Professional Negligence – Maximising Damages

Often establishing a breach of duty is fairly straightforward in professional negligence cases. Recovering damages is harder.  The recent Supreme Court decision in Tiuta International Ltd (in liquidation) v Villier Surveyors Ltd (2017), UKSC 77, illustrates the need before commencing an action, to consider exactly who caused what damage. Failure to do so can result in the recovery of only nominal damages and great legal expense.

It is interesting to note that the judges came to different decisions, but asserted a straightforward common-sense analysis that would lead to the right result. As a judge once told me – “I have found that common sense is not that common.“

The case involved a second loan agreement or what might be commonly known as re-mortgage. The final appeal held that the damages against the negligent valuer, would be limited to only the extra amount advanced between the first loan and the second loan.  In this case, both the first and second loans were from the same lender. The first loan was repaid using part of the second loan, hence very little extra was advanced. Doubtless, after a considerable amount of expense, the disappointed lender will consider amending their claim to plead negligence in relation to the first valuation – they are not time barred in this case.

The Supreme Court’s decision flows from their analysis of the chain of transactions. However, it does not explain what would happen if there were two different loan companies.

In conclusion, this case illustrates the need to carefully analyse the history of any negligence. From that one can ensure that all proper defendants are included and every act of negligence that might be recoverable is pleaded.  As such, it will inevitably lead to more complex pleadings requiring specialist legal analysis.

Fraud and the vulnerable – professional duties

It is a sad fact that the vulnerable are far more susceptible to fraud than the capable. One would assume therefore that professionals would owe a higher duty of care, when advising vulnerable people. This is especially so in relation to transactions.

However, this is not expressly set out in the 24th Edition of the Conveyancing Handbook for 2017. The Conveyancing Handbook, at Section 1.6.3, states that the Money Laundering Regulations 2007 (SI 2007/2157) apply to transactions. Those regulations require lawyers to take a risk-based approach to customer due diligence. However, being vulnerable is not listed as a risk factor. This may be due to problems in defining the vulnerable and concerns around discrimination.

Despite this, case law is full of examples of the vulnerable having been victims of not only fraud but also undue influence and professional negligence. This shows the vulnerable are clearly more at risk than the capable. As such they need additional assistance. Despite that, advice is often not as good as it should be. Some are not even aware of basic safeguards, such as only proceeding with a conveyance under a Lasting Power of Attorney, once they have received an office copy of that power from the Office of the Public Guardian (see Handbook at E2.11.6).

Part of their vulnerability stems from the fact than some are challenging people to deal with. The vulnerable are often isolated people with difficulties with communication and understanding financial issues. Many transactional lawyers operating on a fixed fee, find such clients taking up more time than others.  They become a client to avoid, not a client to invest considerable extra time in.

Despite having worked for many years with vulnerable people, either directly or on behalf of the Official Solicitor, Local Authorities or the Court of Protection, it is my view that such clients do require additional time and support. The Law Society guidance to the profession – meeting the needs of vulnerable clients sets out many good practice points, however all of them require additional thought and time. There is no shortcut to effective communication. Unless this is factored into the work, some vulnerable people will continue to experience problems.

A further risk factor is that once a problem has occurred some vulnerable people can find it difficult to raise issues in a timely fashion. This reduces the chances of correcting mistakes and mitigating losses. They are then faced with making a claim to recover losses. Again, this process will be difficult for them. Whilst, for those who lack capacity the usual limitation rules do not apply, some will miss out on recovery, unless they find specialist advice.

Given the ever-growing population of elderly and vulnerable people, this real need should be seen not as an additional risk, but as an opportunity to add value.  Equally those advising vulnerable persons should appreciate that they do require additional support and time.

Avoidance tactics: looking at loss

When a loss occurs through a professional’s negligence, it is natural and often essential, for the loss to be avoided as quickly as possible.  In commercial contexts, this might involve refinancing a loan or restructuring a transaction that went wrong.

But if this is done so that the loss is avoided, is the claimant prevented from recovering from the professional the loss that it caused in the first place?

In two cases that were before the Court in 2017 the Judges had to consider whether a benefit enjoyed by the claimant after suffering the loss should be taken in to account as collateral in assessing damages. That both cases, Swynson v Lowick Rose LLP [2017] 2 WLR 1161 and Tiuta International v De Villiers Surveyors [2017] 1 WLR 4627, were before the Supreme Court should tell us that it is not an easy question to resolve.

