Manchester Building Society v. Grant Thornton" />(Manchester Building Society v. Grant Thornton  EWCA Civ 40)." />
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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  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.
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  AC 191) in assessing the scope of a negligent adviser's liability.
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 that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action, only for the consequences of the information being wrong.
The principle therefore distinguishes between:
This has given rise to what is referred to as the "SAAMCO cap", which limits the recoverable damages in an information case to exclude those losses which would have been suffered even if the information had been correct.
The Court of Appeal held that the case was clearly one in which the SAAMCO principle applied. Hamblen LJ summarised the factors to be considered in applying the SAAMCO principle (as clarified by the Supreme Court in Hughes-Holland v. BPE Solicitors  UKSC 21):
The Court concluded that the judge was wrong to approach the issue of liability on the basis of whether GT had assumed responsibility for the losses rather than considering whether this was an "advice" or "information" case.
On the undisputed facts and the judge's findings (including that MBS's decision to enter into the swaps was based not only on GT's advice, but also on other commercial considerations), the Court of Appeal held that this was not an advice case: GT gave accounting advice but was not involved in the decision to enter into the swaps. The purpose and effect of the advice is what matters, and GT's advice did not involve responsibility for "guiding the whole decision-making process" of entering into the lifetime mortgages and swaps. The Court concluded that this was an information case.
The Court noted that it was striking that MBS's claim for damages consisted of the fair value of the swaps and that receiving fair value does not ordinarily give rise to any loss.
MBS contended that the cause of its MTM losses was GT's negligence, as a result of which it had to close out the swaps early. That required MBS to prove the counterfactual: that the loss would not have been suffered had it continued to hold the swaps. However, the best evidence of that was their fair market value at the time of closing out – in other words, their MTM value. The Court concluded that, while the closing-out of the swaps at fair value crystallised the loss of the swaps being "out of the money", it did not create the loss, which was the result of market forces.
The judge had therefore been wrong to find that MBS had established that the MTM losses would not have been suffered had GT's advice been correct. However, the Court of Appeal agreed with his overall conclusion that GT was not liable for the MTM losses, and dismissed the appeal.
The decision helpfully summarises the factors to be considered when applying the SAAMCO principle in a professional negligence case. Those factors include as a first step identifying whether the case concerns information or advice. This is not always straightforward, as was recognised in the Hughes-Holland case. In that case, the Supreme Court commented that the two categories are not distinct or mutually exclusive – information given by a professional is usually a specific form of advice, and most advice will involve providing information.
This case reflects the courts' wider concern that the scope of claims against professional advisers should be limited. Whilst the Court of Appeal disagreed with the approach taken by the judge at first instance, it agreed that GT's responsibility was limited to giving accounting advice and did not come close to extending to responsibility for the entire lifetime mortgage/swaps business, repeating the judge's observation that:
"…it would be a striking conclusion to reach that an accountant who advises a client as to the manner in which its business activities may be treated in its accounts has assumed responsibility for the financial consequences of those business activities...".
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