Scope of an adviser’s duty of care: a purposive approach

In two recent cases, the Supreme Court has provided authoritative guidance on the correct approach to determining the scope of a defendant adviser’s duty of care (Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20; Khan v Meadows [2021] UKSC 21).

This guidance is welcome given the uncertainty and debate generated as a result of the approach set out by the House of Lords in South Australia Asset Management Corp v York Montague Ltd (SAAMCO) and provides the starting point now for practitioners when assessing the scope of duty in a negligence claim and a defendant’s liability for losses in that context ([1996] UKHL 10).

The SAAMCO principle

The idea of limiting the damages recoverable in the tort of negligence to those falling within the scope of the duty of care assumed by the defendant long pre-dated SAAMCO. However, it is this House of Lords’ decision that has informed the modern approach to determining the scope of that duty and, in particular, the extent of a defendant adviser’s liability.

In SAAMCO, the House of Lords confirmed that the courts will not award compensation for damage unless the losses come within the scope of the duty owed. The court made a distinction between:

• Providing information for the purposes of enabling someone else to decide on a course of action (an information case).
• A duty to advise someone as to what course of action they should take (an advice case).

In the latter case, an adviser, if negligent, would be responsible for all the foreseeable loss consequential on the course of action taken whereas, in the former case, liability would be limited to the consequences of the information being wrong (the so-called SAAMCO cap).

This distinction gave rise to questions around the correct formulation of the scope of the duty, with the risk of the formulation being treated as a binary distinction between information and advice cases, which in turn proved difficult to apply in practice.

The Supreme Court considered SAAMCO in BPE Solicitors v Hughes-Holland ([2017] UKSC 21; www.practicallaw.com/5-641-0395). There, the court held that the distinction between providing advice and information should not be treated as a rigid straitjacket and that cases would inhabit a fact-sensitive spectrum.

Reformulating the approach

BPE Solicitors was thought to be the definitive statement on the issue. However, two appeals recently reached the Supreme Court. They were heard by the same expanded constitution of the court in order that the court could provide general guidance regarding the proper approach to determining the scope of the duty and the extent of professional advisers’ liability for negligence, and in particular how to apply SAAMCO in different contexts.

The first, Manchester Building Society, concerned a claim brought by Manchester Building Society (MBS) against its auditor, Grant Thornton, for advice concerning the accounting treatment of interest rate swaps relating to its lifetime mortgage portfolio. As a result of the advice turning out to be incorrect, MBS was required to close out the swaps, incurring a mark-to-market loss of £32.7 million.

Grant Thornton accepted that the advice was negligent but contested its liability for the losses claimed. The High Court held that, while causation was established, Grant Thornton had not assumed responsibility for MBS being “out of the money” on the swaps, which instead flowed from market forces ([2018] EWHC 963 (Comm); see News brief “Responsibility for losses: liability of professional advisers”). The Court of Appeal upheld the decision, albeit on different grounds, stating that the correct approach was not to look at whether responsibility had been assumed, but instead to consider at the outset whether the case was one of advice or information by looking at the purpose and effect of the advice given ([2019] EWCA Civ 40; www.practicallaw.com/w-019-1580). The court concluded that this was an information case and that Grant Thornton’s responsibility did not extend to the mark-to-market losses on swaps.

The Supreme Court unanimously allowed MBS’s appeal. Rather than starting with the distinction between advice and information cases and trying to shoehorn the facts into one or other categories, the court said that the focus should be on identifying the purpose that is served by the duty of care assumed by the adviser.

Applying that focus, the court held that MBS had sought advice from Grant Thornton on whether it could use hedge accounting in order to implement its proposed business model. Grant Thornton advised that it could. This had the effect that MBS adopted the business model, entered into further swap transactions and was exposed to the risk of loss from having to break the swaps, when it was realised that hedge accounting could not, in fact, be used. The loss, the court held, fell within the scope of the duty of care assumed by Grant Thornton.

The court noted that its judgment should be read in conjunction with that reached by the same constitution of the court in Khan, which was heard shortly after Manchester Building Society. Khan was concerned with the scope of duty of a medical expert giving advice. The court confirmed that there was no principled basis for excluding clinical negligence claims from the ambit of the scope of duty principle or for confining it to cases involving pure economic loss arising in commercial transactions.

The position now

The twinned judgments offer a simplified approach to considering the scope of a professional’s duty and, at the same time, a widening of the circumstances in which claimants may be able to recover compensation from their professional adviser. The judgments give rise to a number of important points for practitioners:

• The scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty, which is assessed on an objective basis by reference to the reason why the advice is being given. As the court noted, this had in fact been confirmed as the proper approach in both SAAMCO and BPE Solicitors. It was also part of the Court of Appeal’s reasoning in Manchester Building Society. However, it is probably fair to say that this focus had been lost for practitioners grappling with what was commonly interpreted as a binary choice between advice and information cases.
• It is clear that a binary approach is to be resisted. Instead, cases should be understood as falling on a spectrum, with pure advice and information cases only to be seen at the extremities of the spectrum and most cases falling somewhere in between, as determined by their facts. “Information” and “advice” are not to be applied as terms of art in this area.
• The Supreme Court set out a six-stage model to assist in analysing the place of the scope of duty principle within the tort of negligence. This involves asking questions concerned with actionability, the scope of duty, factual causation, the nexus between the loss and the subject matter of the defendant’s duty of care, remoteness and mitigation. While not intended to be exhaustive (and the court recognised that flexibility may sensibly be used regarding the order in which the questions are addressed), the model should assist practitioners in approaching the issue, knowing that this is likely to be the method the courts will now use as their starting point.
• Careful use should be made of any counterfactual analysis, which involves considering whether the loss would still have been suffered if the advice had been correct. While it was an important element of the approach in SAAMCO, the Supreme Court in Manchester Building Society was clear that it should not be regarded as indispensable and that it risks litigation through elaborate hypothetical scenarios advanced by each party. Nonetheless, it may still offer a useful cross-check.

While Manchester Building Society and Khan offer some much-needed clarity, they also demonstrate the complexity that still surrounds the issue. The court was unanimous in allowing the appeals but there was notable divergence among the judges in their approach: for Lord Leggatt, the question of the scope of duty was fundamentally one of causation, while Lord Burrows took a more policy-based approach, both of which stances the majority rejected.

This article was first published in Thomson Reuters Practical Law.