Solicitors not liable for clients' commercial misjudgments

A recent UK Supreme Court decision has held that a solicitor is not liable to his client for losses arising from the client's own commercial misjudgment. 

What happened?

The story is this. Two friends entered into a loan agreement.  Mr Gabriel loaned GBP 200,000 to Mr Little, who said he would be using the loan to redevelop an old, run-down disused heating tower in an "unattractive location for developers" in Gloucestershire.  In fact, Mr Little intended to use Mr Gabriel's funds to acquire the property (by paying off a mortgage from a bank).  Mr Gabriel knew nothing of those plans, and gave the loan without first getting any valuation of the property.  His legal representatives, BPE Solicitors ("BPE"), were not instructed to undertake the usual searches against the property at the Land Registry.

An assistant solicitor at BPE, Mr Spencer, drafted the facility letter and the charge documents over the building. However, over the course of work, Mr Spencer received instructions from Mr Little that the loan from Mr Gabriel would go towards acquiring the building.  Mr Spencer did not clarify or confirm these instructions with Mr Gabriel.  He used a template facility from another transaction which stated that loan moneys would be used to assist with development costs, and unintentionally confirmed Mr Gabriel's incorrect understanding of Mr Little's actual plans.

The transaction failed and Mr Gabriel was unable to recover his loaned monies.  He then sued BPE for dishonest assistance in a breach of implied trust and for professional negligence.

The Supreme Court's decision

The Supreme Court essentially confirmed and reinforced the landmark decision of the House of Lords in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191: a person under a duty to advise as to what course of action to take would be liable for all the foreseeable consequences of that action taken only if 1) the advice was relied on and 2) the advice was negligent, but this is different from a person who was under a duty to provide information for the purpose of enabling someone to decide on a course of action, in which case they would be liable for the consequences of the information being wrong and not all the consequences of the reliance (the "SAAMCO Principle"):

  • in an advice type case, the professional is responsible for guiding the whole decision-making process and is responsible for the ultimate decision itself. The professional will be liable for all the foreseeable consequences of a transaction entered into upon their negligent advice.
  • in an information type case, the professional contributes a limited part of the material on which his client will rely on when making a decision.  However, the overall assessment of the commercial merits of the transaction rests with the client. The professional will be liable only for the financial consequences of the information which he provided, even if the information was critical to the decision of whether to enter into a transaction.  The reason behind this is because professionals cannot ultimately "become the underwriter of the financial fortunes of the whole transaction by virtue of having assumed a duty of care in relation to just one element of someone else's decision".

To the Supreme Court, it was clear that BPE had no part in Mr Gabriel's decision to make the loan to Mr Little. This case fell under the "information" scenario. BPE was expressly instructed to draw up the supporting documentation, and nothing more. Mr Spencer did not know and did not need to know what had passed between Mr Gabriel and Mr Little, save that they had agreed upon a loan of GBP 200,000 secured by a charge on the tower in Gloucestershire.  Mr Spencer knew nothing about the nature of the proposed redevelopment, its cost, financial capacity of Mr Little to fund redevelopment without the loan, or the value of the property in its developed / redeveloped state. 

By an "unhappy chance", the facility agreement contained language confirming Mr Gabriel's impression that the loan was to go towards redevelopment. But even if Mr Gabriel's assumption had been right, he would still have lost his money because the expenditure of GBP 200,000 would not have enhanced the value of the property. Experienced surveyors had advised that development costs would likely range from GBP 400,000 – 600,000, which is at least double or triple the original loan. None of the loss he suffered was within BPE's scope of duty, which was to prepare the facility agreement and charge. Mr Gabriel's loss arose from his personal (albeit misplaced) commercial judgment, which were of no concern to BPE.

Relevance to Hong Kong

There are only a handful of cases where the SAAMCO Principle has been considered in Hong Kong.  The most recent case was Cheung Wei Man & Anor v Centaline Property Agency Ltd [2006] HKEC 1824, about ten years ago, at the Court of First Instance, where the victims of an abortive conveyancing transaction brought an action against their real estate agents.  The HK Court considered the SAAMCO Principle is applicable in the context of negligence only and dismissed its relevance to the case. However, in 2004, Reyes J (as he then was) applied the SAAMCO Principle extensively in Industrial and Commercial Bank of China (Asia) v BC Chow & Co [2004] HKEC 105 and concluded that the spirit of the principle i.e. if the whole of a loss suffered by a lender is within the scope of the solicitor's duty and is properly recoverable, then a lender is entitled to recover that loss in a negligent " advice" type scenario.  The SAAMCO Principle is applicable in the case and in Hong Kong. 

Industrial and Commercial Bank of China (Asia) v BC Chow & Co remains good law and has not been appealed nor overturned. It would seem then, that despite not being applied in Hong Kong recently, the SAAMCO Principle holds true in Hong Kong and, as the decision of the Supreme Court shows, continues to hold true in the UK as well.  Whether there will be any further clarifications to the SAAMCO Principle will depend on whether another case in a similar factual matrix will reach the Supreme Court, or even the Hong Kong appeal courts – albeit the likelihood of this happening may be low in the near future.

Article by Angela Tsui, an associate

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