The House of Lords decision in Aneco Reinsurance Underwriting v Johnson & Higgins - an interesting development on its decision in the 1996 case of South Australia
Asset Management Corporation (Saamco) v York Montague - highlights how difficult it is to predict how the courts will view a given set of facts.
The Saamco case concerned negligent valuers and drew a distinction between the duty involved in advising on a transaction and that of just providing information. Giving advice can result in the adviser being liable for all foreseeable loss arising from the transaction, whereas the claimable loss resulting from providing information is limited to the consequences of the information being wrong.
In Aneco, the company entered into a reinsurance treaty believing broker Johnson & Higgins had arranged reinsurance cover of $11m (£7.5m). However, the cover was avoided by the retrocessionaires following negligent non-disclosures by Johnson & Higgins when it arranged it. Aneco's total liabilities under the treaty were $35m (£24.1m) and it brought negligence proceedings against Johnson & Higgins. Was the broker liable for the whole loss of $35m or just $11m for the reinsurance that should have been available?
The majority in the Lords held the broker had assumed a duty to Aneco to advise it of the market's reaction to the treaty and, as Aneco would not have entered into the treaty had the market been aware of all the terms, Johnson & Higgins was responsible for Aneco's decision and all the resultant losses. This is consistent with Saamco as Johnson & Higgins had, according to the Lord's majority, assumed a wider responsibility to Aneco. But Lord Millet disagreed with the majority's findings of fact and came to a different decision. The basis of the case is the brokers had a duty to advise on the wisdom of entering into the treaty or to report on the market's assessment of the treaty. Consistent with this, Aneco's underwriter did not ask to see the broker's marketing sheets containing the underwriters' responses who declined to subscribe or ask any questions in relation to them.
In addition, Aneco's counsel conceded it had not used the market's reaction as a guide to the risks inherent in the treaty. The company would also have entered into the treaty provided reinsurance was available and the brokers had not undertaken any responsibility for advising Aneco on what course of action to take in relation to the treaty. If Lord Millet is right on the facts, the broker was only liable for the $11m worth of failed reinsurances. Our conclusions are:
(a) Straightforward cases involving negligent valuations are unaffected by the judgment. They are recognised as a special class of claim and a negligent valuer will only be liable for the difference between his valuation and a correct valuation.
(b) Cases involving negligent provision of information rather than a duty to advise generally should generally result in a more restricted class of recoverable loss. It should be restricted to the loss that flows directly from the faulty information, rather than the total loss suffered as a consequence of the relevant transaction.
(c) (b) is subject to the following caveat. A claimant will often argue that the nature of the faulty information went to the core of their decision to enter into the transaction. Further, that the manner in which that information was provided indicated the claimant was assuming a wider role than simply the "information provider". The House of Lords has shown in Aneco that it may not help the defendant that the facts are more clearly in his favour than in the claimant's favour and, in Aneco, were willing to imply commercial obligations that were not even pleaded by the claimant.
(d) This is a tough case for placing brokers. Written terms of engagement making clear what they are, and are not, advising on is the only reliable method of controlling exposure.