Funders regularly use professional advisers to provide assurance in connection with a lending transaction. This gives comfort in the form of appropriate guidance but also through knowing that the professional advice is supported by a potential claim against the professional’s indemnity insurance. A recent Supreme Court decision clarifying the liability of professionals is likely, therefore, to attract interest.
The liability of professionals
A professional’s liability is calculated by reference to the duty which is owed to the client. This is known as the SAAMCO principle and was established in a claim relating to a negligent valuation. The basic concept is that a professional will only be liable for losses falling within the scope of their duty and not necessarily all foreseeable losses flowing from a transaction entered into after negligent advice. The cases that followed this ruling have often struggled to determine the correct scope of duty.
A recent Supreme Court decision has clarified the principle. Mr Gabriel lent funds to Mr Little on the assumption that they would be used to develop a property. Instead Mr Little used the funds to discharge existing debts secured against the property. When drafting the loan agreement Mr Gabriel’s solicitor mistakenly included terms from a template stating that the funds would be used to develop the property. When the development failed, leaving the property worthless, Mr Gabriel brought a negligence claim against the solicitors based on his reliance on the misleading statement and the solicitors’ negligence in failing to explain how the funds could be used.
The court found that the losses suffered by Mr Gabriel were not recoverable from the solicitors. This decision was reached partly after a discussion of the viability of the development but also by revisiting the distinction between advice and information responsibilities laid down in SAAMCO. The solicitor had only assisted with the loan agreement and security and was unaware of the other factors impacting on the decision to enter the transaction. The court stated that it was Mr Gabriel who made the commercial misjudgement, after considering the factors, not the solicitor and, in the view of the court, the loss suffered by Mr Gabriel arose from the commercial misjudgement rather than the act of negligence.
In reaching this conclusion the court clarified the distinction as follows:
Advice Cases = Greater liability
- Situation – the professional is expected to have considered all relevant factors, not only specific factors, before advising the client on whether the transaction should be entered into.
- Liability – the professional may be liable for all foreseeable losses flowing from the transaction entered into on the basis of negligent advice.
Information Cases = Lesser liability
- Situation – the professional will provide a limited part of the material that the client will use to make its decision. The client will make the decision by reference to all relevant factors and the commercial merits of the transaction. The importance placed on the part of the material provided by the professional does not come into play.
- Liability – the professional is only liable for losses flowing from the act of negligence not for all the foreseeable losses suffered by the client as a result of entering the transaction. For example, this may include the difference between the correct and negligent valuations, but not loss of value caused by a property market crash.
Considerations for Lenders
The Supreme Court has made it clear that lenders will not be able to use claims against advisers as insurance against commercial misjudgements. Before entering transactions lenders must ensure that they are comfortable with the commercial risk having considered each piece of relevant commercial advice as part of a larger picture.
Considerations for Professionals
Whilst this decision appears positive for professionals it must be noted that they are not absolved of all liability and they need to understand whether the nature of their engagement is for advice or information. The liability within a professional’s scope of duty could still be significant. In addition the trust and reputation that professionals build by assisting their clients is a valuable asset that they will do everything within their power to protect.
 South Australia Asset Management Copr v York Montague Ltd  3 W.L.R. 87
 BPE Solicitors and another v Hughes-Holland  UKSC 21