Where does the responsibility lie when it comes to transactional losses?

Solicitors have hailed a Supreme Court decision in a professional negligence case as providing much needed clarity on their liability when they mistakenly give a client wrong information. In BPE Solicitors and Anor v Hughes-Holland (in substitution for Gabriel), five Supreme Court justices led by Lord Sumption unanimously rejected an attempt to overturn a decision that a law firm was not responsible for the entire costs of a disastrous property transaction because it provided allegedly erroneous information after a client had decided to embark upon the transaction.    

It is the first case against a firm of solicitors to reach the Supreme Court since the leading case of Saamco (South Australia Asset Management Corp v York Montague Ltd), in which the House of Lords ruled in 1997 that recoverable losses be limited to the part of the overall loss that was within the scope of the adviser’s duty.

The BPE case arose from services given by Cheltenham business firm BPE Solicitors to a Mr Gabriel over a £200,000 loan to a friend who was a property investor. Gabriel had understood the loan to be secured on a property destined to be converted into offices, however the friend used it to pay off another loan secured on the property. When the friend defaulted and Gabriel subsequently took possession of the property, it was found to be worth only £13,000. Gabriel sued BPE on the basis of documentation the firm had drawn up, claiming his full losses from the doomed venture. 

The judge at first instance accepted that BPE was on an ‘information retainer’ and therefore liable only for the consequences of its information being wrong, but awarded full losses on the basis that Gabriel would not have gone ahead with the loan had he known his money was to be used to discharge existing debts. 

BPE appealed, with the Court of Appeal ruling that Gabriel’s losses were caused by his decision to invest in a venture that was doomed from the outset and by his failure to obtain any valuation evidence or insist on staged payments on completion of phases of the renovation. A trustee of the now-bankrupt Gabriel took the case to the Supreme Court, which upheld the Court of Appeal's decision. 

The judgment states that BPE was not legally responsible for the client’s decision to lend the money, ‘but only for confirming his assumption about one of a number of factors in his assessment of the project’. Even if his assumption had been right, Gabriel would still have lost his money because the expenditure of £200,000 would not have enhanced the value of the property.

‘The development would have been left incomplete, the loan unpaid and the property substantially worthless when it came to be sold into a depressed market under the chargee’s power of sale. None of the loss which Mr Gabriel suffered was within the scope of BPE’s duty. None of it was loss against which BPE was duty bound to take reasonable care to protect him. It arose from commercial misjudgments which were no concern of theirs.’

This decision has provided much needed clarity on the so-called Saamco cap.

This welcomed clarification supports the contention that a professional is not responsible for the full transactional losses of a claimant when it was the claimant's decision to enter the transaction in question. Good news for professionals and their professional indemnity insurers!

If you would like any further information about this please contact the Head of Dispute Resolution at Chattertons, David Rogerson.