Scottish Court of Session Decisions

[1] In this action the pursuers, a building society, seek to recover damages from the defenders, a firm of solicitors. The defenders seek to have the action dismissed, on the ground that the loss which the pursuers are seeking to recover is not a loss consequent upon the breach of duty alleged against the defenders, as it is not within the scope of that duty. The defenders also seek to have certain of the pursuers' averments excluded from proof as being lacking in specification.

[2] The pursuers aver that on or about 22 January 1993 they agreed to advance £135,000 to a Mr and Mrs Hives ("the borrowers"). The offer of advance was made for the purchase of Flat 1, 11 Cleveden Road, Glasgow ("the subjects"). The pursuers were informed by the borrowers that they were purchasing the subjects at a price of £150,000. The balance of the purchase price was to be met by the borrowers. The offer of advance was made subject to various conditions. These included that the borrowers should retain no interest in any additional property and that the pursuers be granted a standard security over the subjects. The pursuers instructed the defenders to act on their behalf in the loan and security transaction. The defenders were also acting for the borrowers. The pursuers' pleadings do not disclose whether the defenders were instructed orally or in writing, and no reference is made to any documentation in which the terms of the instructions might be found. The pursuers however aver:

On 29 January 1993 the defenders submitted a report to the pursuers. The report confirmed that all conditions of the loan had been complied with. It confirmed that the purchase price of the subjects was £150,000. It confirmed that the defenders had acted in accordance with the pursuers' instructions. In reliance on the report, the pursuers advanced the loan on 2 February 1993. A standard security over the subjects was granted by the borrowers in favour of the pursuers and was registered on 16 February 1993. In about 1996 the borrowers defaulted on the loan by failing to make monthly repayments. The pursuers called up the loan and repossessed the subjects in 1997. They then discovered that the borrowers had not in fact purchased the subjects on 2 February 1993. The entire property at 11 Cleveden Road (a large house on a number of floors) had been purchased by them in March 1991 for a price of  £179,000. The house had thereafter been converted into flats. In February 1993 there was no purchase or sale of Flat 1. There was no purchase price of £150,000. The loan monies were used for other (unspecified) purposes. At the time the defenders completed their report, the borrowers retained an interest in the entire house.

[3] The averments which I have summarised imply that the pursuers were utterly misled by the borrowers, and also that the defenders' report misrepresented the true position. At first sight, it would appear to be difficult to avoid the conclusion that the borrowers must have been dishonest. The pursuers aver that in these circumstances the defenders acted in breach of contract and also committed a delictual wrong.

[4] The case in contract is based first upon the breach of express terms. I have already quoted the pursuers' averments about the terms of the instructions given to the defenders. The pursuers aver that the defenders acted in breach of those terms by providing a report which was inaccurate. The pursuers further aver that the defenders acted in breach of an implied term that they would exercise reasonable care in providing their report. This branch of the case appears to be an alternative to that based on an express term requiring the provision of a report which had not merely been prepared with reasonable care but was in fact accurate. The case in delict is based upon the breach of a duty of care co-extensive with that said to arise as an implied contractual term.

[5] The averments of loss are in the following terms:

Although these averments are not a model of clarity, one can deduce from the final figure that the pursuers are seeking to recover from the defenders the amount by which the loan account is in debt, less the amount expected to be recovered on the sale of the subjects. The averments challenged as lacking in specification were those concerning the London Money Market.

[6] The argument advanced on behalf of the defenders was that the loss for which the pursuers sought compensation in damages had not been suffered by them as a result of the defenders' breach of their contractual or delictual obligations. The loss which the pursuers sought to recover was the consequence of the borrowers' default. There was no averment suggesting that the defenders had misled the pursuers as to the value of the subjects or the creditworthiness of the borrowers. In any event, the defenders had not warranted the creditworthiness of the borrowers; but the pursuers were seeking to hold the defenders liable for the entire debt on the loan account, as if the risk of the borrowers' default had been assumed by the defenders. Reference was made to Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, Bristol and West Building Society v Mothew [1998] Ch. 1, Swingcastle Ltd v Alastair Gibson (1990) 1 WLR 1223 and Bristol and West Building Society v Fancy & Jackson [1997] 4 All ER 582, as supporting the defenders' argument. It was acknowledged that a number of recent Scottish cases were unfavourable to the defenders, but it was submitted that these cases - Bristol and West Building Society v Rollo Steven & Bond 1998 SLT 9, Kvaerner Construction (Regions) Ltd v Kirkpatrick & Partners Consulting Engineers Ltd 1999 SLT 1120 and Leeds & Holbeck Building Society v Alex Morison & Co, 25 August 2000, Court of Session (unreported) - had all been wrongly decided, and that none of them in any event compelled me to find in the pursuers' favour.

