In Manchester Building Society v Grant Thornton UK LLP, the Commercial Court held that the defendant, a firm of accountants, was not liable for substantial losses suffered on unprofitable transactions which had been entered into as a consequence of advice received from the defendant, even though the losses were foreseeable and caused by the negligent advice. The negligent advice received concerned how the transactions should be accounted for. An appeal is due to be heard by the Court of Appeal in January 2019.
The focus of this post in on the implications of the decision, and particularly the reasoning on one issue at the heart of the case: the extent to which losses which were foreseeable, and were the reason why professional advice was sought, may still fall outside the scope of a duty of care.
The defendant had provided advice on the accounting method to be used for interest rate swaps. The advice was important because the accounting method had significant implications for the viability of the transactions, as a result of the claimant’s regulatory obligations to hold a certain amount of capital on its balance sheet. The advice was negligent and following the downturn in the markets in 2008, the swaps became unprofitable. When it was discovered that hedge accounting could not be used (so that the claimant’s balance sheet was exposed to the full value of the losses on the swaps), it had to sell its swaps, along with valuable assets, in order to comply with its minimum capital requirements and to stabilise its balance sheet. It claimed losses of nearly £50 million, of which £32.7 million represented the cost of terminating the unprofitable swaps. The judge found that the defendant’s negligence was the cause of the loss, both in fact and in law. Nonetheless, he also found that the defendant was not liable for the £32.7 million loss on the swaps. Despite expressing considerable difficulties with the point, the judge came to the conclusion that the defendant could not be said to have assumed responsibility for the financial outcome of the transactions by virtue of having advised on how they should be accounted for.
The decision demonstrates the importance of considering the scope of a duty of care independently from other issues. It emphasises the distinction between “information” and “advice” cases (as explained by Lord Sumption last year in the Supreme Court’s decision in BPE Solicitors and another v Hughes-Holland at paragraphs 40 and 41) that a professional sometimes advises on the merits of a transaction as a whole, and sometimes provides information or advice on particular issues which the client then weighs in the balance when deciding whether or not to embark on a course of conduct. Where the professional gives advice only on particular issues, the professional is not responsible for all of the consequences of the conduct, even if the advice was the effective cause of that conduct and the conduct was foreseeable.
There is a strong argument for saying that the decision is ultimately wrong on the facts. However, whatever the correct conclusion on the facts of the case, the decision is of real significance for all parties who take professional advice before entering into transactions. In highlighting the significance of the “information” and “advice” distinction, the decision demonstrates the importance for clients in understanding (and making sure advisers understand) the purpose for which advice is sought, and whether the adviser has any responsibility for looking at the bigger picture of the transaction.
Notwithstanding the pending appeal, parties should be advised to take steps to protect their interests now. Parties intending to rely on advice should give careful consideration to the advisers’ terms of engagement and the scope of the responsibility that is being undertaken. Equally, professionals (and those advising them) need to ensure that the terms of their engagement make the scope of their duty clear, and if they do not intend to form an independent view of the transaction as a whole, this should be made clear in the instructions or terms of engagement for the advice.
The decision is also significant for litigators practising in professional negligence. If upheld on appeal, it will cast real doubt on a number of previous decisions and dicta, including some of the cases cited by the judge in Manchester Building Society itself. Even the reasoning in seminal cases such as Caparo Industries v Dickman (which draws heavily on an earlier judgment of Denning LJ indicating that negligent accountants would be liable for the consequences of transactions for which they know the accounts will be used) might be open to question if Manchester Building Society, and its application of the Supreme Court’s decision in Hughes-Holland, is upheld as good law. If that were the case, then the scope of liability for negligence will often be reduced significantly, as advisers will generally be careful to restrict the scope of their advice to particular aspects of a transaction or situation. By contrast, if the Court of Appeal overturns the decision and gives a narrow reading to the reasoning in Hughes-Holland, then professionals may once again be faced with substantial claims based on the consequences of transactions that were entered into in reliance on their advice.