SAAMCO and MBS v Grant Thornton: a further retreat from the false binary of ‘information’ versus ‘advice’
Has the law on scope of duty become clearer or has the locus of the battleground simply shifted? James Hall, Tom Bell and William Golightly examine the much-anticipated case of Manchester Building Society v Grant Thornton UK LLP  UKSC 20; Khan v Meadows  UKSC 21 and its impact on the principles in SAAMCO.
A summary of the significance of these decisions
The Supreme Court’s linked decisions in MBS v Grant Thornton and Khan v Meadows have provided much needed clarity to how one ascertains the scope of recoverable loss in professional negligence claims.
Six of the seven Justices who decided the appeals stated that the scope of a professional’s duty is defined by an objective assessment of the purpose of the duty. The so-called SAAMCO counterfactual (to what extent would the claimant have suffered loss even if the defendant’s advice had been correct?) is only a ‘cross-check’, or subsidiary consideration, to the central question of purpose.
The judgments are also significant in confirming that the binary division between ‘advice’ and ‘information’ cases, which was popularised by SAAMCO, should be jettisoned. It is more appropriate to see cases falling on a spectrum. At the one end, the professional provides just one piece of information for the client to take into account; at the other, the client is wholly reliant on the professional to guide a course of action. With the exception of simple valuation cases, the professional’s responsibility will generally lie somewhere in between.
In establishing the purpose for instructing the professional, a key question to ask is: what risks, judged objectively, was the professional instructed to guard against?
Khan v Meadows further confirmed that the scope of duty analysis, including the SAAMCO cross-check, applies to clinical negligence just as much as it applies to claims against other types of professional. In this regard, it is not restricted to cases of pure economic loss. The focus of this article will, however, be on MBS v Grant Thornton.
MBS v Grant Thornton
MBS’s accounts were audited by Grant Thornton. Grant Thornton negligently advised MBS that its accounts could be prepared using the ‘hedge accounting’ methodology, which allowed MBS to treat their underlying fixed-rate, lifetime mortgages and the related swaps as constituting a single entry in its accounts. The rationale for hedge accounting is that the two assets effectively cancelled each other out in economic terms. The problem, however, was that in most cases the swaps had a longer lifespan than the mortgages, which meant that it was uncertain whether the two could be matched. This meant that, contrary to Grant Thornton’s advice, hedge accounting was impermissible.
In 2013, Grant Thornton told MBS that it had been wrong to apply hedge accounting and that it would need to account for the fair value of the swaps going forwards. This had a significant negative effect on its stated financial position, since by that time interest rates had fallen significantly, which meant that the swaps were “out of the money”.
MBS decided to close out the swaps and reduce the volatility they brought to its accounts. This was an expensive exercise, however: the cost of breaking the swaps was £32.7m. In turn it sought to recover this sum from Grant Thornton by way of damages for professional negligence.
The Supreme Court overturned the finding of the trial judge and Court of Appeal that Grant Thornton was not liable for the cost of closing out the swaps. The loss was within the scope of Grant Thornton’s duty of care given the purpose of its advice, as the Supreme Court saw it. A reduction of 50% was made for contributory negligence, and credit was also given for £5.96 million of gains made on the books of mortgages in question, leading to a net recoverable loss of circa £13.4 million.
Lords Hodge and Sales (with whom Lord Reed, Lady Black and Lord Kitchin agreed) set out a six-stage conceptual enquiry for negligence cases :
- Is the harm actionable in negligence? (“the actionability question”)
- What are the risks of harm to the claimant against which the law imposes on D a duty to take care? (“the scope of duty question”)
- Did D breach that duty? (“the breach question”)
- Is the loss the consequence of D’s breach? (“the factual causation question”)
- Is there a sufficient nexus between the loss and the scope of the duty? (“the duty nexus question”) and
- Is a particular element of the loss irrecoverable because it is (i) too remote, (ii) there is a different effective cause (eg. a break in the chain of causation); or (iii) C has mitigated their loss or has failed to reasonably avoid loss (i.e. contributory negligence)? (“the legal responsibility question”)
Lords Hodge and Sales confirmed that the scope of the duty of care of a professional adviser is defined by the purpose of the duty, assessed objectively, by reference to the reason the advice is sought . The court establishes ‘what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk.’ 
Echoing the conclusion of Lord Sumption in BPE v Hughes-Holland  UKSC 21 that Lord Hoffman’s original distinction between ‘information’ and ‘advice’ cases should not be viewed as giving rise to a binary means of classification, their Lordships confirmed that the court should focus on identifying the purpose to be served by the duty of care assumed by the professional  – . Their Lordships agreed with Lord Leggatt’s concurrent judgment that the descriptions of ‘information’ and ‘advice’ should be dispensed with .
The SAAMCO counterfactual – where the court asks whether the claimant would have suffered same loss even if the information given by the defendant had been correct – can be a useful cross-check, but is nevertheless subsidiary to the key analysis of the purpose of the duty .
