Return of the Mountaineer’s Knee


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For further information, please contact Ben Drew, Partner, Fladgate LLP (bdrew@fladgate.com)


 

Another look at the Mountaineer’s Knee – Supreme Court revisits SAAMCO in important judgment on the law of damages; clarifies distinction between advice and information negligence cases and the application of SAAMCO to claims against professionals

The decision of the Supreme Court in BPE Solicitors v Hughes-Holland handed down on 22 March 2017 is the first occasion that the Supreme Court has had to consider the landmark decision of the House of Lords in South Australian Asset Management Corp v York Montague Ltd [1997] A.C. 191 (SAAMCO).  The Supreme Court has reviewed the decision and clarified certain aspects of that judgment and its application.

In handing down the lead judgment, Lord Sumption illustrated what he called one of the main dilemmas of the law of damages by recounting the story of the mountaineer’s knee devised by Lord Hoffmann in SAAMCO:

“A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit.  The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee.  He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee.”

The facts of the current case were as follows:

In 2014 Mr Richard Gabriel (an experienced businessman) and Mr Roger Little (a developer and builder) met in a pub and discussed the proposal that Mr Gabriel lend Mr Little’s development company, Whiteshore Limited, £200,000. Mr Gabriel understood the purpose of the loan was to develop a property, a disused heating tower at an airfield in Gloucestershire called Building 428 (the Property) after which Mr Gabriel would be repaid £270,000 at the end of the loan period.  Subsequently, Mr Gabriel advanced the money to Mr Little.  Unfortunately, Mr Gabriel’s understanding proved to be wrong and the money was used to acquire the Property and the balance for other purposes.  None of it was used for development costs.  The development failed and Mr Gabriel lost nearly all his loan.  He sued Mr Little and the solicitors he had instructed to advise him, Messrs BPE Solicitors (BPE).  In his claim, Mr Gabriel alleged that BPE had been negligent in a number of respects, in particular that the loan agreement had been negligently drafted and that BPE had failed to advise that the loan would be used to discharge some third party liabilities and not to develop the Property.  He was successful at first instance, with the judge finding that BPE had been negligent in not passing the relevant information to Mr Gabriel.  The judge at first instance held that had Mr Gabriel been aware that his money was not being used as he had understood, he would not have proceeded.

The Court of Appeal disagreed, reversing the decision (Gabriel v Little [2013] EWC (iv) 1513).  The court held that BPE only owed Mr Gabriel a duty to provide information and not to advise on what course of action to take.  Although Mr Gabriel was successful in establishing that BPE had been negligent in that they had mistakenly inserted terms which indicated that the loan was to be used to fund the development and the Property, the Court of Appeal held that Mr Gabriel’s loss in relation to the loan fell outside the scope of BPE’s duty.  BPE had not been under a duty to advise as to the course of action he should take or as to the commercial risks inherent in the loan. Mr Gabriel’s loss arose from his own misjudgement of the transaction, rather than BPE’s negligence.

Mr Gabriel (through his trustee in bankruptcy) appealed to the Supreme Court. The lead judgment (with which the others all agreed) was given by Lord Sumption.  He summarised the main issues before the court as being what damages are recoverable where (i) but for the negligence of a professional adviser his client would not have embarked on some course of action, but (ii) part or all of the loss which he suffered by doing so arose from risks which it was no part of the adviser’s duty to protect his client against.

Lord Sumption identified the viability of the development project as being of central importance, it being the essential foundation of the Court of Appeal’s reduction of damages to zero. He found that the Court of Appeal was right to find that the expenditure of £200,000 on the Property would not have enhanced the value of the Property as the project stood no chance of success from the outset for other reasons.

The main issue before the court was what loss had been suffered as a consequence of failure to apply the loan monies to develop the Property. After a full review of the case law both before and after SAAMCO, Lord Sumption found that, to the extent any loss had been suffered by Mr Gabriel, it was not because the loan monies had not been applied to develop the Property.  He emphasised that a defendant whose obligation was to provide information, which would be relied upon by a claimant in deciding whether or not to proceed with a transaction, was only liable for the consequences of that information being wrong.  In this case, Mr Gabriel would not have recovered any more even if his loan monies had been applied to develop the Property.

The important points to come out of the judgment are as follows:

  1. The SAAMCO principle is a general principle of the law of damages which requires an analysis of the scope of the professionals’ duty to protect their client against the risk of a transaction.
  2. The principle in SAAMCO has often been misunderstood. It is now established that there is a difference between a duty to advise someone as to what course of action to take and a duty to provide information to enable someone to decide on a course of action. The negligent adviser would be responsible for all the foreseeable loss consequent upon the course of action advised, whereas the negligent supplier of information would only be responsible for the foreseeable consequence of the information being wrong.
  3. Consequently, the two leading solicitors’ cases on SAAMCO, Steggles Palmer (one of the conjoined decisions reported in Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 582) and Portman Building Society v Bevan Ashford were wrongly decided as they had applied flawed reasoning (by following the no transaction rule, contrary to SAAMCO).
  4. The burden of proof in these types of cases lay with the Claimant. That was simply part and parcel of the claimant having to satisfy two separate tests and having to prove loss and that the loss fell within the scope of the duty owed.

The decision is an important clarification of the law on a principle that had been inconsistently applied in respect of claims against professionals. Whilst the facts of the case in question concerned solicitors, claims against other professionals where it is alleged a transaction would not have proceeded will also be impacted.

Furthermore, the confirmation from Lord Sumption that the burden of proof falls on claimants in such cases may well give rise to evidential challenges for claimants, in negligent information cases, in proving quantum.

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