Manchester Building Society v Grant Thornton UK LLP

In a professional-negligence claim arising from reliance on accounting advice, the court must first identify whether the advice guided the whole decision to enter the transaction or supplied information on a specific issue. Only the former is an advice case attracting responsibility for all foreseeable consequences of entering the transaction. In an information case, liability is confined to foreseeable consequences of the information being wrong, excluding losses that would have been suffered if it had been correct. Where a claim concerns the negative fair value of long-term swaps closed out at fair value, the claimant must prove that the loss would not have been suffered had the swaps been retained. Proof of the close-out payment alone is insufficient.

The claimant building society sued its former auditor after entering long-term interest-rate swaps in reliance on negligent advice that it could use hedge accounting. When that advice was corrected, the swaps were closed out at negative mark-to-market values. Teare J found factual and legal causation, foreseeability and remoteness, but held that the auditor was not liable for the market losses. The building society appealed from the Commercial Court decision at [2018] EWHC 963 (Comm). The appeal concerned whether the claim was an advice or information case and whether the losses would have been incurred if the accounting advice had been correct.

The appeal was dismissed unanimously. Hamblen LJ gave the leading judgment, with which Males LJ and Gloster LJ agreed.

1. Applicable framework. The judge had erred by using an open-ended inquiry into assumption of responsibility. Under the SAAMCO principle in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, as authoritatively explained in Hughes-Holland v BPE Solicitors [2017] UKSC 21, the court must first classify the case. It is an advice case where the adviser considers what matters should be taken into account, considers all relevant matters and guides the whole decision-making process. Otherwise it is an information case. In an information case, liability is confined to the foreseeable consequences of the advice or information being wrong, excluding losses that would have been suffered if it had been correct.
2. Classification. Grant Thornton’s advice concerned only the accounting treatment of the swaps. Manchester Building Society entered the swaps for commercial reasons and did not entrust Grant Thornton with the wider decision. The case was therefore one of information, not advice. Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2001] UKHL 51 and Main v Gaimbrone [2018] PNLR 17 involved advisers whose responsibility extended to guiding the relevant transaction and did not assist on these facts.
3. Proof of loss. The finding that the swaps would not have been closed out in 2013 if the advice had been correct did not establish the recoverable loss. The negative mark-to-market value reflected market expectations of future payments. Closing out at fair value crystallised the market position but did not create the loss, and it also removed the corresponding future liability. Manchester Building Society therefore had to prove that the loss would not have been suffered if it had continued to hold the swaps, such as by proving a later and more advantageous close-out. It failed to do so.

The claim for the mark-to-market losses was consequently not recoverable, and the appeal was dismissed.

1. Court of Appeal (Civil Division): Appeal dismissed. [2019] EWCA Civ 40.
2. Commercial Court, Queen’s Bench Division: Teare J held that Grant Thornton was not liable for the building society’s mark-to-market losses, while finding causation, foreseeability and remoteness. Decision under appeal: [2018] EWHC 963 (Comm).