BOOM OR BUST? TRENDS IN PROFESSIONAL NEGLIGENCE CLAIMS FROM THE RECENT RECESSION

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1 BOOM OR BUST? TRENDS IN PROFESSIONAL NEGLIGENCE CLAIMS FROM THE RECENT RECESSION A lecture by Andy Stevenson and Nick Curling, Elborne Mitchell LLP 5 December 2012 These notes are derived from a talk by Andy Stevenson and Nick Curling of Elborne Mitchell LLP, given at Lloyd's Old Library on Wednesday 5 December Where specific reference is made to the law it is to English law as at 5 December For specific advice, you should please contact Andy Stevenson and Nick Curling at Elborne Mitchell LLP. Disclaimer: These Notes are for information only and nothing in them constitutes legal or professional advice. They should not be considered a substitute for legal advice in individual cases; always consult a suitably qualified lawyer on any specific legal problem or matter. Elborne Mitchell LLP assumes no responsibility to recipients of these Notes.

2 BOOM OR BUST? TRENDS IN PROFESSIONAL NEGLIGENCE CLAIMS FROM THE RECENT RECESSION Introduction Back in the UK economy was formally in recession and there was a depressed property market for most of the country. It was also a period of very high interest rates and this led to many borrowers being unable to afford their mortgage repayments, leading to repossessions and forced sales by banks and other mortgage lenders. This led to a new phenomenon of the banks and lenders, who had sustained large losses as a result of the collapse, systematically reviewing their lending files to look for instances of negligence on the part of valuers and solicitors in order to bring claims against them for negligence/breach of contract. This was in the knowledge that the professionals were backed by professional indemnity insurers or, in the case of solicitors, the Solicitors Indemnity Fund. That led to a raft of claims being made against the professionals, which took a number of years to resolve. Indeed, some of the cases were still going early into the next decade. Since it was something of a new phenomenon, a large number of cases went to trial as professionals and their insurers and those on the claimant side each tried to establish new law that favoured them as far as possible. This time round we have had a much longer recession and one that was very much a global problem, triggered by a crash in the US property market. The effects were clearly being felt in the UK property market from Autumn 2007 onwards and led in turn to the banking crisis and what became known as the Credit Crunch. This led to the UK economy going into recession in We re not going to get into whether the UK has ever come out of recession, whether there was a double dip recession etc. The bottom line is that, as before, it has unleashed a wave of new claims against professionals. It is difficult to get much of a feel for whether the numbers of claims are higher than they were in the last recession because it is still comparatively early in the cycle. What we can say from our experiences of dealing with insurers and other solicitors and barristers, is that 2

3 people are generally being kept busy with these claims and nobody seems to think that they are tailing off or will do any time soon. One thing that we have definitely noticed this time round is that there are more cases arising out of property development and property investment. The cases in the last recession tended to arise out of residential properties. This time around we are seeing many more claims involving loans by banks etc to developers who were going to construct commercial and residential properties on a site or where the property was being used as an investment. Claims are much bigger, running to millions of pounds, and are generally more complex. Although we will come on to discuss the case law that there has been in a moment, I think it fair to say that there hasn t exactly been a flood of decided cases this time round, certainly not in the way that there was following the early 1990s recession. There could be a number of reasons for this: These days claims against professionals are subject to a Pre-Action Protocols that the Courts expect parties to follow. Whereas before the tendency was to identify a claim and then issue proceedings, now the parties are required to set out their cases in detail pre-action and also to exchange documents. This has undoubtedly led to claims that would have previously ended up in Court being resolved at an earlier stage. Mediation is a method of dispute resolution that is very much in vogue now. It was rarely used before. Whether it takes place pre-action or pre-trial it often results in cases being settled before they get to trial. Lots of new law was made as a result of the last recession and much of it seems to be accepted as correct or difficult to challenge. Consequently, there isn t the same need as there was before for parties to run cases to trial in order to clarify what the law is. The peak of cases probably has not yet been reached. Next year will be 6 years from the crash, meaning that the primary limitation on a lot of cases will expire. Lender claimants are going to have to decide whether to bring claims in respect of these, many of which will be less clear-cut than claims they have already made. So we may get more cases next year and more that give rise to novel or difficult legal issues. 3

