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The Supreme Court wrestles again with issues of loss in professional negligence claims

We have recently focused on the potential for the tough economic road out of the pandemic to increase the volume of professional negligence claims. We now have a very timely decision from the Supreme Court attempting to clarify the legal basis for quantifying loss in such claims.

The House of Lords addressed the point almost exactly 25 years ago in a case called SAAMCO (South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191).

The SAAMCO Decision

The point then was whether a surveyor who provided a negligent valuation could be found liable for all the losses incurred by a property investor at the time of a market recession. SAAMCO decided that in cases where the surveyor was providing information (i.e. a report) rather than advice (e.g. recommending the investment) losses should be capped at the difference between the negligent valuation and an accurate valuation at the time (plus interest from time of investment).

 The case has provided a very helpful rule of thumb for lawyers stretching right into the recession of 2008/9. It has been applied to advice from a whole range of professionals and received positive affirmation from the Supreme Court in relation to solicitor’s negligence in particular in the case of BPE Solicitors v Hughes-Holland [2017] UKSC 21 (relating to a negligent report from solicitors regarding the use to which loan funds were to be put). However, as the range and complexity of contracts for professional advice becomes ever broader, inevitably this rule of thumb has started to fall short of providing real clarity.

Manchester Building Society v Grant Thornton UK LLP

In the recent case of Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20, the defendant accountants were providing audit advice to the plaintiffs on interest swap hedging for long-term mortgages. At the time the advice was provided in 2005, the products were relatively uncontroversial, but with the huge falls in interest rates post-crash a new perspective was brought to bear. Grant Thornton were forced to admit that their advice on tax and regulatory compliance was wrong and the plaintiffs had to exit the interest swaps market in 2013. The question was whether the total break costs of doing so could be claimed against Grant Thornton.

At both first instance and before the Appeal Court, losses were capped at a low level, applying the logic of SAAMCO and determining that Grant Thornton had simply provided information rather than advice and should not be liable for all the commercial break costs (many millions). The Supreme Court overturned this. They did recognize a 50% degree of contributory negligence on the part of the Building Society for their commercial decision to take on the risk of the swaps, but applied that to the full break losses incurred. They did so by reformulating the SAAMCO test as a test depending solely on scope of duty.

We are all familiar with letters of engagement setting out precisely what professional advisers will and will not be doing for their fee. These are helpful guides to what their scope of duty is but it will be necessary to look more broadly at the purpose of the work being undertaken to crystallize precisely what the scope of duty is in any given situation. Sometimes there is no letter of engagement; sometimes (for example in treatment by a doctor) there is no contract and the law applied is the law of delict. The Supreme Court in the Grant Thornton case sets out a template for the questions to be asked in assessing scope of duty and therefore extent of losses which can be claimed.

The Supreme Court Decision

The opinion of Lord Hodge and Lord Sales sets out six questions to be asked in cases where a claimant seeks damages from a defendant for negligence:

  • Is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence? (the actionability question).
  • 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). The defendant’s duty of care to the claimant does not extend to every possible kind of harm which the claimant may suffer as a result of a breach of that duty. The nature of the damage is therefore important. One must ask what risk the duty was supposed to guard against and then look to see whether the loss suffered represented the fruition of that risk. The categories of “advice” and “information” cases are too rigid; the focus should be on identifying the purpose to be served by the duty of care assumed by the defendant.
  • Did the defendant breach his or her duty by his or her act or omission? (the breach question)
  • Is the loss for which the claimant seeks damages the consequence of the defendant's act or omission? (the factual causation question)
  • 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 stage 2 above? (the duty nexus question)
  • Is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote, or because there is a different effective cause (including novus actus interveniens – a new act which breaks the chain of causation) in relation to it or because the claimant has mitigated his or her loss or has failed to avoid loss which he or she could reasonably have been expected to avoid? (the legal responsibility question).

The decision that a business model matching swaps and mortgages would be commercially attractive was the society’s own judgement, and Grant Thornton was not asked to provide commercial advice on this. The purpose of Grant Thornton’s advice, and thus the scope of its duty, was to deal with the issue of hedge accounting in the context of its implications for the society's regulatory capital (under the FSA regime the society was required to maintain a substantial level of capital to ensure its continuing viability should it come under stress, and If it failed to do so, the FSA could take steps to close its operations). Grant Thornton advised the society that use of hedge accounting could enable it to have sufficient capital resources to carry on the business of matching swaps and mortgages, when in reality this was incorrect. Grant Thornton did breach its duty to the society by providing this negligent advice, and the society’s loss clearly did flow from this negligent advice.

Conclusion

What is the takeaway from all of this? The one clear thing is that, as for example with interpretation of contract, the Supreme Court’s approach is that although there are a basic set of rules to be applied, it is necessary to look very carefully in each case at the facts to determine the scope of the duty (and therefore the extent of exposure to loss). It is too simple to ask if it is an advice or information case. Instead one must look at the purpose of the advice. Is it advice expressly to enable a lender to lend, or a company to pay dividends etc.? If so, and something goes wrong in that process, the advisor may be exposed to wider losses. One immediate result may be to cement further the now standard practice of professionals imposing limitations on their liability or to specify that particular purposes are expressly not covered by the advice. In any event, we look set for another period of evolution of the law in this complex area.

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