Distinguishing Between 'Advice' And 'Information' When Assessing The Scope Of Liability In Professional Negligence Claims: Manchester Building Society V. Grant Thornton

The Court of Appeal has considered the application of the "SAAMCO principle" in deciding the scope of an auditor's liability for negligent accounting advice (Manchester Building Society v. Grant Thornton [2019] EWCA Civ 40). It confirmed that the correct approach to the issue of liability was to assess whether the case was an "advice" or an "information" case, rather than asking an open-ended question as to the extent of a party's assumption of responsibility.

Background

Manchester Building Society (MBS) issued a number of fixed-interest lifetime mortgages. In order to hedge the risk of its own cost of borrowing, MBS entered into long-term interest rate swaps. In doing so, it relied on advice from its auditors, Grant Thornton (GT), concerning the accounting treatment of the swaps in its financial statements. GT advised MBS that it could apply "hedge accounting" in order to reduce the effect of volatility of the fair value of the swaps in its accounts. That advice was negligent as MBS was not entitled to apply hedge accounting.

Once the error was discovered, MBS had to account for the swaps at fair value, namely, at their mark-to-market (MTM) value. The impact of the change in accounting treatment on its financial position was significant and resulted in MBS having insufficient regulatory capital. It therefore closed out the swaps, which were heavily "out of the money" because of the fall in interest rates following the financial crisis. The MTM value it paid to break the swaps early was £32.7 million.

MBS's claim for the MTM losses failed at first instance. Although the judge found that causation was established, he held that GT was not liable as it had not assumed responsibility for the MTM losses - it had only advised on the accounting treatment of the swaps and these were market losses, due to the fall in interest rates.

MBS appealed. In reaching its decision, the Court of Appeal considered the application of the SAAMCO principle (so called from the House of Lords decision in South Australia Asset Management Corp v. York Montague Ltd [1997] AC 191) in assessing the scope of a negligent adviser's liability.

The SAAMCO principle

In SAAMCO, the House of Lords held that a valuer was not liable for all the foreseeable market-related losses suffered as a result of a lender entering into a loan in reliance on the valuer's negligent valuation, and was liable only for the consequences of the valuation being wrong. This was based on the principle...