Manchester Building Society v Grant Thornton UK LLP

An accountant who gives negligent advice about the accounting treatment of a transaction is liable only for loss within the scope of the responsibility assumed. Causation in fact and effective causation do not by themselves establish recoverability. The court must identify the particular feature that made the advice wrongful and ask whether the loss flowed from it. The foreseeability of loss and the importance of the advice are relevant but insufficient alone. Where correct advice would have prevented the claimant from incurring a loss at the time claimed, a speculative inquiry into payments that might have arisen decades later is unwarranted. A claimant’s contributory negligence requires comparison of blameworthiness and causative potency, while avoiding double counting losses already excluded by the scope-of-duty analysis.

The Claimant, a building society, claimed damages from its auditor for admitted negligence in approving the use of hedge accounting under IAS 39. The accounting treatment concealed or reduced the effect of changes in the fair value of long-term interest-rate swaps on the Claimant’s reported profits and regulatory capital. When the error was discovered in 2013, the swaps were closed out and the Claimant incurred substantial losses.

The principal issues were whether the negligence caused the claimed losses, whether those losses fell within the scope of the Defendant’s duty, whether alternative hedging would have avoided them, and whether the Claimant was contributorily negligent. The court also considered statutory relief for an auditor under Companies Act 1985 and Companies Act 2006.

1. Causation. The Defendant’s negligence was an effective cause of the Claimant’s decision to close the swaps in 2013. The accounting treatment affected reported profits, available capital and regulatory capital requirements. The Claimant proved that, absent the negligence, it would probably not have entered into further long-term swaps and would have closed the existing swaps. The proposed alternative of balance guaranteed swaps was not shown to be a likely alternative.
2. Scope of duty. Applying the approach in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 and Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029, the break costs representing the market value of the swaps were outside the responsibility assumed by the Defendant. The Defendant advised on accounting treatment, not on the commercial wisdom of entering into long-term swaps or on the risk of a sustained fall in interest rates. The losses therefore flowed from market risks for which the Defendant had not assumed responsibility.
3. The Defendant was nevertheless liable for termination or penalty costs, and for specified advisory and hedge-accounting expenses. The court rejected the claims for the 2006 unrealised gain, lost profits on the mortgage book, servicing costs, Spanish-business costs and most restructuring costs.
4. The Claimant was contributorily negligent in purchasing 50-year swaps and in failing to scrutinise its own hedge-accounting policy. The Defendant’s fault was substantially more blameworthy and causatively potent. Damages of £420,460 were reduced by 25 per cent, producing judgment for £315,345 plus interest.
5. Relief under section 727 of Companies Act 1985 and section 1157 of Companies Act 2006 was refused because the Defendant’s negligence was pervasive and compelling, not minor or merely technical.

First-instance decision in the High Court (Commercial Court). No appellate history was stated in the judgment.