4 Scope of the lecture In order to illustrate what changes there have been between the last recession and this one, we thought that the simplest thing is to break things down into the constituent elements that every PI lawyer looks for when asked to look at a claim. These are: Duty owed what professional duty did the individual or firm owe? What was the scope of their duty? Breach of duty did the professional breach the duty owed to the Claimant? Reliance and Causation Did the Claimant in fact rely on the alleged negligent advice and did that negligent advice cause the Claimant to suffer loss? Loss what is the loss that has allegedly been suffered by the Claimant and is it of a type that the law recognises as being compensatable with damages or some other remedy? Contributory Negligence Has the Claimant contributed to its own loss in any way? If so, ought there to be a deduction from the damages received to reflect that? I will begin by talking about the first two. Nick will then talk about the others and we will wrap up with some comments on what we think may happen in the forthcoming months and years. Duty owed It is fair to say that we, as a firm, haven t seen too many cases thus far where duty owed is a major issue because it tends to be apparent from the documents. Where it is in dispute, the starting point will often be whether there is a written contract in place between the professional and his client. This will often include precise details of the scope of the retainer and the obligations on the two parties. The law will also imply into every relationship a duty on the valuer to act with reasonable skill, care and diligence. In the absence of a written contract, or often in addition to it, case law can help determine the scope of the duty owed. For instance 4

5 Smith v Eric S Bush (1990) This was a House of Lords decision from the last recession. Mr Bush was a residential property surveyor. He was retained by a mortgage lender, Abbey National, to value a house in Norwich that Mrs Smith wanted to buy with funds to be lent to her by Abbey National. She paid a small fee to Abbey for the valuation. Mr Bush issued a written retainer that contained a term that he could not be liable in negligence to Mrs Smith. Mr Bush valued the property and wrote a report saying that no essential repairs were required. Following that Abbey lent Mrs Smith the money to buy the house. Soon afterwards, the roof was severely damaged by bricks that had fallen off the chimney. Mrs Smith brought proceedings against Mr Bush for damages alleging that he owed her a duty of care, that he had breached it by giving an incorrect statement as to the condition of the property and that his purported exclusion clause was contrary to the provision of the Unfair Contract Terms Act 1977 and thus void. The House of Lords agreed and held that Mr Bush was liable to Mrs Smith for his negligent misstatement and that the purported exclusion was not reasonable and therefore invalid. It is important to bear in mind that this was a case where the Court extended the scope of the valuer s duty to both lender and purchaser in circumstances where it was an individual buying a house to live in. Contrast that with: Scullion v Bank of Scotland Plc [2011] Mr Scullion (S) was a prospective buy-to-let property investor. Colleys (C) were a firm of property surveyors whose business had been transferred to Bank of Scotland (B). In 2002 S wished to buy a 2 bedroom flat in Cobham, Surrey on a buy-to-let basis and S s mortgage broker (M) had engaged the services of C to value it, but not on behalf od the mortgage lender. C gave an open-market value of 353,000 and a rental income of 2,000 pcm. S had agreed to pay 352,950 for the property but ultimately only paid 299,800 after various discounts and deferred consideration. After completion, S discovered that he could not let it for the amount suggested and was only able to let it for 1,050 pcm. 3 ½ years later, S sold the flat for 270,000, but still owed a significant shortfall to M due to various administration charges and fees. S brought a claim against B as the current owners of C s business and 5

6 argued that he had bought the flat on the basis of C s valuation, both as to market value and rental income and that he would not have entered into the transaction had it not been selffinancing. C knew he was a buy-to-let investor and it was argued that it was reasonably foreseeable that if the valuations were inaccurate he would be forced to sell, So S claimed that B was liable on that basis. S claimed that he was entitled to damages reflecting the fall in value and losses sustained as a result of his inability to let the property at a higher rate. It was held at first instance that C knew or ought to have known that S would be relying on both aspects of its valuation to decide whether or not to purchase the flat and therefore owed a duty to S. However, it clearly had not been engaged to advise on whether he should proceed with the purchase. The Judge also made a decision on quantum that Nick will deal later on. As regards scope of duty, B appealed on the grounds that the case was distinguishable from Smith v Eric S Bush as the transaction was not a domestic householder purchasing a home for him/herself but was for an investment and the transaction was therefore (from the point of view of S at least) commercial in nature. B also argued that S had not in fact relied upon the valuation by C and would have bought the property anyway. Held: appeal allowed. The Court of Appeal said that whether S had relied on the valuation was a matter of fact for the judge to determine and there was no reason to interfere with the underlying decision. However, it went on to say that this case was distinguishable from Smith v Eric Bush. Given that it was a commercial transaction for S rather than him buying a house to live in, the CA held that it was not sufficiently clear that C would have foreseen that S would simply rely on its valuation rather than seeking his own independent valuation, as a prudent investor would. There were many factors that would not be covered in the valuation provided by C that C would expect S to engage his own valuer to consider, e.g. the ease of letting the property, any rent-free period that it may be necessary to allow and any other fees or terms that may need to be agreed. There was only one section of C s report dealing with rental value, entitled Suitability for Letting, which it was considered might have been included primarily to confirm to M that the property was suitable for the purpose for which it was being acquired by S. There was no inherent likelihood that a purchaser, buying a flat for the purpose of letting it out, would rely on a valuation provided to the mortgagee; accordingly C did not owe a duty to S. So that is a significant marker being put down that the Courts do not regard those buying individuals who buy property for investment as the same those buying a home for themselves 6

