In what is now the leading authority on the application of the decision in South Australia Asset Management Corpn v York Montague Ltd  AC 191 (SAAMCO), the Supreme Court has held that a mutual building society’s claim for damages for economic loss fell within the scope of its auditor’s duty of care in giving (admittedly) negligent advice regarding the accounting treatment of interest rate swaps: Manchester Building Society v Grant Thornton UK LLP  UKSC 20.
The appeal was heard by an expanded constitution of the Supreme Court, in order to provide general guidance regarding the proper approach to determining the scope of duty and the extent of liability of professional advisers in the tort of negligence, including the proper application of the SAAMCO principle. As such, the outcome and reasoning of this decision will be significant for advisers facing claims for economic loss due to alleged negligent advice and their liability insurers.
The Supreme Court overturned the Court of Appeal’s decision which had found that, in applying SAAMCO, the court should consider at the outset whether it is an “advice” or “information” case, ie whether the professional is providing advice on the merits of a transaction overall, to guide the client’s whole decision-making process, or merely providing information on which the client’s decisions will be taken. If the latter, the Court of Appeal found, applying SAAMCO, the adviser would be responsible only for the foreseeable consequences of the information being wrong, and so the claimant would have to prove that the loss would not have been suffered if the information had been correct.
The majority of the Supreme Court said that the descriptions “information” and “advice” should be dispensed with as terms of art in this area. Instead, the court’s focus should be on the purpose of the duty, judged on an objective basis by reference to the purpose for which the advice is being given. In practice, this means that, when looking at the case of negligent advice given by a professional adviser, 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. The counterfactual test, as to whether the loss would have been suffered if the information had been correct, should be regarded only as a tool to cross-check the result in most cases, and should not be regarded as replacing the decision that needs to be made as to the scope of duty of care.
In the present case, the purpose of the auditor’s advice was to provide technical accounting advice as to whether the mutual building society could use hedge accounting in order to implement its proposed business model within the constraints of the regulatory environment. As a result of the auditor’s negligent advice, the building society adopted the business model, entered into further swap transactions and was exposed to the risk of loss from having to break the swaps, when it was realised that hedge accounting could not in fact be used and the building society was exposed to the regulatory capital demands which the use of hedge accounting was supposed to avoid. That was a risk which the auditor’s advice was supposed to allow the building society to assess, and which their negligence caused the building society to fail to understand. Accordingly, the losses suffered by the building society when breaking the swaps were within the scope of the duty owed by the auditors. However, the damages should be reduced by 50% on the basis of the building society’s contributory negligence.
For more information see our Banking Litigation Notes blogpost on the decision.