Practical application of the scope of duty test in professional negligence claims

In its June 2021 decision in Manchester Building Society v Grant Thornton, the Supreme Court reformulated the test for assessing what damages are owed by professionals (see our article on the decision). In summary, one needs to:    

• Assess what the purpose of the professionals advice was (i.e. what were they asked to do);

• Analyse whether the loss stems from their negligence (i.e. a “but for” test); then

• Consider whether there is a sufficient nexus between the harm suffered and the subject matter of the professional’s duty of care and whether there was any other causes of the loss.

The Privy Council in the case of Charles B Lawrence & Associates v Intercommercial Bank Ltd [2021] UKPC 30 was tasked with applying this new test in circumstances where there were two negligent professionals. Although an appeal from the courts of Trinidad & Tobago, the applicable law was English.

Facts

Intercommercial Bank Ltd was lending $3million to a borrower. The loan was guaranteed by a corporate guarantor, which was to provide security by way of a legal charge over a parcel of development land. Charles B Lawrence & Associates provided a valuation of the land of $15 million on the basis that planning would be granted for a commercial development. As is standard practice, the valuer stated that it had assumed there was good title for the land.

The borrower defaulted on the loan almost straightaway and the guarantor failed to meet its obligations. When it came to enforce its security, the bank discovered that the land was only suitable for residential development with the consequence that its true value (established at trial) was only US$2.375M. To make matters even worse for the bank, the guarantor did not have good title, so the security was worthless.

The bank settled its claim against it lawyers for the lack of good title for US$2.4M. It also succeeded against the valuer at trial, with both the first instance and appeal courts assessing damages at cUS$2M on the basis of the amount lent, plus interest, less the settlement received from the lawyers.

The valuer appealed to the Privy Council as to how damages had been assessed, principally by reference to the scope of duty it owed to the bank.

The true causes of loss

The Privy Council upheld the valuer’s appeal. It said that the valuer’s duty was to value the land correctly on the assumption there was good title to it. Although the bank would not have entered the loan but for the negligent valuation, the valuer could not be liable for the land not in fact having good title; this was a matter for the lawyers to have protected against.

To put it another way, if there had been good title for the land, the bank would have been able to enforce its security. It would have then been left with a shortfall, that it could seek to claim from the valuer as a result of the negligent overvaluation.

Accordingly, the correct measure of loss was to deduct the true value of the land (assuming good title) of US$2.375M from the amount lent. This gave a damages figure of US$625,000 to which any deductions for contributory negligence should be made and interest added.

Learning points

This case is a paradigm example of the importance of establishing a nexus between the risk the professional was meant to guard against and the reason for the loss being suffered, especially where the lender is unfortunate enough to have relied on the negligent advice of more than one professional. 

Although this was an extreme set of facts, the approach of the Privy Council will be applicable to any case where a solicitor has negligently failed to identify something in the title that goes to a property’s value (i.e. restrictive covenants, access rights, planning).

It also serves to demonstrate that the use of counter-factuals (i.e. had the professional given correct advice, what would the position be) should only ever be used as a secondary cross-check in assessing scope of duty, as the Supreme Court said in the Manchester Building Society case.

Finally, the reformulated test for assessing the loss arising from a professional’s scope of duty may give rise to new battles between co-defendants around contribution claims. Section 1 of the Civil Liability (Contribution) Act 1978 allows a party to seek contribution from another where they are both liable for the same damage. With the increased focus on establishing a nexus between the negligent act and the cause of loss, there appears to be greater scope to argue that the damage suffered is different. Whilst this may be an interesting sideshow for lenders, it could mean it takes longer to settle claims involving multiple professional defendants.  

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.