The Supreme Court recently issued a landmark decision in Routhan v PGG Wrightson Real Estate Ltd regarding the scope of liability in negligence in the context of the provision of advisory services. One of the key issues for the Court was to determine how damages for negligent misstatements should be measured.

The significantly different quantum awarded by the High Court, Court of Appeal and now Supreme Court (which itself was split 3:2 on the appropriate damages) demonstrates that the issue is complicated and one that is likely to continue to be debated. It therefore remains as important as ever that professionals carefully document the scope of their instructions and include appropriate carve-outs and limitations where possible.

Background

In 2010, the Routhans bought a dairy farm near Hokitika for $2.8 million. The real estate agent, PGG Wrightson Real Estate Ltd (PGGW Real Estate), told the Routhans that the farm’s recent milk production was steady at 103,000 kgMS per season. In fact, the farm’s recent production was substantially less than that and PGG Wrightson negligently failed to provide updated numbers. The Routhans would not have bought the farm had they known the true position. Unable to meet the expected returns, the Routhans were forced to sell the farm in 2020 at a reduced price of $1.5 million. 

The Routhans sued PGG Wrightson for, amongst other things, negligent misstatement. They claimed damages for overpayment in the purchase price of the farm, loss of equity from the forced sale, and capital expenditure. The High Court awarded the Routhans $1.7 million, including a 20% reduction for contributory negligence. 

These damages were reduced to $300,000 by the Court of Appeal. It ruled that PGG Wrightson’s duty of care was to provide the Routhans with updated production information so that they did not overpay. The Court of Appeal said that PGGW Real Estate did not assume a duty to advise the Routhans about whether they should buy the farm. Accordingly, the Court of Appeal found that PGGW Real Estate was not liable for the downstream consequences of the purchase. The Court applied an English decision called SAAMCO^[1] which distinguished between liability for simply providing information versus substantive advice.

Supreme Court decision

Scope of the duty of care

Despite criticism in a separate judgment from Justice Kós, a majority of four confirmed that the SAAMCO “scope of duty” principle forms part of New Zealand’s law of negligence. This requires the Court to examine the scope of the duty of care assumed by the professional. Part of that analysis involves an inquiry into the kind of risk the professional was taking responsibility for, and whether that was fair in the circumstances (or whether there might be some good reason why the duty of care should be narrower).

The Supreme Court said that adopting strict distinctions between simply providing “information” and offering full-service or comprehensive “advice” to identify different types of duties was too narrow. It said that the notion of a spectrum between simply providing information compared to advising on the merits of a transaction can be helpful.

The Court in SAAMCO also said that damages could be capped by limiting damages to the foreseeable consequences of the professional’s information being wrong (the SAAMCO cap). A majority of the Supreme Court rejected the concept of the SAAMCO cap as unworkable and leading to unjust outcomes.

PGGW Real Estate’s liability

The Supreme Court was also split on the extent to which PGGW Real Estate was liable and to what extent the Routhans had contributed to their own loss. The majority found that the Routhans purchased the farm because they reasonably relied on information provided by PGGW Real Estate. The majority also concluded the Routhans were competent farmers and had taken reasonable steps to try to increase production before being forced to sell. They awarded:

• $480,500 being the amount the Routhans overpaid for the farm; and
• $300,000 for additional fertiliser and re-pasturing costs spent in an attempt to achieve the production they had been led to expect.

A minority agreed that PGGW Real Estate was liable for the $480,500 overpayment but believed the post-purchase losses were too remote to be recoverable and were caused by the Routhans, not PGGW Real Estate.

All of the judges agreed that claims for revenue shortfalls, supplementary feed, capital improvements, and higher debt servicing should be rejected. They said that those losses were too remote, not caused in PGGW Real Estate’s breach, or were unproven.

Our thoughts

Quantifying damages for negligent misstatement eludes any easy or formulaic description. The Supreme Court’s endorsement of SAAMCO is at odds with recent UK legal developments and the approach taken in Australia and Canada so there is perhaps scope for future development of the law in this area. The Supreme Court’s decision means that weight will continue to be placed on how professionals have defined the scope of their instruction and the breadth of risk they have adopted between simply passing on information at one end of the spectrum and comprehensive advice at the other. Ensuring robust terms of engagement, appropriately limited or qualified advice and insurance cover remain as important as ever. However, the rejection of any form of SAAMCO cap does increase the chance that professionals may become liable for a greater amount of a plaintiff’s consequential losses.

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Special thanks to Greer Collinson for her assistance in preparing this article.