The UK Supreme Court (UKSC) has provided welcome clarification on the scope of the duty assumed by a professional adviser. The distinction between information and advice drawn by Lord Hoffmann in South Australia Asset Management Corporation v York Montague Ltd (SAAMCO) has been dispensed with in favour of a more practical examination of the purpose for which the advice was given. The UKSC also provided helpful guidance on the correct application of the SAAMCO counterfactual analysis.
In SAAMCO, Lord Hoffmann distinguished between a duty to advise someone as to what course of action they should take (“advice cases”) and a duty to provide information to enable someone else to decide on a course of action (“information cases”). In advice cases, the adviser has a duty to consider all the possible consequences of a transaction, and they are therefore liable for all losses arising from it, subject to the principles of remoteness and causation. In information cases, the adviser’s liability is limited to losses arising from the information being wrong. This reflects the far narrower duty of care assumed by the adviser.
For information cases, Lord Hoffmann considered that the extent of a claimant’s recoverable loss could be determined by way of a counterfactual analysis: the court should ask whether the claimant would have incurred the same loss if the advice given by the adviser had been correct. This limit on recoverable damages is known as the “SAAMCO cap”.
These principles have attracted a great deal of commentary. Most notably, in Hughes-Holland v BPE Solicitors, Lord Sumption considered (at paragraphs 39 to 44) that Lord Hoffmann’s binary approach was insufficiently precise and liable to mislead. In his view:
“[b]etween these extremes, every case is likely to depend on the range of matters for which the [adviser] assumed responsibility and no more exact rule can be stated”.
In Manchester Building Society v Grant Thornton UK LLP and Khan v Meadows, two judgments were handed down on the same day by seven UKSC judges, giving further consideration to these principles. This blog post examines the approach taken by the UKSC in Manchester Building Society v Grant Thornton.
In 2006, the claimant building society (the Society) sought advice from the defendant financial advisers (Grant Thornton) as to whether hedge accounting could be used to match long-term interest rate swaps against lifetime mortgages on the Society’s balance sheet. The Society’s aim was to reduce the appearance of volatility on its balance sheet and so decrease the amount of regulatory capital it was obliged to maintain. Grant Thornton negligently advised the Society that it could do so. In the years that followed, the value of the swaps decreased.
Seven years later, Grant Thornton’s error was discovered and the Society’s true accounting position became clear: the Society’s net assets were significantly lower than it had thought and it did not have sufficient capital reserves to meet its regulatory obligations. The Society had little option but to close out the swaps at a net loss of £26.7 million.
At first instance, Teare J found that Grant Thornton was only liable for the transaction fees incurred by the Society in connection with closing out the swaps. On appeal, Hamblen, Males and Gloster LJJ held that the claim was an information case, and that the Society had failed to show that it had suffered any loss just by closing out the swaps at their fair value. The Society appealed.
The UKSC agreed with Lord Sumption that the distinction between advice cases and information cases established by Lord Hoffmann in SAAMCO was too rigid. Cases should not be shoehorned into one or other of these categories (paragraph 19).
While there was a divergence of views as to the correct approach, the majority considered that the scope of an adviser’s duty should be judged objectively, by reference to the purpose for which the advice is given. In the present case, the purpose of Grant Thornton’s advice had been to protect the Society against volatility on its balance sheet. As a consequence of precisely that, the Society had been required to close out the swaps. Its resulting losses therefore fell within the scope of Grant Thornton’s duty of care (paragraph 36), albeit the Society’s damages were reduced by 50% to account for its own contributory negligence.
The majority added that, while Lord Hoffmann’s counterfactual analysis may be used as a tool to cross-check the court’s findings as to the purpose of the adviser’s duty, it is subordinate to that analysis and should therefore not displace it (paragraph 4).
The Supreme Court’s intervention on these complex and controversial principles will be welcomed by many. The departure from Lord Hoffmann’s binary approach to assessing the scope of an adviser’s duty is a sensible step, which reflects the broad spectrum of professional negligence cases that appear before the courts, and the fact that a great many of these defy such categorisation.
Given the divergence of views between the UKSC judges, it is likely that there will be further developments on how the scope of an adviser’s duty should be properly assessed. For now, however, the UKSC’s thoughtful and well-reasoned analysis provides helpful clarification in this regard.
This article first appeared on the Practical Law Dispute Resolution Blog on 15 July 2021