In this substantive guide, we identify and explain the different types of loss and damage that are commonly awarded by the courts in claims for compensation for professional negligence.
Although this guide is of significant length, we have numbered each head of compensation below and addressed it separately. This should make the guide easier to navigate and remove the need for it to be read in its entirety, unless so desired. For each head of compensation, and to provide additional insight and context, we have also given a real-life case example.
For anyone considering making a claim for the first time, we have produced a separate introductory guide to professional negligence claims. This contains answers to a number of the practical questions we frequently get asked, as well as links to further information. The guide is accessible here.
General principles of compensation
The aim of an award of compensation (commonly in the form of ‘damages’) is not to punish the professional concerned, but to compensate the injured party, typically the client. A classic formulation of the principle can be found in the historic judgment of Lord Blackburn in Livingstone v Rawyards Coal Co., where he stated that the measure of damages is:
‘…that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.’
Over the years various legal rules and principles have been established by the courts to ensure that the compensation awarded to clients, and the corresponding financial exposure of professionals, is kept within sensible bounds. These are relatively complicated, not only in themselves but also in terms of their application, and a detailed examination of them is beyond the remit of this guide. However, in summary, it should be noted that:
- Not all financial losses suffered will necessarily be recoverable as compensation for professional negligence;
- In some cases, there can be an element of uncertainty as to both the type and amount of compensation that the court will ultimately award in a successful claim for professional negligence; and
- For loss or damage to be recoverable as compensation for professional negligence, it will generally need to fall within the scope of the professional’s retainer and be caused (both as a matter of fact and law) by the mistake made by the professional.
Against this background, we set out below common categories of loss and damage that have been awarded by the courts in claims for compensation for professional negligence.
1. Compensation for loss of chance
Compensation claims for the loss of a chance are relatively common in professional negligence claims. They arise where the injured party has, through the mistake of a professional adviser, been prevented from securing a financial gain (or avoiding a liability) which itself was contingent upon the actions of a third party. Where such claims are successful, the court will award as damages such percentage of the loss suffered as reflects the chance that the claimant otherwise had of securing the gain (or avoiding the liability).
Case example: Wellesley Partners LLP v Withers LLP
In Wellesley the claimant was an executive search firm, operating in the investment banking sector. In 2007 and with a view to expansion, it instructed the defendant firm of solicitors to draft a contract to sell 25% of its shares to Addax, a Middle Eastern bank, for £2.5m.
When preparing the contract and contrary to its instructions, the defendant altered a clause so as to give Addax the option to request the return of 50% of its investment within 41 weeks. When Addax later exercised the option, the claimant suffered financial hardship. In turn, this prevented the claimant from opening an office in the US and tendering for a lucrative recruitment appointment.
At trial, the judge concluded that there was a 60% chance that the claimant would have secured the recruitment appointment. He further concluded that there was a 25% chance that the appointment would have been an exclusive one and a 75% chance that it would have been a shared appointment. This meant that the overall chance of the claimant securing the net profit from an exclusive appointment was 15% and the overall chance of securing the net profit from a shared appointment was 45%. Against projected profits of £3,262,551 and £1,262,016 respectively, this produced compensation awards of £489,383 and £567,907 (being £1,057,290 combined) for loss of chance.
2. Compensation for diminution in value
Damages awards for the reduction in the value of property are extremely common in, but not exclusive to, professional negligence claims against surveyors. Here, the court will award as damages the difference between the price paid for the property (assuming that represents its market value, free of defects) and its actual market value taking into account the defects which the negligent professional failed to identify.
Case example: Watts v Morrow
In Watts the claimants had instructed the defendant building surveyor to provide a full structural report on a house they were intending to purchase. While the report had not identified any significant defects, following the purchase, the claimants subsequently discovered that extensive remedial work to the property was required. The claimants then commenced a professional negligence claim against the defendant, alleging that had they known of the unreported defects, they would not have purchased the house or would have negotiated a lower purchase price.
On appeal, the court held that the appropriate measure of damages was £15,000 plus interest, representing the difference between the price paid for the property and its true value, having regard to the unreported defects. It therefore set aside the higher award of damages of £33,961 originally made by the court below, which represented the costs incurred by the claimants in rectifying those defects which should have been, but were not, reported.
3. Compensation for wasted expenditure
In claims against solicitors, the assessment of loss can be less predictable than in the case of claims against surveyors. In some instances, where, for example, a party extricates itself from a disastrous transaction brought about by professional negligence, the court may award as damages the reasonable costs incurred by a party in both entering into and exiting such a transaction.
