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Supreme Court clarifies distinction between 'advice' and 'information' negligence cases


A law firm that made a mistake when drafting a loan letter on its client's instructions, and failing to draw critical information to his attention, was not liable to that client when the loan failed.  The client would have made a loss on the loan in any event due to his commercial misjudgments, the UK's highest court has ruled.

The decision clarifies the distinction between so-called 'advice' and 'information' cases, and confirms that negligent advisers will only be liable for the full amount of a client's losses where the transaction was entered into solely on negligent advice, according to professional negligence expert Suzie Boyd of Pinsent Masons, the law firm behind Out-Law.com.

"The scope of the duty assumed by a professional will as ever depend on the specific facts in each case, but for many professionals and their insurers this decision will be welcomed," she said.

"Solicitors and valuers, for example, will often only provide 'information' on a transaction – for example, a surveyor's valuation of a property - and will will leave the final commercial decision to the client. However, the clarification provided by this case may not be so welcome for investment advisers, as their services may more commonly fall within the 'advice' distinction. Professionals wishing to protect their position would be well advised to set out the scope of their duties, including any limitations on decision-making, in their letter of engagement," she said.

Giving the unanimous judgment of the court, Lord Sumption described 'information' cases as those in which "a professional adviser contributes a limited part of the material on which his client will rely in deciding whether to enter into a prospective transaction". However, "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".

"In such a case … the [professional's] legal responsibility does not extend to the decision itself," he said.

"It follows that even if the material which the [professional] supplied is known to be critical to the decision to enter into the transaction, he is liable only for the financial consequences of its being wrong and not for the financial consequences of [the client] entering into the transaction so far as these are greater. Otherwise the [professional] would become the underwriter of the financial fortunes of the whole transaction by virtue of having assumed a duty of care in relation to just one element of someone else's decision," the judge said.

This was the case even in what have been described as 'no transaction' cases, where the claimant would not have proceeded with a transaction if the adviser had not been negligent when reporting of some relevant fact (rather than a "successful transaction" case where the claimant would still have proceeded if it had received non-negligent advice, but on a different basis). The adviser could not be said to have "assumed responsibility for identifying all the matters relevant to the lender's decision or for advising them whether to proceed", he said.

The dispute in this case arose in connection with a £200,000 loan made by a businessman, Richard Gabriel, to his friend Peter Little and one of his companies. Gabriel had expected the loan to be used to develop a property in Gloucestershire, although this was not expressly stated by Little. In fact, Little intended to transfer the property to a special purpose vehicle (SPV), which would use the funds to pay a company owned by Little. That company would then pay off a bank loan and security held over the property by a bank.

Gabriel had instructed BPE, a law firm, to draw up the loan agreement. He used a template from an earlier transaction, which inadvertently confirmed his incorrect understanding of Little's plans for the property. When the transaction failed, Gabriel sued Little, his company and the SPV for fraud and negligent misrepresentation and BPE for breach of an implied trust and negligence. A High Court judge dismissed all the claims except the negligence claim against BPE, but this was overturned by the Court of Appeal.

In his Supreme Court judgment, Lord Sumption said that it was "clear" that BPE had not assumed responsibility for the transaction.

"Their instructions were to draw up the facility agreement and the charge, nothing more," he said.

Given that BPE's only legal responsibility was for the consequences of confirming Gabriel's assumption about "one of a number of factors in his assessment of the project", the firm was only liable for any loss attributable to that assumption being wrong, the judge said. However, Gabriel would still have lost the money, because his £200,000 would have done nothing to enhance the value of the property, he said.

"None of the loss which Gabriel suffered was within the scope of BPE's duty," he said. "None of it was loss against which BPE was duty bound to take reasonable care to protect him. It arose from commercial misjudgements which were no concern of theirs."

Although Lord Sumption discredited the distinction between 'no transaction' and 'successful transaction' cases, this was a case of solicitor's negligence, said professional negligence expert Michael Fletcher of Pinsent Masons.

"It remains to be seen how this will be applied in other fields," he said. "For example, in a case of surveyor's negligence, it may be clear that a lender would not have lent if it had received a non-negligent, lower, valuation of its proposed security, because the lower loan amount would have been insufficient for the borrower's purposes and the transaction would have collapsed; the borrower would have walked away - a 'no transaction' case - rather than proceed with a lower loan - a 'successful transaction' case."

"Defendant surveyors will naturally now argue that all such cases should proceed on a successful transaction basis, but the courts will need to determine whether Lord Sumption's judgment should apply to such cases," he said.   

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