Disputes Quick Read: Scope of duty and the SAAMCo counterfactual following Manchester Building Society

Briefing

On 22 November 2021, the Privy Council handed down a judgment on the scope of duty principle in a valuer's negligence dispute in Trinidad and Tobago. Maybe not a judgment that would ordinarily find itself at the top of your reading list. But the circumstances, if not the facts of the case, make this interesting.

Two members of the Privy Council (Lords Kitchin and Burrows) were also members of the Supreme Court in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20. This was therefore an opportunity to illustrate how to apply their findings only a few months later.

Background

Lord Burrows and Lady Rose gave the sole judgment, and the result was not in our view a surprising one. A lender had advanced a loan in reliance on a negligent, and much overstated, valuation of land that would form security for a guarantee. When the bank tried to enforce its security, it was clear that the land had been overvalued, and it would therefore have suffered a loss on a sale. As matters transpired the guarantor never had legal title to the land and so the security was in fact worthless. The lender sued its conveyancing solicitors for negligence and recovered a substantial sum. It also sued the valuer.

Applying the test in Manchester Building Society, the Privy Council held that the purpose of the valuer's report was to value the property on the assumption that there was good legal title to the land. It was not the purpose of the report to advise on, or give information about, the title to the land; that was a matter for a lawyer.

It was possible to exclude from the damages the loss caused by the defect in title which fell outside the scope of the valuer's duty, leaving only losses attributable to the overvaluation. That could be achieved in this case by awarding the difference between the loan made and the actual value of the land. That, of course, differs from the typical 'SAAMCo cap' in valuer's negligence cases, being the difference between the negligent and actual values of the land. As explained below, the Privy Council may have calculated loss in that manner to ensure that none of the lender's losses entered a black hole and were not recoverable from either the solicitor or valuer.

The SAAMCo counterfactual

Perhaps the most interesting part of the judgment was the discussion on the use of the SAAMCo counterfactual - would the claimant still have suffered the same loss if the information or advice had been true? The Supreme Court in Manchester Building Society had relegated that tool only to a flexible and useful cross-check, and that was very much the approach adopted by the Privy Council here.

They found that applying the counterfactual test would in fact contradict their findings in this case. Had the valuation been correct, the bank would still have entered into the loan, taking the mortgage over the land as security, but would not have suffered the same (or any) loss. That was because, assuming a high valuation of the land and no defect in title, the bank would have had adequate security to cover the guarantor’s default in repaying the loan.

The Privy Council were no doubt alive to criticisms that they had used the wrong counterfactual test and that, for example, there was no reason to assume that there would be no defect in title in the counterfactual. The response was that "it may be that one could modify the counterfactual in order to reach the 'correct' result but, in our view, this merely serves to reinforce the point made by the Supreme Court that the counterfactual is of second-order importance as regards establishing the scope of the duty and is a helpful cross-check of that scope in most but not all cases 'adding' this is one of the cases where it is unhelpful."

Had the SAAMCo counterfactual been applied correctly, then no loss should have been attributable to the negligent valuation: had the valuation been correct, the title would still have been defective, and the bank would still have had worthless security and recovered no money.

As a matter of policy, one can see that the Privy Council may not have considered that a 'fair' result. If the lender were left only with a claim against its solicitors, it arguably would not have been able to recover the full value of its lost loan and interest because losses attributable to the overvaluation would not have fallen within the scope of the solicitor's duty.

This is a clear example of the Privy Council manipulating, or discarding, the SAAMCo counterfactual to arrive at what it considers to be a fair outcome.

It is a helpful reminder (if we needed one) from Lord Burrows and the other members of the Privy Council that reliance on a SAAMCo counterfactual may well be a thing of the past and that parties, and the Court, may simply dismiss it as unhelpful if it contradicts their view. Whether it makes the outcome of tricky scope of duty cases any easier to predict, however, is another matter.