The recent case of Manchester Building Society v Grant Thornton 2018 is a striking example of the inability to recover certain losses from a professional adviser, even where their advice has been negligent.
In a claim for negligence, a claimant can only claim for losses for which a defendant adviser has assumed responsibility. The Manchester Building Society (‘the Society’) has this month felt the full force of this principle, being awarded just £315,345 of the £48.5 million claimed from its accountants, and potentially facing a bill for a portion of the accountant’s legal costs.
The Society entered into ‘lifetime mortgages’ with borrowers, under which equity was released and no payments were due until the owner entered a care home or died. From 2006, it hedged the interest rate risk by purchasing interest rate swaps.
Under the International Financial Reporting Standards ("IFRS") the swaps had to be entered onto the balance sheet. This created ‘volatility’ on the balance sheet because the fair value of the swaps would fluctuate with changes in present and estimated future interest rates.
The Society’s accountants, Grant Thornton, approved the use of hedge accounting as a method of limiting that volatility, by allowing an adjustment to be made to the value of the hedged asset, the mortgage. That advice, however was negligent. When the Society realised this and drew up its accounts without the use of hedge accounting in 2013, the Society’s financial position took a serious downturn, resulting in substantial losses.
The Society sued its accountants in 2015 for breach of contract, negligence and breach of statutory duty, alleging negligent advice on how to account for interest rate swaps in their balance sheet, leading to losses of £48.5 million.
The case was decided by Mr Justice Teare on 2 May 2018 who held that whilst the advice given between 2006 and 2011 was negligent, the accountant advisers had not assumed responsibility for the whole £48.5 million losses.
What is interesting about this case is that it appeared to have all the ingredients for a successful negligence claim; the judge finding that:
- the losses would not have occurred if the advice had been correct;
- the accountant’s negligence was an effective cause of the loss; and
- the losses were foreseeable
The critical requirement that was found to be missing, however, was the assumption of responsibility, by the accountants, for the extent of the losses suffered. Mr Justice Teare stated:
the loss suffered by the Claimant, looked at broadly, sensibly and in the round, was not in truth something for which the Defendant assumed responsibility or the "very thing" to which the Defendant had advised the Claimant would not be exposed. Rather, the loss flowed from market forces for which the Defendant did not assume responsibility
An impartial observer of the dealings between the Claimant and Defendant from November 2005 until April 2006 would not have concluded that the Defendant was assuming responsibility for the risk of loss to the Claimant in the event that there was a sustained fall in interest rates
There have been numerous cases which have debated what constitutes an assumption of responsibility and what test should be applied by the courts in deciding this. In basic terms, the court will look at whether the defendant advisor accepted responsibility for the potential losses that could be incurred should their advice be wrong. In this case the judge concluded that whilst the losses were fairly attributable to the accountant’s negligent advice, the accountants had not accepted responsibility for the total losses suffered.
Mr Justice Teare recognised a number of practical and commercial factors when allowing the accountants in this case to largely escape liability as follows:
- The accounting treatment of business activities can be different from the actual economic consequences of those business activities;
- Even if the material which the adviser supplies is critical to the decision to enter into the transaction, he is only liable for the consequences of that being wrong and not for the financial consequences of the claimant entering into the transaction so far as these are greater, meaning advisers will not necessarily be responsible for what is a commercial decision; and
- There were other causes of the loss including the decision of the claimant to purchase the swaps in the first place and the subsequent fall in interest rates which occurred following the financial crisis of 2008.
Mr Justice Teare did find the accountants liable for the relatively modest termination/penalty costs of breaking the swaps in the sum of £315,345 which he considered were losses for which the accountants had accepted responsibility.
Every case is different
The practical difficulty for both potential claimants and professional advisers that is highlighted by this case is the fact that many of these cases will turn entirely on their factual matrix. The court will look at the context in which the advice was given, what the adviser was engaged to do, what work the adviser assumed responsibility for and whether the losses suffered were “fairly attributable to the negligently proffered advice/information” (Main v Giambrone and others  EWHC 1946 (QB), Foskett J).
One has some sympathy for the claimant in this case because whilst the legal principles have been with us for some time, their interpretation and application to the facts at hand can vary greatly. Mr Justice Teare stated in his judgment:
It is not possible to lay down hard and fast rules as to how to determine whether the losses were within the scope of the defendant’s duty
In the earlier case of Hughes-Holland v BPE Solicitors 2017 Lord Sumption said:
every case is likely to depend on the range of matters for which the defendant assumed responsibility and no more exact rule can be stated
The costs hearing is due to take place on 18 May 2018, following which we will see whether or not the Society is going to appeal the decision.
In the meantime, those engaging professional advisers and advisers themselves should give careful thought to what liability, and the extent of that liability, is being accepted in respect of work carried out at the outset. It may be that we start to see more clarifications of this responsibility being addressed head on in retainer documentation to avoid similar drastic reductions to a claimant’s expectation on loss.