Lender litigation: an application of key principles for mutualsPrint publication
In Connaught Income Fund v Hewetts  the High Court has reviewed and applied some of the key principles in lender litigation. This article explains a recent case that will be of interest to building societies and their professional advisers.
Case and key principles
The loan arrangement in this case was a complex commercial scheme whereby a funder (the claimant) loaned money to a short term lender (the intermediate lender) for onward lending to the borrower for the purchase of a commercial property, however the legal principles apply equally in relation to straightforward retail mortgage lending.
When the borrower defaulted on the loan, the claimant sued the intermediate lender’s solicitors (the defendant) for professional negligence. The claimant alleged that the defendant owed a Bowerman  duty (which required the defendant to advise the claimant of any information which a reasonably competent solicitor would realise might have a material bearing on the lender’s security) and that the defendant breached that duty when completing the certificate of title (COT). The judge carefully considered the essential elements of a lender claim:
- Duty – The court held that, in the absence of special circumstances, the defendant did not owe the claimant a Bowerman duty and instead had assumed a more limited responsibility only to complete the COT with due skill and care. This was because:
- there were two different elements to the lending transaction and the defendant was not privy to the basis for the claimant’s lending decision;
- although the COT was addressed to both the claimant and the intermediate lender, the instructions were clear that the defendant was acting for the intermediate lender and the defendant was not asked to, nor given any means to, speak to the claimant beyond completion of the COT; and
- it would have been open to the parties to have expressly agreed that the defendant owed wider duties to the claimant and that had not been done.
- Breach – On the facts the court held that the defendant had committed a breach of duty when it failed to complete a section of the COT to refer to the fact that the security had been sold at an undervalue. Duty and breach alone, however, cannot found a claim, and the judge reiterated that a claimant must also establish reliance and causation of loss.
- Reliance – the judge was satisfied that the claimant had relied on the COT when it decided to advance the loan…
- Causation – … however he decided that the breach did not cause any loss because even if the COT had been completed to refer to the undervalue, that would not have caused the loan to be rejected and so the transaction would have proceeded in any event.
- Calculation of damages – A failure to establish causation was fatal to the claim, but the judge nevertheless went on to confirm that this was a case in which the defendant’s duty of care was limited to the provision of information and did not extend to a duty to advise. The SAAMCO  cap would therefore apply and any recoverable damages would have been limited to the consequences of information given being incorrect.
This case represents a comprehensive application of some of the key principles underpinning lender litigation. The judge’s clear explanation of how a claim will be established and how any damages will be assessed is relevant to claims in the retail context and will therefore be of interest to building societies.
Of particular interest is the implication that the Bowerman duty is less likely to apply in more complex, multi-party cases, and the indication that lenders may wish to expressly set out in their instructions to solicitors any intended more wide-ranging duties.
(As an aside, the judge also found that in a layered funding or bridging loan arrangement such as this, there is no reason in principle why a relationship of creditor/debtor could not coexist alongside a relationship of principal/agent. Mutuals and their legal advisors should ensure that the implications of this are dealt with appropriately in the drafting of the respective loan agreements.)
 Connaught Income Fund, Series 1 (in liquidation) v Hewetts Solicitors (a firm) [2016 EWHC 2286 (Ch)
 Mortgage Express ltd v Bowerman & Partners  2 All ER 836. See Walker Morris’ earlier briefing for more on the Bowerman duty.
 South Australia Asset Management Corporation v York Montague  UKHL 10, in which 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 can be relied upon to limit liability in negligence where the duty is to provide information.