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Clack: SAAMCO in practice

Introduction

In Nigel Clack v Wrigleys Solicitors LLP [2013] EWHC 413 (Ch), Mr Nicholas Strauss QC (sitting as a Deputy Judge of the High Court) found for the Claimant client against his former Solicitors.

The case has a very useful digest of key principles laid down in South Australia Asset Management Corporation v York Montague Limited [1997] A.C. 191 (SAAMCO), relevant to the calculation of damages in professional negligence cases. It is also particularly helpful to practitioners in that the Judge adopted a useful test that could well help parties in the difficult task of identifying the nature and scope of the duty a professional was under (and the recoverable loss flowing therefrom) in an given case.

The facts

Clack is a case about the negligent provision of advice by Ws to C, in connection with a loan of £600,000 C made to his acquaintance, B. B had told C he owned/had a beneficial interest in shares in a company, CPDL, and offered C a charge over those shares as security for the loan. Ws advised C in connection with the drafting of relevant loan and security documents. Ws had advised C they had obtained all the documents required to effect a charge over the shares in CPDL.

Unfortunately, that wasn’t the case. They hadn’t procured a copy of any share certificates or a register of company members. As such, the Court found, they failed to advise C that without those documents, the security was ineffective or seriously defective. C was clear in his evidence that he had not asked D to advise him whether or not he should make the loan and that all D was asked and required to do was to effect security in the event of default.

Unhappily, B paid only four instalments of interest before he was made bankrupt. Thanks to the size of his debts, his creditors, including C, stand to recover nothing in the bankruptcy and C stands no chance of obtaining a transfer of the CPDL shares. 

C established that: had Ws advised him accordingly, he would have insisted on receiving a copy of the register of members and the share certificate; B would not have provided them; and, C would not have proceeded with the transaction.  Further, C established that had he enjoyed an effective charge over the shares, he would have assumed a role as a director of CPDL (and earned £30,000 fees from that position). The Court found that the shares in CPDL were (and remained at the date of judgment) worthless.

Damages & SAAMCO

The Judge found that C’s loss was limited to that part resulting from the ineffectiveness of the security. As the shares in CPDL were and are worthless, damages could not be calculated by reference to the value of the missing security and C’s loss was restricted to the lost director’s fees of £30,000. The Judge held that, "save to this extent, he must bear the loss, which is attributable to risks inherent in the transaction which he took on himself, and not to the breach of duty" [6(c)].

In deciding that C was not entitled to recover the whole of his loss (i.e. including the balance of the loan he had made to B), the Judge applied the principles relating to the recoverability of loss set out in SAAMCO. In the process, he undertook a very helpful review of the principles (as developed in subsequent caselaw). In essence, the Judge described them as including:

(i)  a wrongdoer is, in general, liable only for loss which is attributable to his wrongful conduct;

(ii)  in general, liability is limited to "those consequences which are attributable to that which made the act wrongful";

(iii)  it is not enough for a Claimant to show that he would not have suffered the loss "but for" the Defendant’s breach of duty; but,

(iv)  it must also be shown that the loss claimed was within the scope of the Defendant’s duty.

In SAAMCO, Lord Hoffman drew a distinction between breaches of 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 they should take [quoted at 99]. The distinction is a significant one: the damages falling with the scope of the former duty are likely to be curtailed substantially, in comparison to the latter.

As professional negligence practitioners are only too well aware it is often very difficult to categorise, properly, what the relevant duty was in any given case: the input provided by a given professional could often be described equally as "information" or "advice".

Provision of information or advice?

In Clack the Judge (adopting submissions from Ws’ barrister) set out a useful starting point for any analysis [103 and 104]:

(i) that in most cases a distinction can be drawn between giving advice (or information) as to a particular feature of a proposed transaction; and, giving advice or information as to whether to take the overall decision to proceed with it.

(ii) it may then be helpful to ask the questions: (a) what is the scope of the duty in question, and (b) what is the prospective harm, or kind of harm, from which the person to whom the duty is owed falls to be protected.

(iii) As is so often true, in any given case whether matters fall within one category or another is a question of fact and degree.

On the facts, the Judge found that the case fell within the former category at (i) above. The key issue was that Ws had advised only as to a feature of the transaction: the security, and not as to the wider question of whether C should enter into the loan agreement at all.

Wider issues

While it did not form part of his judgment, the Judge made a series of observations of particular interest. Those were that [107]:

(i) The tenor of the current caselaw is that, in general, where the negligent information or advice relates to the reliability of the borrower (or of the other party to a different party to a transaction) it will be treated (in SAAMCO terms) as advice as to whether the recipient should enter into a transaction- and not mere information to help him to make the decision. Accordingly, the whole of the relevant foreseeable loss will often be treated as being within the scope of the duty breached;

(ii) But, the Judge observed, it was not clear this was a “universal rule” as a lending decision could be made on the basis of a number of factors, and it would seem inconsistent with the principles set out in SAAMCO (as explained, subsequently) to hold a Defendant who has negligently provided information/advice relating to the borrower’s reliability automatically liable for the whole of the loss, disregarding other reasons for the decision to lend, and without enquiry as to the extent to which the loss may be due to entirely unrelated causes.

Take home points

Beyond providing a useful example of the application of SAAMCO to a novel factual scenario of Solicitors’ Negligence, Clack sets out a useful approach for practitioners to adopt when tackling the tricky issue of properly categorising the nature of the alleged professional duty in any particular case.

Clack also raises key questions of causation in cases where advice is provided as to the reliability of borrowers or contracting counter-parties: we await with interest to see when and how this logic is applied and developed in cases to come.