[7] On behalf of the pursuers, on the other hand, I was invited to follow the approach adopted in the Scottish cases, and in particular that of the Lord Ordinary in the Leeds & Holbeck case. The English cases were distinguishable, as the failures in duty with which they were concerned (e.g. as to the value of security subjects) did not go to the heart of the transaction in the same way as the failure in the present case to advise that there was no genuine purchase transaction at all. Reference was also made to Bristol and West Building Society v Aitken Nairn, WS 2000 SLT 763.

[8] The starting point of any discussion of damages must be the precise nature of the duty broken. Damages (whether in contract or in delict) are intended to place the pursuer in the position he would have been if the duty had not been broken; and the basic measure of damages is therefore a comparison between what the pursuer's position would have been if the defender had fulfilled his duty, and the pursuer's actual position. The nature of the duty is therefore of central importance. In relation to a duty of care, for example, one cannot do better than adopt the words of Brennan J. in the High Court of Australia in Sutherland Shire Council v Heyman (1985) 60 ALR 1 at 48:

Thus the scope of the duty may limit the kinds or categories of damage for which liability will arise, or (as in Banque Bruxelles Lambert) the quantification of damage. In the present case, however, the nature of the alleged duties, and the circumstances giving rise to them, featured very little in the discussion before me: I was simply told that "default is not in issue" and that "the only issue is damages". For the reasons I have explained, however, the assertion - and even the agreement - that there has been a breach of duty does not take one very far, without there being also specification of the content of the duty, and an understanding of the circumstances giving rise to the duty. This cannot be achieved without an examination of the facts. Very little is however said about the facts in these pleadings; but that aspect of the pleadings was not criticised.

[9] It is difficult to understand the defenders' argument, that the loss consequent on the borrowers' default is not within the scope of the defenders' duty, in a situation where neither party has attempted to analyse the duty, and where the pursuers' failure to make specific averments about the defenders' duties and the circumstances giving rise to them has not been criticised. In that situation, however, I could only sustain the defenders' preliminary plea if I were satisfied that on no conceivable state of the evidence could the pursuers' loss consequent on the borrowers' default fall within the scope of the defenders' duty. I am not satisfied that that is the case.

[10] In general terms, the outline of the situation is reasonably clear. The building society have been told by prospective borrowers that they want to borrow £135,000 to enable them to purchase a flat costing £150,000. They have solicitors acting for them. The building society are willing to lend £135,000, subject to various conditions and the obtaining of a security over the flat, and also subject to the solicitors confirming the purchase price and that the borrowers have no interest in other property. Although the matter would have to be established by evidence, it is possible to envisage how the solicitors might normally check the purchase price: they should be able to check the missives of sale and the disposition of the flat, and in most cases the purchase price will pass through their hands. It is difficult to envisage how they might check that the borrowers had no interest in other property, and it may be that any confirmation of that matter will merely be to the best of their knowledge and belief. If one asks why the building society want these various matters confirmed by the solicitors prior to advancing the loan, that is again a matter which would have to be established by evidence. Since the amount of the loan has already been agreed, however, it would appear that the solicitors' report is intended to be relied on in deciding whether to lend, rather than how much to lend. On these matters the pleadings are silent; but the averments of duty imply that the importance of the confirmation to the building society, to the knowledge (actual or imputed) of the solicitors, is such as to impose a duty of care upon the solicitors.

[11] In relation to the delictual duty of care, one might infer that, since reference is made to the foreseeability of reliance on the report, the duty is of the nature considered in Hedley Byrne & Co v Heller & Partners [1964] AC 465, i.e. a duty called into being by, inter alia, the foreseeability of the pursuers' suffering harm to their interests through advancing the loan in reliance on an inaccurate report. What is the interest which calls the defenders' duty of care in existence? In other words, what is the kind of loss or damage in respect of which the defenders were found to exercise reasonable care?

