Hayes v Dodd [1988] EWCA Civ 8 (07 July 1988)

A solicitor's negligence induced the claimants to purchase a business. The court held that damages were limited to the difference in the property's value at the date of breach. Subsequent trading losses were not recoverable as they were not reasonably foreseeable.

Facts

The plaintiffs, Mr and Mrs Hayes, purchased a motor repair and scrap business, including the freehold property, for £48,000 in 1979. They relied on the advice of their solicitor, the defendant Mr Dodd. The defendant acted negligently by failing to discover and advise the plaintiffs of a right of way which ran across the rear of the property, seriously impeding access and affecting the viability of the business. It was accepted that had the plaintiffs been properly advised, they would not have proceeded with the purchase. After acquiring the business, the plaintiffs carried on trading for approximately one year but incurred significant losses. The business ultimately failed. At first instance, the judge awarded the plaintiffs damages totalling over £52,000, which comprised £15,000 for the diminution in the property’s value and a further £37,422 to cover their trading losses, interest payments, and other costs incurred while trying to run the business.

Issues

The central legal issue on appeal was the correct measure of damages for a solicitor’s negligence in a failed property transaction. Specifically, the court had to determine whether the plaintiffs were entitled to recover not only the capital loss on the property (the diminution in value) but also the consequential trading losses they incurred after the acquisition. The key question was whether such trading losses were a reasonably foreseeable consequence of the solicitor’s breach of duty.

Judgment

The Court of Appeal (Staughton, Parker and Croom-Johnson LJJ) allowed the appeal in part, overturning the award for trading losses. Staughton LJ, giving the leading judgment, conducted a thorough analysis of the principles governing the remoteness of damage in both contract and tort, concluding that the same result would be reached under either.

Reasoning of Staughton LJ

Staughton LJ framed the analysis by reference to the rule in Hadley v Baxendale, focusing on what was reasonably foreseeable. He distinguished between acquiring a defective asset and the subsequent financial performance of that asset. While the solicitor’s negligence caused the plaintiffs to acquire the property, it did not cause the subsequent trading losses. These losses were dependent on numerous other factors, including the plaintiffs’ business acumen, market conditions, and other commercial decisions.

He stated the critical distinction as follows:

It seems to me that it does not follow that the plaintiffs, having acquired a defective motor business, would necessarily trade at a loss, still less at a loss of £37,000. That would depend on a whole variety of other circumstances, such as the skill with which they conducted it, the market for scrap metal, the incidence of competition, the state of the national economy and so forth.

He ultimately concluded that these trading losses were too remote and not a kind of loss that was reasonably foreseeable as a consequence of the solicitor’s specific failure. The duty of the solicitor was to advise on the property’s title and encumbrances, not to guarantee the profitability of the business venture itself.

In my judgment the plaintiffs’ loss of profit, or their trading loss, is not a loss of a kind that is reasonably foreseeable as a consequence of a solicitor’s negligence.

The court held that the appropriate measure of damages was the established rule for negligent valuation or survey cases: the difference between the price paid by the plaintiffs and the actual market value of the property at the date of purchase, given the defect. This amounted to £15,000, as assessed by the trial judge. The additional award for trading losses was therefore set aside.

Implications

The decision in Hayes v Dodd is a significant authority on the limits of recoverable damages in professional negligence claims, particularly against solicitors and surveyors. It reaffirms that the primary measure of damages is the diminution in value of the asset at the date of breach. The case serves as a crucial precedent for limiting liability for consequential or economic losses that are not a direct and foreseeable result of the specific breach of duty. It established a clear line between the professional’s responsibility for the advice given and the client’s own commercial risk in the subsequent operation of a business venture. An advisor is not an insurer of a client’s business profitability unless they have expressly assumed such a wider responsibility.

Verdict: The appeal was allowed in part. The damages awarded to the plaintiffs were reduced from over £52,000 to £15,000 plus interest, thereby excluding the claims for trading losses.

Source: Hayes & Anor v Dodd [1988] EWCA Civ 8 (07 July 1988)