The cost of bad advice

Much of my early career was taken up with arguing cases for professional negligence on behalf of banks and building societies against valuers, on the basis of the House of Lords decision in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd; South Australia Asset Management Corporation v York Montague [1997] AC 191 (“SAAMCO”). In SAAMCO, Lord Hoffmann drew a distinction between a duty to provide information for the purpose of enabling someone else to decide on a course of action, and a duty to advise someone as to the course of action that they should take.

If the duty was to advise, the adviser was liable for all foreseeable loss arising as a consequence, but if the duty was to provide information then the adviser was only liable for the consequences of that information being wrong, not the wider financial consequences of the transaction.

To take a simple valuation example – a property is worth £8 million. The valuer negligently values it at £10 million, causing the lender to lend more than they otherwise would have done. The market crashes by 50% and the property sells for £4 million. According to SAAMCO, the valuer’s maximum liability is £2 million (i.e. the difference between the wrong and correct valuations), rather than the £6 million which is the maximum loss possible as a consequence of the lender having entered into the transaction. In other words, the SAAMCO rule (often referred to as a “cap”) ensures that the valuer is responsible only for the consequences of the lender having too little security due to the wrong valuation, with the remainder of the loss being attributed to the market collapse and, therefore, something outwith the valuer’s duty.

It was always very difficult to explain to clients that their recovery of loss would be restricted as a consequence of the SAAMCO principle: they generally regarded it as unfair that they would not be fully compensated for their loss. Further, SAAMCO was not widely accepted as correct. Some commentators, such as Professor Jane Stapleton, considered that the court adopted the wrong approach to determining the scope of the defendant’s duty, saying: “What makes the valuation wrongful is that it is careless, not that it is not true” (“Negligent Valuers and Falls in the Property Market” (1997) 113 LQR 1). Others criticised the cap itself, saying that there were fairer and more realistic approaches to establishing recoverable loss.

A true distinction?

However, SAAMCO is, of course, not simply applicable to valuer cases. It applies to all cases where economic loss is caused to one party as a consequence of negligence by a professional adviser. More recently, in Hughes-Holland v BPE Solicitors [2017] UKSC 21, the Supreme Court has had to consider the SAAMCO rule in the context of negligence by a solicitor.

In that case, Lord Sumption discussed the problems that arise as result of applying the rather rigid distinction between “advice” cases and “information” cases established by the House of Lords in SAAMCO. He acknowledged that most “information” given by a professional adviser is “usually a specific form of advice”, and that “most advice will involve conveying information. Neither label really corresponds to the contents of the bottle”.

At paras 40 and 41 of his judgment Lord Sumption explains what each category of case entails and reiterates the principle in SAAMCO. However, it was clear from his judgment that the misleading nature of the “labels” as terms of art was likely to lead to difficult cases and wrong results.

Recently the Supreme Court has had the chance to consider the SAAMCO rule again in two cases, Manchester Building Society v Grant Thornton LLP [2021] UKSC 20 and Khan v Meadows [2021] UKSC 21. The Supreme Court had a larger than normal constitution of seven Justices who heard both appeals.

The appeals were in very different areas of practice. The first was in the context of advice given by professional accountants. The second was in the context of professional advice given by medical experts. However, each concerned the proper approach to the scope of an adviser’s duty of care and the extent of liability of professional advisers in the tort of negligence, and the same principles therefore applied in both cases. The majority judgment was given by Lord Hodge and Lord Sales (with Lord Reed, Lady Black and Lord Kitchin agreeing). Lord Leggatt and Lord Burrows gave separate but concurring judgments, while differing on certain aspects
of the relevant test.

SAAMCO reconsidered

All the Justices agreed that the distinction between “advice” and “information” cases should be abandoned. Lord Leggatt considered (at para 92 of Grant Thornton) that “it seems to me that it would be desirable to dispense with the descriptions ‘information’ and ‘advice’ as terms of art and to focus instead on the need to identify with precision in any given case the matters on which the professional person has undertaken responsibility to advise and, in the light of those matters, the risks associated with the transaction which the adviser may fairly be taken to owe a duty of care to protect the client against”.

At para 22 the majority of the court agreed with the proposal to dispense with this distinction, while Lord Burrows commented at paras 196-197 that although “it is not easy to find shorthand replacement terminology” for the distinction, it had to be recognised, as Lord Sumption made clear at para 44 of Hughes-Holland, that the categories were on a spectrum with, for example, investment advice at one end and a valuer’s information at the other, with many cases in between the two.

The court also made interesting comment about the value of counterfactual analysis in professional liability cases. All members of the court agreed that while a counterfactual analysis of the kind proposed by Lord Hoffmann in SAAMCO (i.e. whether the claimant’s actions would have resulted in the same loss if the advice provided had been correct) was a useful cross-check of the result, it was no more than that.

In an interesting passage in his judgment, Lord Leggatt examines the problems with a counterfactual test, saying (at para 101) that: “One source of difficulty is the intrinsic vagueness of counterfactual propositions… In order to yield a determinate answer to a counterfactual question, assumptions need to be made about how precisely the counterfactual world is supposed to differ from, or remain similar to, the actual world.” He demonstrates his point with an analysis of the different assumptions and approaches to loss that were proposed by commentators following the SAAMCO decision and how they could each easily lead to different results.

