Manchester Building Society v Grant Thornton UK LLP

The scope of a professional adviser’s duty is determined objectively from the purpose for which the advice was given. The adviser is liable where the loss represents the fruition of a risk which that duty was intended to guard against.

The distinction between “advice” and “information” cases is not a rigid classification. The purpose of the duty remains the governing inquiry. A counterfactual asking whether the loss would have occurred if the advice had been correct is only a cross-check and must not drive the result.

Where professional services create parallel duties in tort and contract, responsibility has the same extent. A claimant must prove that the loss falls within that responsibility.

The appellant building society obtained accounting advice from the respondent, its auditor, that it could use hedge accounting for lifetime mortgages and interest rate swaps. The society relied on that advice when adopting and continuing a business model matching mortgages with long-term swaps. The advice was negligent because the requirements for hedge accounting were not satisfied.

When the error was discovered, the society had to restate its accounts. This revealed insufficient regulatory capital. It closed the swaps at a cost of about £32.7m and claimed that cost as damages.

Teare J in the Commercial Court, [2018] EWHC 963 (Comm); [2018] PNLR 27, held that the main loss fell outside the auditor’s duty, although he assessed contributory negligence at 50%. The Court of Appeal dismissed the society’s appeal: [2019] EWCA Civ 40; [2019] 1 WLR 4610. The central issue before the Supreme Court was whether the cost of closing the swaps fell within the scope of the auditor’s duty of care.

Appeal allowed unanimously.

1. Lord Hodge and Lord Sales, with whom Lord Reed, Lady Black and Lord Kitchin agreed, held that the scope of a professional adviser’s duty is governed by its purpose. That purpose is assessed objectively by asking why the advice was being given. The court must identify the risk which the duty was intended to guard against and decide whether the loss represented the fruition of that risk.

2. The scope question forms part of a wider negligence framework comprising actionability, scope of duty, breach, factual causation, duty nexus and legal responsibility. In cases concerning the extent of economic loss, it will often be practical first to identify the claimant’s basic loss on a simple “but for” basis and then determine how much falls within the duty. The claimant bears the burden of establishing that nexus.

3. The distinction in SAAMCO between “advice” and “information” cases must not operate as a rigid classification. Professional advice lies on a spectrum. The prior and controlling inquiry is the purpose of the duty and the range of matters for which the adviser assumed responsibility.

4. The SAAMCO counterfactual is subordinate to that inquiry. It may cross-check whether a loss arose from a risk within the duty, but it must not replace the purpose analysis. Its parameters may otherwise be manipulated in ways which obscure the real allocation of responsibility.

5. The purpose of the respondent’s advice was to determine whether hedge accounting could be used so that the society could operate its proposed business model within the constraints created by regulatory-capital requirements. The advice exposed the society to the very balance-sheet volatility and regulatory-capital consequences which it was intended to avoid. The loss incurred when the swaps had to be closed therefore fell within the duty. The duty did not extend to unrelated risks, such as a counterparty’s insolvency.

6. Lord Leggatt concurred in allowing the appeal. He regarded the decisive connection as that between the loss and the absence of the effective hedging relationship which made the advice wrong. Lord Burrows also concurred, emphasising the purpose of the advice, a fair allocation of risk and the counterfactual’s limited role as a cross-check.

7. After credit for gains on the mortgage books, the basic loss was about £26.7m. The judge’s 50% reduction for contributory negligence was upheld because the society had adopted an overly ambitious mismatch between mortgages and swaps. The society was entitled to about £13.4m in additional damages, with the exact figure to be agreed.

1. United Kingdom Supreme Court: The court unanimously allowed the appeal: [2021] UKSC 20. It held that the swap-closing loss fell within the scope of the auditor’s duty, subject to the 50% reduction for contributory negligence.
2. Court of Appeal: The court dismissed the society’s appeal: [2019] EWCA Civ 40; [2019] 1 WLR 4610. It treated the case as an “information” case and held that the society had not proved recoverable loss under its counterfactual analysis.
3. Commercial Court: Teare J awarded £316,845 plus interest but rejected the principal claim for the cost of closing the swaps: [2018] EWHC 963 (Comm); [2018] PNLR 27. He found factual and legal causation and assessed contributory negligence at 50%, but held that the principal loss fell outside the auditor’s duty.