Recent developments in respect of scope of duty and causation of loss in professional negligence

Publication | March 2018

Before embarking on potentially lengthy and costly litigation, a claimant in a professional negligence action will need to consider carefully whether, in addition to proving a breach of duty, it will be able to establish that it has suffered a loss which is legally recoverable from the potential defendant.

This is not as straightforward as it might initially appear in the light of the requirement, following South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 (SAAMCO), that when deciding whether to award compensation, a court has to be satisfied both that

  • The loss was reasonably foreseeable and not the result of some intervening cause.
  • The damage fell within the scope (or extent) of the defendant’s duty of care.

The appellate courts have had to consider some difficult issues in this context this year, as illustrated by three recent decisions of the Supreme Court.

In the first case, BPE Solicitors v Hughes- Holland [2017] UKSC 21, the Supreme Court had to determine on the basis of some unusual facts whether the loss suffered by the claimant fell within the scope of the defendant solicitors’ duty in the sense established by SAAMCO.

In the second case, Swynson v Lowick Rose [2017] UKSC 32, the Court had to consider whether related transactions which effectively extinguished the claimant’s loss should be taken into account or should be ignored on the basis that they were res inter alios acta.

In the third case, Tiuta International Limited (in liquidation) v De Villiers Surveyors Limited [2017] UKSC 77, the Supreme Court considered how the “but for” test for causation is to be applied as between an allegedly negligent valuer and lender in a refinancing situation.

BPE Solicitors v Hughes-Holland

The claimant lent an acquaintance £200,000 to be used, he erroneously believed, to redevelop a property. The claimant understood that the loan was to be repaid in full after 18 months, together with a return of £70,000. In fact, however, the loan was used to refinance the property, which was never redeveloped. Eventually the property was sold and the claimant only recovered £8,000.

The claimant brought proceedings against the firm of solicitors who acted for him in respect of the loan transaction on the basis that they were negligent for failing to make clear what the true purpose of the loan was. He claimed all his losses arising from the transaction on the basis that he would not have entered into the loan if he had known its true purpose (a “no transaction” scenario).

Whilst the judge at first instance found in the claimant’s favour and awarded him damages of circa £192,000 (the amount of the original loan less the £8000 recovered), this was reversed by the Court of Appeal on the basis that the losses claimed did not fall within the scope of the defendant’s duty (or were not caused by breaches of that duty).

The Supreme Court upheld the Court of Appeal’s decision. Following the approach adopted by Lord Hoffman in SAAMCO, it was held that the solicitors had not assumed responsibility for the claimant’s decision to lend, which the claimant had resolved to do prior to instructing them, and which would always have led to the loss. Lord Sumption reiterated the distinction between an “advice” case, where the professional owes a duty to advise on all aspects relevant to the decision to enter into the transaction and may therefore be liable for all losses flowing from having entered into it, and an “information” case, where the professional is only responsible for supplying an element of the material relevant to the decision (even if that element is critical to the decision, so may lead to a “no transaction” scenario). In this respect their lordships specifically overruled the decision of Chadwick J in Bristol & West Building Society v Steggles Palmer [1997] that the solicitors in that case were liable for all the consequences of the loan just because the claimant would not have lent the money but for the breach of duty.

Lord Sumption stated at paragraph 35: “… where the contribution of the defendant is to supply material which the client will take into account in making his own decision on the basis of a broader assessment of his risk, the defendant has no legal responsibility for his decision”. The question in such an “information” case is whether the loss claimed “flowed from … the particular feature of the defendant’s conduct which made it wrongful”. Accordingly it was not sufficient that the claimant would not have lent the money but for the solicitors’ breach of duty, as the loss did not flow directly from a breach of the specific duty they owed (i.e. the loss did not flow from how the loan was used, as the money would never have been sufficient to carry out the works required to enhance the value of the property in any event).

Accordingly it appears that a claimant seeking damages for breach of duty, even in a “no-transaction scenario”, will need to establish that the loss it seeks either flows directly from a breach of the specific duty owed by the defendant (i.e. directly from the inaccuracy of the material supplied by the defendant to assist the decision making process) or that the defendant has accepted responsibility for all losses arising from the transaction because the defendant has effectively advised the claimant to enter into the transaction (i.e. an “advice” case ), and not merely provided material to assist the decision.