[12] On receipt of a satisfactory report, the pursuers will advance the loan and receive in return certain rights, namely the borrowers' covenant (to use an English term as a convenient shorthand way of referring to the borrowers' undertaking to perform their obligations under the contract of loan), and a security over the subjects. The pursuers' interest would therefore appear to lie in the value of the borrowers' covenant and the value of the security. The risk that they run is that the value of the rights they acquire may be less than they have bargained for. Counsel for the defenders submitted, and the solicitor advocate for the pursuers did not appear to dispute, that the inaccuracies in the defenders' report did not affect the value of the security. If that is correct, then the only interest of the pursuers which would appear to be at risk would be their interest in the value of the borrowers' covenant. At first sight, that would appear to make sense: if the pursuers had known that they had been utterly misled by the borrowers, it would not be surprising if that caused them to have concerns about the risk of the borrowers' defaulting. Accordingly, the basis of the admitted delictual obligation may be that the defenders' report was a means of "policing the transaction"", as it was put in Bristol and West Building Society v Rollo Steven and Bond (at 12), i.e. of checking the integrity of the borrowers and thus the value of their covenant. Even if the request for the report had some other purpose - for example, to check that the loan was for the purpose of a domestic mortgage rather than a commercial venture (such as the conversion of property into flats) - that might still relate wholly or partly to the risk of default.

[13] If the interest which calls the defenders' duty of care into existence can be identified as the pursuers' interest in the value of the borrowers' covenant, then the loss arising from the borrowers' default - in a situation where, but for the defenders' negligence, there would have been no loan at all - is prima facie within the scope of that duty, and will be the responsibility of the defenders unless it is referable to some supervening event. In other words, if (as averred) the pursuers would not have advanced the loan, and therefore would not have suffered the loss arising from the borrowers' default, unless they had relied upon the defenders' negligent report, and if the defenders' duty of care existed precisely to protect the pursuers from the risk of default (as may be established in evidence), then there is prima facie no reason why the loss should not be regarded as flowing from the breach of duty and as being within the scope of that duty.

[14] The point is also illustrated by asking when the delict ex hypothesi committed by the defenders was complete. If the duty of care arises to protect the pursuers' interest in the value of the borrowers' covenant, then although there is a breach of duty when the negligent report is provided, the delict is not completed until actual damage occurs, i.e. some quantifiable loss (see Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No. 2) [1997] 1 WLR 1627, at 1630-1631 per Lord Nicholls of Birkenhead, at 1638-1639 per Lord Hoffman). It may well be, as counsel for the defenders submitted, that there is no ascertainable loss so long as the borrowers' covenant is performing satisfactorily, and that it is only on a default that any loss can in practice be quantified. The implication of that, however, is not that such a loss is outwith the scope of the duty, but rather that it is the occurrence of that loss which gives rise to the pursuers' cause of action. Effectively, the defenders' argument seems to be equivalent to suggesting that solicitors can be negligent with impunity in providing such reports, since any loss does not follow automatically from their negligence but is contingent upon default. It is of course true that the risk of default is inherent in any loan transaction; but the critical factors in the present case are that the purpose of the report (unlike a valuation, in most cases) may be not merely to enable the lender to decide how much to lend, but to decide whether to lend at all; and insofar as any inference can be drawn from the pleadings, the report may have been relevant to the lender's assessment of the risk of default.

[15] The position is essentially the same as regards the case based on a contractual duty of care. On the defenders' argument - that no loss results from the inaccurate report, the loss all being caused by the borrowers' default - it is difficult to see why a duty of care would arise, either as implied contractual term or in delict. The pleadings are laconic as to why a duty of care necessarily arises as an implied term of the agreement to provide the information in question, but it is reasonable to infer from the averment (seemingly admitted) that a duty of care arose, that the defenders are to be taken to have known that the pursuers would rely on the information and were liable to suffer loss in the event that it was inaccurate. On the basis that there was a contractual duty of care, the defenders would be liable for such losses as a reasonable person would regard as flowing naturally from reliance on the negligent report or were of a kind that should have been within the defenders' reasonable contemplation. Since the only type of loss to which, at first sight, the pursuers were exposed was contingent on default, and since a negligent report might increase the danger of exposure to the risk of default (by leading the pursuers to lend to borrowers who had misled them with a false account of a non-existent transaction), that would appear to be the very loss which would have to have been within the defenders' reasonable contemplation in order for the duty to arise in the first place.