Case example: Hayes & Another v James & Charles Dodd (a firm)
In Hayes the claimants ran a motor repair business, which they wished to expand. They instructed the defendant firm of solicitors to act for them on the purchase of a lease of a workshop and yard, which the defendant advised them enjoyed a right of way over land at the rear of the property.
In the event, no such right existed. As a result, the claimants were unable to operate the business, which they were forced to close after 12 months.
On appeal, the court confirmed that the claimants were entitled to recover as compensation the wasted costs that they had incurred in entering into and then extricating themselves from the transaction. These included the purchase price and rent paid, the loss of goodwill, bank interest, travel expenses and conveyancing costs. This produced a total award of £102,447.81 inclusive of interest.
4. Compensation for additional legal costs
As a consequence of a mistake made by a professional, a client may find themselves embroiled in litigation with another party. Alternatively, a client may embark on litigation against another party in an effort to mitigate the losses that he or she would otherwise incur. In either case, the additional costs incurred may then be awarded as damages against the negligent professional.
Case example: Hermann v Withers LLP
In Hermann the claimants had instructed the defendant firm of solicitors to act for them on the purchase of a residential property in London for £6.8m. While the solicitors had advised that the property included a right to use a communal garden in a square close to the property, in actual fact, no such right existed.
In a subsequent claim for professional negligence against the defendant, the court considered that the advice it had given had been negligent and it awarded damages under various heads of loss. These included the costs that the claimants had incurred in obtaining independent legal advice as to the existence of any right to use the garden and in negotiating the purchase of such a right. These costs totalled £55,906.28 and were to be assessed on an indemnity basis.
5. Compensation for lost management and staff time
In commercial claims, and particularly in claims against construction professionals, it is not uncommon for a considerable amount of additional management and staff time to have been expended. This may arise either from dealing with the practical effects of negligent conduct or advice, or in seeking to mitigate the financial losses that flow from such conduct or advice. The courts are alive to the costs associated with this and, in appropriate circumstances, will compensate a business with an award of damages.
Case example: R+V Versicherung AG v Risk Insurance and Reinsurance Solutions SA & Others
In R+V Versicherung the claimant was a German reinsurance company whose chief underwriter had dishonestly conspired with a representative of the defendant insurance broker. The aim of the conspiracy was to deprive the claimant of significant premium income, which was generated under two binder agreements covering short tail property and contingent risks and personal accident risks.
Having found against the defendant on liability, one of the issues for the court to consider in determining the amount of compensation payable was whether the claimant was entitled to recover as damages internal management and staff time, except to the extent that the claimant could prove that it had suffered a loss of profits.
Finding against the defendant again, the court held that wasted management and staff time spent on the investigation and/or mitigation of the defendant’s wrongdoing was recoverable, notwithstanding that no additional expenditure or loss of revenue or profit could be shown. It also held that the claimant could recover as damages its additional staff costs of handling insurance claims arising from the business written under the two binders.
6. Compensation for loss of profit / income
Where the purpose of a commercial transaction is to generate profit and where that intention is well known to the professional at the time of acting or advising in connection with it, the courts have been prepared to award any subsequent loss of profit or income as compensation for professional negligence.
Case example: Keydon Estates Ltd v Eversheds LLP
In Keydon Estates the claimant was a small property investment company who had instructed the defendant firm of solicitors to act for it on the purchase of the freehold of a commercial office building known as Willow House.
As the defendant knew, the purchase was intended as an investment and therefore the existing tenant’s covenant to pay rent was of the utmost importance. However, following the purchase, the tenant refused to pay rent on the valid grounds that it had assigned its lease as a result of previously granting a sub-lease.
The defendant having admitted negligence, the issue for the court to decide was the appropriate measure of compensation. Here, the court concluded that damages should not to be assessed on the lower basis of diminution in value (as to which, see above) but on the higher basis of the alternative income stream that the claimant would have enjoyed from a comparable property with the desired level of income security.
7. Compensation for mental distress
While damages awards for mental distress are made by the courts in professional negligence claims, they are not as common as some other awards. Generally, such awards will only be made where either (i) one of the main objects of the professional’s retainer was to provide pleasure, relaxation, peace of mind or freedom from molestation; or (ii) the distress was accompanied by physical inconvenience.
