Supreme Court’s finding – Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20

The Supreme Court has recently provided guidance on the extent of a professional adviser’s duty of care. In short, the duty of care owed will be governed by the purpose of the duty.

South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 (the SAAMCO case)

SAAMCO first set out the approach to be taken when establishing an adviser’s duty of care. The Court, in this case, held that where an adviser provides information or bits of advice (which is one of many factors for a client to take into account) then the adviser will only be liable for information that is incorrect. It follows that in the context of information in an inaccurate valuation, only those financial losses attributable to the breach of duty by the adviser, are usually recoverable. In order to be attributable, the loss must come within the scope of the duty of care owed by the adviser in question.

The Court drew a very important distinction between advisers providing information and advice. Where the adviser merely provides information or bits of advice to help a client decide what action to take, then the adviser can only be responsible for the consequences of that information being incorrect and will not usually be liable for any other consequences. Contrastingly, where the adviser advises a client on which decision they should make, then the adviser must take reasonable care to consider all the consequences that may arise. If such advice is considered negligent, the adviser will be responsible for all the foreseeable loss which is a consequence of that particular decision having been made.

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

Background

Grant Thornton acted as Manchester Building Society’s (MBS) auditors. They primarily advised MBS on its accounts and that they could be prepared on the basis of hedge accounting (which is a method of accounting where entries to adjust the fair value of a security and its opposing hedge are treated as one – the purpose of doing so is to enhance the basis for recognising gains and losses). MBS relied on this advice and entered into long-term interest rates swaps as a hedge against the cost of borrowing money for lifetime mortgages.

Low and behold it turned out that the advice provided by Grant Thornton was incorrect. In 2013, shortly after Grant Thornton realised its mistake, MBS had to produce its accounts. These showed a significant reduction in its assets and insufficient regulatory capital. To rectify the situation that MBS found themselves in as a result of Grant Thornton’s negligent advice, they had to close out the interest rate swaps earlier than anticipated, which cost in the region of £32,000,000. MBS then pursued a claim against Grant Thornton to recover that cost.

The decision

The High Court and Court of Appeal both refused to allow MBS to recover their costs of closing out early. The Supreme Court, however, took a different approach and allowed their appeal.

The Supreme Court held that MBS had suffered a loss that was recoverable as it fell within the scope of duty that Grant Thornton owed them because ultimately, the purpose of said advice, centered on hedge accounting. The Supreme Court said that the scope of a professional adviser’s duty of care rests on the purpose of the duty, and that purpose must be judged on an objective basis, with reference to the very reason why the advice was being provided by the professional adviser in the first place. The Supreme Court also drew upon the distinction first made in SAAMCO and found that such distinction was not satisfactory. This was because "one looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk." It follows that the Courts should look to identify the purpose of the duty of care first.

The purpose in this case was found to be whether MBS could use hedge accounting for lifetime mortgages whilst complying with the relevant regulatory framework. Grant Thornton advised that MBS could but, in entering into the long-term interest rates swaps, MBS were exposed to capital demands which the use of hedge accounting was supposed to avoid and risked a loss in breaking the swap transactions as a result.

Grant Thornton’s advice was considered negligent by the Supreme Court and the loss therefore fell within the scope of the duty of care they owed to MBS. The Supreme Court ruled that Grant Thornton were liable for 50% of the loss suffered by MBS (a reduction was made due to MBS’s contributory negligence).

Final thoughts

It seems as though in the past many cases were categorised under the strict rule put forward in SAAMCO, i.e. did the information or advice relate to helping a client decide what course of action to take, or, did it specifically advise them what decision they should make?

Arguably, the recent decision taken by the Supreme Court simplifies the approach that should be taken. After all, it does seem sensible to focus more on the purpose of the advice being given but will this mean professional advisers are reluctant to offer up advice on such important decisions? It may mean heavily caveating anything that is said, but professional advisers should be clear on the risks that any advice they give to clients may present, and allow them to assess these fully.

With that being said, not all businesses are as heavily regulated as Grant Thornton, but it’s still important that businesses understand the extent of their duty of care and ensure they guard appropriately against risks.

If you need any advice regarding your business, then please do get in touch with Elizabeth Clazie, Kimberley Clayton, or, Max Harnden at Gotelee Solicitors LLP, emails: elizabeth.clazie@gotelee.co.uk, kimberley.clayton@gotelee.co.uk & max.harnden@gotelee.co.uk, telephone numbers: 01473 298187, 01473 298168  & 01473 298139.