A recent decision by the Supreme Court has shed clarity on a commonly misunderstood legal principle.
During the highly anticipated judgment in BPE Solicitors and another v Hughes Holland, Lord Sumption confirmed the appropriate application of the ‘SAAMCo principle’. This is a general principle regarding the law on damages, looking at the scope of the professional’s duty to appropriately shield their client from transaction associated risks.
Likely to be welcomed by solicitors and professional indemnity insurers alike, the decision overrules the judgments in Bristol & West v Steggles Palmer (1997) and Portman Building Society v Bevan Ashford (2000).
The case concerned two friends who agreed to a deal in 2004 – Richard Gabriel and Peter Little. The latter of the pair was a property developer, and Mr Gabriel, in the belief his money would be used towards the development of a property, lent Mr Little the sum of £200,000.
However, Mr Little instead wished to put these funds towards the purchase of another property from another company which he had an interest in. In doing so, this would discharge a bank loan of £150,000 over the property as well as the VAT liability of his own company. The loan was therefore substantially for the benefit of Mr Little.
The loan documentation was prepared by BPE Solicitors. Retained by Mr Gabriel, they made aware that the loan’s purpose was to fund the purchase of a property by Mr Little. However, the solicitors did not make Mr Gabriel aware of this. Further, the prepared loan documentation also included misleading elements which gave the impression the money would actually be used for the property development.
Consequently, on the basis of Mr Gabriel’s misunderstanding towards its purpose, the loan went ahead.
The trial judge found that if Mr Gabriel had been aware of the loans’ real purpose, he would not have made it in the first place.
Contrary to Mr Gabriel’s hopes, the property was never developed and he did not receive any repayments in respect of the loan. In addition to this, Mr Gabriel’s forced sale of the property did not gather any recovery and from all of the money originally sent, he only received a small payment from Mr Little himself.
Having pursued claims against numerous parties involved, Mr Gabriel succeeded at first instance only against BPE. In failing to advise Mr Gabriel as to the true purpose of the loan, the Court found that the solicitors had acted negligently.
Satisfied that Mr Gabriel would not have suffered the same losses had the loan actually been used for property development, the trial judge awarded Mr Gabriel his full losses against BPE.
However, this decision was subsequently reversed by the Court of Appeal. This was based on the lack of evidence which indicated that Mr Gabriel would have recovered the money if had actually gone towards property development as opposed to Mr Little’s own interests. Therefore, the Court emphasised that the burden of proof was on Mr Gabriel; in this case, he had failed to discharge this burden.
The losses he suffered were due to the commercial risks involved in the transaction – of which Mr Gabriel was fully aware – and it was therefore not BPE who should take on the responsibility, but himself.
An appeal to the Supreme Court was later launched by the trustee in bankruptcy of Mr Gabriel.
This appeal was dismissed. In a unanimous decision, the Court found that as BPE had only been asked to prepare the loan documentation, they were not responsible for his decision to lend in the first place.
BPE was responsible for Mr Gabriel entering into the transaction with a misunderstanding as to his loan’s purpose, but no part of his loss could be attributed to this misunderstanding, On the facts, even if the money had been used for the property development, the full loss would have still been suffered.
As the loss was a result of commercial risks, the loss fell outside the scope of BPE’s duty.
Conclusions
Lord Sumption, delivering the sole judgment, contemplated and discussed the SAAMCo principle, describing its application as well as the common misunderstandings regarding its use.
One the main points he considered was distinguishing advice cases from information cases.
So-called ‘advice’ cases involve the professional giving advice to their client on whether they should enter the transaction or not. They are therefore under a duty to consider every matter relevant to the case and to protect the client from the full range of transaction associated risks. The professional in these circumstances takes on legal responsibility for the decision to enter the transaction. If they are found to be negligent, in principle the client is able to claim back all losses which stemmed from the transaction.
On the other hand, ‘information’ cases involve the professional providing only a limited portion of information, to be taken by the client as part of their own decision-making process. In these instances, the professional is only responsible for the information they provided; if it’s wrong and leads to financial consequences, they may be liable. They are not, however, responsible for the client’s decision to enter the transaction. This is the case even if they were aware that the material they were providing was crucial to the client’s decision.
Another important point he touched on was the operation of the SAAMCo “cap”. Excluding loss which would have occurred even if the information had been true, he highlighted that the cap was simply a tool to give effect to a distinction between (a) the loss stemming from the fact that, as a result of the defendant’s negligence, the provided information was incorrect and (b) the loss stemming from the decision to enter the transaction at all.
The “cap” is the result of the claimant being able to satisfy two specific requirements. Initially, they must prove that they have suffered that loss, and secondly, that this loss fell within the scope of the duty owed.
Lord Sumption also mentioned the burden of proof in such cases; when it comes to proving that the losses fall within the scope of the professional’s duty, the burden lies with the claimant.