7 and the Court are not prepared to imply a duty of care onto a valuer who is retained for the purposes of a prospective loan to a BTL/commercial customer. However, S has been given permission to appeal to the Supreme Court on the question of duty owed and so the story has not ended. We understand the case is likely to be heard in early It could, if the decision is reversed again, have potentially major ramifications for valuers and their insurers given the prevalence of BTL mortgages in the last decade. But in order to try and determine any trends in the way that the Courts are looking at the duty owed professionals in these recessionary times, it is worth briefly looking at a few other recent cases involving professionals. First, Swain Mason v Mills & Reeve (CA 2012) a Court of Appeal decision from earlier this year regarding the scope of a solicitor s ongoing duty to advise in changing circumstances. S was a businessman who had ceased to work full time and decided to sell his business by way of a management buy-out. He retained M&R to advise on this and also on tax advice pertaining to the buy-out (but not as to S s affairs generally). Following M&R s advice, the buy-out was executed by way of a share purchase agreement. Two weeks afterwards, S died whilst undergoing a routine heart procedure. It transpired that there was a 1 million inheritance and capital gains tax liability following S s death. M&R had not advised as to this. Cs, who were S s daughters were also his executors and owned shares in S s business, claimed that M had negligently failed to give advice on these issues and that, had they done so, the buy-out would have been deferred until after the heart procedure, thereby avoiding the tax consequences. At first instance the Judge held that, although M&R were under a continuing duty to advise as circumstances changed, on the facts they were not retained generally to provide S with personal tax advice and had no knowledge of his medical condition other than that he was having a routine procedure and were notified of this by chance rather than with the specific intention that advice was to be provided. Thus they held not to be under a duty to advise generally on the tax consequences following S s death. C s appealed but the CA upheld the first instance decision. 7

8 It is also worth looking at Alexander Langsam v Beachcroft LLP & Others (2012), another recent CA case. L had originally retained B to advise him in relation to a professional negligence case he had against his former accountants. B settled that case on instructions but L subsequently brought professional indemnity proceedings against B alleging that they had been excessively cautious and that, had less pessimistic advice been given, he would have settled for more. B maintained that the crucial advice had been given by leading counsel and that had, entirely reasonably, adopted it. B was successful at first instance. L appealed arguing, amongst other things that B was under a duty to continue giving advice. The Court of Appeal held that the duty of a solicitor as regards advice from leading counsel is to consider whether it is obviously or glaringly wrong and B was not liable for having adopted counsel s advice and not expanded upon it as to all potential outcomes at trial. So, again, the Court here, was not prepared to extend the scope of a professional s duty even though it would have deeper pockets in the background able to pay any damages. So, for anyone fearing a spate of banker-bashing by the Courts and, by extension professional- and insurer-bashing, doesn t find any support from this case. See also Newcastle International Airport v Eversheds LLP (2012) for another recent example of the Court refusing to extend the duty beyond the contractual retainer. Breach of duty With the existence of a duty of care more often than not, undisputed, many more cases are fought on the basis of whether the professional has breached the duty of care owed. As above, the law implies a duty into all professional retainers that the professional is to act with reasonable care and skill when carrying out his/her duties. This basic starting point was clarified further by our old friend the Bolam test that derives from Bolam v Friern Hospital Management Committee (1957) where it was held that [A doctor] is not guilty of negligence if he has acted in accordance with a practice accepted as proper by a responsible body of medical men skilled in that particular art This has subsequently been adopted, out of the medical field, to professionals generally to mean that a professional, whether it be a valuer, solicitor, quantity surveyor, is required to 8

9 operate according to the standard of the reasonably competent [valuer, solicitor, quantity surveyor etc] in the same circumstances. It means that a professional can operate in a manner that the majority of reasonably competent professionals in that field might not consider the most appropriate way, provided that there is a smaller body, but also a reasonably competent one, that would support that approach. Certain other points have also come out of the multitude of claims against valuers in particular arising from the last recession. In the case of valuers, it is clear that they are entitled to be lucky. That is, he/she can adopt a negligent methodology, but if it results in a non-negligent answer, then the professional is not negligent Merivale Moore plc v Strutt & Parker (2000). Similarly, valuation in particular, is recognised by the Courts to be an art not a science. It is understood that two valuers can value the same property and come to different conclusions, both of which would be regarded as reasonably competent and thus not negligent (see Singer & Friedlander v John D Wood & Co (1977)). This has led to the adoption of margins of error whereby the Courts are prepared to accept, usually based on expert evidence, that a particular property has a particular margin of error attached to it eg +/- 10%, sometimes referred to as a 20% bracket. If the Court determines that the true value of a property was X and the alleged negligent valuation was within the appropriate margin, then the valuer will not be negligent. On the other hand, if his/her valuation is outside that margin, then they almost certainly will be (unless they can show that he still exercised reasonable skill and care). This continues to be a regular feature of valuer claims in the current recession, though the debate tends to focus on which margin of error ought to apply. With residential developments (eg a 3 bedroom Victorian terrace in a London street), the scope for debate is relatively small die to the large pool of available comparable evidence. However, where as we are seeing, claims in this recession involve large residential developments, pubs, amusement arcades, grade II listed conversions, offices etc, it is much more difficult to determine what the true valuation should be because suitable comparable evidence is more limited. 9

