The Supreme Court has made an important ruling about the scope of professional advisers’ duty of care in negligence cases. The court has decided that the duty is governed by the purpose for which the advice was being given. This ruling clarifies the legal principles set out in the landmark SAAMCO case of 1997.
The ruling significantly diminished the distinction between whether a professional is providing ‘advice’ or ‘information’ set out in SAAMCO and later in BPE Solicitors v Hughes Holland (2017), and the varying degree to which professionals are liable for losses in each case. The Supreme Court’s judgement takes the principle of duty of care back to basics. “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,” the court said in its judgement.
The appeal to the Supreme Court focused on a long-running negligence dispute between Manchester Building Society and its auditor, Grant Thornton (see Brunel News, July 2018). Manchester Building Society had offered ‘lifetime mortgages’ to customers. These released equity from a customer’s property, but no repayments were due until the customer died or entered a care home. The building society was exposed to an interest rate risk on these loans and arranged a series of interest rate swaps to try to limit this exposure.
The value of the swaps would vary in response to expectations of interest rate movements, causing volatility in the building society’s balance sheet. This in turn affected its regulatory capital. Grant Thornton, as auditor, approved the building society’s adoption of a ‘hedge accounting’ methodology, which allowed the society to vary the value of the mortgages on its balance sheet to smooth out the volatility.
Grant Thornton’s advice was incorrect and negligent. When the society realised the mistake it restated its accounts, resulting in substantial losses. It needed to break the swap agreements at a cost of over £32 million which it claimed from Grant Thornton.
Both the High Court and Court of Appeal ruled that Grant Thornton was not liable for the losses, based on their interpretation of Grant Thornton’s duty of care as set out in the previous case law. The Supreme Court overturned these decisions, setting out a simple interpretation of the duty of care principle. It held that “the society suffered a loss falling within the scope of the duty of care assumed by Grant Thornton, having regard to the purpose for which it gave its advice on the use of hedge accounting”.
James Burgoyne, Divisional Director – Claims & Technical, Brunel Professions warns firms to look carefully at their letters of engagement when accepting instructions from clients: “The Supreme Court has made it clear that the courts should look at the purpose for which advice is given in deciding whether a professional is liable for any losses incurred. This means that it is vital that the firm’s letter of engagement describe this purpose clearly and accurately. Professionals should be wary of using general language which could expose them to the client asserting that additional losses fell within the stated purpose, when in fact the work being done was narrower and more limited in its purpose.”
Practitioners should note that risk management advice focusing on the distinction between ‘advice’ and ‘information’ has been superceded by this case. In the light of the Manchester Building Society case we would suggest that practitioners consider the following carefully:
• Contemporaneously record on your file your understanding of why the client is seeking your advice
• Address in your letter of engagement the agreed purpose for which your advice is being sought
• Avoid “retainer creep”; if this does occur, retrench your position by reissuing the letter of engagement with the agreed purpose re-stated to reflect the changes
The underlying theme of these suggestions is to have an explicit written statement of the purpose which reflects both parties’ understanding. It seeks to establish boundaries so that it is clear what the professional is and is not doing, in order to avoid speculative and opportunistic behaviour by a claimant after losses have been sustained. As such, specific rather than overly general language is to be preferred in describing the purpose.
Brunel provides professional indemnity insurance broking services to professional firms. Visit our website to find out more or call Jonathan Filer on +44 (0)117 325 0752.