In a landmark decision, the Supreme Court has clarified the scope of a defendant’s liability for negligent misstatement. While that liability is limited to the foreseeable consequences of the breach, in some circumstances the decision will expand liability to include the cost of steps taken to improve the property subject to the misrepresentation to the condition it would have been in had the representation been true.

Why this matters

Defendants (and their insurers) are potentially exposed to much greater liability than before this decision.

The Supreme Court’s decision marks a departure from the relatively settled principle that a tortfeasor’s liability was limited to the difference in value of the property between what it would have been worth had the relevant representation been true, and what it was actually worth, at the date of sale. The decision potentially expands tortious liability to costs incurred in attempting to improve the property to equate with the represented attribute,
so long as those costs were foreseeable and within the scope of the duty. This will impact how insurers and brokers assess professional risk for those insureds who make representations and convey information in the course of their business. This refined approach has implications for underwriting, how limits and excesses are set, and how insurers evaluate claims exposure.

Professional liability insurers must now pay close attention to the scale and context of their clients’ businesses, particularly when assessing the scope of services, reliance placed on advice, and the foreseeable consequences of misinformation. The core question remains whether the type of loss claimed falls within the scope of the duty the defendant assumed. What did the professional know, what was their relationship to the claimant, and how was the information to be used?

Background

In 2010, the Routhans, as trustees of the Kaniere Family Trust, purchased a dairy farm near Hokitika, alongside their existing run-off farm. Before purchasing the farm, they asked a PGG Wrightson Real Estate Ltd (PGG) agent to confirm the farm’s historical average production of milk solids per season. This information was important to the farm’s value.

The misrepresentation

PGG’s agent represented to the Routhans that the farm had recent historical average production of 103,000 kgMS per season. He knew the vendor had not verified the production data but did not disclose this, nor did he pursue the vendor for more information. He also overstated the number of cows milked and understated the quantity of fertiliser applied. Not only was the farm’s recent production substantially lower than what was represented, it was in decline and so the average was not 103,000 kgMS per season. Had they known the truth, the Routhans’ evidence was that they would not have purchased the farm.

The Routhans’ efforts to achieve represented production

The Routhans purchased the farm in reliance on PGG’s statement about milk production. They then set about trying to achieve it. They increased their borrowing and invested significantly. This included purchasing supplementary feed, using additional fertiliser, re-pasturing, and extending the milking season. These efforts all failed. They were unable to service their debt over a decade, and both of their properties were eventually sold at a combined loss of nearly $2 million.

The claim

Claiming that they would not have purchased the farm had they known the true milk production value, the Routhans’ trust sued PGG in negligence and under the Fair Trading Act 1986. They initially sought not less than $3 million in damages, reflecting the position they said they would have been in had they bought an alternative farm that in fact produced at the represented level of milk solids. In the alternative, they claimed ongoing operating losses, interest and costs. The core issue was whether those downstream losses were attributable to PGG.

The High Court decision

The High Court found the Routhans would not have bought the farm but for PGG’s misrepresentation. It awarded damages not on the basis of a hypothetical alternative property, but on actual loss, including costs incurred in post-purchase efforts to improve production. The Routhans were entitled to compensation for their lost equity in the farm and the run-off property, and their investment in capital improvements to improve production.

The Routhans had lost their capital investment when they realised that the farm was not as represented to them. This included: “overpayment” for the farm; costs of fertiliser; re-pasturing and feed; lost production revenue; interest and increased debt taken on to fund various steps as part of efforts to improve milk production, long-term capital improvements and partial loss on the resale of the farm.

The Court held that since the misrepresentation affected both the purchase and subsequent decisions, the resulting losses were compensable. The Court awarded $1,697,600, comprising the forced sale loss ($1,442,000), costs of improvement not recovered on resale, and interest. The Court deducted 20% on account of contributory negligence linked to unproductive capital expenditure.

