Law On The Scope Of Duty Of Professional Advisers
The Supreme Court has handed down landmark decisions in the cases of Manchester Building Society v Grant Thornton (where negligent advice was given by accountants) and Khan v Meadows (where negligent advice was given by a GP). The cases were heard by the same panel of judges so the Court could clarify the correct approach to determining the scope of duty and extent of liability of all professional advisers.
The decisions broaden and simplify the legal test used by the courts to ascertain the scope of the duty of care owed by professional advisers and this may assist claimants to recover damages for losses caused by negligent advice.
This article focuses on the Manchester Building Society v Grant Thornton case and its implications for professional advisers in the commercial field.
What Was The Background?
The scope of duty test, established in South Australia Asset Management Corp v York Montague Ltd  (“SAAMCO”), places restrictions on the losses which can be claimed in the context of inaccurate information. A professional adviser is liable only for losses which fall within the scope of his or her duty of care to the claimant. However, there has been much debate about how this test applies in practice.
Grant Thornton UK LLP (Grant Thornton) incorrectly and negligently advised the Manchester Building Society (the Society) that its accounts could be prepared using a method known as “hedge accounting” and that accounts prepared using that method gave a true and fair view of the Society’s financial position. In reliance on that advice, the Society carried on a strategy of entering into long-term interest rate swaps as a hedge against the cost of borrowing money to fund its lifetime mortgages business.
The misstated accounts served to hide volatility in the Society’s capital position and what became a severe mismatch between the negative value of the swaps and the value of the mortgages which the swaps were supposed to hedge. When Grant Thornton realised its error, the Society had to restate its accounts and close out the interest rate swap contracts early at a cost of over £32 million.
The Supreme Court was asked to decide whether the Society could recover in damages the cost of closing out the swaps from Grant Thornton. The trial judge and the Court of Appeal had previously held that it could not, in each case based on their understanding of the scope of a defendant’s duty of care as laid down in SAAMCO.
What Did The Supreme Court Decide?
The Supreme Court ruled in favour of the Society. The Society had suffered losses which fell within the scope of the duty of care assumed by Grant Thornton, when taking into account the purpose for which it gave its advice on the use of hedge accounting.
Grant Thornton was therefore liable for the losses, subject to a reduction in damages of 50% for contributory negligence due to the Society’s mismatching of mortgages and swaps in an overly ambitious application of the business model.
Reasons For The Decision And New Duty Test
The Supreme Court set out the correct approach to ascertaining the scope of the duty of care owed by a professional adviser.
First, it set out six questions that arise in any claim where a claimant seeks damages from a defendant in the law of negligence which can be used to assess liability.
In relation to the question concerning the scope of a defendant’s duty of care, the Supreme Court said that this is to be governed by the “purpose of the duty”, judged on an objective basis by reference to the purpose for which the defendant gave the advice. In practice, this new test means that the courts should consider:
- what risk the duty was supposed to guard against; and then
- whether the loss suffered represented the fruition of that risk.
Applying the above, the Court held that the purpose of Grant Thornton’s advice was to allow the Society to assess whether it could use hedge accounting within the constraints of the regulatory environment to implement its proposed business model. Grant Thornton wrongly said that it could when it could not. The losses claimed were within the scope of Grant Thornton’s duty and were therefore recoverable.
What Are The Practical Implications?
This is a very significant decision. It broadens and simplifies the legal test used by the courts to ascertain the scope of the duty of care owed by professional advisers and this may assist claimants to recover damages for losses caused by negligent advice.
There will now be a great deal of focus on the precise detail of what a professional adviser was retained to do and for what purpose. Advisers should therefore ensure that their terms and conditions clearly define the scope of their duties and any limitations.
How Can We Help?
If you would like advice in relation to negligent professional advice or any other type of commercial dispute, please speak to a member of our Commercial Dispute Resolution Team.