The UK Supreme Court recently handed down judgment in the important auditor’s negligence case of Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20. The Court also heard an appeal in a clinical negligence case of Khan v Meadows, which raised similar issues, at the same time. Both decisions addressed the scope of a professional’s duty of care including the proper application of the principles in SAAMCO (South Australian Asset Management Corp v York Montague Ltd [1997] AC 191). Andrea Challis has provided an analysis of the Khan v Meadows decision here.


The SAAMCO litigation arose out of the negligent over-valuation of properties given to the claimant lenders as security for loans. The lenders had relied on the valuations in deciding whether, and how much, to lend on the security. They ultimately suffered losses when the borrower defaulted, and the properties were sold. This took place against the backdrop of a substantial fall in property prices in the early 1990s. The key question was whether the lenders could recover their loss in full, or whether the damages should be limited in some way to reflect that the losses suffered were partly due to the wider fall in property prices.

The House of Lords concluded that the damages recoverable by the lenders were limited to the amount by which the security was over-valued, as opposed to the full depletion in value caused by the over-valuation and the fall in property prices.

Lord Hoffmann (with whom the other Justices agreed) started from the general principle that a person who owes a duty of care to another is not normally liable for all the consequences of a breach of that duty, but only for losses of the kind that fall within the scope of the duty owed. This became known as the SAAMCO principle.

In applying this general principle, Lord Hoffmann drew a distinction between a “duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take”. This has since given rise to a distinction between “advice” cases and “information” cases.

In an “advice” case, the adviser is responsible for considering what matters should be taken into account in deciding to whether to enter the transaction, and for guiding the whole decision-making process. If one such matter, which later proves to be critical, has not been taken to account or has been negligently mis-judged by the adviser, then the client will be entitled to recover all losses flowing from the course of action that has been taken because the adviser had a duty to protect against those losses. In contrast, when the professional adviser contributes only a limited part of the material on which the client will rely in order to decide whether to enter a transaction (an “information” case), the adviser’s legal responsibility is limited to the consequences of that information being wrong and does not extend to all losses arising from the client’s decision generally. Whilst relatively straightforward in the abstract, these labels have proved to be more difficult to apply in practice.

Factual Background

The claimant, Manchester Mutual Building Society (Society), engaged the defendant, Grant Thornton, to audit its accounts between 1997 and 2012.

Between 2004 and 2010, the Society sold lifetime mortgages. These were loans designed to release the equity in a borrower’s home. Interest was charged at a fixed rate, but neither interest nor capital were to be paid to the Society until the borrower died, moved out of the property, or chose to repay the loan. Until that time, interest on the loan was compounded.

The Society funded the mortgage loans by borrowing at variable rates of interest. This created a commercial risk: the interest eventually received when the mortgages were repaid might be less than the interest paid out to fund the loans. In order to protect itself against that risk, the Society entered into interest rate swap contracts. The Society hoped to hedge against the commercial risk of borrowing at a variable rate but lending at a fixed rate. The supposed hedging itself created another risk because the swaps were for defined lengths of time whereas the mortgages were not. For the hedge to be effective, the value and duration of the swaps needed to match the value and duration of the mortgages.

From 2005 onwards, the Society was required to change the way it prepared its accounts. In accordance with the International Financial Reporting Standards, the swaps had to be accounted for on the Society’s balance sheet at their fair value. The mortgage loans, on the other hand, were accounted for at their book value. A consequence of accounting for the swaps at fair value was that the balance sheet would reflect movements in interest rates, which would cause the reported financial position to look volatile. The accounting volatility would increase the amount of capital the Society needed to hold to meet its regulatory obligations. However, this volatility could be mitigated if the Society was able to use “hedge accounting”. The Society therefore sought confirmation from Grant Thornton – whether it was permissible to use “hedge accounting” rules under the relevant International Accounting Standard to the lifetime mortgages and swaps. Grant Thornton negligently confirmed that it was. The Society relied upon this advice to prepare its accounts for the years 2006–2011.

In 2013, Grant Thornton informed the Society that it was not permitted to use hedge accounting after all. This meant the Society was required to account for the fair value of the swaps in its 2012 accounts without any adjustment to the book value of the mortgages. The Society also had to restate its 2011 accounts, with the result that its reported profit of £6.35 million for 2011 became a loss of £11.4 million and its net assets were reduced from £38.4 million to £9.7 million. As a result of these corrections, the Society had insufficient regulatory capital, with a deficit of £17.9 million. To resolve the situation, the Society terminated all of its interest rate swap contracts early at a cost of about £32.7 million.

The question raised on appeal was whether the Society could recover as damages the costs of closing out the swaps from Grant Thornton. This squarely put in issue the scope of Grant Thornton’s duty of care to the Society.