The Court of Appeal decision

While upholding the High Court’s finding that PGG was liable to the Routhans, the Court of Appeal held PGG’s duty was limited to providing accurate production data, not to advising the Routhans on business strategy.

The Court concluded that downstream financial losses such as expenditure on attempting to achieve the represented features of the farm were outside PGG’s duty. Efforts to increase production, inability to manage debt, and subsequent equity loss were beyond the scope of risk assumed by PGG.

Furthermore, the Court found that the Routhans could have sold the farm at cost in 2014, meaning the claimed long-term losses were too remote. Ultimately, the Court of Appeal applied a commonly cited UK case called SAAMCO to limit PGG’s liability to the difference between the price paid for the farm, and the farm’s market value given PGG’s misrepresentations. That difference in value equated to $300,000.

The Supreme Court decision

The Supreme Court allowed the plaintiffs’ appeal by majority, but did not fully reinstate the High Court award. While it confirmed the centrality of the scope of duty principle, it also rejected the SAAMCO “cap” on damages, qualifying its application to cases where A owes B a duty in tort but does not also owe B a concurrent contractual duty for the same breach – presumably cases analogous to contract.

The “scope of duty” principle

To assess whether a loss falls within scope, the Court must ask:

• For what types of risks was the defendant undertaking responsibility?

• Was the allocation of risk fair in the circumstances?

Rejecting the rigid SAAMCO cap

The majority held that the Court of Appeal erred by using the SAAMCO cap as the “normal” measure of damages. The risk of compensating one party for losses unrelated to the impugned advice or information can be mitigated by carefully considering the scope of duty and the remoteness of damage. If the breach of duty merely served as the occasion for the losses e.g. it allowed a transaction to take place, rather than being their cause, it will not meet the threshold for legal causation.

Moving beyond the advice/information dichotomy

The Court was critical of a rigid distinction between “advice” and “information”. These labels were found to be artificial and of limited use in complex, real-world, professional relationships.

Instead, the Court endorsed a “riskspectrum” approach, asking whether the kind of loss claimed was of a type for which the professional assumed responsibility. This better aligns with commercial expectations and recognises the practical realities of professional services.

The outcome for the Routhans

The Court limited compensation to losses within the scope of PGG’s assumed duty, namely:

• Overpayment based on the farm’s true value;

• cost of additional fertiliser applied in reliance on the misstatement; and

• cost of a re-pasturing programme undertaken on expert advice.

Other operational and equity losses were deemed too remote or outside the scope. The total damages awarded were $780,500, plus interest and $50,000 in costs.

Our view

This decision provides clarification, if not comfort, for liability insurers. The Supreme Court confirmed that, even if loss would not have occurred “but for” a misstatement, it is not recoverable unless it falls within the assumed duty. However, the scope of the assumed duty has crept beyond the traditionally understood “difference in value” approach to one that will likely invite claims for greater amounts, including costs incurred to seek to cure a misrepresentation. The decision does, however, limit potentially open-ended exposure and affirms that professionals are not guarantors of commercial success.

Key takeaways

• Courts will now inquire into the nature of the professional’s role, what was reasonably foreseeable, and how information provided to recipients was used.

• Where a contractual relationship exists, the law of contract will usually govern the scope of duty and remoteness of loss. In such cases, SAAMCO limits are less relevant. This aspect reinforces the importance for insurers of scrutinising professional insureds’ standard engagement terms to ensure they clearly define scope and limit liability.

• Conversely, reliance-based damages are limited to the actual loss incurred by relying on the misrepresentation: such as overpayment, wasted expenditure, and will be equally confined by questions of causation and reasonable foreseeability.

• PGG was not responsible for downstream losses that arose from broader commercial risk. The Court drew a clear boundary: professionals are responsible only for the specific risks they undertook, not the client’s overall financial position.

• Liability turns not so much on what was said, but on what the recipient was reasonably expected to do with the information.
   

This article was co-authored by Leticia Alvarez, a Solicitor from our Litigation team.