10 Some assistance has been derived from the 2011 Capita v Drivers Jonas case, which involved a multi-million pound shopping centre and an alleged negligent valuation. It was also a case that was very recently decided by the Court of Appeal (8 November 2012) so is worth looking at for that reason alone. Capita Alternative Fund Services v Drivers Jonas [2011] Matrix (M), was a property investment company that sponsored and promoted investments into Enterprise Zone syndicates and Enterprise Zone property unit trusts (EZPUTs). Capita Alternative Fund Services (C) was the trustee of the EZPUT through which individual investors invested on the basis of an information memorandum issued by M, who was the trust manager. In 2001 C & M engaged Drivers Jonas (D) to prepare a valuation report on the lease of a factory outlet shopping centre (FOC) in Chatham, Kent. D did so giving open market value of the lease as million and a value of million with the benefit of enterprise zone allowances. M & C relied on D s report when C acquired the lease of the FOC for 62.85m. D was paid more than 500,000 for the report, of which nearly 400,000 was for investment and valuation advice When the FOC was opened in 2003, only about 60% was let. It proved to be quite difficult to let units and for tenants to trade there successfully; trading figures were well below those that had been forecast by D in 2001; in short the property was not a commercial success. C & M brought proceedings against D alleging that D generally did not have the necessary expertise to value such a development with the result that their advice was wholly inadequate, Specifically, it was alleged had negligently failed to prepare an assessment of the FOC s ability to attract consumer spending (known in the trade as a CACI report ), which in turn led to D overstating the rent, value and commercial prospects of the development and that D failed to assess the attractiveness of the location and design of the centre and the competence and experience of the developer to operate the centre. D defended the claim on the basis that they had competently valued the property. They also challenged causation, (in that they said the investors knew it was a high risk venture and were primarily interested in tax avoidance than property investment returns), and quantum). Held: in favour of C & M. D had been retained to prepare valuations of the development, carry out due diligence and negotiate the price and terms of the purchase. D therefore owed a duty to C & M to exercise the reasonable standard of skill and care to be expected of an 10

11 ordinarily competent valuer and commercial property investment advisor in undertaking these actions. D did not have the required experience or expertise to advise on the development and was in breach of duty by taking on the project. D failed to commission or rely upon full retail performance analysis reports, despite being aware they were used by others carrying out commercial appraisals at the time. The failure to prepare the CACI report was negligent. D also failed in a number of other duties including not carrying out proper due diligence in respect of the developer, overestimating the figure for rent, failing to consider the impact of comparable centres, setting the budget too low for incentives and marketing, not advising on problems created by location, design, layout and the listed status of the centre. Accordingly the valuation was too high (almost 30%), well outside of the reasonable range suggested by the experts (15%) and was therefore negligent. The Judge accepted C & M s evidence that it would not have proceeded at all had they received competent, correct advice. C & M were awarded 25.5m in damages and interest again, see below under Loss for more detail regarding this. It is a complicated, fact-specific, case that has a number of features that are not of wider application. However, on the subject of margins the Judge, gave a helpful over-view of the law. This does have a wider significance. It was held that the analysis of the case law undertaken in the 2010 case K/S Lincoln & Others v CB Richard Ellis Hotels Ltd, was correct, namely: For a standard residential property: +/- 5%; For a one-off property: usually +/- 10%; For a property with exceptional features : +/- 15% Higher rates are possible (indeed +/- 20% was applied to one aspect of the Drivers Jonas valuation). So we now have some firm judicial guidance on what the margins of error are. The dispute in practice tends to be whether a particular development property falls into the +/-10% or the +/- 15% category. The Judge also said that it was appropriate to determine what the appropriate margin was for one of the constituent elements of the valuation, the yield. Although on the facts, the overall 11

