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Limiting liability in negligence: Scope, application and an extension to SAAMCO?

Business Meeting Print publication

05/01/2016

The High Court has considered the “SAAMCO” principle in a case which raises questions about the extent to which negligence liability might be limited in different circumstances. Professional negligence specialist, Sandip Singh, explains.

What is the SAAMCO principle?

In the leading case of South Australia Asset Management Corporation v York Montague (SAAMCO) [1] the House of Lords held that surveyors who provide negligent overvaluations are only liable for loss caused by the negligent valuation itself, and not for loss caused by any extraneous factor(s). That proposition has become known as the SAAMCO principle or ‘cap’, and is frequently relied upon to limit valuers’ negligence liability [2].

Edward Astle & others v CBRE, Evans Randall & others

In this recent case [3] the claimants invested almost £27 million in a trust scheme to develop, and then obtain a rental income stream from, five properties. The scheme was devised by Evans Randall and was financed by the Bank of Scotland on a ‘waterfall’ loan arrangement. (The waterfall meant that any security in the properties always belonged to the bank, and not to the claimant investors.) Evans Randall instructed CBRE to provide property valuations and promoted the scheme to the investors in a memorandum which set out the valuations, along with other information. In 2008 the property market collapsed and in 2010 the development of the properties was cancelled. The value of the properties fell below that set out in the memorandum and the claimants lost all their investment.

The claimants sued CBRE and Evans Randall in negligence on the basis that the properties were overvalued and the promotional memorandum contained other inaccuracies. The defendants argued that even if the valuations and the rest of the information within the memorandum had been entirely accurate, the claimants would still have lost their investment because the loss was attributable to the market collapse and the cancellation of the project. In addition, the defendants argued that the waterfall investment scheme meant that, for reasons unrelated to the valuations or the promotional information, the bank’s debt grew to such a level that there would never have been any value left in the properties for the claimants in any event.

The defendants therefore relied upon the SAAMCO principle to try to avoid liability.

Why is this case interesting and important?

The first interesting question which this case raises is whether the SAAMCO principle operates to limit the liability of a defendant such as promoter of an investment scheme, just as it does in the case of a valuer. In other words, does the SAAMCO cap apply in circumstances beyond the merely provision of valuation advice by surveyors, to the provision of information – such as factual or commercial information – by others?

The second is whether the defendants were correct in their interpretation of the SAAMCO principle, namely that the only relevant question was whether, by virtue of extraneous events and the financing arrangement, the claimants would have been in the same position even if the valuations and the memorandum had been correct.

The answers to both these questions will provide crucial clarification on: (a) the scope of the duty of care owed by any valuer or other person providing information or advice to potential investors, or indeed to anyone entering a transaction in reliance on that information; and (b) on the circumstances in which the SAAMCO cap may be applied. The answers may well represent a significant extension to the SAAMCO cap.

One to watch

The hearing that has taken place in the Edward Astle litigation so far was a summary judgment application. A summary judgment hearing is not a mini-trial of the substantive issues in a case. All that is needed for the claim to proceed is for the claimant to establish that it has a reasonable prospect of success, which is a fairly low threshold. The court was not sufficiently persuaded by the defendants’ arguments on this occasion to summarily dismiss the claim. The court’s approach and decision in the full trial of this matter will have potentially wide-ranging implications for valuers, investors, lenders and practitioners. Walker Morris will therefore monitor the case with interest and will report in due course.

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[1] [1996] UKHL 10
[2] In Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd [1997] 1 W.L.R. 1627 the SAAMCO principle was followed, confirming that, in a negligent valuation case, a valuer’s liability will typically be limited to the difference between the negligent overvaluation and the correct value.
[3] [2015] EWHC 3189 (Ch)

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