UK Supreme Court issues landmark judgments on the scope of duty principle in the tort of negligence

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Introduction

In the recent landmark decision of Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 (Grant Thornton), the Supreme Court of the United Kingdom (UKSC) restated the principles enunciated in the seminal United Kingdom House of Lords’ (UKHL) decision of South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 (SAAMCO). In rendering its decision, the UKSC clarified the principles governing the application of the scope of duty principle and the extent of liability of professional advisers under the tort of negligence. At the same time, the UKSC also handed down a judgment in Khan v Meadows [2021] UKSC 21, which considered this principle in the context of medical negligence, opining that it is desirable for both judgments to be read together as reflecting and supporting a coherent underlying approach.

In SAAMCO, the UKHL had previously distinguished between (i) a duty to advise someone as to what course of action he should take (i.e., “advice” cases); and (ii) a duty to provide information to enable someone to decide upon a course of action (i.e., “information” cases). In the latter type of cases, the Court may perform a counterfactual analysis to identify the extent of loss suffered by the claimant which falls within the scope of the defendant’s duty. This is done by considering whether the claimant’s actions would have resulted in the same loss if the information given by the claimant had been correct (the SAAMCO counterfactual).

In Grant Thornton, the majority held that the proper approach is to have regard to the purpose of the defendant-professional’s duty, judged on an objective basis by reference to the reason why the advice or information was sought or given. The majority also stressed that the distinction originally drawn in SAAMCO between “advice” and “information” cases is not to be viewed as a rigid or binary rule. In addition, the SAAMCO counterfactual is simply a tool to cross-check the result of the objective analysis of the purpose of the duty.

This article discusses the UKSC’s decision of Grant Thornton and provides some key takeaways.

Background and decision

The Appellant, Manchester Building Society (MBS), was a mutual building society which had employed the Respondent, Grant Thornton UK LLP (GT), as its auditors between 1997 and 2012. From 2006 to 2011, GT negligently advised MBS that it could prepare its annual financial statements according to a method known as hedge accounting, and that these statements would give a true and fair view of MBS’ financial position. MBS relied on this advice to expand its business of issuing lifetime mortgages, entering into long-term interest rate swaps as a hedge against the costs of borrowing money to fund their business.

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

Thereafter, MBS brought a claim in the tort of negligence against GT, seeking damages for, among others, the costs of closing out these swaps. GT sought to limit its liability by relying on the SAAMCO principle that professionals can only be held liable for losses which fall within the scope of their duty of care.

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

The majority’s judgment: a novel approach

The majority laid down a framework of six questions (to be answered in sequence) that will be helpful in considering how the scope of duty question fits within the tort of negligence:

  1. Is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence? (the actionability question)
  2. What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care? (the scope of duty question)
  3. Did the defendant breach his duty by his act or omission? (the breach question)
  4. Is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission? (the factual causation question)
  5. Is there a sufficient nexus between a particular 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 2 above? (the duty nexus question)
  6. Is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote, or because there is a different effective cause (including novus actus interveniens) in relation to it, or because the claimant has mitigated his loss or has failed to avoid loss which he could reasonably have been expected to avoid? (the legal responsibility question)

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

  1. The scope of duty question is located within a general conceptual framework in the law of the tort of negligence (i.e., the framework above);
  2. The proper approach is to have regard to the purpose of the defendant-professional’s duty of care, judged on an objective basis by reference to the reason why the advice or information was sought or given. In other words, the Court evaluates what risk the duty imposed on the defendant-professional was supposed to guard against, and then determines whether the loss suffered by the claimant represented the fruition of that risk;
  3. In some cases, where the issue is confined to determining whether particular kinds or categories of losses are within the defendant-professional’s duty of care, the scope of duty question when answered, also answers the duty nexus question;
  4. The “information” or “advice” dichotomy introduced in SAAMCO is too rigid and it would be inappropriate to start the analysis by attempting to shoehorn a particular case into one category or the other;
  5. The SAAMCO counterfactual is an analytical tool that is useful in only some cases in ascertaining the extent of the defendant-professional’s liability which flows from the breach of a duty of a defined scope. In most other cases, it is only a tool to cross-check the result given pursuant to the analysis of the purpose of the duty, and it is subordinate to this analysis and should not supplant or subsume it.

Applying the law to the facts, the majority found that the purpose of GT’s advice was to establish whether MBS could use hedge accounting in order to implement its proposed business model within the constraints of regulatory capital requirements. As a result of GT’s negligent advice, MBS entered into further swap transactions and was exposed to the risk of loss in breaking those swaps when it realised that hedge accounting could not be used. This was the risk that GT owed a duty of care to protect MBS against. Therefore, having regard to the purpose for which GT had given advice, MBS’ losses fell within the scope of GT’s duty of care. Nevertheless, the damages awarded to MBS was reduced by 50% on the basis of its contributory negligence.

Lord Leggatt’s judgment: a causation-based analysis of the scope of duty principle

Lord Leggatt couched his analysis of the scope of duty principle in the language of causation. In his view, the central question is whether there is a sufficient causal relationship between the state of affairs that made the advice or information provided by the professional incorrect and the claimant’s “basic” loss. Answering this question would involve comparing the claimant’s actual financial position with what that position would have been if the defendant had performed its duty.

Lord Burrows’ judgment: a more traditional approach

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

Key Takeaways

Just over 20 years after the UKHL’s decision of SAAMCO, the UKSC’s decisions of Grant Thornton and Meadows have shaken up the law regarding the scope of liability in professional negligence significantly. Notably, the distinction between “advice” and “information” cases and the SAAMCO counterfactual have been subordinated, with the focus now placed on the purpose of the defendant-professional’s duty.

For professional advisers, these decisions would suggest that their terms of engagement should spell out clearly the agreed purpose of the advice being sought. While the UKSC did not clarify whether this new approach is limited to purposes as expressly stated in the terms of engagement, professional advisers may wish to err on the side of caution by contemplating any implied or incidental purposes at the start of their engagement. To this end, professional advisers should also bear in mind that the client-advisor relationship is a fluid one, and the purpose(s) for which they are being engaged may change throughout its course.

It will be interesting to see how the Singapore Courts respond to this development of the law in the UK. Under Singapore law, the nature and extent of the duty of care owed by professionals appears to intersect with issues of causation and remoteness (see the Singapore Court of Appeal decision of JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (a firm) [2007] 4 SLR(R) 460 at [140]–[146] and The Law of Torts in Singapore at [07.113]–[07.118]), an approach which six of the seven justices in Grant Thornton and Meadows did not adopt.

It remains to be seen whether the Singapore Courts will adopt the majority’s proposed framework or retain its traditional causation-based approach. The framework elucidated by the majority appears to be a sensible one, although it is unclear whether this will add to or reduce the existing complexities in the law of negligence.

This decision is a significant development in the professional negligence sphere. Whether it is a favourable change for professional advisers or their clients, time will tell.

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

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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