In an eagerly anticipated recent judgment, the Supreme Court in BPE Solicitors v Hughes-Holland has not only reaffirmed the doctrine in South Australia Asset Management Corpn v. York Montague Ltd  A.C.191 (SAAMCO), namely that damages are to be assessed by reference to the professional's scope of duty, but has provided guidance explaining the rationale of the oft-criticised decision.
In so doing, the Supreme Court has narrowed what lender claimants can expect to recover from negligent legal advisors, expressly stating that the decisions in Bristol and West Building Society v Steggles Palmer and Portman Building Society v Bevan Ashford (where the solicitors were found to be liable for the lender's full loss where they had failed to report facts which called the integrity of the borrower into question) were wrongly decided.
In late 2007, Mr Gabriel agreed to loan £200,000 to a company called Whiteshore, which was controlled by an acquaintance, Mr Little. Mr Gabriel intended the loan to be used for the development of a disused building, which was owned by another company, High Tech, also controlled by Mr Little. Mr Gabriel instructed his solicitors, BPE, to prepare the necessary loan documentation.
BPE were told by Mr Little that the loan was to be used by Whiteshore to acquire the building from High Tech, discharging another lender's security in the process. The balance of the loan monies was put to various other uses. BPE did not bring this to Mr Gabriel's attention or take his instructions that the loan monies were to be used for development purposes only. Further, the loan agreement drafted by BPE stated that the purpose of the loan was to redevelop the building, giving Mr Gabriel the wrong impression that the loan transaction was as he intended.
The redevelopment never proceeded and, after enforcing his charge, Mr Gabriel lost more or less all of his money.
The first instance Judge held that, had he known the true position, Mr Gabriel would not have advanced any monies and awarded him damages for his full loss.
The Court of Appeal overturned the award on the basis that BPE's duty was to provide information to Mr Garbiel and not advice as to whether he should enter into the transaction and that, as the development was doomed to fail form the start, Mr Gabriel would have suffered his loss regardless of BPE's negligence.
The Supreme Court upheld the Court of Appeal's decision.
It held that BPE's role was to provide information rather than to advise Mr Gabriel on whether to enter into the transaction. They had not assumed responsibility for Mr Gabriel’s lending decision. Further, Mr Gabriel had not discharged his burden of proof that, if the loan had been used to develop the property, he would have recovered all of his money because it was clear that the development would not have been successful. Mr Gabriel's loss had therefore been caused by his own misguided commercial decisions and not the wrong information supplied by BPE.
Importantly, the Supreme Court explained the rationale behind the SAAMCO doctrine, which has caused lawyers much debate (at least outside the context of claims against property valuers) as to what exactly it meant.
The decision is one that favours professionals as it appears to significantly curtail their liability to finance providers.
Financiers rely on their solicitors to provide information about the transaction which is relevant to their decision on the borrower's covenant and whether to finance a transaction, including whether there are indicia of mortgage fraud (in accordance with the Law Society's guidance). In light of the BPE v Hughes-Holland ruling, there appears no, or at least no proportionate, sanction on solicitors for failing to provide this important information.
Our view is that this Insurer friendly decision will be the subject of further clarification in the courts. One possibility might be that the courts will revisit the law on breach of trust to widen the remedies against negligent solicitors. We will keep you updated on any developments.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.