Incorrect information or advice: to what extent will a professional be held liable?

11 February 2019

The recent Court of Appeal judgment in Manchester Building Society v Grant Thornton UK LLP [2019] re-enforces that the correct approach in professional negligence cases is to distinguish between ‘information’ and ‘advice’ cases when considering the extent to which a professional may be liable. The decision confirms that the distinction is necessary, important and requires consideration of the extent of any assumed responsibility (We previously blogged on the scope and effect of SAAMCO and the distinction between information and advice and how the Courts are willing to restrict a professional’s liability for an information-only case)

Facts

Grant Thornton (GT) acted as the auditors for Manchester Building Society (MBS) and advised MBS that it could apply hedge accounting to reduce the effect in its accounts of the volatility of the fair value of interest rate swaps. MBS relied on the advice of GT and entered into fixed rate mortgages hedged against long-term swaps. As a result of the financial crisis and decreased interest rates the value of the swaps became negative. MBS could no longer apply hedge accounting and had to pay the fair value of the losses on the swaps and the transaction fees for breaking the swaps early. MBS sought damages of £48.5 million. It argued that but for GT’s negligence it would not have entered the life mortgage business and the swaps after April 2006 and it would have closed the existing swaps.

At first instance Judge Teare held that GT was not liable as it had not assumed responsibility for the loss of value of the swaps but had merely advised as to the manner in which MBS’s activities could be treated in its accounts. The losses to the fair swaps value were therefore market losses due to the fall in interest rates and GT was not liable for them.

MBS appealed on the basis that the Court should have considered whether it was an ‘information’ or ‘advice’ case as per SAAMCO and that even if it were an information case GT should be liable as the losses to the fair swap value would not have been incurred if the information had been correct. 

Court of Appeal decision

The Court of Appeal held that this was not an ‘advice’ case as GT gave accounting advice but was not involved in the decision to enter into the swaps. In reaching its decision, the Court helpfully stated that an advice case would be one where it could be shown that:

  1. the advisor was responsible for guiding the whole decision-making process;
  2. the advisor was left to consider what matters should be taken into account in deciding whether to enter into the transaction; and
  3. the advisor had a duty to consider all relevant matters and not only specific matters in the decision.

As this was an information case it was held that GT would only be liable for the foreseeable financial consequences of that information being wrong rather than responsible for all the foreseeable financial consequences of the transaction.

This involved the Court considering what losses would have been suffered had the information been correct. The Court held that the closing out of the swaps crystallised the loss but did not create the loss. MBS therefore failed to prove that the losses would not have been suffered if GT’s advice had been correct. Accordingly, it was held that the first instance judge had been correct to hold that the loss in the fair value of the swaps was non-recoverable. 

The appeal was therefore dismissed. The effect of this decision was that out of a claim for £48.5 million, MBS was only awarded £315,345 (which took into account MBS’s contributory negligence).

Comment

The case provides useful guidance on the SAAMCO principle and the distinction between “advice” and “information” cases.

In negligence cases, it will be important to consider the scope of the professional’s retainer early on in order to advise as far as possible on the extent to which damages may be recoverable and whether an action may be worthwhile. It will also be crucial to undertake a realistic assessment of what evidence is available to demonstrate loss in the event that the case falls into the ‘information’ category.

About the authors

Jemma Brimblecombe is a Senior Associate in the Dispute Resolution department. Jemma has a wide range of experience in dealing with a variety of commercial disputes, including breach of contract, breach of trust and contractual disputes. Jemma also has experience of dealing with civil fraud claims.

Emily Grieg is a Trainee Solicitor in the Dispute Resolution department. Emily joined Kingsley Napley in January 2016 as a Paralegal where she assists on a wide variety of cases.

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