Court of Appeal provides welcome guidance on the application of SAAMCO in Manchester Building Society v Grant Thornton UK LLP

Published 20 March 2019

Last year a claim against GT for £48.5M largely failed at trial, as the economic consequences of MBS entering into interest rate swaps were found to fall outside the scope of GT's duty. On 30 January 2019, the Court of Appeal dismissed MBS’ appeal and made important  comments – of interest to everyone involved with claims against professionals – on the types of losses recoverable in claims for negligence.

Underlying Facts

To briefly recap, MBS sold life time mortgages (repayable when the borrower entered a care home or died), and hedged its interest rate risk (the risk that its costs of funding its loans would exceed the interest received from borrowers) through interest rate swaps. In April 2006, GT advised on the accounting treatment of the swaps and advised that hedge accounting could be used.  MBS subsequently discovered that it could not use hedge accounting, forcing it to close out the swaps at a loss of £48.5M, which loss MBS sought from GT.

Judgment

Negligence was admitted but GT successfully defended the claim on scope of duty grounds. On causation, the judge concluded that GT’s negligence had caused MBS to suffer loss on breaking the swaps, both on a “but for” basis and as a matter of legal causation. However, the judge found that the losses were not recoverable as they fell outside the scope of GT’s duty, as the loss flowed from economic forces (the market value of the swaps had fallen) for which GT did not assume responsibility.  The reasoning is hard to follow because the judge see-sawed between finding GT’s advice had caused the losses, and finding that it had not assumed responsibility for those losses.  The Court of Appeal judgment clarifies the correct legal test when determining scope of duty and concludes the judge was wrong in finding GT’s advice caused the claimed losses.

Appeal

On appeal, MBS argued that the judge should not have concluded the test was whether GT had assumed responsibility for the claimed losses, but should have (1) decided whether this was an “advice” case or an “information” case, and (2) concluded that this was an “advice” case so that GT was liable for the “foreseeable” losses claimed.

Since SAAMCO^[2], there has been an important distinction between “advice” cases and “information” cases.  In MBS v GT, the Court of Appeal gave helpful guidance on determining on which side of the line a scenario falls:

1. An “advice” case is where the professional is left to consider what matters should be taken into account in deciding whether to enter into the transaction; he is under a duty to consider all relevant matters, and is responsible for guiding the whole decision making process. The advisor assumes responsibility for the decision to enter the transaction and will be responsible for all the foreseeable financial consequences of doing so.
   
   
2. All other scenarios are “information” cases. In an “information” case, the professional will not have assumed responsibility for the decision to enter the transaction, and, if negligent, is only responsible for the foreseeable financial consequences of the advice and/or information being wrong.  This involves a consideration of what losses would have been suffered if the advice and/or information had been correct. It is only losses which would not have been suffered in such circumstances that are recoverable.

Applying that analysis to the facts, the Court of Appeal found that this was an “information” case: GT had provided information in respect of MBS’ decision to enter into the swaps. Whilst GT gave accounting advice, GT was not charged with considering what matters should be taken into account in deciding whether to enter into the swaps; GT was not responsible for guiding the whole decision making process.

Hamblen LJ went on to consider, as an “information” case, what loss would have been suffered had MBS been entitled to use hedge accounting i.e. had the advice which GT gave been proven to be correct. He pointed out it could not be proven that the loss would have been less, had MBS not been forced to sell the swaps and had held onto them. The Court of Appeal was also struck by the fact that although the swaps were “out of the money” when they were closed out in 2013, that was due to market forces. MBS could have been “in the money” had the market not moved against the swaps at the point in time when it was realised GT’s advice was wrong and hedge accounting could not be used, and the swaps had to be closed out. In concluding this, the Court of Appeal also found that GT had not “caused” the losses in question.

Analysis

The Court of Appeal’s clarification is welcome.  Not only has it reaffirmed that the “advice vs information” test is central to determining what losses are recoverable under SAAMCO, it also reaffirms the “assumption of responsibility” test as a further filter, or sense check, for what losses are recoverable from professionals.  Because of its admirable clarity, we think it will help professionals in arguing that their advice is on the “information” side of the line, and it should consequently limit the type of losses, and the occasions for those losses, for which an advisor may be found liable. To maximise the prospects of being on the “information” side of the “advice”/“information” divide, advisors should ensure that retainer letters and advisory reports to clients clearly record the scope of their retainer, and that adequate records are retained of factors relevant to a client’s decision making process which are outside the professional’s remit.