2017 saw that rare thing: not one but two Supreme Court decisions which are both relevant and helpful to professional indemnity insurers and their clients. The cases were BPE Solicitors v Hughes-Holland
(also known as Gabriel v Little
), where judgment was given on 22 March, and Tiuta International v De Villiers Surveyors
(29 November). Both cases are important on scope of duty and causation. We summarise the facts of each and look at the decisions.
BPE – the facts
Mr Gabriel agreed to lend £200,000 to his friend, Mr Little, but they had different understandings of how the money would be applied. Mr Gabriel thought it would be used to develop a disused tower; however Mr Little intended to use the money to buy the tower (owned by his company) and redeem a loan secured on it. Mr Gabriel’s solicitors (the “BPE” of the case name) drafted a loan facility agreement and charge. This negligently included terms suggesting that the loan was to be used to fund the development of the tower, which confirmed Mr Gabriel’s understanding of the basis for the loan.
The tower project failed and Mr Gabriel lost all his money. He sued his solicitors, who were held to have been negligent and were ordered to pay all the losses resulting from the transaction (£190,000 plus interest). The Court of Appeal reduced the damages award to nil, holding that the project would have failed in any event. Mr Gabriel (by now bankrupt and acting through his trustee) appealed to the Supreme Court.
BPE – the decision
The first, essential, finding of the Supreme Court was that the development would have failed in any event. This gave them the basis to look at the scope of the solicitors’ duty. They reinforced the decision in SAAMCo (a 1997 House of Lords case about scope of duty in valuer’s negligence, which has been widely applied to other professionals but also often misunderstood), by emphasising the distinction between a duty to provide information, and a duty to advise.
Where a professional has a duty to advise on a particular course of action (which means they “guide the whole decision-making process”), and does so negligently, they are liable for all the foreseeable consequences of the course of action advised. However, where the professional simply provides information which forms part of the material the client uses to decide whether or not to proceed, the professional is only liable for the consequences of the information being wrong, even if the information is critical to the client’s decision.
This is a two stage test:
- Work out what loss would have been avoided if the professional had not been negligent.
- Work out what part of that loss is recoverable/within the scope of duty by excluding loss that would have occurred even if the incorrect information had been true.
The second part of the test has always caused problems. Its application is best illustrated by applying it to the facts of BPE. This was an information case: BPE did not take responsibility for the decision to lend funds, they simply provided Mr Gabriel with some of the information relevant to his decision. On stage one of the test, if BPE had not been negligent, the transaction would not have gone ahead (losses: £190,000+). But on stage two, even if BPE’s information had been correct, spending £200,000 on the development would not have enhanced its value and ultimately Mr Gabriel would have lost all his money. Therefore none of the £190,000 was within the scope of BPE’s duty (loss: nil).
BPE - conclusions
This decision is both important and helpful. It confirms that the distinction between “transaction” and “no transaction” cases is wrong. In particular, the clarification about the difference between “advice” and “information” cases means that it will be rare that a negligent professional is liable for all the foreseeable consequences of the negligence: usually, professionals provide information to clients but the decision to proceed rests with the client. The effect of BPE is that the professional will rarely be the underwriter for the entire venture.
Tiuta – the facts
The decision in Tiuta rests on a precise factual scenario, with a number of points being assumed for the purposes of the hearing. That scenario can be summarised thus. Nearly £2.5 million was advanced to a borrower by Tiuta under a facility arrangement (“Facility One”): security was an incomplete residential development. Eight months later, Tiuta created a new facility of nearly £3.1 million, using the same incomplete development as security (“Facility Two”). Facility One was discharged in full by Facility Two: the borrower drew down a further £289,000, before defaulting. De Villiers provided valuations to Tiuta in support of both facilities. It is assumed that the second valuation was negligent, but the first valuation was not.
Tiuta – the decision
Assuming those facts, what was Tiuta’s loss? The answer involves applying the “but for” test which, in lender claims, involves the “basic comparison” established in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd. This usually requires comparing the sums lent plus interest against the value of the borrower’s covenant and the true value of the property.
The Court of Appeal and the Supreme Court agreed on the test, but disagreed on its application, and implicitly disagreed on the effect of Preferred Mortgages Ltd v Bradford & Bingley Estate Agents.
Preferred Mortgages says, briefly, that where a loan facility has been discharged in full, there is no loss and so no claim. In the Court of Appeal’s view, since Tiuta had no claim in respect of Facility One, it was not unfair to treat Facility Two as an entirely new transaction – this was also consistent with the structure, Facility Two being a separate facility, not an extension of Facility One. Therefore the “basic comparison” involved comparing the full amount of Facility Two with the true value of the security (unknown) and the value of the borrower’s covenant (here nil). The fact that Facility Two was largely used to discharge Facility One was irrelevant.
The Supreme Court, led by Lord Sumption, disagreed. The “basic comparison” involves a purely factual analysis. But for De Villiers’ presumed negligence, Facility Two would not have occurred, but Tiuta would still have lost the sums advanced under Facility One. Often, a lender can show that but for a valuer’s negligence, it would have retained the money or lent it elsewhere. Here, Tiuta could not do so – the money was already tied up in Facility One. Tiuta’s loss was therefore limited to the additional sums advanced (c£289,000). Lord Sumption also swatted away an attempt to categorise the redemption of Facility One as a collateral benefit which did not need to be brought into account.
Both cases are welcome, and to a large degree reflect common sense. Both were able to reach the conclusions they did due to the available facts, but were equally able to lay down clearer rules of engagement when looking at loss.
They are clearly important decisions for insurers and their professional clients. While there will be the inevitable satellite litigation around the precise meaning and extent to which the decisions should be applied, the critical point is that the landscape has shifted and insurers can take comfort from that.