If the duty was to advise then 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 £8million. The valuer negligently values it at £10million causing the lender to lend more than they otherwise would have done. The market crashes by 50 per cent and the property sells for £4million. According to SAAMCO the valuer's maximum liability is £2million (i.e. the difference between the wrong and correct valuations) rather than the £6million 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 with the remainder of the loss being attributed to the market collapse and, therefore, something outwith the valuer's duty.
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 paragraphs 40 and 41 of his judgment in Hughes-Holland he 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.
This week 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 Kahn v Meadows [2021] UKSC 21. The Supreme Court had a larger than normal constitution of 7 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, therefore, the same principles 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.
All the justices agreed that the distinction between "advice" and "information" cases should be abandoned. Lord Leggatt provided (at para 92) 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 paragraph 22 the majority of the court agreed with the proposal to dispense with this distinction with Lord Burrows commenting at para 196 of his judgment that while "it is not easy to find a shorthand replacement terminology" for the distinction, it has to be recognised, as Lord Sumption made clear at para 44 of Hughes-Holland that the categories are 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 was a useful cross-check of the result it is no more than that. In an interesting passage in his judgment, Lord Leggatt examines the problems with a counterfactual test saying 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 has been reached. In other words, the analysis is not really part of the test, but rather subordinate to it.
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" (paragraph 17). In that context, the court referred to the famous mountaineer's knee example given by Lord Hoffmann in SAAMCO where a doctor negligently advised 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". However, there is little to choose between the judgments and Lord Leggatt (at paragraph 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 7 question at para 79 of Kahn which he considers to be crucial.
Following these principles, the justices arrived at the same result in each case. Kahn 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 Kahn 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. Ms Meadows argued that she would have terminated the pregnancy had she known rather than give birth to a child with haemophilia and that Dr Kahn was liable for all the consequences of his negligence including the costs arising from a disability unrelated to his 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 the 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 £32million. 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 and 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 contributory negligent to the extent of 50 per cent due to what the court referred to as an "overly ambitious application of the business model by the society's management".
In practice, the judgments of the Supreme Court will be of assistance to practitioners and will avoid us having to try and fit cases into the straightjackets of "advice" and "information" when neither label seems to suit the allegedly professional advice. While the Supreme Court's analysis was primarily based on tort, 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 (often in the form of terms of business). A reminder for all professional advisers of the importance of drafting terms of business which properly identify the advice to be given or not to be given in particular cases.
