UK Supreme Court hands down landmark judgments on extent of duty principle in tort of negligence | Denton

introduction

In the recent historic decision of Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 (Grant Thorton), the United Kingdom Supreme Court (UKSC) reaffirmed the principles set out in the founding decision of the United Kingdom House of Lords (UKHL) of South Australia Asset Management Corporation v York Montague Ltd [1997] CA 191 (SAAMCO). In making its decision, the UKSC clarified the principles governing the application of the principle of scope of duty and the extent of liability of professional advisers under the tort of negligence. At the same time, the UKSC also issued a judgment in Khan vs. Meadows [2021] UKSC 21, which considered this principle in the context of medical negligence, finding it desirable that the two judgments be read together as reflecting and supporting a consistent underlying approach.

In SAAMCO, the UKHL had previously distinguished between (i) a duty to advise someone on what to do (i.e. ‘advice’ cases); and (ii) an obligation to provide information to enable someone to decide on a course of action (ie, “information” cases). In the latter type of cases, the court may conduct a counterfactual analysis to determine the extent of the plaintiff’s loss that is the defendant’s liability. This is done by considering whether the plaintiff’s actions would have resulted in the same loss if the information provided by the plaintiff had been correct (the SAAMCO counterfactual).

In Grant Thorton, the majority considered that the appropriate approach is to take into account the purpose of the obligation of the defending trader, assessed on an objective basis by reference to the reason for which the advice or information was sought or given. The majority also pointed out that the distinction originally drawn in SAAMCO between the cases “notice” and “information” should not be considered as a rigid or binary rule. Moreover, the SAAMCO counterfactual is simply a tool for cross-checking the result of the objective analysis of the subject matter of the right.

This article discusses the UKSC’s decision to Grant Thorton and provides a few key takeaways.

Context and decision

The appellant, Manchester Building Society (MBS), was a mutual building society which employed the respondent, Grant Thornton UK LLP (GT), as an auditor between 1997 and 2012. From 2006 to 2011, GT negligently to MBS that it could prepare its annual financial statements on a so-called hedge accounting method and that these statements would give a true and fair view of MBS’s financial situation. MBS used this advice to grow their life mortgage origination business, entering into long-term interest rate swaps as a hedge against borrowing costs to fund their business.

In 2013, GT discovered its error and informed MBS that it would have to restate its accounts, which consequently showed significantly reduced net assets and insufficient regulatory capital, as required by the applicable regulatory regime. MBS remedied the situation by prematurely closing the interest rate swaps at a cost of approximately £32.7 million.

Subsequently, MBS brought a tort action against GT, claiming damages for, among other things, the costs of closing these swaps. GT sought to limit its liability by invoking the SAAMCO principle that professionals can only be held liable for losses that fall within their duty of care.

The UKSC unanimously held that the loss of MBS fell within the duty of care assumed by GT. In reaching this conclusion, however, the judges were divided in their analysis of the principle of the scope of the duty and SAAMCO.

Majority Judgment: A New Approach

The majority have established a framework of six questions (to be answered in order) which will be helpful in determining how the question of scope of duty fits within the tort of negligence:

1. Is the injury (loss, injury and damage) that is the subject of the claim subject to an action in negligence? (the issue of actionability)
2. What are the risks of harm to the plaintiff against which the law imposes a duty of care on the defendant? (the scope of the question of duty)
3. Did the defendant breach its obligation by its act or omission? (the offense issue)
4. Is the loss for which the plaintiff seeks damages the consequence of the act or omission of the defendant? (the issue of factual causation)
5. Is there a sufficient nexus between a particular element of harm for which the plaintiff seeks damages and the subject matter of the defendant’s duty of care as analyzed in step 2 above? (the question of the bond of duty)
6. Is a particular element of harm for which the plaintiff seeks damages irrecoverable because it is too remote or because there is some other effective cause (including novus actus interveners) in this regard, or because the plaintiff mitigated his loss or failed to avoid a loss which he could reasonably have been expected to avoid? (the issue of legal liability)

In allowing the appeal, the majority reaffirmed the approach to be taken in assessing the extent of liability of professional advisers:

