knowledge | 5 July 2021 |
Damages in Professional Negligence Claims
A recent decision of the UK Supreme Court clarifies the scope of the duty of professional advisers and the application of the SAAMCO decision relating to damages in professional negligence claims.
In this case,1 Manchester Building Society ("MBS") was a small mutual building society. Grant Thornton ("GT") was its auditor. MBS alleged that GT advised it that it could use an accounting treatment, "hedge accounting", in the preparation of its annual accounts, and that this accounting represented a true and fair statement of the financial position of MBS.
MBS said that in reliance on the advice from GT, it entered into various fixed rate mortgages hedged against long term swaps under which it paid a fixed rate but received a variable rate. When GT discovered an error with this approach, MBS had to restate its accounts and it no longer held sufficient regulatory capital. As a result, MBS had to close out the swaps, and pay the losses and transaction fees for breaking the swaps early.
MBS brought a claim in negligence against GT. The trial judge concluded that GT was not liable for the losses, and that was upheld by the Court of Appeal. However, the Supreme Court held that the loss fell within the scope of the duty of care owed by GT to MBS and allowed the appeal.
The majority of the Supreme Court found that the scope of duty question (and how it might limit damages) should be analysed within a general conceptual framework in the law of the tort of negligence, by asking the following questions:
- Is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence? (the actionability question)
- What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care? (the scope of duty question)
- Did the defendant breach his or her duty by his or her act or omission? (the breach question)
- Is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission? (the factual causation question)
- Is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant’s duty of care as analysed at stage 2 above? (the duty nexus question)
- Is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote, or because there is a different effective cause (including novus actus interveniens) in relation to it or because the claimant has mitigated his or her loss or has failed to avoid loss which he or she could reasonably have been expected to avoid? (the legal responsibility question).
The Supreme Court held that that the scope of duty question is governed by the purpose of the duty, judged on an objective basis by reference to the purpose for which the advice is being given.
Looking at previous authority, the Supreme Court held that the distinction used by the House of Lords in SAAMCO2 – and by the Court of Appeal in this case - between “information” and “advice” should not be maintained. This distinction was identified by the House of Lords in SAAMCO as limiting liability in circumstances where the professional adviser contributes a limited part of the material on which their client relies when making a decision, but the overall assessment of the commercial merits of the transaction is for the client. This distinction proved difficult to apply in subsequent cases and the Supreme Court held that instead the focus should be on the purpose to be served by the duty of care. Focussing on the purpose of the duty enables identification of the factors of the loss for which the defendant is in fact responsible.
The Court said that Lord Hoffmann’s counterfactual analysis in SAAMCO (that is, an analysis of whether the claimant’s actions would have resulted in the same loss if the advice had been correct) should be regarded only as a tool to cross-check the result given pursuant to analysis of the purpose of the duty, but one which is subordinate to that analysis and which should not supplant or subsume it.
The Supreme Court held that MBS had suffered a loss which fell within the scope of the duty of care assumed by GT, having regard to the purpose for which it gave its advice about the use of hedge accounting i.e. to advise MBS whether it could employ hedge accounting in order to reduce the volatility on its balance sheet and keep its regulatory capital at a level it could afford in relation to swaps to be held to term on the basis that they were to be matched against mortgages.
The Supreme Court held that MBS’s damages should be reduced by 50% on the basis of its contributory negligence in the manner in which it implemented its business plan.
In Ireland, SAAMCO was considered and applied by Mr Justice Clarke in ACC Bank Plc v Johnston p/a Brian Johnston & Co Solicitors.3 In that case, damages, which had been found to be recoverable on a "no transaction" basis, were limited on foot of that analysis. Given that there has been no substantive consideration of the SAAMCO principle in the Irish Supreme Court, it will be interesting to see whether any Irish court considering these issues in light of this UK Supreme Court decision will focus its analysis on the purpose of the duty of care as a means of identifying recoverable losses.
Also contributed by Moya O'Dowd.
- Manchester Building Society v Grant Thornton UK LLP  UKSC 20.
- South Australia Asset Management Corpn v York Montague Ltd  AC 191.
-  IEHC 376.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.