Good news for all professionals - Supreme Court guidance on scope of duty

Published 25 mayo 2017

BPE Solicitors v Hughes-Holland [2017] UKSC 21

In BPE Solicitors v Hughes-Holland the Supreme Court has provided important clarification on the loss a Claimant may recover from a negligent professional. The decision involves solicitors' liability, but its application is much wider, and highly relevant to accountants facing claims.  

Following the House of Lords' decision in SAAMCO¹, there has been an important distinction between:

• Information cases: where a professional provides information to the client so the client can decide how to proceed. A negligent professional is only liable for the consequences of the provided information being wrong; and
• Advice cases: where the professional advises the client on what action to take. The professional is responsible for all foreseeable consequences of their negligence.

Facts

In December 2007 Mr Gabriel ("G") lent £200,000 to L for the purpose of a property development, secured on the property. BPE Solicitors acted for G to prepare a facility letter and legal charge and were negligent in doing so. G thought the loan would be used to develop the property, in fact it was used by L to buy the property and repay debts. The development project failed, and the property sold at auction in 2010 for £13,000 (leaving nothing for G after the costs of sale).

In the claim against BPE which followed G established at first instance that - but for his solicitors' negligence - his misunderstanding (of how the £200,000 would be used) would have been corrected, and he would not have made the loan. The trial judge awarded G his entire loss on the transaction, on the basis that, had £200,000 been used to develop the property (as G thought it would be, i.e. had the information from the solicitors been correct), it might have been enough to complete the project so that G was repaid.

Appeal

The Court of Appeal reduced G's damages to £nil: G had not proved that, if £200,000 had been spent on developing the property, his loan would have been repaid. The available evidence showed that much more than £200,000 was required to successfully develop the site. 

The Supreme Court agreed with the Court of Appeal's conclusion.  It also noted that SAAMCO relates to the scope of duty and not just causation and loss.  Even if the information in the facility letter had been correct, G would never have recovered the advance. G's loss was not within the scope of BPE's duty and "arose from commercial misjudgements which were no concern of (BPE's)".

It also provided helpful commentary on the distinction between Information and Advice cases, and its implications²:

• Advice cases are those where the professional is under a duty "to consider all relevant matters and not only specific factors in the decision" and "to protect his client (so far as due care can do it) against the full range of risks associated with a potential transaction".   
• Information cases are those where the professional contributes a limited part of the material on which the client relies to decide whether to enter into a transaction. Furthermore, the fact that the information was critical to the decision making process, or would have revealed a fraud does not turn it into an Advice case.

The Supreme Court helpfully made it clear that the burden is on a Claimant to prove the financial consequences of the wrong information.

Implications

Any commercial transaction is likely to carry a number of risks.  A professional will only be liable for the loss which flows from his negligence. He will not be liable at all where that loss would have been suffered anyway, or where that loss was caused by factors which fall outside the scope of the duty to advise.

This is true of both Information and Advice cases.  However, the scope of duty is potentially much narrower in Information cases. The type of loss which can be recovered in Information cases is limited to the loss caused by the information being negligently wrong. 

But how can an accountant know on which side of the line their work will fall?

Some guidance is set out in the judgment. At one end of the spectrum, a valuer or conveyancer will rarely supply more than a specific part of the information on which a client relies in making a decision. However, an investment advisor advising a client on buying a particular stock is likely providing advice. Between those two poles, it depends on the facts.

A retainer letter is likely to be key in assisting the Court to characterise the professional's engagement. Accountants' roles can be wide and varied. In our experience, where the role is specific and only information is being provided, for example, where due diligence is undertaken on a target company, the accountants' engagement letter invariably does make clear that the accountants' role does not extend beyond the competence of the due diligence work. However, accountants should beware taking on a wider consultancy role without considering the risks of doing so.  Liability exposure that comes with an Advice role can prove to be far larger. 

Whichever side of the line an engagement is likely to fall:

• Not only should the retainer letter be accurately drafted at the outset, but it must be kept under close review, and revised as necessary if there are unanticipated developments.
• Accountants should also always consider additional risk management strategies, including negotiating a liability cap, and reviewing their liability insurance for new areas of work.  

¹South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191

²Overruling two solicitors' liability cases where the distinction was wrongly applied: Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 582 and Portman Building Society v Bevan Ashford [2000] PNLR 344.