mount a defence along the lines, even if it was negligent, the claimant would still have proceeded and would have suffered the loss in any event.
This is especially relevant in the property finance arena. One of the more straightforward examples arises in the context of claims by lenders against negligent valuers. A valuer will often argue that a lender would have advanced funds secured against the property in any event (i.e. even if the valuation was correct) and, accordingly, should not be liable for the full amount of monies lost by the lender. The valuer will say it is only liable to the extent of the additional shortfall by its overvaluation.
A more complex issue might be a fund looking to purchase distressed mortgage debt. If the fund’s lawyer failed to spot a material defect in the security, meaning the fund could not enforce to recover monies owed, the position becomes less clear. Often funds purchase debt at a significant reduction to reflect the risks in enforcing. The defendant could well argue the fund would still have proceeded given a greater appetite for risk even if the legal advice had been correct. The Supreme Court’s decision lends clarity to the situation. One must look at the purpose of the advice, here being to advise on the risks of the transaction. Had the fund in this example been so advised of the risks, it is reasonable to conclude that it would not have proceeded. There is now less focus on the ‘counterfactual’ alternative, which is a welcome development given the uncertainty it created.
The SAAMCO cap is just one component when assessing liability. A key issue is to consider the scope of the duty of care which is governed by the purpose of that duty. The question focussed on is whether the loss in question was within, or outside, the scope of duty of care. This is no longer an issue of causation, albeit the Supreme Court was not unanimous on this point.
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