12 decision was determined by the question of whether the valuation as a whole was outside the appropriate margin, which it was. Court of Appeal (8/11/2012) D appealed the decision, but not as to breach of duty. It alleged that that the expert evidence had been inadequate to allow the Judge to make a finding that the true value of the lease was By a majority of 2-1, the CA the decided that the Judge had been entitled to come to that conclusion. Second, Drivers Jonas succeeded on their claim that the award of damages was too high. Nick will deal with this later on under Loss. So, all in all, D remained negligent, albeit for a lesser sum. More significantly, the Judge s comments on margins remain sound as a guide for dealing with claims. Next on the subject of breach of duty, I want to briefly mention a couple of cases arising out of planning and use of land issues. First, Platform Funding Ltd v Miller Parris Solicitors (2012). Miller Parris had acted for both for the borrower (J) and for the mortgage lender Claimant, Platform, in relation to a leasehold property. MP reviewed the lease and advised P that it contained no provision which imposed a material restriction on occupation or which might influence P s decision to lend. The lease was a sub-lease and J s landlord was a company (S). A dispute arose between S and J as J was in arrears of ground rent and service charge and had sub-let the flat to a tenant whose behaviour had led to the police being called. S obtained a determination from the Land Valuation Tribunal that J was in breach of a restrictive covenant by allowing the flat to be occupied by persons who were neither his family nor members of his household. S served notice of intention to forfeit and C agreed to pay the amount of arrears outstanding. C sought damages for breach of contract and/or negligence by MP in failing to report or warn about the effect of the restrictive covenant. The Claimant made an application for summary judgment and on the issue of breach of duty/breach of contract was successful, the solicitors having failed to comply with their obligation to report any feature of the title which might reasonably be expected to be material in the sense of adversely affecting the value of the property and its future marketability. (Issues of causation and loss were deemed not appropriate to be dealt with summarily). 12

13 The significance is that this comes pretty close to establishing strict liability for a solicitor who fails to report a restrictive covenant or some other encumbrance on the property that might reasonably be expected to affect its value or marketability. But contrast this with the case of Middle Level Commissioners v Atkins Ltd [2012] Middle Level Commissioners (M) were a drainage authority. Atkins Ltd (A) is an engineering consultancy. M wished A to advise as to planning issues involved in building a new pumping station on a particular site. A asked the local planning authority who said planning permission would not be required as it would be a permitted development existing legislation. A accordingly advised M of this, although in its advice it was noted that the issue of permitted development was open to interpretation. M went ahead with construction but local residents objected to the required temporary access road and issued proceedings against M, on grounds including the lack of planning permission. M settled the case by undertaking not to use permitted development rights and paid the residents costs. M brought a claim against A for negligence in advising that the pumping station was not permitted development. Held: judgment given for A. A had conducted proper investigations and come to a view that, although not every engineering consultant would have come to, a respectable body of.engineering consultants would have come to and thus it could not be said that A s advice fell below the required standard. The majority of what I will cover will focus on Loss and the calculation of damages. Consistent with our intention to cover recent cases in all aspects of a professional negligence claim, I will first deal briefly with a few cases on the issue of causation. Reliance and Causation Ordinarily, the fact that a claimant relied on the professional advice is not difficult to establish. Indeed, in Levicom International Holdings v Linklaters the Court of Appeal in effect held that there is a rebuttable presumption that a client who pays for professional advice relies on that advice. Whilst reliance may not usually be an issue, proving that the negligent actions of a professional caused the loss can be less straightforward. 13

14 The classic test for causation is often known as the but for test. In other words, but for the negligence of the professional, a party would have taken a different course of action or would have been in a better position than they now find themselves in. None of the recent reported cases involving causation are particularly ground breaking but they serve as useful illustrations, In Godiva Mortgages Ltd v Khan (2012) Godiva claimed damages from the borrower, a Ms Khan as the first defendant for fraudulent misrepresentation and Keepers Legal LLP, its solicitors, for breach of contract and/or negligence. Keepers Legal LLP had acted for Khan and Godiva in the purported purchase of a house by Khan from her brother-in-law. The purchase price was said to be 495,000, of which 173,250 had already been paid by way of a family deposit. Godiva had agreed to make a mortgage advance for the remainder ( 321,750). On completion, Keepers Legal were informed that 305,374 was sufficient to complete the purchase and that they could retain 16,376 for costs and disbursements. Before the first repayment was due on the mortgage, Khan cancelled her direct debit and it was discovered that the transaction was fraudulent. The purported vendor s solicitor had failed to discharge the existing mortgage on the property, the money in its client account disappeared and the solicitor ceased practising. It emerged that the purported vendor (as it happened, Khan s brother-in-law) had in fact died over a year before and all documents signed by him were forgeries; accordingly, Khan had not obtained title to the property and Godiva had an unenforceable mortgage. Godiva claimed against Keepers Legal for failing to advise it of discrepancies in the deposit paid, that Keepers Legal did not have control of the payment of all monies and the apparent reduction in the price being paid due to the 16,000 or so not being needed from Godiva s mortgage advance, issues Godiva said would have caused it to refuse to lend. Although the Court held that Keepers Legal had acted in breach of duty, the circumstances of the transaction (i.e. a known family sale with a substantial equity cushion and apparent confirmation from the vendor s solicitors as to the payment of the deposit) and the lack of evidence on the part of Godiva on the issue of what it would have done had it known the true position meant that it could not be established that Godiva would not have proceeded with the transaction. Accordingly, it could not be said that Keepers Legal caused the loss suffered. Given that Keepers Legal were not represented at trial, one does have to question why on earth Godiva s solicitors did not ensure the Court had at least some evidence before it on the issue. 14

