The Supreme Court has restated the principles in South Australia Asset Management Corp v York Montague Ltd [1997] A.C. 91 (SAAMCO) for determining the limits of the losses recoverable from a negligent professional advisor, overturning the Court of Appeal’s own restatement in the process. An enlarged panel of seven Justices unanimously agreed that the losses in question were within the scope of the relevant accountant’s duty of care, but in doing so gave three separate judgments with three distinct routes to that answer. The leading judgment of five of the seven Justices held that the scope of any professional advisor’s duty of care is governed by the purpose of the duty, judged on an objective basis by reference to the reason why the particular advice is being given. The majority emphasised that the distinction originally drawn in SAAMCO between “advice” cases and “information” cases, which the Court of Appeal had held to be the critical question, is not to be viewed as a rigid or binary rule. They also held that the SAAMCO counterfactual – which asks whether in an “information” case the claimant’s actions would have resulted in the same loss if the advice given had been correct – is simply a tool to cross-check the result of the objective analysis of the purpose of the duty.
Accounting standards and interest rate swaps
Grant Thornton UK LLP (GT) audited the accounts of Manchester Building Society (MBS) from 1997-2012. During this time MBS issued a number of fixed interest lifetime mortgages in the UK and Spain. MBS hedged its’ resulting interest rate risk by entering into certain long-dated interest rate swaps. GT negligently advised that MBS could apply hedge accounting to these swaps under the International Financial Reporting Standards (IFRS), such that MBS’s accounts did not recognise the volatility of the fair value of the swaps. When GT informed MBS in 2013 that it could not apply hedge accounting, interest rates had fallen to historically low levels and thus recognising the fair value of the swaps in MBS’ 2011 accounts resulted in a regulatory capital deficit of GBP17.9 million. Under regulatory pressure to address that deficit, MBS closed out the swaps incurring GBP32.7 million in close-out costs, alongside significant transaction fees. MBS claimed the close out costs from GT (in addition to other losses not in issue before the Supreme Court).
Recap – damages for negligence
Once a professional advisor’s negligence has been established, the quantum of their liability for the consequences of that negligence is subject to three hurdles or filters:
- Causation – is the negligent advice the factual and legal cause of the loss claimed?
- Reasonable foreseeability – is the loss a reasonably foreseeable consequence of the advice being wrong, or is it too remote?
- What has become known as the SAAMCO principle – is the loss within scope of the duty of care owed? This case concerns this third filter.
High Court and Court of Appeal Judgments
High Court
At first instance (see Swap close-out costs – causation but no assumption of responsibility by auditors) GT accepted its’ advice was negligent, and Teare J found that GT’s advice was both the factual and an effective legal cause of MBS’ losses in closing out the swaps, and that those losses were the reasonably foreseeable consequences of GT’s negligence. Following the Supreme Court’s decision in Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029, Teare J then identified the key question for the court to ascertain whether the close-out costs were within the scope of GT’s duty of care as whether a GT had assumed responsibility for those costs, and in particular “whether the loss flowed from the particular feature of the defendant’s conduct which made it wrongful”. In doing so he rejected the distinction drawn in SAAMCO and Hughes-Holland between “information” cases and “advice” cases. Teare J held that “in the round” the loss resulted from a business decision by MBS to enter into the swaps, for which GT had not assumed responsibility.
Court of Appeal
The Court of Appeal (see Swaps close-out costs: auditor not responsible for financial consequences of decision to enter into swaps) disagreed with Teare J on the law but agreed on the outcome. It held that Teare J had erred in treating the key question for the application of the SAAMCO principle as whether GT assumed responsibility for the relevant losses. The Court of Appeal held that Hughes-Holland had authoritatively restated the applicable legal principles. It must be decided whether each case is an “information” or “advice” case, as the scope of the defendant’s duty, and thus the measure of liability, differs between the two. Specifically:
- In an “advice” case the adviser assumes responsibility for the decision taken, and is thus liable for the foreseeable financial consequences flowing from that decision.
- In contrast, in an ‘information’ case, the adviser is not responsible for the financial consequences of the decision taken, only for the foreseeable financial consequences of the information or advice provided being wrong. The foreseeable financial consequences are only those that would not have been suffered if the correct advice or information had been provided – sometimes known as the SAAMCO counterfactual.