[16] The position in relation to the case based on an express contractual term is more difficult to understand. There is averred to have been an express term that the defenders would confirm to the pursuers the purchase price of the subjects and inform the pursuers if the borrowers had an interest in property other than the subjects of sale. Counsel for the defenders criticised these averments for failing to specify the term, but the problem seems to me to be to understand the effect of the term averred. It was a matter of agreement before me that the term did not require the defenders to warrant the accuracy of the information provided. Counsel for the defenders maintained that it merely imported the implied duty of care averred elsewhere in the pursuers' pleadings. If that is correct, then this branch of the case adds nothing new. The solicitor advocate for the pursuers on the other hand maintained that the term imposed on the defenders an absolute duty to provide accurate information about the matters in questions. If that is correct, then on the pursuers' averments there was a breach of that term, and the defenders are prima facie liable for such consequences as were within their reasonable contemplation. For the reasons already discussed, those consequences might include a loss resulting from default.

[17] The authorities relied on by the defenders do not in my opinion compel a different conclusion. The Banque Bruxelles Lambert case was concerned with a negligent valuation. Counsel founded on Lord Hoffmann's speech, first at 214:

In that passage Lord Hoffman had in mind a situation in which losses incurred following reliance on erroneous information include losses which are not due to the inaccuracy of the information (other than in the sense that they would not have been incurred if the information had not been relied on), but would have been sustained even if the information had been correct: for example, losses due to a fall in the property market, incurred following reliance on an inaccurate valuation. As Lord Nicholls explained in Nykredit Mortgage Bank (at 1631):

It is not apparent in the present case that one can distinguish in that way between the consequences of the inaccurate report and the consequences of making the loan: it may be (as the pursuers' averments suggest) that the pursuers would not have taken the risk of the borrowers' default if they had been provided with an accurate report. Nor is it clear what sort of duty of care could exist (as one admittedly did, according to the pleadings), in the circumstances of the present case, which did not impose responsibility for losses occurring on a default.

Counsel also relied upon Lord Hoffmann's statement (at 214) that:

Where the wrong information confirms the truthfulness of statements made to a lender by a prospective borrower, and correct information would have revealed that the borrower had completely misled the lender, I do not feel able to say, without evidence, that losses suffered on the borrowers' default were not a foreseeable consequence.

[18] I note that in the subsequent case of Nykredit Mortgage Bank Lord Hoffmann said of Banque Bruxelles Lambert (at 1638):

The core of the decision is therefore that the valuer owes no duty of care to the lender in respect of his entering into the transaction as such (as distinct from particular aspects of it, e.g. the amount he is prepared to lend on the security of the subjects which have been valued). As I have said already, the discussion before me did not analyse the duty of care; but, for the reasons I have explained, I cannot exclude the possibility that the defenders did indeed owe a duty of care to the pursuers in respect of their entering into the transaction "as such". The damages recoverable cannot therefore be said, on the pleadings at least, to be restricted by the scope of the duty of care in the same way as in Banque Bruxelles Lambert.

[19] The next case relied on, Bristol and West Building Society v Mothew, concerned a negligent report on title made by a solicitor to a building society in connection with a house purchase. The report incorrectly stated that the balance of the purchase price was being provided by the purchasers without resort to further borrowing, whereas in reality the borrowers had a small bank debt which was to be secured over the house by a second charge. The borrowers thereafter defaulted, and the building society sought to recover from the solicitors their entire loss, part of which was due to a collapse in the property market. The solicitors maintained inter alia that the building society would have proceeded with the loan even if they had been told about the second charge. The Court of Appeal made it clear that the building society could only recover for losses which were properly attributable to the inaccuracy of the information, that being an issue to be determined at trial. I see nothing inconsistent with the Court of Appeal's approach in my allowing the pursuers a proof of their averments of damage in the present case.

[20] The next English case relied on by counsel was Bristol and West Building Society v Fancy & Jackson. That decision does not appear to me to assist the defenders' argument. The report concerns a number of separate cases, all involving an inaccurate report on title by a solicitor to a building society, followed by the default of the borrower and a claim by the building society against the solicitor in respect of its entire loss. In his judgment, Chadwick J. carefully distinguished between different types of breach of duty, considering the significance of each particular breach in the context of building society lending, and reflecting relevant differences in the scope of the damages recoverable. One of the cases (Bristol and West Building Society v Steggles Palmer) concerned a wrongful confirmation of the purchase price, the true price being less than the borrower had told the building society. The building society quantified its loss by adding to the principal sum the interest which would have been earned on an equivalent sum invested on the money market at London Inter-Bank Offered Rates (LIBOR) and deducting from the aggregate the interest and capital repayments actually made by the borrowers and the net recoveries from the realisation of the security subjects on sale. Chadwick J. accepted that the building society would not have made the advance but for the solicitor's breach of duty. In relation to damages, Chadwick J. said (at 622):

I respectfully agree with that reasoning; and I cannot exclude the possibility that a similar conclusion may be appropriate in the present case, once the evidence has been heard.

