After 20 years, the Supreme Court tells us what many thought – the Steggles Palmer/Colin Bishop distinction is wrong – the big question is where next?
Whilst solicitors and professional advisors will welcome the decision of the Supreme Court in BPE solicitors v Hughes Holland (in substitution for Gabriel) lenders will find the decision perturbing.
For 20 years lenders have pursued claims against solicitors on the basis that it was either:
- a Steggles Palmer type case: where the solicitor failed to provide information that would have revealed the dishonesty of the borrower, in which case the solicitor was responsible for the whole loss of the transaction; or,
- a Colin Bishop type case: where the solicitor failed to provide information that would have revealed that the property was over-valued, in which case the solicitor was only liable for the SAAMCO cap.
Now it has been decided that distinction is wrong. Not only will this cause problems for any existing lender claims against solicitors, but the question is where next for lenders relationships with their solicitors?
Mr Gabriel lent £200,000 to a company in the erroneous belief that the money would be used in a project to develop land owned by it. In fact, the money was used to buy the land and pay off debts of one of the directors. The project was disastrous. The property was never developed. The loan was not repaid. The property was sold for just £13,000.
Mr Gabriel claimed that he was entitled to receive the whole amount of his loan as damages because he would never have made the loan if the solicitor’s draft facility letter had not negligently misled him about the use to be made of the money i.e. development of the land. The solicitors claimed that the reason why the project failed was not because the money had been used for things other than as set out in the facility letter but because the project would have still been a disaster even if it had and they were not responsible for that and therefore not liable for damages.
The Court of Appeal
The Court of Appeal in reversing the decision of the trial judge that BPE were liable for the whole loss held that Mr Gabriel’s loss fell outside the scope of BPE’s duty. The court held that the true cause of Mr Gabriel’s loss was not:
- within the scope of Mr Gabriel’s loss; or,
- caused by the breach of duty if it had been.
The Supreme Court
Lord Sumption giving the only judgement in dismissing the appeal, said that “in order to show damages it is not enough to show that but for the breach of duty the lender would not have entered into the transaction and thus would have avoided the loss. There must be a sufficient relationship between the loss suffered and the particular respect in which the defendant broke his duty”.
It appears therefore that most lenders’claims against solicitors will now fall into the Colin Bishop category on the basis that the advisor does not assume responsibility for the decision to lend but only a legal responsibility for the advice given on the limited aspect of the transaction he was concerned with.
In other cases, such as an investment advisor, the professional may advise on a whole range of factors that may be relevant to the claim whether to proceed with the transaction. In these cases, if the professional is negligent he will be liable for the whole loss.
The “no-transaction” case for lenders is now effectively dead. To succeed in a claim that does not involve an over-valued property such as a sub-sale (or back to back) purchase transaction but the dis-honesty of the borrower, lenders will now have to focus on why the unreported information bore on the factors which caused the loan to fail.
For example, in a case involving the solicitor’s failure to report a discount (where the purchaser does not pay the balance of the purchase price) the conundrum will be: how to prove that the loss fell within the scope of the solicitor’s duty AND would not have been suffered even if the information provided by the solicitor had been correct. In effect proving a negative of the hypothetical question of what would have happened had the information provided by the solicitor been correct.
Many lenders may feel that as a result, the basis on which the solicitor acts for them and perhaps the CML Lenders’ Handbook for Conveyancers will need re-visiting.