Accredited specialist in professional negligence law Karen Cornwell reflects on mainstream lending seven months after judgment was handed down in Hughes-Holland v BPE Solicitors UKSC 21.

Mainstream lenders rely upon (i) the value of the security subjects and (ii) the borrower’s covenant when advancing loan funds.

In claims against valuers, on whom the lender relied when advancing funds, it is generally accepted in Scotland that the level of recoverable loss is restricted by the SAAMCO cap. Effectively, the lender requires to prove, on balance that (i) but for the negligence the sums would not have been advanced and (ii) the loss falls within the SAAMCO cap.

In cases where a solicitor is sued in relation to an adverse impact on value of a property the same principle applies.

Mr Justice Chadwick decided in the, well documented, case of Bristol & West v Fancy & Jackson that the same approach did not apply where the solicitor negligently failed to report matters of viability and reference which would have led to the concerns as to the borrower’s honesty or otherwise. In effect, the whole loss being recoverable subject to other arguments e.g. contributory negligence, mitigation of loss etc.

Hughes Holland v BPE overruled certain aspects of what was understood to be the correct approach. Lord Sumption’s opinion can be summarised as follows:

SAAMCO introduced a distinction between “advice” and “information” cases. What does that actually mean? In advice cases the professional is responsible for all loses sustained in entering the transaction upon that advice. However, in information cases the professional apparently liable for only some of the consequences of entering into the transaction.

My understanding is that the claimant must prove (a) that had the negligent information been disclosed as it ought to have been the transaction would not have proceeded (“but for” test) and (b) the loss claimed is directly attributable to the incorrect information (or omission) which the professional negligently provided to the client. The burden of proof rests with the lender

Why should the loss not be wholly attributable assuming all else in order? Especially in a situation whereby it can be shown that the borrower was a fraudster. For example, a lender bases their decision to lend on various factors, not all of which the solicitor will be liable for checking in order e.g. the valuation for mortgage purposes. If the valuation and all other factors are in order, as they often are, then surely it is arguable that the lender is entitled to recover their entire loss? The only issue being the negligent information provided by the solicitor?

Regardless, BPE can be distinguished from standard lender claims. BPE involved monies to be invested in development of a unique property at a disused airfield – not exactly run of the mill. The money was not invested as it ought to have been and the borrower sought his entire loss from the solicitor. The investment was always deemed to fail and as such the borrower was entitled to recover nil.

That seems to be perfectly reasonable. Not the same can be said for standard lender claims, least of all in a situation whereby it would have been disclosed that the borrower was dishonest had the correct information been provided as it ought to have been. If it can be proved that a solicitor gave priority to the borrower’s interests over those of the lender such conduct must assist in substantiating a case that the solicitor was negligent and in breach of fiduciary duty. In a case of fraud the lender will recover all loss sustained with no reduction for contributory negligence.

The effect of BPE seems to be that a lender cannot simply rely on the fact that the information which ought to have been disclosed was not disclosed. Why not? What if all else is in order and the omission is the deciding factor? If you have a dishonest borrower then the lender proceeds on good ground. In short - the loan would not have been advanced to the borrower if the information had been made available to the lender. Their covenant would likely be nil/zero. It is fair to assume that honest borrowers are more likely, on balance, to maintain payments than those that are dishonest.

If the basis to proceed in solicitor, accountant claims etc is indeed in line with SAAMCO, the cap would likely only apply after the deduction of sums for contributory negligence and failure to mitigate.

It is also arguable that BPE does not affect the ultimate valuation of a claim and rather requires sufficient pleadings and evidence in order to substantiate the sums claimed.

Let us not forget that the (Scottish) cases referred to in both written and oral examination were not in any way commented upon. It seems to me that it is open to argue that they stand undisturbed by the decision. Indeed, there was no explanation provided as to what the correct approach ought to be. BPE was not a conventional mortgage lender case. The question of what a solicitor’s responsibility is when acting for a lender will no doubt be determined in due course. Watch this space.