15 A further example that the burden is on the claimant to prove it would have acted differently had it been properly advised can be found in the case of Platform Funding Limited v Miller Parris Solicitors that Andy mentioned earlier. In this case, although Platform Funding successfully established breach of duty on a summary judgement basis, the Court agreed with the defendant that it had an arguable case that Platform would have continued with its loan regardless of whether it had been advised of a restrictive covenant. The instance of fraudulent conduct by one or more parties often plays a part in professional negligence claims involving lenders. Another example of causation not being established, this time as a result of fraudulent conduct on the part of a third party, arose in Platform Funding v Anderson & Associates (2012). Andersons, a firm of valuers, were found to have breached their duty to carry out the valuation in accordance with the RICS Red Book requirements, which provided that, in the context of new build properties, valuers should identify any incentives being offered as they will have an impact upon value. However, the Court also found that, even had Andersons attempted to perform their duties with the appropriate care and skill, they would have been unable to ascertain any further information that would have resulted in their valuation being any different. The reason for this was that the developer had arranged for artificially inflated comparables to be provided by his marketing company. Any loss that was suffered was therefore not caused by Anderson but by the deceitful actions of the third party developer. Loss/Quantum I d now like to focus on the issue of loss and the calculation of damages. The starting point of any discussion about the assessment of damages in a professional negligence context has to be the case of South Australia Asset Management Corporation v York Montague, more commonly known by the abbreviation SAAMCo. SAAMCo was a House of Lords case from the mid-nineties involving the calculation of damages for a negligent property valuation. At the centre of the case was whether the negligent valuer was liable for all reasonably foreseeable losses of a transaction entered into as a result of the negligent advice (as the lender contended and the Court of Appeal had held) or was the liability restricted to the consequences of the information provided being inaccurate (as the valuer contended). Lord Hoffman, in his Judgment, answered the question as follows: 15

16 I think that one can to some extent generalise the principle upon which this response depends. 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. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. 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. Lord Hoffman s judgment effectively created a distinction between information (recoverable damages are restricted) and advice cases (recoverable damages will be the whole loss suffered). What constitutes mere information and what constitutes advice has caused both lawyers and the Courts many hours of debate ever since. In the context of a property valuer, the law generally appears to be well settled and as a result there have been relatively few recent reported cases on the point. A valuer is providing information by way of his valuation. The damages for getting the valuation wrong are capped (often referred to as the SAAMCo Cap ) at the difference between the negligent valuation and the true valuation. So, for example, if a bank s actual loss suffered was 4m, the negligent value 5m and the true value 3m, the bank s recoverable damages would be capped at 2m (plus interest). Two recent valuer s cases are worth referring to. 16

17 First is the Scullion case referred to earlier by Andy. Due to the Court of Appeal s decision that there was no duty owed and so no liability on the valuer s part, the first instance decision in relation to quantum is strictly speaking now obiter. It has, in any event, been questioned by the Court of Appeal. Colleys had given a Market Value of 353,000 and a rental value of 2,000 per month. As Colleys had clearly not been engaged to advise on whether Mr Scullion should proceed with his buy-to-let purchase, the recoverable losses were those that were attributable to the incorrect valuation: the overstatement of capital and the rental values. It was held that the true market value was in fact 300,000 and that the rental value was 1,100 per month. Regarding the capital value, the Court at first instance held that Mr Scullion could not recover more than the difference between what he had actually paid and what the true value of the property was. As Mr Scullion had in fact paid 299,800, 200 less than the true value, he was not entitled to recover anything as he had suffered no loss. This contention does not appear to have been challenged on appeal. In relation to the rental valuation, the Court at first instance held that Mr Scullion was entitled to recover damages to compensate him for the losses sustained by the overvaluation of the rent and the cashflow difficulties caused as a result. This included monthly interest payments on the mortgage, ground rent, service charges and charges attributable to cash-flow difficulties which he would not have faced had the flat been generating the expected rental, such as direct debit rejection fees, monthly arrears administration charges and legal fees. Credit had to be given for any rental income actually received. Mr Scullion was not entitled to recover acquisition costs or the costs of fitting out the property to be let since it could be fairly assumed that a purchaser would not rely on rental income to fund acquisition costs. For similar reasons, the first payment of interest to the lender was not recoverable on the basis that it would take at least a month to achieve a letting. The Court of Appeal questioned the calculation of damages at first instance on the obvious basis that the Judge had failed to apply the reasoning of SAAMCo and restrict the damages to the extent of the rental value being wrong. Lord Neuberger MR said as follows: In this case, the inaccurate information was that the rental value of the Flat was 2,000 per month, and the extent of the inaccuracy was that the correct figure was about 1,050 per month. The damages which the Judge awarded effectively ascribed 17

