pnBlawg

the professional negligence blog

A collaboration between Rebmark Legal Solutions and 1 Chancery Lane

Friends become Enemies aka The Dangers of Free Advice

  We were often warned against giving legal advice to our friends.  As professionals, if we give advice of a professional nature, there is (surprisingly to me) a distinct possibility that it will be relied upon.  This accords with the well-established Hedley Byrne doctrine of liability for the assumption of responsibility.  When giving advice, this liability can arise even if we don’t charge for our services.  Negligent mis-statement is the ground usually pleaded but in the instant case it formed only a part of a Preliminary Issue determination as to the nature and scope of any duty owed by the friend/professional.   The parties were, in the one corner, a married couple and in the other corner, their erstwhile architect friend.  The architect gave recommendations to the couple about their proposed garden scheme.  An issue arose as to what duty she owed at the time (for alleged economic loss) and deciding this involved a full examination of the architect’s role and recommendations.   Given that the judge found it impossible to find the basic elements of a contract in the numerous email exchanges between the parties, and no money was charged or mentioned by the architect, this limb of the claim naturally fell away.  However, he found that the architect still owed a tortious duty of care because her advice had been formal, specialist and extensive.    You might recall from earlier this year that the newspapers seemed to like this story of people falling out over rather expensive landscaping.  Nevertheless, I prefer to think of this case as in the manner in which the TCC judge put it: a ‘cautionary tale’.    (1) PETER BURGESS (2) LYNN BURGESS v BASIA LEJONVARN [2016] TCLR 3

Crystal ball gazing: how does a judge assess loss of chance?

You can prove that a past event has happened but you cannot prove that a future event will happen. When the actions of a third party are relevant all that can be done is to evaluate the chance of that event happening. So when a claimant has proved as a matter of causation a real or substantial chance rather than a speculative chance of an event or events happening how does a court evaluate that loss of chance? In Joyce v Bowman Law Ltd [2010] EWHC 251 (Ch) J bought a property which was advertised with an option for the buyer to purchase the lower end of the garden if the seller’s application for planning permission was unsuccessful. J was keen to develop the land. He instructed B to act for him. Unfortunately the contract for sale contained a seller’s option, not a buyer’s option. B admitted negligence. J claimed loss of profit of £400,000: he would have developed the property and the additional land by building a large house. J argued that all the uncertainties concerning negotiating an option in the proper form, funding the redevelopment and obtaining planning permission should be reflected in a single percentage of 75%. He would recover damages of £300,000 on this basis. B argued that none of the consequential losses were recoverable as a matter of law, either because they were not within the scope of B’s duty of care, were not caused by the negligence or were too remote. B also argued that J had failed to mitigate his loss by building a smaller new house. It was held that J could only recover damages for his loss of profit if he could bring himself within the second limb of Hadley v Baxendale by showing that B had knowledge of the special circumstances which were liable to cause more loss. The judge found that B knew of J’s intention to make a profit from developing the property. It did not matter that B was not aware of the precise scale of the intended development; the knowledge was sufficient to give B knowledge of special circumstances outside the "ordinary course of things" of such a kind that a breach in those special circumstances would be liable to cause J loss. How did Mr Justice Vos assess the loss of chance? He found that the chances of: J being granted a suitably watertight buyer’s option were 85%; J exercising his option 100%; J being able to obtain planning permission or his plans 40%; and J obtaining funding for the development 85%. Multiplying these percentages gives a figure of 29%. On a finding of a loss of profit of £130,000 the Judge awarded damages of £37,700. In Tom Hoskins plc v EMW Law [2010] EWHC 479 (Ch) Mr Justice Floyd approached the task a little differently. This was a professional negligence claim against solicitors handling the sale of a portfolio of public houses and a brewery. The main issue was that E’s negligence caused T to complete transactions late and on relatively unfavourable terms. Although there were multiple contingencies (agreement to the terms, attempts to re-negotiate or extend the date for completion) the Judge considered it was wrong to apply a mechanistic approach of multiplying percentage by percentage. By way of illustration if the Judge had thought there was a 20% chance of the purchaser agreeing to provide a director’s guarantee and an 80% chance of completion occurring at the end of October that would produce a loss of chance of 16%. However this did not reflect the true chances of the deal being done. The Judge evaluated the overall chances of completion by the end of October at 50%. In Harding Homes v Bircham Dyson Bell [2015] EWHC 3329 (Ch) B acted for H in connection with a bank loan to finance a residential development. B included an all-monies clause by mistake in the guarantee. When H defaulted the bank demanded that the shareholders pay the sum due of £5.9m. Counsel for B argued that as the contingencies were truly independent so that the chances of one contingency happening were unrelated to the chances of the other contingencies happening the court should apply a mechanistic approach. Mrs Justice Proudman cited the decision in Tom Hoskins and decided that she should look at the chances of various contingencies happening in the round, not by applying percentage upon percentage. Although in the end it was irrelevant because the Judge found that causation was not made out and only nominal damages were awarded.   A mechanistic approach seems attractive: sequential logical steps with a percentage at each step then calculate the product of those figures. However it can skew the loss of chance and lead to a figure that does not truly reflect the overall chance that without the negligence the claimant would have negotiated or achieved a better outcome. After all damages are supposed to be compensatory in nature.

