Professional negligence – a simplified test

On 18 June 2021 the Supreme Court handed down a landmark judgment relating to professional negligence in the case of Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20.

The facts

From 2004 Manchester Building Society (MBS) purchased and issued lifetime mortgage loans. Neither the fixed interest, nor the capital, were paid to MBS until the borrower in question died, sold their property or chose to repay the loan in full. In order to fund these mortgages, MBS borrowed with variable rates of interest.

This created a commercial risk for MBS; the interest they received under the mortgages could be less than the interest due under the loans funding the mortgages. To minimise this risk, MBS entered into interest swap contracts to minimise the interest owed from MBS to its interest swap contract counterparties and maximise the interest owed to MBS from the borrowers under the mortgages.

In 2005, the requirements for MBS accounts changed. They now had to account for the ‘fair’ value of the interest swap contracts: this was the value which fluctuated depending on the rate of interest.

This would make MBS’ financials volatile and impact the amount of regulatory capital they were required to have. If the Financial Services Authority deemed MBS they could not withstand financial stress, they would be required to increase their regulatory capital which would impact their ability to lend and borrow.

Due to these accounting changes, MBS asked Grant Thornton UK LLP (Grant Thornton) whether it would be permissible for them to use ‘hedge accounting’ which involved adjusting the value of the mortgages to offset the volatility of the interest swap contracts.

Grant Thornton advised MBS initially, and at each annual audit, that this was permissible.

In 2013, Grant Thornton advised MBS that they could not use hedge accounting and that their previous advice had been incorrect. Consequently MBS’ accounts were amended to show the volatility of the interest swap contracts and they did not hold adequate regulatory capital – they had to terminate the contracts early creating a £32.7 million loss.

MBS claimed against Grant Thornton for the costs of terminating these contracts. Grant Thornton admitted negligence, but denied that the costs incurred were within their scope of duty.

Court of appeal judgment

Following judgments at Commercial Court and High Court level which found in favour of Grant Thornton, stating the MBS’ losses were not within Grant Thornton’s scope of duty and were instead due to market forces, MBS appealed.

The Court of Appeal held that Grant Thornton had provided information, not advice, and the onus was on MBS to prove that they would not have suffered the £32.7 million loss if Grant Thornton’s information was correct. They could not establish this and the Court found in favour of Grant Thornton.

Supreme Court

The Supreme Court applied a simplified test, looking to see what risk the duty was supposed to guard against and whether the loss suffered represented the fruition of that risk.

Here, MBS had asked Grant Thornton whether it could use hedge accounting within its regulated profession: Grant Thornton incorrectly advised MBS on this on numerous occasions and MBS had therefore suffered loss within the scope of Grant Thornton’s duty.

The Court laid out six questions that any judge who is presiding over a professional negligence case should consider:

1. Is the harm which is the subject matter of the claim actionable in negligence?
2. What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care?
3. Did the Defendant breach their duty by their act or omission?
4. Is the loss the claimant seeks damages for the consequence of the defendant’s act or omission?
5. Is there a sufficient link between an element of the harm for which the claimant seeks damages and the subject matter of the defendant’s duty of care, as analysed at stage two above?
6. Is there an element of the harm that is too remote, that relates to a different cause, or because the claimant has mitigated their loss or that has failed to avoid loss which they reasonably could have been expected to avoid?’

Points to consider

Claimants who have suffered loss due to negligence advice will view this judgment favourably as it provides a more common sense test for ascertaining whether loss was within a defendant’s scope of duty.

Professionals giving advice must ensure their terms of engagement are clear on the agreed purpose of the advice sought to protect against professional negligence claims. As there will now be considerable emphasis placed on the precise detail of what an adviser is instructed to do and for what purpose, it is preferential that an advisers role, scope and the risk they are being asked to or not to protect against are recorded in writing.

For any professional negligence queries please contact our expert Jonathan Sachs.