Mr Gabriel lost the £200,000 he lent in connection with the development of a disused building. The Supreme Court held that solicitors who negligently confirmed his belief that the money would be spent on the development were not liable for that loss. The project would have failed even if the money had been spent as he believed, and their duty did not cover the commercial risks of the venture.
The transaction
Mr Richard Gabriel was adjudicated bankrupt in March 2014, and the appeal was brought by his trustee, Mr Peter Hughes-Holland. In November 2007 Mr Peter Little had asked Mr Gabriel for £200,000 in connection with Building 428, a disused heating tower at Kemble Airfield. Mr Gabriel believed that the property belonged to Mr Little or a company he controlled and that the loan would fund development costing about £200,000. He thought the building worth about £150,000, and more than £400,000 once developed.
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The building belonged to High Tech Fabric Maintenance Ltd and was charged to a bank for £150,000. Mr Little intended to transfer it to Whiteshore Associates Ltd and to use the loan to fund the purchase, so that the bank could be repaid and VAT met. Nothing would remain for development. The judge found that Mr Gabriel did not know this and would not have accepted it. Mr Little would be contributing nothing.
Mr Gabriel decided to instruct Mr Richard Spencer of BPE Solicitors to prepare a facility letter and a charge. The instructions reached Mr Spencer in a voicemail from Mr Little and were never confirmed with Mr Gabriel. Mr Spencer used a facility letter from an earlier abortive transaction as a template and failed to remove statements that the loan would be made available as a contribution to the costs of development and that its purpose was to assist with those costs. Those statements did not match the instructions he had received, but they confirmed Mr Gabriel’s belief. At completion on 7 December 2007 Mr Gabriel learned that High Tech owned the building and that the bank’s charge was to be discharged, but not that his loan would fund the discharge. He read the statements and advanced the money on that basis. He would not have done so had he known the proposed use. No significant construction was carried out. The property was later sold for £13,000, which was consumed by the expenses of sale, and Mr Gabriel recovered only £8,191.56 from Mr Little.
The decisions below
The deputy judge, Mr Robert Englehart QC, dismissed claims against Mr Little, Whiteshore and High Tech for fraud and negligent misrepresentation. He held that there was no implied trust of the loan moneys, so BPE was not liable for dishonest assistance. He held BPE negligent: they had no duty to advise on the commercial risks, but they should have explained that the funds would be applied for Mr Little’s benefit, and the retained statements suggested the opposite. He was not persuaded that spending about £200,000 on development was bound to fail, and awarded £191,808.44, the advance less the sum received from Mr Little, with statutory interest from drawdown.
The Court of Appeal allowed BPE’s appeal. Gloster LJ, with whom Fulford and Maurice Kay LJJ agreed, held that there was no positive evidence that expenditure of £200,000 would have made the loan recoverable, and that the judge had reversed the burden of proof. The damages were reduced to nil.
The project was not viable
Lord Sumption, with whom Lord Neuberger, Lord Mance, Lord Clarke and Lord Hodge agreed, held that the evidence showed that spending £200,000 would not have enhanced the value of the property, irrespective of the burden of proof. About £30,000 would have been needed to decontaminate the site before work could start. Value would have been enhanced only if development was substantially completed, and it was not suggested that Mr Little had any other funds for completion. Cost evidence, together with Mr Gabriel’s own case that the nature and cost of the required work had not materially increased after 2007, showed that £200,000 was far from enough. His expert accepted that a valuer in 2007 would have regarded the project as unviable. The deputy judge accepted that the cost was likely to be far in excess of £200,000, but he found only that the possibility of some recovery could not be ruled out. That was not a finding that the project was viable. The Court of Appeal was entitled to find that the expenditure would not have enhanced the value.
Loss outside the solicitors’ duty
In South Australia Asset Management Corpn v York Montague Ltd, the House of Lords held that a professional whose duty is to take reasonable care in supplying information, on which the client will decide what to do, is responsible for the consequences of the information being wrong, not for all the consequences of the client’s decision. Where the duty is to advise whether a course of action should be taken, the adviser must consider its potential consequences and, if negligent, is responsible for the foreseeable loss flowing from that course. The distinction depends on the range of matters for which responsibility was assumed. The whole loss is not recoverable merely because the information was critical or because the client would not have proceeded without it. Lord Sumption rejected the approach, adopted by the deputy judge from earlier solicitor cases, of treating the loss flowing from the decision to proceed as recoverable on that ground alone. The claimant must prove both that he has suffered loss and that the loss fell within the scope of the duty. That is part of his case, not a matter such as mitigation for the defendant to prove. The Court of Appeal was right on the burden of proof.
BPE had not assumed responsibility for Mr Gabriel’s decision to lend. The instructions were to draw up the facility agreement and the charge, nothing more. Mr Spencer knew of the agreed loan and security, but not of the nature or cost of the development, Mr Little’s resources, or the value of the property. The template wording confirmed Mr Gabriel’s assumption by oversight. Had that assumption been correct, Mr Gabriel would still have lost his money, because expenditure of £200,000 would not have enhanced the value of the property. The development would have been left incomplete, the loan unpaid and the property substantially worthless on a sale in a depressed market. None of the loss was within the scope of BPE’s duty. It arose from commercial misjudgements which were no concern of theirs. No question of contributory negligence arose.
Verdict: The Court unanimously dismissed the appeal. The solicitors’ negligence had been a reason for entering the loan, but none of the loss arose from a risk their duty covered. The award of nil damages stood.
Source: BPE Solicitors and another v Hughes-Holland [2017] UKSC 21
