A summary of the significance of these decisions
The Supreme Court’s linked decisions in MBS v
Grant Thornton and Khan v
Meadows have provided much needed clarity to how one
ascertains the scope of recoverable loss in professional negligence
claims.
Six of the seven Justices who decided the appeals stated that
the scope of a professional’s duty is defined by an objective
assessment of the purpose of the duty. The so-called
SAAMCO counterfactual (to what extent
would the claimant have suffered loss even if the defendant’s
advice had been correct?) is only a ‘cross-check’, or
subsidiary consideration, to the central question of purpose.
The judgments are also significant in confirming that the binary
division between ‘advice’ and ‘information’ cases,
which was popularised by SAAMCO, should
be jettisoned. It is more appropriate to see cases falling on a
spectrum. At the one end, the professional provides just one piece
of information for the client to take into account; at the other,
the client is wholly reliant on the professional to guide a course
of action. With the exception of simple valuation cases, the
professional’s responsibility will generally lie somewhere in
between.
In establishing the purpose for instructing the professional, a
key question to ask is: what risks, judged objectively, was the
professional instructed to guard against?
Khan v Meadows further confirmed that
the scope of duty analysis, including the
SAAMCO cross-check, applies to clinical
negligence just as much as it applies to claims against other types
of professional. In this regard, it is not restricted to cases of
pure economic loss. The focus of this article will, however, be on
MBS v Grant Thornton.
MBS v Grant Thornton
Facts
MBS’s accounts were audited by Grant Thornton. Grant
Thornton negligently advised MBS that its accounts could be
prepared using the ‘hedge accounting’ methodology, which
allowed MBS to treat their underlying fixed-rate, lifetime
mortgages and the related swaps as constituting a single entry in
its accounts. The rationale for hedge accounting is that the two
assets effectively cancelled each other out in economic terms. The
problem, however, was that in most cases the swaps had a longer
lifespan than the mortgages, which meant that it was uncertain
whether the two could be matched. This meant that, contrary to
Grant Thornton’s advice, hedge accounting was
impermissible.
In 2013, Grant Thornton told MBS that it had been wrong to apply
hedge accounting and that it would need to account for the fair
value of the swaps going forwards. This had a significant negative
effect on its stated financial position, since by that time
interest rates had fallen significantly, which meant that the swaps
were “out of the money”.
MBS decided to close out the swaps and reduce the volatility
they brought to its accounts. This was an expensive exercise,
however: the cost of breaking the swaps was £32.7m. In turn
it sought to recover this sum from Grant Thornton by way of damages
for professional negligence.
Decision
The Supreme Court overturned the finding of the trial judge and
Court of Appeal that Grant Thornton was not liable for the cost of
closing out the swaps. The loss was within the scope of
Grant Thornton’s duty of care given the purpose of its advice,
as the Supreme Court saw it. A reduction of 50% was made for
contributory negligence, and credit was also given for £5.96
million of gains made on the books of mortgages in question,
leading to a net recoverable loss of circa £13.4 million.
Reasoning
Lords Hodge and Sales (with whom Lord Reed, Lady Black and Lord
Kitchin agreed) set out a six-stage conceptual enquiry for
negligence cases [6]:
- Is the harm actionable in negligence? (“the actionability
question”) - What are the risks of harm to the claimant against which the
law imposes on D a duty to take care? (“the scope of duty
question”) - Did D breach that duty? (“the breach question”)
- Is the loss the consequence of D’s breach? (“the
factual causation question”) - Is there a sufficient nexus between the loss and the scope of
the duty? (“the duty nexus question”) and - Is a particular element of the loss irrecoverable because it is
(i) too remote, (ii) there is a different effective cause (eg. a
break in the chain of causation); or (iii) C has mitigated their
loss or has failed to reasonably avoid loss (i.e. contributory
negligence)? (“the legal responsibility question”)
Lords Hodge and Sales confirmed that the scope of the duty of
care of a professional adviser is defined by the purpose of
the duty, assessed objectively, by reference to the reason the
advice is sought [13]. The court establishes ‘what risk the
duty was supposed to guard against and then looks to see whether
the loss suffered represented the fruition of that risk.’
[17]
Echoing the conclusion of Lord Sumption in BPE
v Hughes-Holland [2017]
UKSC 21 that Lord Hoffman’s original distinction between
‘information’ and ‘advice’ cases should not be
viewed as giving rise to a binary means of classification, their
Lordships confirmed that the court should focus on identifying the
purpose to be served by the duty of care assumed by the
professional [18] – [19]. Their Lordships agreed with Lord
Leggatt’s concurrent judgment that the descriptions of
‘information’ and ‘advice’ should be dispensed with
[22].
The SAAMCO counterfactual – where the
court asks whether the claimant would have suffered same loss even
if the information given by the defendant had been correct – can be
a useful cross-check, but is nevertheless subsidiary to the key
analysis of the purpose of the duty [23].
In this case, the purpose of the advice was to establish whether
the society could use hedge accounting to facilitate its lifetime
mortgage business model. As a lending institution, MBS was
regulated by what was then the FSA, now the FCA. The regulatory
regime required MBS to maintain substantial levels of capital to
ensure its continuing viability should it come under stress. In
simple terms, the more volatile MBS’s financial activities, the
more regulatory capital was required as a safeguard. In the event
MBS provided inadequate regulatory capital, the FSA could take
steps to close its operations. [29] MBS was exposed to this risk -
that it would need to close out the swaps in the event it lacked
the necessary regulatory capital – which Grant Thornton’s
negligent advice directly related to [34]. The loss therefore fell
within the scope of the duty [36].