Caught out by the court fee: a forewarning on issuing claims protectively

Facts The case of Richard Lewis & Others v Ward Hadaway [2015] EWHC 3503 (Ch) concerned 31 professional negligence claims brought against a firm of solicitors relating to conveyancing transactions. In the pre-action correspondence, the individual claims were each valued in the hundreds of thousands with a collective worth of £9 million. However, when the Claimants’ solicitors filled in the claim forms, the anticipated value for each case was considerably understated. Each claim form was then amended prior to service to reflect its true worth and the balance of the appropriate fee was paid. All the claims were sent to the court very near to the end of the limitation period, eleven of which being delivered to the court before, but not issued by the court until after, the expiry of the limitation period.  The Defendant’s alleged that this system was an abuse of process and sought to strike out the claims. In the alternative, the Defendants sought summary judgment on the eleven claims issued after expiry of limitation alleging that they were statute barred.  On 21 December 2015 Mr John Male QC, sitting as Deputy High Court Judge in the case, delivered judgment. Judgment With regards to the strike out application, Judge Male opined that intentionally issuing a claim form lower than its true value amounted to an abuse of process. He added that such practices materially affect the court system’s cash-flow and that it would not be in the public interest to condone such behaviour. His reasoning was supported by the fact that the Claimants’ solicitors had previously been critiqued in several other cases for employing such a scheme.  Interestingly, he did not go on to strike out the claims. Following Zahoor v Masood [2009] EWCA Civ 650 he held that allowing the Claimants to continue with their claims in light of the abuse of process would not be “an affront to the court”, paragraph [84]. His decision was based on the following findings: the prejudice that would result to the Claimants was substantial, the abuse of process did not go to the root of the claim, the potential worth of the claims was high and the Defendant would still able to argue limitation in some of the cases. He then went on to consider the application for summary judgment in respect of eleven of the claims. After considering the relevant CPR, statutory provisions and case-law he concluded that the claims were statute barred. His reasoning was that for a claim to be brought for the purposes of the Limitation Act 1980, the Claimant must have done “all that was in their power to do to set the wheels of justice in motion”, Aly v Aly (1984), paragraph [105]. He held that this had not been done for the eleven claims as the Claimants could have paid the appropriate issue fee.   Comment Whilst it is important to appreciate that Lewis v Hadaway is a High Court decision and is subject to review by the appellate courts, the potential ramifications of this judgment are far reaching. The decision is likely to result in a flurry of interlocutory applications brought by Defendants to extinguish claims where the claim form is issued and the court fee is increased after issue. In turn, this is likely to generate satellite litigation against solicitors, particularly in the professional negligence sphere where there is no recourse for claimants to a discretionary extension of the limitation period. The ruling also raises pertinent questions about access to justice. Last year court fees were significantly increased with a 5% levy on all claims over £10, 000. It is questionable where the dual effect of this judgment and the increases leave a Claimant who is impecunious but the potential recipient of a high-value claim. Judge Man alluded to this situation and held that for “a financially strapped litigant…[i]t may well be that, in that sort of case, there would be no abuse of process”, however, he went on to say that this would only be the case where there was “complete transparency” between the parties as to the undervaluing of the claim forms, paragraph [58]. It is difficult to see why the Defendant’s solicitors would permit such course of action when they can simply have the claim struck out. Some consolation comes from the court fee remission system which is open to Claimants who have a small amount of savings and receive certain benefits or are on a low income. However, whilst this may assist those at the lowest end of the spectrum it fails to address the plethora of Claimants who do not fulfil this criterion. The judicial reasoning is also worthy of analysis. Judge Male’s s ruling on summary judgment was a technical one; if the issue fee is not correctly paid and the claim form is issued by the court outside the limitation period then the action will be statute barred. It is interesting to compare this to an identical scenario but where the claim form is issued by the court before expiry, the only difference being when the court issues the claim form. Given that the intention of the parties is the same and that the issuing of the claim form by the court is down to administrative chance, is there really any difference between these two cases? Either the Claimants in both scenarios did everything in their power to set the wheels of justice in motion, or, if it is deemed they did not because the correct fee was not paid then surely both claims should be summarily dismissed? A strict application of Judge Male’s ratio will cause arbitrary distinctions between cases and one is left wondering whether focusing on abuse of the process would have been a more pragmatic approach.