Accordingly, the court concluded that it was not always helpful to apply a counterfactual test and, where one was applied, it was just a means of checking that the right result had been reached. In other words, the analysis is not really part of the test, but rather subordinate to it.

Different approaches?

The majority of the Supreme Court held that the correct approach in such cases was to focus on identifying the purpose to be served by the duty of care, judged on an objective basis by reference to the reason why the advice was being given. One looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represents the “fruition of that risk” (para 17).

In that context, the court referred to the famous “mountaineer’s knee” example given by Lord Hoffmann in SAAMCO, where a doctor negligently advises a mountaineer about to undertake a difficult climb that his knee is fit for the task. The mountaineer goes on the climb, which he would not have undertaken if the doctor had told him the true state of his knee, and suffers an injury which “is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee”. Lord Hoffmann’s reasoning was that the doctor was not liable for the injury because the injury would have occurred even if the advice had been correct.

Lord Burrows’ reasoning was similar to that of the majority, while putting greater emphasis on the policy of achieving a fair and reasonable allocation of the risk of loss between the parties. Lord Leggatt reached the same result but preferred to frame the scope of the duty principle as an aspect of causation. The majority and Lord Burrows distanced themselves from a causation-based approach, saying that it potentially gave rise to confusion by distracting from “the primary task of identifying the scope of the defendant’s duty” (para 5).

However, there is little to choose between the judgments, and Lord Leggatt (at para 97 of Khan) queries whether there is any substantive difference between his own explanation of the correct analytical approach and that of the majority, saying that: “It is common ground between us that it is always necessary to determine whether (or to what extent) the claimant’s ‘basic loss’ is within the scope of the defendant’s duty of care. Lord Hodge and Lord Sales call this ‘the duty nexus question’ which they formulate as whether there is a sufficient nexus between the loss and the subject matter of the defendant’s duty. I understand the word ‘nexus’ to be another term for what I refer to, more prosaically, as a ‘causal connection’.”

Lord Burrows suggests that the “duty nexus” approach taken by the majority is a novel approach to the law of negligence, and considers that a more conventional approach is appropriate, outlining seven questions at para 79 of Khan which he considers to be crucial.

How the principles applied

Following these principles, the Justices arrived at the same result in each case. Khan was a straightforward case. First, there was no reason why the scope of the duty principle did not apply to clinical negligence cases, as argued by counsel. Dr Khan had incorrectly advised that Ms Meadows was not carrying a haemophilia gene. As a consequence of that advice, she conceived and gave birth to a son who not only suffered from haemophilia but also from autism, a condition unrelated to haemophilia. Meadows argued that she would have terminated the pregnancy had she known, rather than give birth to a child with haemophilia, and that Khan was liable for all the consequences of her negligence including the costs arising from a disability unrelated to her son’s haemophilia.

On a straightforward application of SAAMCO, the doctor was only liable for the costs associated with bringing up a child with haemophilia. She was not liable for costs associated with his autism which was causally unrelated.

The facts of Grant Thornton were not straightforward, and related to advice given by Grant Thornton to the effect that “hedge accounting” could be used to give a true and fair view of Manchester Building Society’s financial position. On that advice, the society carried out a strategy of long-term interest rate swaps as a hedge against the cost of borrowing money to fund its lifetime mortgages business. However, the misstated accounts hid volatility in the society’s capital position. When Grant Thornton realised that it had made a mistake, the society had to restate its accounts which showed insufficient regulatory capital, meaning that it had to close out its interest rate swap contracts early at a cost of £32 million.

On the basis of the principles outlined above, the appeal was allowed and Grant Thornton was liable for the loss suffered by the society in breaking the swaps early. Whether the society could employ hedge accounting in order to implement its proposed business model was the advice the society had asked for; the advice given in that regard had been negligent and the exposure to regulatory capital demands was one of the risks which the advice was supposed to guard against. Accordingly, Grant Thornton had breached its duty to the society, but the society was contributorily negligent to the extent of 50% due to what the court referred to as an “overly ambitious application of the business model by the society’s management”.

Look to the terms of business

In the immediate wake of the Grant Thornton decision, some commentators have suggested that it will make a solicitor’s job more difficult because they will, in any case, have to consider what risk the defender had a duty to take care against and whether the loss suffered is the “fruition of that risk”, which may involve a number of factors and assumptions in more complicated cases.

From my perspective the Supreme Court’s clarification simplifies matters. The judgment will be of assistance to practitioners and will avoid us having to try and fit cases into the straitjackets of “advice” and “information” when neither label seems to suit the allegedly negligent professional advice. That was never much of a problem in valuation cases such as SAAMCO, but was always a difficult question in cases such as Hughes-Holland where a solicitor’s negligence was concerned.

Finally, it is important to remember that while the Supreme Court’s analysis was primarily based on tort/delict, the same principles will apply to breach of contract by professional advisers, and the scope of a professional adviser’s duty will often be provided for in that contract (frequently in the form of terms of business). For practitioners the emphasis put by Lord Sumption in Hughes-Holland on the importance of terms of business or the client retainer remains, and this decision provides a reminder for all professional advisers of the importance of drafting terms of business which properly identify the advice to be given, or (sometimes crucially) not to be given, in particular cases.