Case example: Farley v Skinner
In Farley the claimant was interested in purchasing a residential property for his retirement. He instructed the defendant surveyor to inspect the property and to ascertain, amongst other matters, whether it was seriously affected by aircraft noise from a nearby airport.
While the surveyor reported that the property was not so affected, after purchasing and moving into the property, the claimant discovered that it was. Having decided to remain in the property, the claimant then brought an action against the surveyor, seeking compensation for professional negligence.
On appeal the court held that to recover damages for mental distress, it was sufficient that a major or important object of the defendant’s retainer had been to give pleasure, relaxation or peace of mind. It therefore restored the damages award of £10,000 originally made by the judge in the court below.
8. Compensation for physical inconvenience
While awards have been relatively modest the courts have, for some time now, been prepared to compensate individuals for the physical inconvenience and discomfort that they have suffered as a result of professional negligence.
Case example: Wapshott & Another v Davis Donovan & Co (A Firm)
In Wapshott the claimants had instructed the defendant firm of solicitors on the purchase of a small leasehold flat. Two years after the purchase and following the birth of their first child, the claimants decided to sell the flat in order to move to larger accommodation. However, at this point they discovered that the flat had been built on land belong to the neighbouring house, which rendered the flat unsaleable.
At first instance, the court held that the defendant had been negligent and that the claimants were entitled to recover as damages the price that they had paid for the flat. Nevertheless, the court declined to award anything in respect of the physical inconvenience that the claimants had suffered as a result of having to bring up a growing family in the confines of a single bedroom flat.
On appeal, however, the court held that such inconvenience was a foreseeable consequence of the solicitors’ mistake and that it could see no reason of policy on which the law would refuse compensation or recovery. It therefore awarded the claimants additional damages of £3,000 each.
9. Compensation for pain, suffering and loss of amenity
When professional negligence occurs, it is relatively rare that it will result in physical injury to a person. Therefore, it is not often appropriate to claim or award as compensation for professional negligence, damages for physical pain, suffering and loss of enjoyment of life, which are more usually associated with actions for personal injury. However, such awards can and do occur.
Case example: Malyon v Lawrence Messer & Co
In Malyon the claimant was injured in a road traffic accident in Germany. While he instructed solicitors in England to pursue a claim for compensation on his behalf, the solicitors were slow to act and eventually his claim became time-barred. This prevented him from pursuing it further. The claimant then commenced a claim for compensation for professional negligence against the defendants.
At trial the court accepted that the claimant had been suffering from an anxiety syndrome related to his personal injury claim, that the solicitors had known of the syndrome and that it would probably abate as soon as the litigation was concluded. It therefore determined that the solicitors were liable to pay damages for pain, suffering and loss of amenity in respect of the additional period the claimant had suffered the anxiety syndrome due to their delay.
10. Compensation for cost of reinstatement / cure
In claims against construction professionals, and where defects arise as a result of negligence in the design, execution and/or supervision of a project or scheme, the primary head of compensation will often be for the costs incurred in curing those defects, through rectification or reinstatement works.
However, and while less common, such compensation has also been awarded in claims against other types of professionals, where pre-existing defects in relation to property have been missed prior to purchase.
Case example: Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd
In Harbutt the claimant was a manufacturer of crayons and chalks. It appointed the defendant to design and install equipment in its factory for storing and dispensing a heavy wax, which had to be liquefied under heat for the manufacturing process. However, as a result of the defendant’s negligence, both in designing and installing a heating system, a fire broke out which caused damage to the claimant’s factory buildings, plant and machinery and stock.
The claimant was insured for the fire and promptly set about rebuilding the factory, albeit to a permitted design specification that was different (but overall no larger) than the original factory. It also commenced a claim for compensation for professional negligence against the defendant.
On appeal, the court confirmed that the appropriate measure of compensation was not the difference between the value of the claimant’s buildings, stock and plant before and after the fire (ie diminution in value) as the defendant had advocated. Rather, the claimant was entitled to recover the costs of replacing the factory, plant, machinery and stock, notwithstanding that in doing so it received ‘new for old’ and, to that extent, an element of betterment.
As the above case examples should demonstrate, in professional negligence claims compensation can be recovered for a variety of different types of loss. While some of these losses can be recovered simultaneously, others cannot, particularly if this would result in ‘double’ recovery.
While the courts have favoured certain approaches in particular types of claims, what type of compensation can and cannot be recovered will often depend on the circumstances of the particular case and the task that the professional was required to undertake.
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