Has there ever been a principle talked, written and argued about amongst Judges and practitioners alike since the House of Lords decision over 25 years ago?
Following our article in September 2020 addressing the Court of Appeal’s application of the SAAMCo principle in AssetCo v Grant Thornton[1], the Supreme Court judges have recently had even more to say regarding the application of SAAMCo in professional negligence cases.
Recap: the SAAMCo principle until now
The SAAMCo principle determined that a claimant must establish not merely that the loss for which damages were claimed were caused by the professional’s breach of duty in the “but for” sense, but also that that loss fell within the scope of the duty owed by the professional defendant. The key message from AssetCo was that SAAMCo should be regarded as a freestanding and flexible legal tool used to determine the scope of recoverable loss from a defendant professional. The case confirmed that the troublesome “information vs. advice” distinction between cases was very much at the heart of the SAAMCo principle and was essential to bear in mind when determining the extent of a defendant’s liability.
In advice cases, the professional owed broad duties and was responsible for every aspect of a transaction and the full consequences of that advice is wrong. In information cases, a professional who provided information that is considered by a client as part of their decision on whether to proceed with a certain transaction, SAAMCo limited the recoverable damages to losses resulting from the information being wrong, not for the financial consequences of the claimant entering into the transaction. Nor is a professional liable for any loss that would have been sustained in any event even if the advice had been correct (which gave rise to consideration of what became known as “the SAAMCo counterfactual”).
The Supreme Court decision
The Supreme Court handed down its Judgments on 15 June 2021 in two cases: Manchester Building Society v Grant Thornton UK LLP[2] and Khan v Meadows[3]. Both cases confirm that, whilst practitioners should have regard to SAAMCo when considering a professional’s liability for loss, the application of the SAAMCo principle has been permitted to become significantly over-complicated over the years. Practitioners will note with gratitude the Supreme Court’s clear shift in position, and a move towards a more traditional “Donoghue v Stevenson” type approach to determining the extent of a defendant’s liability.
In order to fully appreciate the Supreme Court’s reasoning, the Judgments should be considered in full and together (as the Supreme Court emphasised they should be), however as professional negligence lawyers, this article focuses on the Manchester Building Society Judgment, where we examine the key points and what it means in practice for professionals and their insurers.
Reviewing SAAMCo, the Supreme Court has now concluded that the information and advice distinction between cases is “too rigid”, “liable to mislead”, and “not the right starting point”, stating that the application of SAAMCo in information cases “could not be determinative but was no more than a cross-check which was subordinate to considering the purpose of the duty”.
MBS v GT – background
The claimant building society (MBS) granted a number of fixed interest lifetime mortgages where no payments were required until the borrower entered a care home or died. These types of mortgages exposed MBS to a risk that the variable rate of interest payable to acquire funds would exceed the fixed rate it received from borrowers under the terms of the mortgages. To mitigate this interest rate risk on the transactions, MBS entered into interest rate swaps in effect to insure against this potential interest rates mis-match, and following regulatory changes in in 2005, these interest rate swaps had to be recorded on MBS’ balance sheet. Absent mitigating measures, this requirement would result in greater volatility in MBS’ reported financial position which, in turn, would affect its regulatory capital requirements. Grant Thornton (GT) MBS’s appointed auditor advised MBS that it should adopt hedge accounting to address this volatility.
On GTs advice MBS made further loans and entered into further interest rate swaps as a hedge against the cost of borrowing to fund its mortgages. This meant that the misstated accounts hid the volatility in MBS’ capital position and, following the 2008 financial crisis, instead of being an asset on MBS’ balance sheet, the interest rate swaps became a liability.
In 2013, GT advised that MBS could not use hedge accounting. MBS’ financial position was therefore very different to that stated in its audited accounts, which in turn impacted its regulatory capital requirements. MBS closed out the swaps at their fair value and stopped lending in December 2013, incurring some £32.7m in closing the swaps plus other costs/fees incurred as part of the closing process.
The dispute
The crux of the dispute was whether GT – who it was accepted had acted in breach of duty – was responsible for MBS’ costs incurred in closing the swaps. The trial judge and the Court of Appeal found that GT was not liable for MBS’s losses on the basis of the SAAMCo scope of duty principle, on the basis that GT’s advice on hedge accounting was only part of the material relevant to MBS’s considerations when adopting its material business strategy. The Supreme Court disagreed, however, and allowed MBS’s appeal, finding that MBS’s losses fell within the scope of the duty owed by GT, subject to a 50% reduction in damages for contributory negligence. For GT, the change in approach means a difference between a first instance judgment against it awarding damages of £315,345 and a judgment against it following the decision of the Supreme Court for some £13.4m.
