The cap may no longer fit - In a welcome and well-reasoned decision from the Supreme Court in the case of Manchester Building Society -v- Grant Thornton, the scope of duty and extent of liability of professional advisers has been comprehensively reviewed and clarity provided.
The Manchester Building Society (“MBS”) claim related to a claim against Grant Thornton (“GT”) regarding auditing and accounting advice it provided. In 2006 GT negligently advised MBS that it could use hedge accounting to offset the value of its long-term interest rate swaps with the value of lifetime mortgages. The intention was that this would enable MBS to avoid balance sheet volatility and increased regulatory capital demands. MBS relied on this advice and entered into additional swaps and lifetime mortgages. The financial market collapse in 2008 resulted in the swaps holding a negative value, which in turn produced a mismatch between the hedged swaps and the mortgage loan values.
In 2013 GT recognised its error and advised that the hedge method was incorrect, and MBS in turn had to restate its accounts, which reduced its assets below the required regulatory capital to demonstrate sufficient liquidity. As a consequence, MBS had to close the interest rate swap contracts early at a cost of over £32m.
The question before the court was whether the losses suffered by MBS were caused by the advice given by GT and whether they were recoverable. The first instance court and Court of Appeal held that the losses were not recoverable from GT because the losses did not fall within the scope of duty as established by South Australia Asset Management Corp. v York Montague Ltd  AC191 (Saamco). That test is one that has been used on countless professional negligence cases over the last 25 years. It sought to straight jacket cases into a somewhat artificial characterisation of “information” or “advice” cases – the relevance being if you provided negligent information, you are only responsible for the losses that were caused by the information being wrong, whereas if you provided negligent advice, then you were potentially liable for a greater head of loss caused out of the transaction itself.
The problem with this distinction is that it has encouraged an overly forensic and ex post facto analysis as to whether the professional was giving advice or information, when in many cases it might be both. The Supreme Court held that the distinction between information and advice should be dispensed with, as it was too rigid and liable to mislead. In reality cases would sit in a spectrum where advice and information merge and these arbitrary categories should not be used. Instead the Supreme Court has held that the proper approach is to consider the following question – on an objective basis, what was the purpose that the duty of care was supposed to serve – in other words is the loss the type of loss that the professional advice was supposed to guard against. This analysis offers a much more sensible and real-life approach to how to address professional negligence claims. One is asked to consider what was the claimant seeking advice for, and whether the professional adviser accepted a duty of care to advise against the risks that had been identified.
This is a very important decision, as it now enables the shackles of the SAAMCO information/advice dilemma to be dispensed with, and a more relevant question to be adopted. It requires an objective assessment of what the claimant was seeking advice on, what the professional agreed to give advice on, and whether the scope of duty that the professional accepted was intended to extend to cover the losses that were being considered and sought to be addressed. In most cases this is a question that can easily be addressed and does not require an after the event consideration of categorisation of information or advice.
This is a much more common-sense approach. It will enable claims which previously did not sit in the two extremes of the advice/information category, to be more readily assessed and is a welcome restating of the principles of recoverable losses and negligent advice.
Whether this will result in an opening of floodgates of professional negligence claims is debatable - the claims arguably have always existed, what this ruling perhaps does is offer a more realistic and workable clarification as to the extent to which a professional is responsible for the advice given, aligned to the scope of duty that it has accepted. The assessment is moved from the court room to assessing what took place in the meeting room at the time.
One likely effect of the ruling however will be a careful review of the terms and conditions of professional advisers to expressly define the scope of duties.