In this case, the purpose of the advice was to establish whether the society could use hedge accounting to facilitate its lifetime mortgage business model. As a lending institution, MBS was regulated by what was then the FSA, now the FCA. The regulatory regime required MBS to maintain substantial levels of capital to ensure its continuing viability should it come under stress. In simple terms, the more volatile MBS’s financial activities, the more regulatory capital was required as a safeguard. In the event MBS provided inadequate regulatory capital, the FSA could take steps to close its operations.  MBS was exposed to this risk – that it would need to close out the swaps in the event it lacked the necessary regulatory capital – which Grant Thornton’s negligent advice directly related to . The loss therefore fell within the scope of the duty .
Lord Leggatt and Lord Burrows each agreed with the conclusion but gave their own (differing) reasons.
Lord Leggatt considered the scope of duty question as an issue of causation. The question the court must ask is whether there is sufficient causal connection between what made the information/advice incorrect and the loss incurred . Applying the SAAMCO counterfactual requires making certain assumptions about the allocation of risk between the parties, and this may not always be possible  – . Applying the SAAMCO counterfactual in this case, if Grant Thornton’s advice had been correct and hedging was possible, the loss would not have occurred as they would not have had to close out the swaps at all  and .
Lord Burrows largely agreed with Lord Hodge and Lord Sales (et al) but placed the emphasis on the underlying rationale for scope of duty as being centred on the public policy desirability of achieving a fair and reasonable allocation of risk between the parties  and . Lord Burrows again restated his preference for a traditional seven stage analysis for negligence ((i) existence of duty of care; (ii) breach of duty; (iii) factual causation; (iv) remoteness; (v) legal causation; (vi) was the loss within the scope of duty; (vii) do any defences apply), rather than the six stages outlined by the majority (at ). Lord Burrows was also not keen on the novel terminology of ‘duty nexus’.
Many in the profession had considered that the Supreme Court was likely to make further inroads into the SAAMCO principle in these cases and lead to a more nuanced, fact-driven approach to assessment of scope of duty and recoverable loss. That had been the broad direction of travel in the Court of Appeal since BPE v Hughes Holland. Notably, whilst Lord Sumption in BPE did highlight the descriptive inadequacy of ‘information’ and ‘advice’, and referred to a spectrum, he was reluctant to jettison those terms, and a default starting point at one end or other of the spectrum, entirely. For example, where he considered that conveyancing negligence would generally sit at the information-only end of the spectrum, we consider that MBS v GT in its focus on purpose and guarding of risks means that conveyancers will often be more vulnerable to claims for the full (or at least more of the) basic loss than they may hitherto have been; conveyancers when negligent may often be negligent about one discrete piece of information, but that piece of information may often be absolutely fundamental to the client’s decision to proceed, and a risk which the conveyancer was entreated to guard the client against, and may have a very big impact on value of the property. On the other hand, where in some cases the Court may previously have been persuadable that a conveyancing case was an ‘advice’ not an ‘information’ case (because of perceived risk of under-compensation in the latter categorisation), the Court may now be more willing to segregate areas of basic loss and find that some fall within the scope of duty and others not.
The evolution of SAAMCO into a principle based on the purpose of the professional’s instruction makes sense. It balances the rights of the parties. Where previously defendants may have (understandably, given the binary) sought to pigeonhole cases as pure ‘information’ cases, which if correct would sometimes drastically reduce recoverable loss, they will not be able to take so restrictive an approach. On the other hand, claimants must recognise that not all factually caused (on a ‘but for’ basis) losses will always be recoverable; there must be reasonable limits to professionals’ liability for pure economic loss.
It is notable that Lord Burrows considered it unhelpful that the majority of the Court had introduced, as question 5 in their scheme for analysing professional negligence cases, the terminology of ‘duty nexus’. Indeed, nowhere in the majority judgment is that term explained beyond its apparent definition in question 5 – which talks of a ‘sufficient nexus’ between an element of the harm and the subject matter of the duty of care. But what counts as ‘sufficient’? It remains to be seen whether the courts find this terminology helpful. In fact, as was noted in Khan  sometimes there will be no need to bring scope of duty back in at stage 5 of 6 (the ‘duty nexus question’, per the majority decision) at all, as it has already been dealt with at stage 2 (‘the scope of duty question’); but it appears that it is sometimes appropriate for the issue to come in ‘at the other end’ as well because, on the view of the majority (but not Lord Burrows), the SAAMCO counterfactual retains some utility, and causation of loss issues ought logically to be looked at after breach, of course.
Whilst MBS v GT seeks to put to bed disagreements about scope of duty, there are still two areas which remain fertile for argument from either side to a claim:
- What were the purposes (particularly the implied purposes) for which a given professional was instructed? What risks were they asked (not just expressly but also impliedly) to guard against? There will be scope for argument in this regard on the facts of most cases.
- What is a ‘sufficient nexus’? This is a very unpredictable criterion, which a critic would say allows judges to decide cases on a merits basis, rather than by reference to objective criteria or principles.
Time will tell as to whether MBS v GT has simplified this thorny area of law or simply introduced different battlegrounds to fight in.
1st July 2021
James Hall, Tom Bell and William Golightly
 See  in MBS v GT where he refers to  –  in Khan v Meadows, which is where Lord Burrows sets out these seven stages.
 See our previous articles at:
- https://gatehouselaw.co.uk/assetco-v-gt-a-chink-in-saamcos-armour-and-a-lost-chance-to-sort-out-loss-of-a-chance/; and
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