18 all the loss of revenue suffered by Mr Scullion to the inaccurate rental valuation. In other words, he seems to have thought that the damages should be such as to ensure that Mr Scullion was not out of pocket, at least in terms of revenue, as a result of buying the Flat. I do not consider that such an approach represents the right approach to assessing the loss that he suffered as a result of Colleys negligent rental valuation of the Flat. that approach is close to treating the negligent misstatement as a warranty. Although it did not carry out a calculation of damages as it was unnecessary to do so, it is clear from the Judgment that the Court of Appeal would have applied a cap of 950 per month and would have factored expected rental void periods where no rent would be received into any calculation. The second valuer s case is Capita v Drivers Jonas, also already referred to by Andy. At first instance, Capita was awarded damages of 18.05m, being the difference between the negligent market value given for the factory outlet of 62.85million and the correct market value, held by the Court to be 44.8million. Drivers Jonas appealed the damages awarded on the basis that the Judge had failed to bring into account tax benefits received by investors on the purchase of the factory outlet. The Court of Appeal agreed and said it would be unreal to ignore the entitlement of the investors to tax credits which in practical terms (for them) reduced the purchase price. Since tax considerations were part and parcel of the scheme they were relevant in calculating damages. It was held that the correct approach was to deduct tax relief from both the negligent million figure and the correct 44.8 million figure, with the resulting difference between the two being awarded as damages. Capita was still awarded 11.86million plus interest. So much for knowing how the Court will apply SAAMCo in the context of valuer s claims, but has the current round of cases shed any light as to how SAAMCO is applied to other professionals? Well, generally speaking there has been little that gives assistance. 18

19 In relation to claims against solicitors, at least in the context of lender claims, the application of SAAMCo has proved to be perhaps the most difficult. The position can be roughly summarised as follows: Where the solicitor fails to advise on issues that might affect the value of the security (such as a right of way), then damages will usually be capped at the difference between the value advised and the value taking into account the issue (Bristol & West v Colin Bishop). Where the solicitor fails to advise on issues that might affect the value of the borrower s covenant (such as a second mortgage being taken out), damages will usually be capped between the value of the covenant with and without this information (Bristol & West v Mothew). Finally, where the solicitor fails to advise on issues that might affect the perception of the borrower or the rationale for the loan, damages will usually be everything flowing from entering into the loan (Bristol & West v Steggles Palmer). These distinctions, particularly in relation to the last scenario, continue to cause great debate and I believe we can expect to see further cases in the future. Each case very much turns on its facts, however, and we may never get to a definitive position. In this recessionary round of cases, Elbornes has seen an increasing number of claims being levelled by lenders against quantity surveyors engaged to advise on the feasibility of a particular development and thereafter to monitor its progress against the expected budget and programme. SAAMCo is generally argued by the QS, and in the context of a negligently assessed construction budget it is probably right that damages should be the difference between the negligent and the true budgets. But quantity surveyors owe a number of other duties, including, prior to the loan being made, advice as to how long the development will take to complete and the competency of the developer to undertake the development. Once the development is up and running, advice will be given as to cost overruns, delays to the expected completion date and whether the development can be completed for the remaining budget. Under the principles established by SAAMCo, the scope of each of these duties, which seem to be a mixture of information and advice, should in theory be individually assessed. How the Courts will tackle this exercise is as yet unclear as there appears to be no reported cases. 19

