The Supreme Court shakes up the law applied since SAAMCO

A specially constituted panel of seven members of the Supreme Court has reached an important decision as to the proper approach when determining the scope of duty and the extent of liability of professional advisers for negligence in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 40; [2021] PLSCS 108. The building society had asked its accountants for advice about its proposal to enter into interest rate swaps to hedge the risks of fixed-interest lifetime lending to borrowers seeking to release equity in their homes. The accountants’ advice about the accounting treatment that was appropriate was negligent and the building society had to close out the swaps. Were the accountants liable for the losses incurred as a result? The court noted that the decision in South Australia Asset Management Corp v York Montague Ltd [1997] AC 191; [1996] 2 EGLR 93 had distinguished between a duty to provide information so that someone can decide on a course of action and a duty to advise someone what to do. The Court of Appeal had decided that this was an information case, that the accountants were not responsible for the decision to make the swaps and that the building society’s losses flowed from a fall in interest rates. So closing out the swaps did not create the loss; it crystallised it. But the Supreme Court considered that the information/advice test was too rigid a straitjacket. The scope of the duty of care of a professional adviser is governed by the purpose of the duty. So one must look to see what risk the duty was supposed to guard against and whether the loss suffered resulted from that risk. In other words, the court must focus on the purpose served by the duty of care. The building society had asked for accounting advice on whether it could use hedge accounting to deal with volatility on its books within the constraints of its regulatory environment. And the accountants had advised that it could. That advice was negligent – and the building society had adopted the business model and was exposed to the risk of loss, when it was realised that hedge accounting could not be used, and to the regulatory capital demands that it had sought to avoid. The volatility of its balance sheet led to the swaps being closed and hence to the building society’s loss. This did not mean that the accountants were liable for all the losses that might have resulted. For example, if a counterparty had become insolvent, any losses incurred would not have been within the scope of the accountants’ duty. Similarly, if a counterparty had chosen to terminate a swap, the costs incurred by the building society would not have been within the scope of the duty. The losses would not have been attributable to the wrong advice – that hedge accounting could be applied – and would have been incurred, had the advice been correct. However, the accountants had, in effect, informed the building society that hedge accounting would help it to have sufficient capital resources to carry on the business of matching swaps and mortgages, when in reality it did not. This was analogous to a case in which an auditor negligently advises a company that it has capital resources at a level that would permit the payment of a dividend, when in fact it does not. Consequently, the building society was entitled to damages (reduced by 50% due to the building society’s contributory negligence) of approximately £13.4m, together with costs and interest. Allyson Colby, property law consultant