The Supreme Court clarifies the application of SAAMCO when determining the scope of the duty of care owed by professional advisers

SUMMARY

In Manchester Building Society v Grant Thornton UK LLP [1],  the Supreme Court has confirmed that the scope of a professional adviser's duty of care will be determined by objective assessment of the purpose for which the advice or information is given.  Damages shall only be recoverable if they arise from fruition of a particular risk for which the professional adviser had assumed responsibility and negligently advised.  The SAAMCO counterfactual test is not a replacement for a proper assessment of the scope of the duty of care.

FACTUAL BACKGROUND

In 2006, Grant Thornton UK LLP (GT) negligently advised Manchester Building Society (MBS) that it could use hedge accounting to offset the value of its long-term interest rate swaps with the value of lifetime mortgages.  This was intended to allow MBS to avoid balance sheet volatility and increased regulatory capital demands.  In reliance on GT's advice, MBS entered into additional swaps and lifetime mortgages.

When the financial markets collapsed in 2008, the swaps held negative value.  This produced a mismatch between the hedged swaps and the mortgage loan values that was not apparent from MBS' balance sheet.  When GT recognised its error in 2013, MBS was forced to close out the swaps early and restate its accounts.  In doing so, MBS incurred losses of approximately £26.7m.

KEY LEGAL POINTS

The Supreme Court objectively assessed the scope of the duty of care assumed by GT with reference to the purpose of its duty (and the advice sought), the risks the duty was supposed to protect MBS from and the extent to which the claimed losses represented realisation of that risk.

In doing so, the Supreme Court:

• dispensed with the distinction between cases of 'advice' and 'information' introduced by SAAMCO [2].  All matters within this spectrum could be assessed by determining the purpose to be served by the duty of care assumed by the professional adviser; and
• clarified that asking whether a claimant's actions would have resulted in the same loss had the advice given by the professional adviser been correct (the SAAMCO counterfactual test) was a secondary, cross-checking tool that should not replace proper assessment of the scope of the duty of care with reference to its purpose.

GT had appreciated the purpose of its advice was to confirm whether MBS had financial capacity to match swaps and mortgages within regulatory constraints.  However, as a result of GT's negligence, MBS had been exposed to the exact regulatory capital demands that the use of hedge accounting had been intended to avoid.

Overturning the Trial Judge and Court of Appeal decisions, the Supreme Court held that the resulting losses were within the scope of GT's duty of care.  MBS was entitled to recover £13.4m as the difference between MBS' actual financial position and what its financial position would have been had it not entered into any additional swaps as a result of GT's advice, subject to a 50% reduction for MBS' own contributorily negligence.

COMMENTARY

The Supreme Court's decision clarifies the application of SAAMCO in the determination of the scope of a professional adviser's duty of care and emphasises the significance of purpose in assuming such a duty.

The judgment highlights the importance of companies remaining aware of their exposure to the consequences of taking commercial decisions that are related to, but extend beyond, a professional adviser's remit or where such advice is a single contributing factor to such decisions.

Companies seeking advice from professional advisers should be clear about why they are seeking advice and how the information provided will be utilised in their future business dealings.  Terms of Engagement correspondence provides a reliable resource for adequately reflecting the agreed scope and purpose of any instruction in writing.  These should always be carefully verified on receipt, whether in contemplation of a new relationship or with regard to a repeat appointment, and challenged where necessary.

[1] [2021] UKSC 20

[2] Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd; South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191

For our analysis of the Court of Appeal decision in 2020 click here.