UK: Earl Of Malmesbury v Strutt & Parker And Another (2007)

The recent decision in Seventh Earl of Malmesbury and others v Strutt & Parker (a partnership) and another (2007) - a surveyors’ negligence case delivered on 11 May 2007 - contains some important lessons for professionals and those who insure them.

The court had much to say about the need for a professional, who has been retained to provide commercial advice over a number of years (here to negotiate terms of a lease), to carefully consider the factual matrix afresh each time work is carried out for the client, and to ensure that any gaps in expertise are filled. The decision also examines the correct measure of damages where an asset is transferred following negligent advice, and highlights the difficulties for defendants facing claims for loss of a chance.

The claimants, tenants for life of an estate that bordered Bournemouth International Airport ("the BIA"), instructed a Mr Ashworth of Strutt & Parker to negotiate the lease of land to the BIA for a car park. Mr Ashworth negotiated the terms of four consecutive leases, which were entered into in 1997, 2000, 2002 and 2003.

The claimants claimed over £100 million on the basis that Mr Ashworth was negligent in failing to negotiate the 2000, 2002 and 2003 leases with turnover based rents, which would have allowed the claimant to benefit from the significant earnings of the car park.

The court concluded that Mr Ashworth had not acted negligently in relation to the 2000 lease. Mr Ashworth had attempted to negotiate a turnover rent but it was refused by the BIA, and he had not insisted further due to concerns about the "bigger picture", including the benefits of a good relationship with the BIA. The court found that, in these circumstances, it was a proper exercise of Mr Ashworth’s judgement not to press for a turnover rent.

However, at the time the 2002 and 2003 leases were negotiated, the commercial background had changed to the extent that the BIA would almost certainly have agreed to a turnover rent, and keeping them "on side" was no longer such a key consideration. As a result, the court concluded that Mr Ashworth was in breach of his duty by not taking into account the changes in the commercial background and attempting to negotiate a turnover rent for those leases.

In considering the standard of care to be applied, the court emphasised the need for professional firms to ensure that work is adequately resourced. The standard of care to be expected from a professional in Mr Ashworth’s position was the level of competence that might be drawn from the professional’s firm as a whole so that, if the individual was not fully competent to deal with a situation, he or she should draw on the resources of the firm. If the firm could not provide the necessary expertise in a particular situation, it should seek external specialist skills. This reinforces a central tenet of risk management: it is essential that firms have systems and procedures in place to ensure that appropriate specialist skills are deployed to all relevant engagements. The failure to do so unnecessarily exposes the firm.

The claimants alleged that Mr Ashworth’s negligence had denied them the opportunity of achieving a turnover rent of 80 per cent. The court found that this claim was entirely unrealistic and that, if Mr Ashworth had requested a turnover rent of 80 per cent, he may have been in breach of his duty because such an unrealistic bargaining position may have damaged the claimants’ position. However, the court went on to impose its own view of what the proper return should have been, saying "the claimant’s case that, if 80% of turnover was not appropriate, then the court should take whatever figure it finds appropriate, involves a similar adjustment to what Mr Ashworth should have sought in negotiation. I think that this is the realistic way to look at the problem". The court concluded that 10 per cent was the most likely turnover rent that the parties would have agreed upon if Mr Ashworth had performed his duty.

The approach of the court, whilst not unusual in loss of chance claims, highlights the oppressive burden that can be placed on professionals defending such claims, particularly where, as here, an exaggerated claim is put forward. There appears to be no sanction on a claimant for having pursued an inflated claim, leaving the defendant in the position of having to try and guess what a court will consider to be the proper return in the absence of negligence.

The court went on to consider the measure of damages. It concluded that, in the circumstances of this case, the "diminution of value rule" applied. As a result, the claimants were entitled to recover the difference between: (a) the value of the claimants’ interest in the leases that had been obtained; and (b) the value of the claimants’ interest in the leases that should have been obtained. However, if this approach had not been consistent with the overriding compensatory rule (a party should be put in the position they would have been in had they not sustained the wrong), the court would have assessed damages as the difference between: (a) the rent to be received under the leases that had been obtained; and (b) the present value of the rent that would have been received under the leases that should have been obtained.

The defendants had joined a firm of solicitors, also retained by the claimants to assist on the lease, arguing that should they be found negligent, it followed that the solicitors must also have been negligent. The court was not persuaded by this, drawing a distinction between the scope of the duty imposed on the professionals: whilst Mr Ashworth was retained to give commercial advice, the solicitors had been retained solely to give legal advice. It was therefore Strutt & Parker’s responsibility to consider the viability of turnover rent, not that of the solicitors. The court noted however that a situation could easily arise in which it became the duty of solicitors to question Mr Ashworth's commercial advice because it was obviously wrong, although this was not the case here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.