02 Dec 2014

Case Comment: New defences – the extension of SAAMCo?

Case Comment: New defences – the extension of SAAMCo?

 

Paul McIntosh, Associate, comments on new defences and the extension of the SAAMCo case.

It has been fairly well established in Scottish professional negligence cases that surveyor recoveries are limited by the principles of the SAAMCo case to the difference between the valuation provided and the valuation which should have been provided.

Case law in England has seen the basis of this principle extended to apply in respect of a solicitor negligence claim.

Case Law

The case of Clack v Wrigleys Solicitors LLP [2013] EWHC 413 (Ch), Mr Clack entered into an agreement with a borrower to lend £600,000 for a period of six months on the security of 30 shares in a company. Mr Clack instructed a firm of solicitors to draft the loan and security documents.  At the time when the loan was completed, the borrower had not produced a share certificate in his name or a copy of the register of members showing that he was the shareholder.

The borrower was subsequently made bankrupt, and was later prosecuted for fraud arising from certain matters including the loan. Mr Clack brought proceedings against the solicitor, alleging negligence.

Mr Clack submitted that the solicitor had negligently advised him that it had obtained all the documents required to effect the charge over the shares, including the share certificate and a copy of the register of members, and had failed to advise him that without them the security was ineffective or seriously defective. Mr Clack contended that, had he known the true position, he would have not completed the loan and was entitled to recover all losses incurred as damages. In addition it was argued that if security had been effective, Mr Clack would have been in a position, under the terms of a separate undertaking, to become a director of the company after the borrower became bankrupt, and that Mr Clack would have earned director's fees (estimated at £30,000).

Case Outcome

It was accepted by the court that the solicitor had acted negligently and that had Mr Clack been advised that without copies of the register of members showing that the borrower was a shareholder or a share certificate, the security granted was ineffective or at least likely to be defective. It was also accepted that had Mr Clack been advised properly, he would have demanded that the documents be produced or he would not have proceeded with the loan.

However, it approaching the issue of quantum, the court determined that the appropriate measure of loss was to compare the situation where the security was invalid, with the position which would have occurred if the security had been valid. The court held that the loss would have arisen even if the security had been effective due to the inherent risks of the transaction which Mr Clack had decided to undertake, lending considerable sums against share value. The court held that Mr Clack would only be entitled to recover such part of their loss as resulted from the ineffectiveness of the security.  Since the shares in the company were worthless, that sum would be limited to the directors' fees that Mr Clack would have earned, which were of the sum of £30,000.

Conclusions

Whilst this is an English authority, and not in point with a standard residential transaction, this case provides a starting point for firms defending negligent solicitors to argue for an alternative approach to quantum other than full loss. We would anticipate arguments arising as to the nature and extent of the losses which are attributed to the particular breach, compared with the losses which would have been incurred regardless of the breach as a result of the downturn in the property market.

Paul McIntosh, Associate

@AC_PaulM


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