Manchester Building Society v Grant Thornton LLP – SAAMCO revisited

The Supreme Court recently handed down its judgment[1] in Manchester Building Society v Grant Thornton LLP and this will have left many professionals, particularly accountants, wondering how their future liability may be affected. While the facts of this case involved accountants, it is important to note that the decision applies to all professional negligence claims.

This article will consider the judgment in detail, explain how the decision differs from the established SAAMCO guidelines, and offer some practical advice.

SAAMCO

The case of South Australia Asset Management Corp v York Montague Ltd (SAAMCO) established that in professional negligence cases, a Claimant could only recover losses falling within the scope of duty owed by the Defendant.[2]

The facts in SAAMCO involved a property valuer who had provided incorrect information to a lender. The court in that case held that the valuer could only be liable for the losses resulting from the valuation being wrong rather than all the losses suffered by the lender. A Defendant would not be liable for losses which would have occurred even if the information provided had been correct.  In that case, the recoverable losses were limited to the difference between the negligent valuation and the actual value of the property at the time.  The Claimant could not recover losses attributable to the fall in the property market.

The court made an important distinction between incorrect information and incorrect advice. Information is provided to a client more generally, meaning the client is responsible for making their final decision having considered all the information provided. Advice on the other hand, involves the professional considering the client’s circumstances and evaluating the best course of action based on the client’s aim which would have been communicated to the professional from the start. By way of example, providing information would be explaining the different types of mortgage which exist and providing advice would be recommending a specific mortgage.

The valuer’s breach fell within the incorrect information category and its liability was, therefore, capped. In cases of incorrect or negligent advice however, the court held that an adviser would be liable for all the foreseeable losses resulting from the incorrect advice.

Manchester Building Society v Grant Thornton

Facts:

Grant Thornton (GT) were auditors for Manchester Building Society (MBS). GT advised MBS they could use hedge accounting when entering into interest rate swap contracts in order to reduce financial volatility. The facts are technical and complex. In short, GT’s advice was wrong and MBS was forced to terminate the swap contracts at a cost of £33m.

MBS pursued GT for the loss arguing that, but for GT’s negligence advice, they would not have entered into the swap contracts.

The court found for GT at first instance, holding the losses were due to market fluctuations rather than GT’s advice. MBS then appealed to the Court of Appeal, which upheld the original decision. MBS then appealed to the Supreme Court.

Supreme Court decision

The Supreme Court held that there were six questions[3] to consider in professional negligence claims:

1. Is the harm suffered by the Claimant actionable in negligence?
2. What are the risks of harm to the Claimant against which the law imposes on the Defendant a duty to take care? (the Scope of Duty Question)
3. Did the Defendant breach their duty of care?
4. Is the loss suffered a consequence of the Defendant’s act or omission?
5. Is there a sufficient nexus between a particular element of the harm suffered by the Claimant and the subject matter of the Defendant’s duty as analysed in question 2?
6. Is a particular element of the harm irrecoverable as too remote or because of an intervening act?

The Supreme Court considered that the Scope of Duty Question was crucial. The correct approach in these types of cases was first, to identify the purpose to be served by the duty of care assumed by the Defendant, and then ask whether there was a sufficient link between the Claimant’s loss and the established purpose of the Defendant’s duty.

The Supreme Court held that the decision in SAAMCO was not a standalone principle, but rather an example of assessment of damages relevant to a specific set of circumstances.

It is interesting to note that the Supreme Court criticised the distinction between advice and information cases, which was set out in the SAAMCO case, as overly rigid and difficult to apply to most cases. The focus instead should be on identifying the purpose to be served by the duty of case assumed by the Defendant.

Ultimately, the Supreme Court held that the purpose of the auditors was to help the building society decide whether to use hedge accounting in its business model. The advice provided was negligent and an effective cause of the Claimant’s loss. However, the Supreme Court also found that the Claimant, in reliance on the advice, had set up an overly ambitious business model meaning they had contributed to their own loss, and damages should, therefore, be reduced accordingly.

Advice for professionals

Professionals should be particularly aware of the Scope of Duty Question, which is key in determining the particular scope of duty in any given case.

Going forward, professionals should ensure their Terms and Conditions are very clear when it comes to the agreed purpose of the advice being sought by their client. Establishing a clear and defined scope of duty from the start would help firms curb the amount of losses they could be held liable for if the advice given ultimately proved to be incorrect.