01 July 2021
For the last 24 years the assessment of duty and the extent of liability in professional negligence cases has been determined with reference to the House of Lords’ decision in ‘SAAMCo’ (South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191) and, more recently, the Supreme Court’s decision in Hughes-Holland v BPE Solicitors [2017] UKSC 21. A seven-judge panel of the Supreme Court has recently considered these cases and, in two connected judgments, set out ‘the proper approach to determining the scope of duty and the extent of liability of professional advisors’.
Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20
Whilst assessment of loss may appear a basic exercise in ‘common-sense’, it is anything but: it is often a surprisingly complex and fact sensitive exercise that frequently leads to conflation of basic principles.
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In SAAMCo two principal questions arose: whether the advisor was providing ‘advice’ or ‘information’ (duty) and, if so, what the counterfactual position was i.e. what the injured party would have done had the advice been correct (causation).
The precise answers to these questions often led to divergent results. For example, if an advisor provided only a single piece of information, and the injured party would have assumed a risk in any event, the advisor’s liability may be limited to only a small proportion of total losses (the SAAMCo ‘cap’). Conversely, an advisor making a recommendation determining the injured party’s conduct may be liable for a wide range of relatively remote losses flowing from that advice.
In the two recent Supreme Court cases referred to above, a majority (the dissenting judges reached the same result albeit on different grounds) effectively abandoned the advice/information distinction (as being too rigid) and maintained the SAAMCo ‘counterfactual’ analysis as a useful ‘cross-check’ only. In its place, six questions are to be answered. Simplified and paraphrased, these are:
(1) Actionability: Is the harm actionable in negligence?
(2) Scope of duty: What are the risks of harm for which the advisor has duty to take care?
(3) Breach: Did the advisor breach this duty?
(4) Factual causation: Is the loss claimed the consequence of the advisor’s breach?
(5) Duty nexus: Is there a sufficient nexus between the loss claimed and the subject matter of the duty of care (as per question 2)?
(6) Legal responsibility: Is the loss irrecoverable, for example, because it is too remote, there is an alternate (or intervening) cause or because it could have been avoided or mitigated?
Manchester v Grant Thornton
Manchester used variable rate loans to provide fixed rate mortgages; it then utilised swaps to manage the risks associated with this. Grant Thornton advised that the ‘hedge’ accounting method could be used to record this. That was wrong and, when its accounts were properly assessed, Manchester could not meet its regulatory capital requirements. To rectify this, Manchester was forced to sell its mortgage book and extricate itself from the swaps. The swaps had a variable market value and were sold at a loss, caused in part by the 2008 financial crisis.
Manchester sought to recover the cost of extracting itself from the swaps, some £32million. Grant Thornton admitted negligence, but argued that the harm suffered fell outside the scope of its duty of care and/or was not causative of loss.
Following SAAMCo, the first instance and appeal decisions held that Grant Thornton provided information only, that Manchester could not show any counterfactual loss and that the losses arose from market conditions (and so were not recoverable). Applying the six questions above, the Supreme Court found (objectively) that Grant Thornton was appointed to provide advice with respect to the adequacy of regulatory capital; as such, it was under a duty to protect Manchester from the risk of losses flowing from that issue (question 2). There was a sufficient nexus between duty and loss and the loss was recoverable.
Kahn v Meadows
Kahn was the carrier of the gene responsible for haemophilia. When deciding whether to have a baby or not she consulted a GP and was led to believe that the condition could not be passed on to a child. A child was subsequently born and suffered from both haemophilia and autism, which makes dealing with the haemophilia considerably more difficult.
The haemophilia loss, alone, was agreed at £1.6m. At first instance, Kahn was awarded £9m, with the difference being the additional costs caused by autism. The court’s reasoning was that the child would not have been born at all, but for the negligent haemophilia advice, and so the losses were recoverable. This was overturned by the Court of Appeal in accordance with SAAMCo: that the purpose of the GP’s advice was the haemophilia issue and its duty/liability was limited to that. The Supreme Court came to the same conclusion applying the six-question analysis, i.e. that the GP was not under a duty with respect to the risk of the child being born with autism and should not be liable for losses associated with that.
Discussion
Both cases concern scenarios that would not have occurred ‘but for’ the negligent advice. However, they reach starkly different conclusions. The reasons for this lie in the purpose for which the advice was obtained, the risks the advisor was under a duty to consider and the nexus between that duty and the loss. The point also neatly illustrates the broad warning of the court that the application of general principles (such as ‘but for’) do not assist and that the scope of the duty of care will often be the key issue.
The six-questions set out by the court are not intended to be ‘exclusive or comprehensive’ and a more flexible approach based within a ‘general conceptual framework’ is likely to be followed. This will undoubtedly lead to further questions and debate and, when considering such, a focus on the objective purpose of the advisor’s advice will be a sensible first step.
For more information, please contact:
Matthew Raftery, Associate: mra@bto.co.uk / 0141 221 8012