Forget counterfactuals: concentrate on purpose – SAAMCO duty test clarified by Supreme Court

Manchester Building Society v Grant Thornton UK LLP [18.06.21]

The Supreme Court recently gave judgment in the Manchester Building Society (MBS) appeal against the decisions of the High Court and Court of Appeal which had prevented MBS from recovering damages sustained as a result of having to break interest rate swaps, purchased on the basis of negligent advice provided by its auditors, Grant Thornton.

The decisions of both lower courts were based on differing understanding and application of the scope of duty principle illustrated in SAAMCO. That difference of approach is also evident in the judgment handed down by the Supreme Court, with two of the Justices applying different reasoning, albeit arriving at the same conclusion as the majority that the appeal should be allowed.

In the leading judgment, Lords Hodge and Sales remarked that:

The divergence of opinion about SAAMCO and the scope of the duty principle at this level serves to emphasise the importance of seeking to arrive at an authoritative view after debate within the court.

As a result, the Supreme Court has now issued what the majority considers to be definitive guidance on the issue.

The decision in the Supreme Court

All seven Justices agreed the appeal should be allowed, albeit there remained a degree of dissension as to how SAAMCO should be applied. The majority judgment noted that:

Some confusion has arisen from references in the cases to ‘the SAAMCO principle’, whereas on proper analysis SAAMCO is not a distinct principle but rather is an illustration in a particular context of the scope of duty principle.

The balance of the judgment effectively takes the legal analysis of any one claim back to basics.

The key points arising from the decision, once breach is established, are that:

  1. The primary task is to identify the scope of the defendant’s duty, the focus of the analysis being on the purpose of the duty, judged on an objective basis by reference to the purpose for which the advice is being given. “In the case of negligent advice given by a professional adviser one looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk” (Paragraph 17).
  2. The distinction between “advice” cases and “information” cases is “unsatisfactory”. As Lord Sumption put it in Hughes v Holland,Neither label really corresponds to the contents of the bottle”. Instead, “for the purposes of accurate analysis, rather than starting with the distinction between “advice” and “information”.. the focus should be on identifying the purpose to be served by the duty of care assumed by the defendant”.
  3. Counterfactual analysis should be regarded only as a tool to cross-check the result given pursuant to analysis of the purpose of the duty, but one which is subordinate to that analysis and which should not supplant or subsume it. The Supreme Court concluded “There is no need to apply a counterfactual test to arrive at the correct conclusion and it has the potential to confuse rather than assist the correct analysis” (Paragraph 19).

The majority’s view was that adoption of the “purpose of the duty of care” test should be preferred. If emphasis was given to a causation based analysis of the scope of duty question, then “SAAMCO type counterfactual analysis moves centre stage and appears to assume greater significance than it should do”.

On the facts of the appeal in question, the majority found that MBS had suffered a loss which fell within the scope of the duty of care assumed by Grant Thornton, having regard to the purpose for which the auditor gave its advice about the use of hedge accounting - namely to verify that hedge accounting could be deployed to counter the volatility risk created by its interest swap transactions and its consequences for the society’s regulatory capital.

Comment

The guidance provided by the Supreme Court on the application of SAAMCO should be welcomed by practitioners and their clients, as it clarifies and demystifies what has sometimes been an expensive battleground in professional negligence cases, particularly when the parties have engaged in counterfactual arguments obscuring the true nature of the issue to be determined (the case in hand being a prime example). As Lord Leggatt commented: “The way in which the society’s case was principally advanced obscured in the courts below the correct way of analysing the claim.”

However, the fact that there were dissenting opinions - Lord Leggatt preferring a causation based approach to the scope of duty principle, and Lord Burrows favouring more emphasis on the underlying policy considerations as to the fair and reasonable allocation of the risk of loss between the parties – indicates that the debate may not be completely resolved, particularly when these tests are applied outside the scope of an auditors’ duties.

Read other items in Professions and Financial Lines Brief - July 2021

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