Does the cap fit your advice?
Although the principles on which an award for damages for being in breach of their duty to a client may not be the first thing on a valuer’s mind when accepting an assignment, a recent ruling by the United Kingdom Supreme Court underlines the importance of clearly understanding how far their advice should extend.
It is some twenty years since the House of Lords (HoL), the predecessor as final court of appeal to the Supreme Court, decided the case of South Australia Asset Management Corpn v York Montague Ltd, giving rise to the so called “SAAMCO cap.” This is commonly represented as meaning the damages for which a valuer can be held liable are limited to the difference between the valuer’s valuation figure and the figure which the court decides was the actual value of the property at the date of the valuation. This is actually a significant oversimplification of that decision, and even the leading judge in that case, Lord Hoffmann, cautioned against the use of the “cap” label in his judgement.
The essence of the SAAMCO case was that the claimant lender was seeking to recover from the valuer its total losses suffered when a loan defaulted. In the judgement, Lord Hoffmann conceded that limiting the damages to the amount of the overvaluation might give the appearance of a cap, but this was actually the result of the claimant having to satisfy two separate requirements: first, to prove that it had suffered loss, and, second, to establish that the loss fell within the scope of the duty it was owed. It was not a case of choosing the wrong measure of damages (the total loss) and then correcting the error by imposing a cap.
The need for the claimant to establish that a loss fell within the scope of the duty it was owed led to the HoL distinguishing between “information” and “advice”. Where a professional is under a duty to advise their client on a transaction, if they are negligent they will be responsible for the foreseeable consequences of that advice being wrong. On the other hand, if a professional is only responsible for providing information to assist their client in deciding whether to go ahead with a transaction, if they are negligent they will only be liable for the foreseeable consequences of the information being wrong, not for all the consequences which may flow from the client entering into the transaction.
In the SAAMCO case the valuer was deemed to be providing information, ie the value of the property to be provided as security for the loan, and not advice, ie whether or not the loan should be made. The SAAMCO decision has been criticised because on face of it these are neither distinct nor mutually exclusive categories. Information given by a professional to their client is usually a specific form of advice, and most advice will involve conveying information.
Last month the Supreme Court published its decision in the case of BPE Solicitors and another v Hughes-Holland which considered the principles in the SAAMCO case in detail and provided clarification as to their application. In this case the claimant had lost all of the money loaned to redevelop a property when the borrower defaulted. The lawyers who had drawn up the loan documents made an error which misled the claimant as to the purpose for which the loan was required.
The High Court awarded damages equivalent to virtually the whole of the loan amount, being unpersuaded by the defence’s argument that the proposed redevelopment was never viable, thus meaning the claimant would have lost the amount lent even if the error had not been made.
The Court of Appeal reversed the decision of the High Court, holding that it had been wrong to suggest it was for the defence to prove the scheme was not viable. Following the SAAMCO principle it was for the claimant to prove its loss and that this loss was caused by the lawyer’s error. It found that, on the evidence presented, the amount lent would not have increased the value of the property sufficiently to allow the claimant to be recover any of the loan and therefore there was no loss.
The Supreme Court accepted the Court of Appeal’s finding that spending the amount lent on redeveloping the property would not have enhanced its value. Of wider interest were the clarifying comments of Lord Sumption in relation to the “advice” and “information” distinction in the SAAMCO principle. These can be summarised as:
For professional duties to fall within the “advice” category, the client leaves the professional to consider what matters should be taken into account in deciding whether to enter into a transaction. The professional’s duty is to consider all relevant matters. If one of those matters is negligently ignored or misjudged, and this proves to be critical to the decision, the client will be entitled to recover all loss flowing from the transaction.
For professional duties to fall within the “information” category, the professional contributes just part of the material on which the client will rely in deciding whether to enter into a transaction. The process of identifying the other relevant considerations and the overall assessment of the commercial merits of the transaction are exclusively matters for the client, or possibly other advisers.
Where the duties are “informational” Lord Sumption went on to explain that even if the material supplied by a defendant adviser is known to be critical to the decision to enter into the transaction, the adviser is liable only for the financial consequences of it being wrong and not for the financial consequences of the claimant entering into the transaction if these are greater.
The Supreme Court has therefore addressed the doubts and criticisms that have arisen around the SAAMCO case, and in doing so, has provided welcome reinforcement of the law around how damages in professional negligence cases should be assessed.
What does this mean for valuers?
Most valuation assignments should fall within the “information” category described above and therefore the clarification that damages should be confined to the loss arising as a result of any mis-valuation rather than any other losses suffered as a consequence of action taken by the client in reliance on the valuation is welcome. However, the comments of the Supreme Court also highlight the need for valuers to be careful to ensure that the limits on their duty to the client are clear.
Both the SAAMCO and BPE cases involved property loans and this is an area in which the risks to the valuer are at the higher end of the scale and where greatest caution is needed. Not surprisingly many banks, and other lenders, want the valuer to provide advice about the suitability of the property as security, not just a spot valuation figure. There is nothing wrong with this and valuers are the best qualified people to advise on matters such as trends in the market or anticipated changes in the property or locality that could affect the security over the term of the loan. However, in giving such advice, care is needed not to stray across the line between the “information” and “advice” categories of assignment as defined by the Supreme Court. It’s time to check your terms of engagement and the way you present and phrase the advice given in your reports to ensure that you cannot be held as having advised that the loan be made if things ever go wrong.