Swynson v Lowick Rose

Swynson, a company owned by Mr Hunt, made a loan to a third party in reliance on due diligence carried out by the defendant accountants. The borrower got into difficulties and eventually the loan was restructured by Mr Hunt (personally) lending the borrower sufficient funds to repay the loan to Swynson. The loan to Mr Hunt was never repaid. Both Swynson and Mr Hunt brought proceedings against the accountants in respect of their alleged negligent advice.

At first instance the judge found that the accountants did not owe a duty of care to Mr Hunt personally but only to Swynson. Nevertheless as both the judge and subsequently the Court of Appeal considered that the restructuring of the arrangements with Mr Hunt were res inter alios acta (“a thing done between others”) and should therefore be ignored, they considered that Swynson was able to claim its losses flowing from the original loan even though that loan had technically been repaid by Mr Hunt.

However, the Supreme Court disagreed on the basis that the restructuring had specifically provided that the loan by Mr Hunt should be used to repay the borrowers’ indebtedness to Swynson, so its losses had been made good, and this could not be ignored. The Supreme Court also considered that Mr Hunt’s other arguments based on the principle of transferred loss and equitable subrogation failed, and ultimately concluded that neither Mr Hunt nor his company, Swynson, could recover any loss from the negligent accountants.

Tiuta International Limited (in liquidation) v De Villiers Surveyors Limited

The claimant lender had originally lent approximately £2.5 million to the borrower in reliance on the defendant’s valuation of the underlying property securing the loan of £2.3 million in its present state and £4.5 million when the development was complete. Ten months later the claimant restructured the arrangements by advancing a new loan to the borrower of approximately £2.8 million in reliance on a further valuation by the defendant, valuing the security at £3.5 million in its present state. It was intended that the original loan would be redeemed from the new loan, leaving a balance of approximately £300,000 available to help fund the development. The borrower subsequently defaulted on the new loan and it is anticipated that the sale of the security will not be sufficient to redeem the loan in full, giving rise to a loss. The claimant sought damages in respect of the whole loss arising from the new loan. It was alleged that the second valuation was negligent, although no such suggestion was made in respect of the first valuation.

At first instance the defendant valuer successfully applied for summary judgment effectively striking out the claim for the majority of the loss on the basis that the loss was not caused by the alleged negligence, as the loss failed the “but for” test as the claimant had already advanced £2.5 million in reliance on the earlier, non-negligent, valuation which it would not have recovered in any event.

However, by a two to one majority, the Court of Appeal allowed the claimant’s appeal. Lord Justice Moore Bick ruled that, based on certain assumptions made during the appeal (including that the new loan was indeed used to repay the earlier loan), the correct application of the “but for” test would mean that the defendant was liable for the loss, because the transaction was structured as an entirely new loan in reliance on the updated valuation and the purpose to which that loan was to be put was irrelevant.

This seemed a surprising outcome because the reality was that had the remortgage not proceeded as a result of the non-negligent valuation the claimant would not have recovered its initial loan of £2.5 million in any event, so it was difficult to see how the negligence can be said to have caused the loss of that sum, a point made in McCombe LJ’s dissent in the Court of Appeal and in the first instance decision.

The Supreme Court allowed the surveyors’ appeal and restored the decision at first instance to strike out that part of the lender’s claim based on its initial advance, thereby limiting the claim to the loss of the circa £300,000. Lord Sumption clearly felt that the Court of Appeal were wrong to have strayed away from the “basic comparison” espoused by Lord Nicholls in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd [1971] 1 WLR 1627, which simply requires a comparison between what the claimant’s position would have been (a) if the defendant had fulfilled its duty of care and (b) its actual position.

In the case of a “no transaction” scenario the comparison is therefore between

  • The amount of money lent by the claimant, which he would still have had in the absence of the loan transaction, plus interest at the proper rate.
  • The value of the rights acquired, namely the borrower’s covenant and the true value of the overvalued property.

Lord Sumption also dismissed a further argument of the lenders that the benefit of repayment of the original loan should be disregarded as collateral under the res inter alios acta principle. On the facts he considered that firstly, on the “basic comparison” analysis, the repayment did not confer a benefit on the lenders and in any event arose as an intrinsic part of the refinancing.

Conclusion

As can be seen from the above cases it is not always easy to predict how the courts will apply the principles of scope of duty and causation of loss to the particular facts of a claim and this aspect will benefit from early and detailed consideration. In particular the last two cases illustrate that the Courts will take into consideration the precise terms and structure of transactions. However the reassertion of the common sense “but for” test by the Supreme Court in Tiuta is welcome and will help lawyers advise claimants about the scope of their potentially recoverable loses with greater certainty.


Contacts

David Stevens

David Stevens

London