English Supreme Court Provides A ‘More Generous’ Test for The Duty of Care Owed by Professional Advisers

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Wong-Chee-Lin.jpg Claudia-Cheah-web.jpg  
Wong Chee Lin Claudia Cheah  

Recently, the Supreme Court of the United Kingdom (“UKSC”) had in the case of Manchester Building Society (Appellant) v Grant Thornton UK LLP (Respondent) [2021] UKSC 20 clarified the test in determining the scope of duty of care owed by professional advisers, where they are now required to pay attention to the purpose of duty to advise and make sure that they are absolutely clear on the agreed purpose of the advice being sought.
 
This is an important decision as the UKSC departed from an earlier House of Lords case of South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 ("SAAMCO") and ruled rather than trying to shoe-horn the statement provided by the professional adviser into the category of “advice” or “information”, which is the test established in SAAMCO; one should look at the purpose of the advice sought by the client.
 
Background
 
The Appellant in this case, Manchester Building Society (“MBS”) is a small mutual building society, and its accounts were audited by the Respondent, Grant Thornton UK LLP (“Grant Thornton”), a firm of accountants.
 
Since 2006 and annually thereafter, Grant Thornton had incorrectly advised MBS that its accounts could be prepared according to a method known as "hedge accounting" and such method gave a true and fair view of MBS’s financial position.
 
In reliance on that advice, MBS entered into various fixed rate mortgages hedged against long term swaps under which it paid a fixed rate but received a variable rate. Grant Thornton realised its mistake in 2013 and MBS had to restate its accounts, showing substantially reduced assets and insufficient regulatory capital. To remedy the situation, MBS closed out the interest rate swap contracts early at a cost of over £32m. MBS then brought a claim in negligence against Grant Thornton.
 
In the court of first instance, the trial judge concluded that Grant Thornton was not liable for the losses and the Court of Appeal dismissed MBS’s appeal. MBS then appealed to the UKSC.1
 
Issue
 
The issue is whether MBS can recover the cost of closing out the swaps from Grant Thornton, in damages.
 
Judgment
 
The Supreme Court unanimously allowed the appeal and held that MBS’s loss fall 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.
 
In arriving at the decision, Lord Hodge and Lord Sales held that “the scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty, judged on an objective basis by reference to the reason why the advice is being given.”2  Lord Hodge and Lord Sales further held that “in the case of negligent advice given by 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”.3
 
Lord Hodge and Lord Sales opined that the distinction drawn between “advice” and “information” by Lord Hoffman in SAAMCO is not satisfactory, and “the focus should be on identifying the purpose to be served by the duty of care assumed by the defendant.”4
 
In the present case, the purpose of Grant Thornton’s advice was to establish whether MBS could use hedge accounting within the constraints of the applicable regulatory environment to implement its proposed lifetime mortgages business model. Grant Thornton negligently advised that it could, and MBS entered into swap transactions pursuant to the business model advised. This resulted in MBS being exposed to the risk of loss in breaking the swaps when it was realised that hedge accounting could not in fact be used, exposing it to regulatory capital demands which the use of hedge accounting was supposed to avoid. That was a risk that Grant Thornton’s advice was supposed to allow MBS to assess, and which its negligence caused MBS to fail to understand.
 
The loss suffered by MBS therefore fell within the scope of the duty of care assumed by Grant Thornton, in light of the purpose of its advice.
 
Comments
 
Whilst this is a decision of the English court, it has persuasive value in the Malaysian court. Professional advisers must thus be cautious of the fact that in the course of giving advice to their clients, the courts or regulators may expect more from them than taking a box ticking approach. Aside from contractual duty, a duty of care may arise by reference to the purpose of the advice.
 
Commentary by Wong Chee Lin, (Partner), Claudia Cheah (Partner) and Cedric Chan (Associate) of Skrine.
 

1  [2021] UKSC 20.                                                      
2  Ibid, para 13.
3  Ibid, para 17
4  Ibid, para 19.
 
 

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.