Avoiding Liability Even Where There Is Negligence

The recent case of Manchester Building Society v Grant Thornton 2018 is a striking example of the inability to recover certain losses from a professional adviser, even where their advice has been negligent.

In a claim for negligence, a claimant can only claim for losses for which a defendant adviser has assumed responsibility. The Manchester Building Society ('the Society') has this month felt the full force of this principle, being awarded just £315,345 of the £48.5 million claimed from its accountants, and potentially facing a bill for a portion of the accountant's legal costs.

Background

The Society entered into 'lifetime mortgages' with borrowers, under which equity was released and no payments were due until the owner entered a care home or died. From 2006, it hedged the interest rate risk by purchasing interest rate swaps.

Under the International Financial Reporting Standards ("IFRS") the swaps had to be entered onto the balance sheet. This created 'volatility' on the balance sheet because the fair value of the swaps would fluctuate with changes in present and estimated future interest rates.

The Society's accountants, Grant Thornton, approved the use of hedge accounting as a method of limiting that volatility, by allowing an adjustment to be made to the value of the hedged asset, the mortgage. That advice, however was negligent. When the Society realised this and drew up its accounts without the use of hedge accounting in 2013, the Society's financial position took a serious downturn, resulting in substantial losses.

The Society sued its accountants in 2015 for breach of contract, negligence and breach of statutory duty, alleging negligent advice on how to account for interest rate swaps in their balance sheet, leading to losses of £48.5 million.

The case was decided by Mr Justice Teare on 2 May 2018 who held that whilst the advice given between 2006 and 2011 was negligent, the accountant advisers had not assumed responsibility for the whole £48.5 million losses.

The decision

What is interesting about this case is that it appeared to have all the ingredients for a successful negligence claim; the judge finding that:

the losses would not have occurred if the advice had been correct; the accountant's negligence was an effective cause of the loss; and the losses were foreseeable The critical requirement that was found to be missing, however, was the assumption of responsibility, by the accountants, for the extent of the losses suffered...