It Was Wrong, But Whose Fault Was It?

When a person takes professional advice and a loss follows, it is normal to look for compensation through the professional's indemnity insurance policy.

In order for the professional to be liable, they have to have owed the claimant a duty of care and their advice has to have been acted upon by the claimant to their detriment. In addition, the claimant must demonstrate that they would not have taken the action which caused the loss had they not relied on the advice.

A recent case in the Supreme Court gave an example of when negligent work in preparing a loan document nonetheless left the lender unable to claim for losses made.

It involved a man who lent a company £200,000 on the assumption that it was going to be used for a property development. His solicitors provided the loan documentation, which confirmed that intention. The circumstances were rather convoluted but at no point was it the intention of the borrower to use the loan as the lender thought – it was to be used to discharge an existing bank loan and pay a current VAT liability. The position when these transactions had taken place was that the lender had made a loan on the property to be developed, but there was no money to fund the development.

The property was eventually sold, leading to a very considerable loss for the lender, and that led to a claim against his solicitors for negligence and breach of trust and a claim against the borrower and his companies for fraud.

The lender claimed that he would not have advanced the money had he known how it would be used. In the High Court, the judge ruled that but for the solicitors' failure to adequately advise the lender that the loan would not be used for developing the property and the error in providing loan documentation which suggested that it would, he would not have made the loan.

However, a question came into point regarding the loss the lender had suffered. Would the £200,000 advance have made the development viable? The solicitors argued that it would not, and that his claim was overvalued as a result.

The High Court ruled in the lender's favour and the case moved to the Court of Appeal, which concluded that he had made a very bad error of judgment in lending on what was likely to be an unviable proposition. It reduced the lender's damages to nil.

He appealed to the Supreme Court, now as a bankrupt. The Court accepted that the expenditure of £200,000 on the development would not have enhanced its value on account of its being a fundamentally unattractive proposition for a variety of reasons, and that the funding needed to bring the project to completion would be nearly £700,000.

The solicitors had a responsibility to their client for their advice to the extent that their negligence led to the loss. However, that liability was limited because the assessment of the commerciality of the transaction was for the lender himself, not the solicitors, to make. They were not responsible for his decision and had he gone ahead on the basis he thought he was proceeding on, he would still have lost his money.

There are a number of lessons to be learned from this. The first is that an investment such as this should only be undertaken with advice from property professionals who can advise on the viability of the project. Secondly, the precise use of the money and to whom it is being lent should be agreed in clear terms.  Lending large sums, effectively on 'an understanding', is very risky. Thirdly, not every bit of wrong advice leads to a settlement.