The SAAMCo Cap.
An article by Carrie de Silva (Harper Adams University)
For how much of a loss is a negligent professional liable?
The BPE Solicitors case heard recently in the Supreme Court, affirmed the SAAMCo cap principle limiting the extent of liability in professional negligence cases. What does this mean, in practical terms?
Firstly, what is the SAAMCo cap? In the House of Lords (what would now be the Supreme Court), South Australia Asset Management Corp. v York Montague [1996] overturned the wider liability held in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd and others [1995] and limited professional liability in cases where the professional service in question was the provision of information, as opposed to advice. To put this into a simple valuation example:
The SAAMCo cap means that in so-called ‘information’ cases, the liability is limited to £20,000, in this example. If, however, the professional had been engaged to ‘advise’ on the transaction, rather than just provide the bare information as to value, then there could be liability for the full £30,000 as there would have been a duty to warn of the full range of risks associated with the purchase, for example, market volatility.
Is valuer liable in negligence for loss of £20,000 or £30,000?
If valuer had given correct value and the property was purchased, there would still have been a loss of £20,000. But it’s not that simple: maybe the transaction would not have been seen as a good move at the true value and, but for the incorrect information, the purchaser would not have entered the transaction at all.
Negligent valuation – £100,000
True valuation at the time – £80,000
Sale price following a drop in the market – £70,000
I am looking at the principle in the context of valuation but it applies across the range of professional advice and BPE Solicitors v Hughes- Holland recently heard in the Supreme Court, related to the purported negligence of a solicitor.
Mr Gabriel agreed to lend Mr Little, a property developer, £200,000 for the development of some offices on land at Kemble Airfield, Gloucestershire. In fact the monies were used by Mr Little to purchase the property and to discharge another loan, with nothing then left for development. The solicitor drawing up the Gabriel-Little agreement knew that the monies were not being used for developing the Kemble Airfield premises. He did not point this out and the misunderstanding on Mr Gabriel’s part was supported by wording in the documents that his monies would be used for the office development project.
Mr Gabriel unsuccessfully sued Mr Little and his associated company for fraud and negligent misrepresentation. He then sued BPE Solicitors for negligence (Hughes-Holland in the case name being Mr Gabriel’s trustee in bankruptcy).
There was a clear basis in relation to liability for negligence. The contention was as to the level of damages.
At first instance, it was held that the solicitors were liable for the full loss. The failure to provide relevant information masked the nature of the transaction thus the whole loss was a foreseeable and recoverable consequence of the negligence, subject to contributory negligence.
The Court of Appeal, in the leading judgment of Gloster, LJ, reversed this. They put the burden of proof on the claimant, Mr Gabriel, to prove that if the information provided had been correct he would not have made the loss. He failed to establish this. It was found that significant losses were (a) on the facts, almost inevitable, and (b) the result of a commercial risk which Mr Gabriel would be, or should be, aware of, not due to the lack of BPE Solicitors failure to highlight the precise use of the monies.
The Supreme Court supported the Court of Appeal decision. The solicitors were engaged to prepare the loan documentation, not to advise on the commerciality of the transaction. They were responsible for the mistaken belief but the loss would largely have been suffered, on the facts, even if the loan had been applied in the way in which Mr Gabriel expected.
In underlining the SAAMCo principle, professional negligence cases need to review the basis of engagement, and those terms of engagement need to be clear.
Where a client is being given information only, the losses resulting from negligence will be limited to losses that are a direct result of the erroneous information, i.e. £20,000 in the above example.
Conversely, where a client is being given advice as to whether or not to enter a transaction, then liability would be for all losses incurred as a result of the transaction, i.e. £30,000 in the above example. The fact the advice is crucial to the decision to enter the transaction does not, of itself, turn the situation into an ‘advice’ case. Whether or not it is an ‘advice’ case will be based on the terms of engagement. The traditional ‘but for’ test, that a transaction would not have been entered ‘but for’ the information provided, is a necessary element of establishing liability but is not sufficient in itself.
Bristol & West v Steggles Palmer [1997] and Portman Building Society v Bevan Ashford [2000] were expressly overturned. The so-called ‘Steggles Palmer principle’ (being an exception to the SAAMCo cap, ascribing liability for the full losses of a transaction where there is an element of dishonesty or fraud) has been swept aside, with the extent of liability in negligence firmly based on terms. This may sound harsh where there has been fraud but there are likely to be other causes of action, both civil and criminal, in such instances.
The decision does not, of course, help to decide whether a particular case is an ‘advice’ or an ‘information’ case and terms can be ambiguous. Lord Hoffman did say that valuers (and conveyancers) are likely to be providing bare ‘information’ where financial advisers will be giving ‘advice’ but this is a simplification of an often complex practice so the drafting of terms of engagement, as well as any subsequent letters, emails or oral assertions, need to be carefully considered.