Manchester Building Society v Grant Thornton UK LLP

Professional negligence – Auditor – Interest rate swaps – Respondent auditor negligently advising appellant about applicability of hedge accounting to reduce effect of volatile mark-to-market value of interest rate swaps – Whether court wrongly concluding respondent not liable for losses incurred when swap agreements closed out at loss on negligent advice coming to light – Appeal dismissed The appellant was a mutual building society. The respondent was a firm of accountants which audited the appellant’s accounts. Between 2004 and 2009, the appellant issued a number of fixed interest lifetime mortgages. They were designed to release the equity in a house to its owner on terms that the loan and interest were not repayable until the owner either entered a care home or died. Until that time, which was necessarily uncertain, interest compounded. The appellant hedged its interest rate risk by purchasing interest rate swaps. The respondent negligently advised the appellant that it could apply hedge accounting to reduce the effect in its accounts of the volatility of the mark to market (MTM) value of swaps. In reliance on that advice, the appellant entered into fixed rate mortgages hedged against long-term swaps under which it paid a fixed rate and received a variable rate. As a result of the financial crisis and fall in interest rates, the MTM value of the swaps became negative. The respondent’s error came to light and the appellant was advised that it could no longer apply hedge accounting. Therefore, in 2013 it closed out the swaps and had to pay the MTM losses on the swaps and transaction fees for breaking the swaps early. An issue arose whether the respondent was liable for the MTM losses as well as the transaction fees. The court held that the respondent was not so liable as it had not assumed responsibility for those losses, which were market losses due to the fall in interest rates: [2018] EWHC 963 (Comm). The appellant appealed contending the respondent was responsible for the MTM losses because they flowed from the need to close out the swaps following the correction of the negligent advice. In particular, following South Australia Asset Management Corp v York Montague Ltd [1996] 2 EGLR 93 (SAAMCO) and Hughes-Holland v BPE Solicitors [2017] UKSC 21; [2017] EGLR 23, this was an “advice” case so that the respondent was liable for all the foreseeable consequences of the appellant entering into the swap transactions in reliance on the respondent’s negligent advice. Alternatively, if it was an “information” case, the respondent was liable because the MTM losses would not have been incurred if the respondent’s advice that hedge accounting could be applied had been correct. Held: The appeal was dismissed. (1) Under the SAAMCO principle, a person under a duty to take reasonable care to provide information on which someone else would decide upon a course of action was, if negligent, not generally regarded as responsible for all the consequences of that course of action. He was responsible only for the consequences of the information being wrong. The principle distinguished between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. This was clearly a case in which the SAAMCO principle applied. The judge had erred by failing to consider whether it was an “advice” or “information” case. That was a necessary first step because the scope of the duty, and therefore the measure of liability, was different in the two cases. It would be an “advice” case if it could be shown that it had been left to the adviser to consider what matters should be taken into account in deciding whether to enter into the transaction, his duty was to consider all relevant matters and not only specific matters in the decision and he was responsible for guiding the whole decision-making process. If it was an “advice” case, the negligent adviser would have assumed responsibility for the decision to enter the transaction and would be responsible for all the foreseeable financial consequences of entering into the transaction. If it was not an “advice” case, it was an “information” case and responsibility would not have been assumed for the decision to enter the transaction. If it was an “information” case, the negligent adviser/information provider would only be responsible for the foreseeable financial consequences of the advice and/or information being wrong. That involved a consideration of what losses would have been suffered if the advice and/or information had been correct. It was only losses which would not have been suffered in such circumstances that were recoverable: SAAMCO and Hughes-Holland followed. (2) On the undisputed facts and the judge’s findings, this was not an “advice” case. Although the respondent gave advice, what mattered was not whether advice was given but the purpose and effect of the advice given. In order to be an “advice” case, the advice needed to involve responsibility for guiding the whole decision-making process, which the respondent’s accounting advice manifestly did not. (3) If this was an information case, it was a striking feature that the appellant’s claim for damages consisted of the fair value of the swaps which it held. Receiving fair value did not ordinarily give rise to any loss. In order to prove that it would not have suffered the MTM losses if the respondent’s advice had been correct, the appellant had to prove that that loss would not have been suffered had it continued to hold the swaps. The closing out of the swaps at fair value in 2013 crystallised the loss resulting from the swaps being “out of the money”, but it did not create that loss. The judge had been wrong to find that the appellant had established that the MTM losses would not have been incurred had the information or advice been correct. On his own findings, that had not been proven. Accordingly, the judge had reached the correct overall conclusion in relation to the non-recoverability of the MTM losses. Justin Fenwick QC, Rebecca Sabben-Clare QC and Harry Wright (instructed by Squire Patton Boggs (UK) LLP) appeared for the appellant; Simon Salzedo QC, Adam Rushworth and Sophie Shaw (instructed by Taylor Wessing LLP) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Manchester Building Society v Grant Thornton UK LLP