Focus on ‘real link’ between loss of profits and nature of duty of care: Manchester BS decision applied

This case review was authored by Amy Childs, Solicitor Apprentice, Taunton.

Due to the cost of living crisis, high inflation and interest rates, and increasing hardship, we anticipate that we will see increased litigation as claimants seek to recoup their losses. Here we look at a recent example of the court’s approach to scope of duty and remoteness of loss, and the need for there to be a link between the damages claimed and the nature of the duty of care, following the decision in Manchester Building Society v Grant Thornton [2021].

Background facts

The defendant solicitors were engaged by the claimants in relation to a property purchase (the Property). The second claimant is a wholly owned subsidiary of the first claimant. In April 2018, the second claimant verbally agreed that the sale of the Property would be transferred to a developer (the developer). In return, the second claimant would be paid a finder’s fee of £1 million plus VAT. The defendant was allegedly instructed to draft documentation putting this agreement into effect.

On completion, the developer only offered a reduced finder’s fee of £500,000, denying it agreed to pay a fee of £1 million. As there was no written agreement between them, the second claimant alleges it had no choice but to accept the reduced finder’s fee. The second claimant had also not sourced development finance because it had intended to sell it on to the developer.

Procedural background and amended claim

A professional negligence claim was issued on 26 April 2022 by both claimants seeking alleged loss of profits from the failed onward sale to the developer. The first claimant subsequently discontinued its claims in November 2022.

The second claimant then applied to amend its claim in December 2022, to add a claim for loss of anticipated profits on the residential development of two additional properties. The second claimant asserted that it had intended to use the £1 million finder’s fee to fund the purchase of these two additional properties.

The second claimant alleged that:

• The defendant negligently assured the second claimant that it would be “protected in its dealings” with the developer and failed to advise the second claimant to procure a legally binding agreement on the terms agreed with the developer (i.e. the £1 million finder’s fee).
• The defendant negligently and wrongly assured the second claimant that it would not require development finance.

The second claimant sought:

• Loss of profits totalling c.£15 million from the development of the Property and the other two properties.
• Alternatively, the difference between the finder’s fee originally proposed and the fee actually paid to the second claimant, namely £500,000.

The defendant sought to strike out the loss of profit claim on the following bases:

• The purported claim for loss of profits of both the Property and the two other properties was outside the scope of its duty.
• The purported claim concerning the two other properties was too remote and therefore not recoverable.

Scope of duty

In reaching its decision, the Court referred to Manchester BS v Grant Thornton [2021] which stated that:

Applying this, the court concluded that the scope of duty is judged on an objective basis, taking into account the reason why the advice is given.

Bearing in mind the second claimant’s pleaded case on the scope of the defendant’s duty, the court found that the defendant’s duty did not extend to every potential damage arising from a breach of its duty. The potential damage suffered, arising from the scope of the defendant’s duty, was limited to the risk of losing the finder’s fee, or the opportunity to purchase the Property using development finance.

The court therefore held there was no real link between this potential damage and the potential loss of profits made on the other two, unrelated, properties. The application for amendment in respect of the other properties was refused.

Comment

This decision should be welcomed by practitioners/solicitors as it suggests that courts are sensibly applying the guidance in Manchester Building Society in considering the question of scope of duty versus loss.

This decision also provides a useful reminder of the importance of pleading all facts necessary to substantiate the losses claimed. Had the second claimant pleaded that they had in fact told the defendant the purchase of the two additional properties was dependent on receipt of the £1 million finder’s fee, then the court’s decision may have been different. The defendant may have faced a finding of having the special knowledge required to establish a recoverable loss.

Related item: Forget counterfactuals: concentrate on purpose – SAAMCO duty test clarified by Supreme Court