Two important decisions were handed down by the Supreme Court on 18 June 2021. The cases will be of interest to all professionals because they address the approach the court will take when ascertaining an adviser’s duty of care.
The cases of Manchester Building Society v Grant Thornton, a case involving accountants, and Khan v Meadows, a case involving a doctor, were handed down together. Both cases consider the application of South Australia Asset Management Group Corporation v York Montague Limited [1997] which is often known as SAAMCO. This blog focuses on Manchester Building Society v Grant Thornton.
SAAMCO
In Manchester Building Society v Grant Thornton (and Khan v Meadows), the Supreme Court has clarified how SAAMCO ought to be applied.
Before going on to consider the Supreme Court’s decision, here is a summary of some of the key points established in SAAMCO.
SAAMCO is a case which is often cited by lawyers dealing with professional negligence cases. The case established that professionals give two types of advice, “advice” and “information”. SAAMCO provided that, if an adviser gave advice about what action the client should take, the adviser will be liable for the consequences of that action. However, if the adviser only gave information to the client, the adviser will only be liable for the consequences of the information being wrong.
SAAMCO also provided for the consideration of hypothetical questions about what would have happened had the information given by the adviser had been correct. Would the claimant have suffered the loss anyway? This counterfactual consideration is often referred to as the SAAMCO cap because using this analysis produces a limit on the damages recoverable.
The Facts of the Case
Grant Thornton accountants (GT) were the auditors for Manchester Building Society (MBS) until 2012. GT advised MBS that it could prepare its accounts using a method called “hedge accounting” and that the method would provide an accurate view of MBS’ financial position.
Relying on that advice, MBS engaged a strategy of using long-term interest rate swaps which were hedged against the cost of borrowing money to facilitate its lifetime mortgage business.
Several years later, GT realised that the hedge accounting did not provide an accurate view of MBS’ financial position and that it had hidden volatility in MBS’ capital position. This meant that, in 2013, MBS had to re-state its accounts. The restated accounts revealed that MBS had significantly reduced assets and did not hold sufficient regulatory capital. Consequently, MBS had to conclude the interest rate swap contracts early and this resulted in a cost of £32 million.
The question which the Supreme Court was asked to consider was whether MBS could claim the cost of concluding the interest rate swap contracts early from GT.
First instance decision
The trial judge decided that GT was not liable for these losses. Though GT’s advice did cause MBS to conclude the contracts early, the losses which crystallised resulted from market forces and not the act of ending the contracts early. GT did not assume liability for the losses flowing from the changes in the market forces. As the losses were caused by market forces, they were not recoverable from GT.
Court of Appeal
The Court of Appeal disagreed the trial judge’s approach but held that the overall result was correct.
As this was an information case, GT did not assume responsibility for long-term interest rate swaps products. GT only assumed responsibility for the financial consequences of its advice as to the hedge accounting being wrong. The Court of appeal also determined that the trial judge should have applied the counterfactual test provided for in SAAMCO. The Court of Appeal further found that MBS had not proved that the losses would not have been suffered had GT’s advice been correct.
The Court of Appeal sought to provide clarity on how the SAAMCO principles should be applied and provided for a step by step process which is not addressed here.
Though the Court of Appeal did not agree with the trial judge’s approach, the Court of Appeal agreed with the trial judge’s assessment that it would be “… A striking conclusion to reach that an accountant who advises a client as to the manner in which its business activities may be treated in its accounts has assumed responsibility for the financial consequences of those business activities…”. As we will see below, the Supreme Court thought differently.
Supreme Court
MBS’s appeal to the Supreme Court was successful, but the Supreme Court provided 3 differing judgments with the majority of 5 providing the leading judgment.
The Supreme Court found that the distinction between “advice” and “information” had been applied too rigidly and applying the distinction in a rigid way could result in misleading outcomes.
The Supreme Court dispensed with the descriptions of information and advice, making reference to the acknowledgment by Lord Sumpton in the case of Hughes-Holland, that information given by a professional person to a client “is usually a specific form of advice”, and “most advice will involve conveying information. Neither label really corresponds to the contents of the bottle”.
Instead, the analysis should focus on identifying what matters the adviser has taken responsibility for and identifying, with reference to those matters, “the risks associated which the adviser may fairly be taken to owe a duty of care to protect the client against”.
The Supreme Court also held that the counterfactual test in SAAMCO is a mere tool to cross check the result of the analysis of the purpose of the adviser’s duty. The counterfactual check is therefore subordinate to this analysis and should not direct the outcome of the case. In cases with very complicated facts, it may not be appropriate to use the counterfactual check at all.
MBS could claim the cost of concluding the interest rate swap contracts early from GT. The loss fell within the scope of GT’s duty having regard to the purpose for which GT’s advice had been given, hedge accounting.
Comment
In straightforward negligence claims, such as valuer’s negligence claims, the outcome of this judgment is unlikely to have a significant impact. However, in more complex cases, the Supreme Court’s decision will be welcome news for claimants because they can now argue that the court will be more flexible when considering the scope of the adviser’s duty.
At each stage of this case, the judges formed different views about how the scope of the adviser’s duty ought to be assessed. As set out above, 3 differing views were given by the Supreme Court judges. This highlights just how difficult the scope of duty question can be. Professional advisers should be very clear about defining the extent of exactly what it is they are advising on, to minimise the potential for debate as much as possible when engaging with their clients.
© Melissa Worth, June 2021