Is an extension to the SAAMCO principle on the horizon?

Background Property valuation is seldom an exact science; it involves the consideration of both present factors and future contingencies.  With the property crashes of the last two decades came a wealth of litigation considering both the scope of the duty of care owed by valuers to lenders and the extent to which losses caused by negligent valuations are recoverable. One such case which those in the professional negligence field will be familiar is South Australian Asset Management Corporation v. York Montague Ltd [1996] UKHL 10. The House of Lords held, inter alia, that valuers who provide negligent valuations are only liable for the loss caused by the negligent information itself and not for any extraneous events (in the legal sphere this became known as the SAAMCO principle). Subsequent cases sought to distinguish its application, particularly where the duty was to advise rather than to inform and, earlier this month, the principle was again brought to the fore in an interesting judgment delivered in Edward Astle & Ors v CBRE Ltd and others [2015] EWHC 3189 (Ch). The case involved a Government scheme which consisted of both a trust and a partnership. The trust held freehold property and the partnership had an interest in the acquisition and development of five development sites. The Royal Bank of Scotland (“RBS”) sought expert valuations for loan security purposes and approached the Defendant companies (ERL and CBRE) in separate capacities. CBRE advised on the value of the units and freehold property. The units and loan notes were then procured and issued by ERL (the owner of the partnership and trustee company) in an information memorandum (“IM”). The IM contained a section entitled “Investment Overview” and sought to raise £37, 500,000, £25, 775, 000 of which was subsequently invested by the Claimants. Unfortunately, there was a collapse in commercial property values in 2008 and a desktop valuation carried out by CBRE noted a sharp decline in the aggregate value of the freehold and units. As such, the development centres were cancelled in 2010 and the freehold was sold. This meant that the partnership defaulted on its debt and the combined value of the properties was such that the Claimants lost all that they had invested. The Claimants brought a claim against the Defendants alleging that the valuations had been materially overstated and that their losses were attributable to the alleged overvaluation in the IM. The Defendant applied for summary judgment against the Claimants relying on the SAAMCO principle, namely that this was a case of duty to inform and therefore a claim for losses unconnected with the alleged overvaluation could not be pursued. Judgment Judge William Tower QC, sitting as High Court judge, delivered judgment on 5 November 2015. Despite accepting that the duty of the investors in this case was a duty to inform rather than to advise he nonetheless went on to hold that the Claimant had a real prospect of establishing that the loss they had suffered was attributable, at least in part, to the alleged inadequacies in the IM. In summary, the arguments presented on both sides were as follows. The Defendant argued that even if the IM has been entirely accurate, the Claimants would still have lost the totality of their investments because the cause of the loss was only attributable to the following events: commercial property values having collapsed, the project having been abandoned and the partnership refinancing having failed. The Claimants argued that whilst the SAAMCO principle applied in relation to the claims against CBRE, it did not apply to the claim against ERL.  