1. The question of the scope of the duty lies within a general conceptual framework of the tort law of negligence (ie the above framework);
2. The appropriate approach is to consider the objective of the respondent professional’s duty of care, judged on an objective basis by reference to the reason for which the advice or information was sought or given. In other words, the Court assesses against what risk the obligation imposed on the defendant professional was supposed to protect itself, then determines whether the damage suffered by the plaintiff represented the materialization of this risk;
3. In some cases, where the question is limited to whether particular types or categories of losses fall within the respondent-professional’s duty of care, the question of the scope of the duty, when answered, also answers to the question of the bond of obligation;
4. The “information” or “advice” dichotomy introduced in SAAMCO is too rigid and it would be inappropriate to begin the analysis by trying to classify a particular case in one category or the other;
5. the SAAMCO The counterfactual is an analytical tool that is only useful in certain cases to determine the extent of the defendant professional’s liability that arises from the breach of an obligation of a defined scope. In most other cases, it is only a tool to cross-check the result given as a result of the analysis of the object of the right, and it is subordinate to this analysis and should not supplant or subsume it.

Applying the law to the facts, the majority concluded that the purpose of GT’s advice was to determine whether MBS could use hedge accounting to implement its proposed business model within regulatory requirements for capital. As a result of GT’s negligent advice, MBS entered into further swap transactions and was exposed to the risk of loss should those swaps be breached when it realized that hedge accounting could not be used. This was the risk against which GT had an obligation to protect MBS. Therefore, having regard to the purpose for which GT had provided advice, MBS’s losses fell within GT’s duty of care. Nevertheless, the damages awarded to MBS were reduced by 50% on the basis of its contributory negligence.

Lord Leggatt’s Judgment: A Causal Analysis of the Scope of Duty Principle

Lord Leggatt formulated his analysis of the principle of the scope of duty in the language of causation. According to him, the central question is whether there is a sufficient causal link between the situation which made the advice or information provided by the professional incorrect and the “essential” loss of the plaintiff. Answering this question would involve comparing the plaintiff’s actual financial situation with what it would have been had the defendant fulfilled his duty.

The judgment of Lord Burrows: a more traditional approach

Lord Burrows’ reasoning was more closely aligned with that of the majority, avoiding a causation-based explanation for the principle of the scope of duty and focusing on the purpose-duty approach. However, His Lordship placed more emphasis on the principle of scope of duty as underpinned by the policy to achieve a fair and reasonable allocation of the risk of loss between the parties, rather than on the conceptual framework of the tort of negligence advocated by the majority.

Key points to remember

Just over 20 years after the UKHL’s decision to SAAMCOUKSC decisions of Grant Thornton and Meadows significantly upset the law relating to the extent of liability in the event of professional misconduct. In particular, the distinction between “notice” cases and “information” cases and the SAAMCO the counterfactuals have been subordinated, with the focus now on the purpose of the defendant trader’s obligation.

For professional advisers, these rulings would suggest that their terms of engagement should clearly state the agreed purpose of the advice sought. Although the UKSC has not clarified whether this new approach is limited to the objectives expressly set out in the terms of the engagement, professional advisers may wish to err on the side of caution in considering any implicit or incidental objectives at the outset of their engagement. . To this end, professional advisors should also keep in mind that the client-advisor relationship is fluid and that the purpose(s) for which they are engaged may change throughout its journey.

It will be interesting to see how the courts in Singapore react to this development in UK law. Under Singaporean law, the nature and extent of the duty of care of professionals appears to intersect with the issues of causation and remoteness (see Singapore Court of Appeal decision of JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (a company) [2007] 4 SLR(R) 460 to [140]–[146] and Singapore tort law at [07.113]–[07.118]), an approach that six of the seven judges of Grant Thornton and Meadows did not adopt.

It remains to be seen whether Singapore courts will adopt the framework proposed by the majority or retain their traditional causation-based approach. The framework elucidated by the majority seems reasonable, although it is unclear whether it will add or reduce existing complexities of negligence law.

This decision represents a significant development in the field of professional negligence. Whether this is a positive change for professional advisors or their clients, time will tell.

Dentons Rodyk thanks and acknowledges intern Harriz Bin Jaya Ansor and intern Mark Chia for their contributions to this article.