Application of SAAMCo
The Supreme Court found that the purpose of GT’s advice was to establish whether MBS could use hedge accounting as part of its lifetime mortgages business model. GT advised that it could and MBS consequently entered into swap transactions, exposing MBS to the risk of loss in the event that it broke the swaps when it realised that hedge accounting could not, in fact, be used.
As a result of GT’s negligence, MBS were exposed to regulatory capital demands that the use of hedge accounting was implemented to avoid. This was a risk that GT’s advice was supposed to guard against and the Supreme Court decided that MBS’s losses therefore fell within the scope of the duty owed by GT (given the purpose of GT’s advice). Assessing the SAAMCo counterfactual, there was a causal connection between GT’s negligent advice and MBS’s loss. If GT’s advice had been correct and there had been effective hedging, as GT advised there was, the loss would not have occurred.
Six questions to ask
The Supreme Court set out six questions that should be asked in all professional negligence claims.
- Actionability – Is the loss which is the subject matter of the claim actionable in negligence? A threshold question to reflect that not all matters are actionable in negligence.
- Scope of Duty – What are the risks of harm to the claimant against which the law imposes a duty on the professional to take care? The professional’s duty to take reasonable care does not extend to every kind of harm which might be suffered by a claimant as a result of breach of that duty. The scope of duty of care assumed by a professional adviser is determined by reference to the objective purpose of the duty i.e. why the advice is being given. This necessitates identifying the purpose to be served by the duty of care assumed by the defendant.
- Breach – Did the professional breach their duty of care by act or omission?
- Factual Causation – Did the professional’s act or omission cause the claimant’s loss? Was the loss causally connected to the material negligent advice provided by the professional ?
- Duty Nexus – 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? In some cases, question two also involves answering this question. However, in cases where one is concerned with the quantification or extent of a particular kind of loss, the duty nexus question should be addressed separately once it has been determined that there is a breach of duty and factual causation.
- Legal Responsibility – Is a particular element of the loss irrecoverable because it is too remote or has a different effective cause or because the claimant failed to mitigate its loss.
What next…
The SAAMCo principle no doubt remains a useful tool when considering the loss for which damages are recoverable from a negligent professional; although it is fair to say that even the most experienced legal practitioners will still struggle to apply it correctly or with complete confidence, notwithstanding the Court’s continuing revisions and fine tuning of the way in which the principle should be applied. At Womble Bond Dickinson, we consider the MBS Judgment helpfully confirms that SAAMCo is a flexible principle with far-reaching applicability to all types of professional negligence cases. It supports the view that, where there is a question mark over the scope of a professional’s duty and whether the professional is legally responsible for a claimant’s loss, the SAAMCo principle should not be overlooked.
It appears, though, that the Supreme Court was keen to avoid practitioners and the courts over-complicating matters by getting lost in a maze of pre-set distinctions and fixed case categories, but considered that there should be a return to the core, basic elements of a negligence claim (i.e. did the defendant owe a duty of care, was that duty breached, and did the claimant’s loss arise as a result of the breach?).
In MBS, the Supreme Court’s approach seems much more straightforward (welcome news to professional negligence lawyers since assessing the value of a professional negligence claim early on in its life-cycle is crucial for professionals and their insurers). Practitioners should focus their considerations on the purpose of the professional’s duty, and why their advice was sought (i.e. what risks was the client hoping to avoid?). If the claimant’s loss is a manifestation of of the risks the professional was retained to help the client avoid, the MBS decision suggests the loss is highly likely to fall within the duty of care owed by the professional.
The Supreme Court’s revised approach might bring about a rise in professional negligence claims as claimants may now feel more confident seeking damages for losses that, pre-MBS, may have been considered beyond the scope of the duty owed by the professional. And professionals may feel exposed following MBS causing them to refrain from giving clear advice, instead presenting options to clients in the hope that they will avoid liability if the client’s decision leads to unfortunate consequences.
From a risk management perspective, given that professionals usually have concurrent claims in tort and in contract and the former is informed by the latter, it would be sensible for professionals to review their terms of engagement to ensure that they specifically address the agreed purpose for which their advice is being given in each case.
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