20 Another professional where we are seeing an increase in claims is investment advisors. While the decision may well turn on its facts rather than being of general application, the case of Rubenstein v HSBC Bank Plc is a recent Court of Appeal decision against an investment advisor and is a useful illustration of how SAAMCo principles were applied. In 2005, Mr Rubenstein approached HSBC wanting to deposit the proceeds of the sale of his home, some 1.25million, for up to a year whilst he looked for a new property to purchase. Mr Rubenstein met a Mr Marsden, a financial advisor in HSBC s private client arm. He told Mr Marsden that he wanted absolutely no risk in any investment, and effectively wanted the risk akin to a simple cash deposit. Mr Marsden advised that an investment should be made in the Enhanced Variable Rate Fund within the AIG Premier Access Bond. No advice was given that the EVRF was an investment in the market and therefore subject to market fluctuations, nor was there any discussion of alternative funds. Mr Rubenstein happily placed his money in the EVRF and, when he did not purchase a property as planned made what turned out to be the ill-fated decision to leave his capital within the EVRF whilst he continued with his search. We wind forward to September 2008 and as everyone knows, AIG hit severe financial difficulties causing investors to withdraw their money from the EVRF and in turn AIG to suspend withdrawals. Mr Rubenstein decided to follow AIG s offered exit strategy which saw him suffer a capital loss of 180,000, which he then sought to recover from HSBC on the basis that he had been negligently advised by Mr Marsden. HSBC defended the claim on the basis that the loss arose due to unforeseeable market conditions. At first instance, the Judge found that HSBC had been negligent in the advice it had given to Mr Rubenstein about the nature and risks of the EVRF. He also found that HSBC had been in breach of a number of FSA Code of Business Rules about understanding the needs of the customer and communicating advice as to the risks of particular products. However, the judge went on to find that the loss suffered was too remote to have been foreseeable by HSBC. He noted that the damage which eventuated, namely, the closure of the fund and a substantial loss of investors original capital, was triggered by subsequent events. If those were not events of a kind which were foreseeable when the investment was made, I do not think that it can be said that the structure of the product truly caused the loss. The risk 20

21 of one of the world s largest insurance companies defaulting in September 2005 was, the Judge said, unthinkable. Mr Rubenstein appealed on the issue of remoteness and the Court of Appeal agreed. Lord Justice Rix, in giving his Judgment, referred to Lord Hoffman s analogy of a doctor and the mountaineer with a dodgy knee used in SAAMCo to demonstrate the distinction of Mr Marsden s role. A mountaineer is told by his doctor that his knee is fit for a mountain climb, but the doctor is negligent, ie the knee is not fit. If the mountaineer had been told that his knee was not fit, he would not have gone climbing. On the climb the mountaineer suffers an accident which, however, had nothing to do with the knee. Is the doctor liable for the consequences of the mountaineer s injury? No, suggested Lord Hofmann, even though the injury would not have happened but for what Lord Hoffmann called both information and advice. The reason is: The injury has not been caused by the doctor s bad advice because it would have occurred even if the advice had been correct. The importance of the example, as it seems to me, is that it illustrates the manner in which we think naturally of causation and responsibility. Ex hypothesi, the injury was caused by something else entirely, for which the doctor had no responsibility. Although the mountaineer would not have gone on the mountain unless he had been given the all clear from the doctor, we would not select the doctor s negligent advice as the cause of the mountaineer s injury unless the injury had been contributed to in some material way by the unfitness of the knee. This is despite the fact that an accident on the mountains whether it is due to something entirely fortuitous such as an avalanche, or is the result of some faulty piece of equipment, or of the weather, always unpredictable but inherently so is always, more or less but readily, foreseeable. However, the doctor is responsible for the mountaineer s knee, but not for the weather, the equipment, or sheer bad luck. the doctor did not advise, let alone recommend, his patient to go mountaineering: he merely told him that his knee was in good shape. Mr Marsden, however, not only advised Mr Rubenstein on the investment of his capital, he recommended a particular investment. He, so to speak, put him in it. 21

22 Lord Justice Rix went on to hold that it was not the foreseeability of AIG collapsing that was relevant but the collapse of the value of the market for securities in which the EVRF was invested that was the cause of the loss. HSBC had a duty to protect Mr Rubenstein from exposure to market forces arising from his request for the same. HSBC was not free of responsibility simply as the incidence of market loss was unexpected. The Court of Appeal agreed with the first instance judge s decision on quantum. The measure of damages is: the sum which will place Mr Rubenstein in the position he would have been in if the contract with the bank had not been broken. It follows that Mr Rubenstein loss should be calculated as if HSBC had succeeded in recommending the most suitable investment, using that investment as a comparator. A couple of final cases on the quantum of damages before I move on to the final topic of contributory negligence. How a claimant treats receipts of monies can be relevant in the assessment of loss. In Capital Home Loans Ltd v Countrywide Surveyors, Countrywide valued a property in 2004 against which CHL advanced a loan. Countrywide valued the property again in 2005 and CHL made a further loan against the increased value. The Borrower defaulted on his payments in 2007, gave possession to CHL who sold the property. Due to the set-up of CHL s automated system, the proceeds were applied to the second (2005) loan, discharging it in full and then the remainder applied to the first loan, discharging it in part. CHL sought to recover the shortfall from Countrywide, but only alleged that the second (2005) valuation had been negligent. The County Court agreed with Countrywide s argument that CHL had appropriated the monies to discharge the 2005 loan in full and accordingly CHL had suffered no loss in respect of it. The only loss related to the shortfall on the 2004 loan and the 2004 valuation was not alleged to have been negligent. It strikes me that this computer says no situation was easily avoidable for CHL. Had the proceeds of sale been applied against the earlier loan (and I can see no obvious argument that 22