When are damages recoverable from a negligent professional adviser?

In this article, William Sturge looks in detail at when damages are recoverable from a negligent professional adviser.

In order to recover damages for negligent advice, a claimant has to satisfy two separate requirements:

1. Prove that they have suffered loss; and

2. Establish that the loss falls within the scope of the duty they were owed.

The first of these steps requires the claimant to establish what the courts call a “basic loss”, by comparing their actual position (financial or otherwise) against the position she would have been in if the adviser had performed its duty.

The second step then involves determining what part of this basic loss falls within the adviser’s duty.  Here the court focuses on establishing the scope of the professional’s duty in such situations.  Various recently reported cases reflect the courts’ approach, as follows.

Negligent valuations

In SAAMCO v York Montague (1997, House of Lords (“HL”)) a negligent valuer was held liable only for the shortfall between the actual value of various properties and the higher value that it had wrongly attributed to the properties.  The valuer was not held liable for the entirety of the client’s losses when the client sold the properties for much less, after a subsequent fall in property prices. 

To reach this conclusion, the HL distinguished between cases where the professional advised the client on whether or not to enter into the transaction in its entirety, and cases where the professional merely provided information on one aspect of the decision whether to proceed.  In the latter type of case, the scope of the duty and the damages for which the professional was liable in the event of negligence was limited.  The court also adopted the use of “counter-factuals”, to hypothesise as to whether the claimant would still have suffered the loss even if the professional had given correct advice.

In later cases, the question arose as to the legal basis on which the professional’s liability had been held to be limited in SAAMCO. One answer was that the scope of a professional’s duty should be limited to the specific consequences of the information it provides being wrong pursuant to the policy of achieving a fair and reasonable allocation of risk between the parties.  It would not be fair and reasonable to protect the claimant against loss that would have been incurred even if the professional had given correct advice.  The risk of that loss should be borne by the claimant.

Negligent legal advice

In Hughes Holland v BPE (2017, Supreme Court (“SC”)) a solicitor negligently informed his client that a loan the client proposed to make to a third party would be used to develop a property, whereas he knew that the third party was going to use the advance to pay off another debt.  The client would not have advanced the loan if he had known the true position. When the loan was not repaid, the client sued the solicitor.  The court held that the solicitor was not liable to pay any damages because there was no causal link between the fact which made the professional’s advice incorrect and the loss, which loss would have occurred anyway because the transaction was always doomed to fail for reasons unrelated to the use that the builder was going to make of the loan. 

Thus, even though the client would not have proceeded if the solicitor had provided the correct information, the solicitor was only liable to the extent of the responsibility undertaken by him.  To put it another way, it is not sufficient to establish that, but for the negligence, the losses would not have occurred. It was necessary to go further and find that the losses arose from the matter which made the professional’s advice incorrect.

Accountants’ negligence

In the landmark case of Manchester Building Society v Grant Thornton (2021, heard by seven judges of the SC), a firm of accountants (“GT”) advised a building society (“MBS”) that it could within the regulatory framework prepare its accounts on the basis that there was an effective hedging relationship between, on the one hand, losses it could suffer in funding its portfolio of fixed rate mortgages from variable rate borrowings and, on the other hand, the potential protection from such exposure provided by certain swap transactions.  After MBS had proceeded on this basis for some seven years, GT concluded that their original advice had been wrong, there was no effective hedging relationship and MBS’ accounts could not be prepared on a hedging account basis.  Therefore, MBS re-stated its accounts and terminated its swap transactions, which it was only able to do at a cost of many millions as the market had at that point moved against its swap positions.

Contrary to what might have been expected from the decision in SAAMCO, the SC concluded that MBS was entitled to recover from GT the full cost of unwinding the swaps (less 50% for contributory negligence).  It was not to the point that this award of damages in effect compensated MBS for trading losses on the swap transactions.

The crucial fact for the SC was that GT had negligently failed to advise of the ineffectiveness of the hedging arrangements. The scope of GT’s duty, determinable from the purpose for which GT undertook the duty, included advising as to the risks of such harm to MBS.  There was a sufficient nexus between the responsibility assumed in the subject matter of the duty and the claimant’s loss.  Another approach was to say simply that the loss flowed from the matter that made GT’s advice wrong, being the negligent failure to advise as to the ineffectiveness of the hedging arrangements, which led to the emergence of a value gap.  It was reasonably foreseeable that MBS would have to incur loss unwinding the transactions.  Therefore, GT could recover the whole of the loss arising.

In passing, the court held that counter-factuals were merely a tool that might or might not be useful as a cross-check and that, rather than categorising professionals as providing either advice or information, the focus should be on the purpose of the duties and responsibility taken on by the professional.

Impact

The scope of the duty owed by a negligent professional may be found to be narrower in future, in that it is determined by the purpose for which the advice is given. Moreover, damages are recoverable only to the extent that they flow specifically from the professional’s negligent act or omission.  That said, where damages are recoverable, these may be higher than was previously envisaged as they encompass all loss reasonably foreseeable from the breach of duty.

About the Author

The author of this article is William Sturge a Consultant Solicitor at Lovetts Solicitors. William is a leading lawyer in the insurance industry. He has advised on insurance and reinsurance claims on behalf of reinsurers, reinsureds and their insureds, both in the UK and worldwide. He has conducted insurance and reinsurance litigation and arbitration, acted in professional indemnity and financial lines business and in shipping and international trade disputes. William has also provided non-contentious insurance and reinsurance advice, usually with an international context.

For further information or advice please feel free to contact William by emailing [email protected] or calling 01483 457500.