[21] Finally, counsel relied on the dissenting opinion of Lord Marnoch in Kvaerner Construction (Regions) Ltd v Kirkpatrick & Partners Consulting Engineers Ltd. That was a case in which a construction firm sued consulting engineers who had provided them with advice on the basis of which the pursuers had successfully tendered for a contract. The pursuers incurred higher costs in carrying out the work than the advice had led them to expect; and they sued the engineers to recover the additional costs as damages for breach of a contractual or delictual duty of care. In his opinion, Lord Marnoch adopted a passage from the speech of Lord Hoffmann in Banque Bruxelles Lambert (at 216):

Lord Marnoch accordingly concluded that it was not enough for the pursuers to aver that they had incurred greater costs than the negligent advice had led them to expect: they had to establish (and therefore aver) what their position would have been if the defenders had duly performed their duty. Such averments are however made in the present case:

Counsel also relied on Swingcastle Ltd v Gibson, at 238 per Lord Lowry:

That case concerned a situation in which the borrowers' default and the valuer's negligence were unrelated. The fundamental point made by Lord Lowry - that the basic measure of damages is the difference between what the pursuers' position would have been if the defender had fulfilled his duty of care, and the pursuer's actual position, is nevertheless "axiomatic" (to adopt Lord Nicholls of Birkenhead's term, in Nykredit at 1631). The averments which I have quoted however follow that approach.

[22] It is true that those averments do not sit happily with the sum sued for (£90,545), which appears to have been calculated as the difference between the debt on the mortgage account including arrears and interest (£200,545) and the anticipated sale price of the subjects (£110,000). A more apt calculation (on the basis of those averments) would follow the approach taken in Bristol and West Building Society v Steggles Palmer. Counsel was rightly critical of the fact that the averments which I have just quoted were not reflected in the sum sued for; and there was force also in his criticism of the lack of specification of the interest which would have been earned on "The London Money Market", although the conclusion gives greater notice of which is meant by referring specifically to LIBOR. In any event, these deficiencies are not so grave as to warrant the dismissal of the action or the refusal of proof of the averments in question.

[23] The conclusion which I have reached is similar to those reached by Lord Maclean in Bristol and West Building Society v Rollo Steven & Bond and Lady Paton in Leeds & Holbeck Building Society v Alex Morison & Co. The circumstances in each of those cases were broadly similar to those averred in the present case; and in each case the Lord Ordinary concluded that the solicitors might be liable for loss suffered by a building society following the borrower's default, if it was established that the decision to lend to the borrower was taken as a result of a negligent report on title. The conclusion reached in those cases was criticised by counsel on the basis that the analysis had been couched in terms of causation or remoteness of damage rather than in terms of the scope of the duty as required by Banque Bruxelles Lambert. In reality, however, there are often different ways of rationalising restrictions on liability: lines can be drawn in terms of duty of care or causation or remoteness. The central problem is deciding where to draw the lines, rather than whether the decision is to be rationalised in terms of duty or causation or remoteness. As Lord Hobhouse observed in Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190 (at 208):

The selection of an analytical category may however be important insofar as it may assist or otherwise the drawing of lines which are just and predictable. The problem with the use of causation for this purpose, as I observed in McConnell v Ayrshire and Arran Health Board (unreported, 14 February 2001), is that causation appeals to a consensus about the deployment of causal language as a matter of common sense; but the problem in cases such as Banque Bruxelles Lambert and the present case cannot be resolved simply by appealing to a consensus about the use of language: it depends on making a judgment about the appropriate extent of legal responsibility in particular factual circumstances. That task seems to me to be more readily carried out by analysing the nature and scope of the duty, in the context of the circumstances bringing it into being. I have accordingly couched my analysis in terms of the scope of the duty; and that appears to me to be the preferred approach, following Banque Bruxelles Lambert. I do not however accept counsel's criticism of the earlier Scottish decisions. They may have deployed different language to some extent from that preferred in Banque Bruxelles Lambert (although even Lord Hoffmann's speech refers to different analytical categories at different points), and indeed deployed a different analysis; but they arrived at the same conclusion as the present opinion albeit by a different conceptual route.

[24] In the circumstances I shall allow a proof before answer.