The Court of Appeal held that this was clearly an “information” case; GT had assumed responsibility for the provision of correct accounting advice only, not for the decision making process by which MBS entered into the swaps. It thus held that GT was not liable for the close-out costs.
Supreme Court – SAAMCO restated
The Supreme Court unanimously allowed the appeal, holding that the close-out costs were within the scope of the duty of care assumed by GT. Lord Hodge and Lord Sales gave a joint leading judgment for the majority, holding that:
- The scope of duty question is located within a general conceptual framework in the law of the tort of negligence.
- The scope of the duty of care is governed by the purpose of the duty, judged on an objective basis by reference to the reason why the advice is being given.
- That objective judgment is reached by asking what risk the duty was supposed to guard against, and then asking whether the loss suffered represented the fruition of that risk.
- The distinction between “advice” and “information” cases drawn in SAAMCO is not to be treated as a rigid rule, contrary to the Court of Appeal’s reading of Hughes-Holland. Cases should properly be viewed as on a spectrum, not subject to a binary categorisation that is liable to mislead. The Court’s focus is on identifying the purpose served by the duty of care assumed in each case.
- The SAAMCO counterfactual is a useful tool to cross-check the result of the objective analysis of the purpose of the duty, but is subordinate to that analysis and should not supplant it.
Applying that framework to this case, the majority held that:
- The purpose of GT’s advice was to establish whether MBS could use hedge accounting to implement its proposed lifetime mortgages business model.
- GT negligently advised that it could, which resulted in the relevant hedges being entered into, exposing MBS to the close-out costs when it realised in fact it could not.
- That was a risk that GT’s advice was supposed to allow MBS to assess, and which its negligence meant it failed to understand. The loss suffered was therefore within the scope of GT’s duty of care, in light of the purpose of its advice.
Lord Leggatt agreed with the conclusion of the majority, but articulated his analysis of the scope of duty principle through the lens of causation. In his concurring judgment he considered that the central question is whether there is a sufficient causal relationship between what made the information or advice wrong and the “basic loss” ie the factually caused loss. Lord Leggatt considered there was a causal connection between GT’s negligent advice and MBS bearing the close-out costs, as they were caused by the lack of an effective hedging relationship between the swaps and the lifetime mortgages, which GT had negligently failed to advise MBS on.
Finally Lord Burrows’ also agreed with the conclusion of the majority for reasons closer to their analysis than Lord Leggatt’s causation analysis. He concurred with the importance of identifying the objective purpose of the duty of care in analysing its scope and the subordination of the SAAMCO counterfactual to that analysis. However Lord Burrows placed greater emphasis on the policy considerations of achieving a fair and reasonable allocation of risk between the advisor and client, than on the conceptual framework of the tort of negligence.
Comment
In this case, together with the separate case of Khan v Meadows [2021] UKSC 21 (a medical negligence case heard by the same panel of Justices at the same time) the Supreme Court has sought to authoritatively re-state the law on the scope of duty of care. The majority do so by embarking on a detailed analysis of the place of the scope of duty principle within the conceptual framework of the tort of negligence, and re-formulating the central question for the court to ask itself when considering that principle. In doing so the Supreme Court has subordinated both the distinction between “advice” and “information” cases and the SAAMCO counterfactual – which in previous cases had at times attained the status of central question themselves – to useful tools to cross-check the analysis of the objective purpose of the relevant duty. However Lord Leggatt and Lord Burrows’ alternative analyses’, whilst leading to the same answer in this case, set out different conceptual frameworks that, on different facts, may lead to different answers (as the majority acknowledged). Therefore whilst this case is a significant restatement of law in this area, it also illustrates the depth and complexity of the jurisprudential debate, itself showing that this case is unlikely to be the last word on SAAMCO.
Further, in adopting a principled but open-textured test, and moving the law away from the clearer (if potentially arbitrary) distinction between “advice” and “information” cases and the use of the SAAMCO counterfactual in the latter, the majority’s judgment may well make it harder for practitioners to give definitive advice in this area.
The Supreme Court also recognised that most professional advice in a financial services context will be given pursuant to contract (unlike the medical advice in issue in Khan v Meadows), giving rise to parallel duties of care in contract and tort. The Supreme Court emphasised that their analysis as to the ascertainment of the scope of the duty assumed by a professional advisor applies whether the question arises in tort or contract.
