Professional advice and duty of care - scope, purpose and SAAMCO

In Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 the Supreme Court delivered one of the most important judgments in the professional negligence sphere since the House of Lords’ decision in SAAMCO in 1997 (South Australia Asset Management Corporation v York Montague Ltd [1997] AC 19). The same panel of the Supreme Court also heard the appeal in the clinical negligence case of Khan v Meadows [2021] UKSC 21 and the two judgments are intended to be read together as providing a clear and coherent underlying approach.

Background to the decision - SAAMCO

SAAMCO has been a leading authority on the question of what type of loss a professional is responsible for where that professional breaches a duty owed to their client, i.e. a professional in breach of duty will only be liable for damage that falls within the scope of the duty that they owe or assume to their client. Accordingly, the starting point for considering recoverability is to consider the scope of the professional’s duty and what ‘harm’ the professional was engaged to protect the client against. In determining the scope of the duty, the House of Lords in SAAMCO established a distinction in professional negligence cases between “advice” cases (where the scope of the professional’s duty was to advise the claimant on what course of action it should take) and “information” cases (where the scope of the professional duty was to provide information in order to allow the claimant to decide upon a course of action).

In “advice” cases, the House of Lords found that the claimant should be liable for all foreseeable losses that are a consequence of the advised course of action being taken. In practice that has resulted in a reinsurance broker being responsible for all the reinsurance losses suffered by its client reinsurer, even though the total sum of those losses was higher than the limit of the policy of reinsurance that the broker negligently failed to place. In “information” cases, the House of Lords found that the adviser should be liable only for losses caused by the incorrect information. In SAAMCO itself this meant that the surveyor that negligently overvalued certain properties was liable to reimburse the lending bank for the difference between the overvaluation and what the property would have been valued at; but not the loss attributable to the steep fall in the real estate market that occurred after the negligence.

A new approach

The majority in Manchester Building Society found that the primary task is to identify the scope of the defendant’s duty, which is governed by the purpose of the duty of care assumed by the adviser, judged on an objective basis, by reference to the purpose for which the advice is given. In light of this primary focus, the court concluded that the information/advice distinction that has proliferated since SAAMCO is too rigid, liable to mislead, and should not be treated as a ‘straightjacket’. Similarly, Lord Hoffman’s counterfactual analysis in SAAMCO (commonly referred to as the ‘SAAMCO cap’) was described as a tool to cross check the result, but ultimately subordinate to the ‘purpose of the duty’ analysis referenced above.

The court sought to locate the scope of duty question within a general conceptual framework in the tort of negligence set out in six questions, out of which two key questions emerge which were relevant to scope of duty: (i) “what are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care”; (ii) “is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant’s duty of care as analysed at (i)”.

Applying the conceptual framework, the majority noted that the scope of duty question arises at an early stage in the analysis of a professional claim before breach and causation are assessed and that some cases may be capable of being dealt with at an early stage having considered this question. However, in cases where scope of duty was relevant to the extent of a particular kind of loss (such as SAAMCO) it was often likely to be useful to look at causation and establish precisely which loss was caused by the breach of duty on a simple ‘but for’ basis before moving to assess whether that loss falls within the scope of the adviser’s duty.

Decision

In Manchester Building Society, the building society’s auditors had incorrectly advised that the society’s accounts could be prepared on a ‘hedge accounting’ basis and, relying on the auditors’ advice, the society entered into long-term interest rate swap contracts to hedge against the cost of borrowing to fund mortgage lending. The lending was long-term, being lifetime, equity release mortgages with borrowers being charged a fixed rate of interest, whereas the borrowing to fund the lending was short-term and at variable rates of interest. It was the risk that the variable rate of interest that the society paid to borrow funds would exceed the fixed rate that it received from borrowers that the swaps were intended to guard against, allowing the building society to greatly reduce the level of capital it needed to hold to meet regulatory requirements.

When the auditors’ error was realised, the society was exposed to the regulatory capital demands which the use of hedge accounting was supposed to avoid, and was compelled to break the swaps, incurring substantial losses. The society also had to pay transaction fees for breaking the swaps early. The building society claimed against the auditors for the costs of breaking the swap agreements, in addition to the transaction costs, on the basis that the losses flowed from the need to close out the swaps following the correction of the advice on the technical accounting treatment. The Court of Appeal found that the losses had flowed from market forces, not the auditors’ negligence. The auditors had not advised on the commercial decision to purchase the swap agreements and were not responsible for the financial consequences flowing from that decision.

The Supreme Court reversed that decision, holding that the losses fell within the scope of the duty of care assumed by the auditors, having regard to the purpose for which the advice was given which was the impact of hedge accounting on the society’s regulatory capital position.

The end of the advice/information distinction and the SAAMCO cap?

The Supreme Court’s judgment stresses the importance of ascertaining the purpose served by the duty of care rather than trying to shoehorn each case into either the information category or the advice category. The majority agreed with Lord Leggatt that “advice” and “information” should be dispensed with as terms of art. The court noted that while there were some cases that would fall easily into one category or the other, in reality there is not a clear distinction but rather a spectrum and there is a large grey area. It therefore seems that while there may be something to be gained by looking at cases through the information/advice lens as a tool for assisting the determination of the purpose of the duty of care when dealing with facts that clearly fit into one category or the other, it is likely that going forwards this distinction will be of far less significance and the primary consideration will be establishing the purpose of the duty of care.

The majority referred to the counterfactual test used to apply the SAAMCO cap as a mechanism that is a “useful cross-check in most cases, but should not be regarded as replacing the decision that needs to be made as to the scope of duty of care”.

The future

This decision will no doubt have a significant impact on the way in which professional negligence cases are analysed and presented going forwards. The English courts’ approach to assessing loss in professional negligence cases is also likely to change but this does not mean the new approach will lead to substantially different results than those stemming from the correct application of SAAMCO.

In light of this decision, professional advisers and those using the services of professional advisers would be well served by considering at the outset of the engagement the purpose for which the adviser is assuming their duty of care in terms of what risks the duty of care is intended to mitigate against, and accurately reflecting this purpose in the written terms of engagement.

Further reading: Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20