High Court applies SAAMCO principle to find no assumption of responsibility for losses flowing from market forces

In a recent decision, the High Court found that an auditor was not liable for break costs of some £32.7 million incurred as a result of its negligent advice in relation to the accounting treatment of interest rate swaps, as those costs fell outside the scope of the auditor’s duty of care: Manchester Building Society v Grant Thornton UK LLP [2018] EWHC 963 (Comm).

The court reached this conclusion by applying the SAAMCO principle, derived from the decision of Lord Hoffmann in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 and expanded upon more recently by Lord Sumption in Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029. In broad summary, the SAAMCO principle provides that, where an adviser has contributed a limited part of the material on which the claimant relied in deciding whether to enter into a transaction, the adviser will not be liable for all losses incurred as a result of the transaction, but only the foreseeable consequences of their information/advice being wrong.

In the present case, the court considered that the defendant had not assumed responsibility for the claimant being “out of the money” on the swaps because the break costs flowed from market forces – even though the claimant’s decision to close out the swaps was taken because the defendant’s advice had been wrong. The court’s conclusion was driven by its view that it would be a “striking conclusion” for an accountant who advised a client as to how certain transactions could be treated in its accounts to have assumed responsibility for the financial consequences of those transactions.

However, this was a finely balanced decision, and the uncertainty in this area of law highlights the importance of clearly defining the scope of an adviser’s duty when agreeing engagement terms. For more information, see our Banking litigation e-bulletin on the decision.

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