In Sywnson, the claimant company made three loans to a borrower. The claimant relied on professional advice from accountants in making the loans. The accountants’ advice turned out to be negligent; the borrower experienced cash-flow problems and defaulted on the loans.  The controlling shareholder of the claimant company stepped in to lend the borrower money which it could use to repay the claimant company the first two loans. The claimant company then issued a negligence action against the accountants in respect of all three loans.

The accountants conceded liability, but argued that because the claimant company had been repaid the first two loans, it was not entitled to damages arising from negligence relating to those loans because the loss had been avoided.

The claimant argued res inter alios acta (a thing done between others does not harm or benefit others) and that the refinancing did not affect the claimant’s recoverable loss.

Lord Sumption held that the general rule is that loss which has been avoided cannot be recoverable as damages, unless it was a collateral benefit which could not be treated as making good the claimant’s loss. The Court held that collateral payments can be characterised as those where the receipt of benefits for the claimant arises independently of the circumstances arising from the loss. Lord Sumption gave the examples of gifts, or insurance contributions, which he said are tantamount to the claimant making good the loss from his own resources because they are attributable to his own work or contributions.

The defendant in Swynson argued that because the loans had been redeemed by the loan from the shareholder of the claimant company the payment was not truly collateral and so should not be ignored in the assessment of damages. Lord Sumption decided that the association of the claimant shareholder was no more relevant than if the loans had been redeemed by money from a bank or an unconnected third party. The critical point was that the payment discharged the very liability at the heart of the transaction; the loans had been repaid by the borrower to the claimant company and thus the loss had been avoided. The transaction between the shareholder and the borrower was not true collateral and could not be ignored in assessing damages.

The Supreme Court overturned the Court of Appeal’s ruling on this point and reinforced the principled approach, which is not so much concerned about doing justice between the position of claimant, defendant and the unconnected party in making good the loss, but looking at the substance of the transaction.

In Tiuta, the question of collateral benefits arose in the context of a negligent valuation of property, which was the basis of a second loan. The second loan of £3.1m was used to refinance a first loan of around £2.8m. The borrower defaulted on the second loan and Tiuta faced the difficulty of having its damages cut down by virtue of the decision in Preferred Mortgages v Bradford & Bingley Estate which establishes that where a loan is paid off by further borrowing the first loan is treated as being redeemed.   To get around that problem, Tiuta argued that the redemption of the first loan should be treated as a collateral benefit and so should be ignored for the purpose of assessing damages, thus not confining Tiuta’s loss.

The Supreme Court did not accept the argument. Lord Sumption held that “the concept of collateral benefits is concerned with collateral matters. It cannot be deployed so as to deem the very transaction that gave rise to the loss to be other than it was”.

In summary, steps taken to avoid loss, if they go to the heart of the transaction, will only be recoverable if they are completely independent from the circumstances of the loss.

If it’s too good to be true…

Recently we have seen a significant rise in clients looking to recoup a bad investment. Typically the bad investment is related to property.

One such example is  a case in which I acted for over 100 people who had been scammed into entering a partnership with various property Companies which just happened to all be under the control of the same person. The clients were told that their money would be used to buy run down properties which would then be refurbished and sold for a large profit. The clients would get half of the profit. The projected profits were eyewatering and if achieved would have made the clients a lot of money.

In fact the properties were already owned by the Companies, were subject to existing mortgages and the Companies had no intention of refurbishing them. Instead they ran off with the money before going into liquidation.

The solicitors who acted for the clients had been appointed by the property Companies and fortunately I was able to agree terms with the solicitors insurers which my clients were happy to accept.

There are some golden rules to follow before ever investing money in a property scheme:

1. Instruct your own solicitor not the solicitor instructed by the scheme organiser. Your solicitor will check out the title and make sure you have a written agreement that protects you.

2. Go and visit the property. Make sure it exists and check its condition – if necessary get your own survey and valuation.

3. Check out the joint venture partner – look on google; social media and forums and make sure no one else has already been stung or is complaining about a similar investment.

The SRA has issued some helpful guidance which is worth a read.