In the case of Manchester Building Society v Grant Thornton UK LLP, and the related case of Khan v Meadows, the Supreme Court has sought to:
“…provide general guidance regarding the proper approach to determining the scope of duty and extent of liability of professional advisers in the tort of negligence.”
In doing so, the majority held that in their view:
“the scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty, judged on an objective basis by reference to the reason why the advice is being given.”
They were critical of a tendency to apply overly rigid rules – such as the distinction between “advice” and “information” cases in SAAMCO – which they felt were liable to mislead, and overly elaborate counterfactuals which they stated to have the “potential to confuse rather than assist the correct analysis.”
Manchester Building Society v Grant Thornton UK LLP
Case background
Grant Thornton UK LLP audited Manchester Building Society’s accounts between 1997 and 2012.
The Building Society sold fixed-interest ‘lifetime’ mortgages to prospective home buyers, within which the principal loan and interest were only repaid when the borrower sold their property, passed away or voluntarily repaid the mortgage.
The loans were funded by borrowing at variable rates of interest. This created the risk that the variable rates of interest it had to pay would exceed the fixed interest the Society received from its customers. The Society, therefore, entered into long-term swap contracts. The aim of the contracts was that the other party would agree to pay a variable rate of interest which would match the rates of interest payable by the Society in relation to its own borrowing. In turn, the Society would pay a fixed rate of interest at a lower rate than that payable by its customers under their mortgages. In that way, it would be guaranteed to make a profit.
Grant Thornton advised Manchester Building Society that its accounts could be prepared using hedge accounting – an accounting method that allows the change in the value of a financial instrument, e.g. a mortgage, to be offset by the change in the value of the corresponding hedge – which would permit the Building Society to reduce the market-to-market value volatility of the swaps on their balance sheet. This was of crucial importance because it apparently allowed it to meet its regulatory requirements.
Unfortunately, the advice provided to the Building Society by Grant Thornton was negligent. As a result, Manchester Building Society was in breach of its regulatory capital requirements and consequently compelled to break the swaps resulting in a loss of £26.7m.
It was accepted that the advice provided by Grant Thornton was negligent, however, they argued – successfully until the Supreme Court’s judgment – that the losses suffered did not fall within the scope of its duty of care and thus were not recoverable. Notably, the Court of Appeal applied the distinction between “advice” and “information” cases when dismissing the Manchester Building Society’s appeal. It found that it was not an “advice” case where Grant Thornton took responsibility for the “whole decision-making process” and thus would be liable for all the foreseeable losses resulting from the decision to enter into the swaps. Instead, it was an “information” case where it was only liable for the foreseeable consequences of the ‘information’ it provided is wrong.
Court proceedings and rulings
The Court unanimously rejected the Court of Appeal’s decision. The majority stated that:
“the society looked to Grant Thornton for technical accounting advice whether it would use hedge accounting in order to implement its propose business model within…the regulatory environment and Grant Thornton advised that it could. That advice was negligent. [As a result] the society…entered into further swap transactions and was exposed to the risk of loss from having to break up the swaps.”
The Court found that by looking at the purpose of the advice, it was clear that the losses suffered by the Society fell within the scope of the duty of care assumed by Grant Thornton.
However, the losses were reduced by 50% for contributory negligence as the Court deemed the Building Society’s losses were also as a result of the mismatching of mortgages and swaps, which was thought to be an “overly ambitious application of (MBS’s) business model“. Consequently, the Building Society has been awarded damages of £13.4m.
Comment
The Court’s greater emphasis on the purpose for which the professional is engaged in determining the scope of the duty of care, and its rejection of the advice/information distinction, may allow certain supposed ‘information’ cases to succeed, which would previously have fallen at that particular hurdle.
How Nelsons can help
If you have any questions in relation to professional negligence claims or any related subjects, please contact a member of our Dispute Resolution team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.