Grant Thornton admitted that it had been negligent, accepting that any reasonably competent accountant would not have advised that hedge accounting was appropriate in the circumstances. However, it defended the claim on the basis that its negligence did not cause the Society the losses claimed, or that the losses were not recoverable at law because it did not owe the Society a duty to protect it from that category of loss.

High Court

At first instance, the High Court awarded damages to the Society of £316,845, being only the transaction costs that were payable to terminate the swaps early. The Court rejected the claim for £32.7 million paid to close out the swaps early by applying the SAAMCO principle.

Court of Appeal

The Court of Appeal dismissed the appeal but held that the trial Judge had erred in his application of the SAAMCO principle. He should have instead considered whether Grant Thornton gave “advice” or only “information” to the Society. The Court concluded that this was not an “advice” case, in the sense that Grant Thornton was not responsible for guiding the Society’s whole decision-making process such that it could be liable for all the foreseeable financial consequences of the decision to enter into the swap contracts. Instead, the Court of Appeal held that this was an “information” case, such that Grant Thornton was only responsible for the foreseeable consequences of the information/advice it gave being wrong.

Supreme Court

The Supreme Court unanimously allowed the appeal. The majority considered that the most helpful way to analyse claims for damages in negligence was to ask the following six questions in sequence:

  1. Is the harm (loss, injury or damage), that is the subject matter of the claim, actionable in negligence (the actionability question)?
  2. 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)?
  3. Did the defendant breach his or her duty by his or her act or omission (the breach question)?
  4. Is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission (the factual causation question)?
  5. 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)?
  6. 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 in relation to it or because the claimant has not mitigated their loss (the legal responsibility question)?

In applying this analysis to the context of professional advisers, the majority emphasised that SAAMCO itself (and other leading authorities, including Caparo Industries plc v Dickman [1990] 2 AC 605) confirmed that the scope of the duty of care assumed by a professional adviser is governed by the purpose for which the advice is given. Put another way, in order to determine a professional adviser’s scope of duty, one must consider what risk the duty was intended to guard against and then assess whether the loss suffered represented the fruition of that risk.

The Distinction between “advice” and “information” Cases

The majority found that this distinction was too rigid. Seeking to shoehorn a case into one category or the other was liable to mislead. Instead, the majority conceived that the range of cases constitutes a spectrum, with pure “advice” cases (i.e. those where the adviser assumes responsibility for all aspects of a course of action) at one end of the spectrum, and instances where the adviser has contributed only a limited part of the material that the client relies on at the other. Accordingly, rather than trying to establish whether a case is a so-called “advice” case or an “information” case, the focus should instead be on identifying the purpose of the duty of care judged on an objective basis by reference to the purpose for which the advice is being given.

Application of a Counterfactual Analysis

The majority agreed that the use of counterfactual analysis (whereby one asks whether, if the advice or information given by the defendant had in fact been true, the action taken by the claimant would still have resulted in the same loss) should be regarded only as a tool to cross-check the result in most cases and should not replace the decision which needs to be made as to the scope of duty of care.

Scope of Grant Thornton’s Duty

The majority held it was clear that Grant Thornton’s role was to advise the Society whether it was entitled to use hedge accounting within the constraints of the regulatory environment in order to pursue its proposed business model. As a result of the negligent advice, the Society was misled into believing what they were doing was acceptable.

The majority also considered that it was important to have regard to the commercial reasons why the Society sought the advice, and the fact that Grant Thornton appreciated these reasons. This was the foundation for its conclusion that the purpose of the advice was to deal with the issue of hedge accounting in the context of its implications for the Society’s regulatory capital. The majority considered that the examination of this purpose showed that the wider loss that it suffered fell within the scope of Grant Thornton’s duty of care.

Accordingly, the Supreme Court considered that the Society was entitled to recover damages of £26.7m, which represented the cost of closing out the swaps early, plus the transaction costs, minus the profits that it made on the sale of the mortgage book. However, these damages were reduced by 50% to accord with the findings of the trial judge that the Society had been contributorily negligent (a finding that was not subject to appeal).

Our Comments

The UK Supreme Court’s decision highlights to professionals the importance of defining the scope and purpose of their advice through clear and precise letters of engagement and terms of business.

While the Supreme Court has sought to distil the scope of duty question into one that is simply determined on an objective basis by reference to the purpose for which the advice is given, it may still be uncertain how, in each particular case, the specific purpose is to be identified. There would seem to be scope for both client and adviser to argue between them as to the purpose for which the professional was instructed, and the types of risks they were asked to guard against.

If you would like to know more about the issues arising in this judgment, please contact Darren Turnbull

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.