Lord Leggatt and Lord Burrows each agreed with the conclusion
but gave their own (differing) reasons.
Lord Leggatt considered the scope of duty question as an issue
of causation. The question the court must ask is whether there is
sufficient causal connection between what made the
information/advice incorrect and the loss incurred [99]. Applying
the SAAMCO counterfactual requires making
certain assumptions about the allocation of risk between the
parties, and this may not always be possible [105] – [106].
Applying the SAAMCO counterfactual in
this case, if Grant Thornton’s advice had been correct and
hedging was possible, the loss would not have occurred as they
would not have had to close out the swaps at all [168] and
[175].
Lord Burrows largely agreed with Lord Hodge and Lord Sales (et
al) but placed the emphasis on the underlying rationale for scope
of duty as being centred on the public policy desirability of
achieving a fair and reasonable allocation of risk between the
parties [179] and [192]. Lord Burrows again restated his preference
for a traditional seven stage analysis for negligence ((i)
existence of duty of care; (ii) breach of duty; (iii) factual
causation; (iv) remoteness; (v) legal causation; (vi) was the loss
within the scope of duty; (vii) do any defences apply1),
rather than the six stages outlined by the majority (at [6]). Lord
Burrows was also not keen on the novel terminology of ‘duty
nexus’.
Commentary
Many in the profession had considered that the Supreme Court was
likely to make further inroads into the
SAAMCO principle in these cases and lead
to a more nuanced, fact-driven approach to assessment of scope of
duty and recoverable loss. That had been the broad direction of
travel in the Court of Appeal since BPE v Hughes
Holland2. Notably, whilst Lord Sumption in
BPE did highlight the descriptive
inadequacy of ‘information’ and ‘advice’, and
referred to a spectrum, he was reluctant to jettison those terms,
and a default starting point at one end or other of the spectrum,
entirely. For example, where he considered that conveyancing
negligence would generally sit at the information-only end of the
spectrum, we consider that MBS v GT in
its focus on purpose and guarding of risks means that conveyancers
will often be more vulnerable to claims for the full (or at least
more of the) basic loss than they may hitherto have been;
conveyancers when negligent may often be negligent about one
discrete piece of information, but that piece of information may
often be absolutely fundamental to the client’s decision to
proceed, and a risk which the conveyancer was entreated to guard
the client against, and may have a very big impact on value of the
property. On the other hand, where in some cases the Court may
previously have been persuadable that a conveyancing case was an
‘advice’ not an ‘information’ case (because of
perceived risk of under-compensation in the latter categorisation),
the Court may now be more willing to segregate areas of basic loss
and find that some fall within the scope of duty and others
not.
The evolution of SAAMCO into a
principle based on the purpose of the professional’s
instruction makes sense. It balances the rights of the parties.
Where previously defendants may have (understandably, given the
binary) sought to pigeonhole cases as pure ‘information’
cases, which if correct would sometimes drastically reduce
recoverable loss, they will not be able to take so restrictive an
approach. On the other hand, claimants must recognise that not all
factually caused (on a ‘but for’ basis) losses will always
be recoverable; there must be reasonable limits to
professionals’ liability for pure economic loss.
It is notable that Lord Burrows considered it unhelpful that the
majority of the Court had introduced, as question 5 in their scheme
for analysing professional negligence cases, the terminology of
‘duty nexus’. Indeed, nowhere in the majority judgment is
that term explained beyond its apparent definition in question 5 -
which talks of a ‘sufficient nexus’ between an element of
the harm and the subject matter of the duty of care. But what
counts as ‘sufficient’? It remains to be seen whether the
courts find this terminology helpful. In fact, as was noted in
Khan [29] sometimes there will be no need
to bring scope of duty back in at stage 5 of 6 (the ‘duty nexus
question’, per the majority decision) at all, as it has already
been dealt with at stage 2 (‘the scope of duty question’);
but it appears that it is sometimes appropriate for the issue to
come in ‘at the other end’ as well because, on the view of
the majority (but not Lord Burrows), the
SAAMCO counterfactual retains
some utility, and causation of loss issues ought logically
to be looked at after breach, of course.
Whilst MBS v GT seeks to put to bed
disagreements about scope of duty, there are still two areas which
remain fertile for argument from either side to a claim:
- What were the purposes (particularly the
implied purposes) for which a given professional was
instructed? What risks were they asked (not just expressly but also
impliedly) to guard against? There will be scope for
argument in this regard on the facts of most cases. - What is a ‘sufficient nexus’? This is a very
unpredictable criterion, which a critic would say allows judges to
decide cases on a merits basis, rather than by reference to
objective criteria or principles.
Time will tell as to whether MBS v GT has simplified this thorny
area of law or simply introduced different battlegrounds to fight
in.
Footnotes
1. See
[212] in MBS v GT where he refers to [78]
– [81] in Khan v Meadows, which is where
Lord Burrows sets out these seven stages.
2. See
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