The reason purported was that the SAAMCO case could be distinguished on its facts based on the following. Firstly, that the scope of the duty of care was different. There was no equivalence between ERL’s role and that of a valuer, SAAMCO related to a standard mortgage lender claiming against a negligent valuer whereas, in the present case, investors had acquired units or loan notes on the basis of a prospectus. In this sense ERL was not providing dispassionate objective advice as a valuer but rather it was the promoter of both a valuation and more nuanced information relating to commercial prospects. As such, ERL was also the recipient of a wide range of other benefits which were far removed from a standard fee for the provision of valuation service type scenario. Secondly, the starting point for discerning loss was different. Unlike SAAMCO, it was submitted that in the present case the court was not required to carry out a speculative analysis of what the valuation would have been had the information been accurate. Instead, it was required to assess the damages at the amount advanced less the amount recovered. The Claimant’s reasoning was that they had suffered an immediate measurable loss at the time of their investment because the units and loan notes (the asset in which they had invested) were in fact worth less than they were represented to be and that since they recovered nothing they were entitled to the full amount advanced.   Judge Tower reviewed the relevant authorities and asserted that the exercise which the court is required to carry out when considering these cases is a two-stage process: Firstly, the court must ascertain the basic loss i.e what loss did in fact occur. Secondly, the court is required to assess the maximum amount of the loss capable of falling within the duty of care, which it does by identifying the consequences which are attributable to that which made the act wrongful. Siding with the Claimants, Judge Tower agreed that it was capable of being argued at trial that the Claimants made an investment which was worthless and which they would not have made if they had been informed as to the true value of the investment. Following this, even though ERL had no duty to advise, as an information-provider on an investment rather than a lending decision, it was arguable that ERL knew that the information would be used by the Claimants and their own advisers to decide on the viability of the transaction.  Therefore the maximum loss was, at least in part, attributable to the alleged overvaluation. Comment Ultimately, this was a summary judgment application. The judge was not permitted to have a mini-trial of the issues and the threshold the Claimant had to surmount to prove that the case had a real prospect of success was a low one. It is also important to note that the judge’s decision was caveated. On the evidence before him Judge Tower decided it was quite likely that the Claimants would not be able to prove at trial that an overvaluation caused anything like as much loss as much that alleged and that a trial judge may find that his two-stage formulation is not appropriate. For all these reasons, practitioners cannot infer too much at this stage as to a possible extension of the SAAMCO principle. Nevertheless, the judgment does foreshadow a trial on the substantive issues which will raise poignant questions as to the scope of SAAMCO and one which will have potentially wide-ranging implications for practitioners (as well as valuers/investors). Most notably the door may be opened in similar cases to a third category of duty which carries a different measure of loss, one that sits between the duty to inform and the duty to advise where the tortfeasor is aware than the information will be used to decide the viability of a transactions. Looking ahead, for practitioners this could mean that the SAAMCO principle will no longer be a ‘carte blanche’ in valuation cases where the duty to inform arises and that investment contracts will need to be subjected to meticulous scrutiny. For those practising in this field, the forthcoming judgment will certainly be one to watch.