SAAMCO and Hughes-Holland reconsidered

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In South Australia Asset Management Corp v York Montague Ltd [1996] UKHL 10 (SAAMCO), the House of Lords limited recovery of damages from a negligent professional advisor to losses which fall within the scope of the advisor’s duty. Last year, in BPE Solicitors v Hughes-Holland [2017] UKSC 21, the Supreme Court reinforced and clarified the application of the SAAMCO principle in claims against solicitors (see previous article here). Now, in Manchester Building Society v Grant Thornton LLP [2018] EWHC 963, the Commercial Court has considered its application in the context of an accountants’ negligence claim.

The claimant building society (MBS) entered into ‘lifetime mortgages’ with borrowers. From 2006 onwards it hedged its interest rate risk by purchasing interest rate swaps. It was advised by the defendant firm of accountants (GT) that ‘hedge accounting’ was an appropriate method of limiting balance sheet volatility.

In 2013 MBS learned that it could not properly use hedge accounting and that the correctly reported balance sheet revealed heavy losses. MBS closed out the swaps, with associated losses of £48.5 million. It looked to recover its losses from GT, claiming that it had received negligent advice about the hedge accounting. GT conceded that its advice had been wrong but contented that:

  • on the basis of SAAMCO and Hughes-Holland, the losses were not within the scope of its duty of care; and
  • even if its advice had been correct, MBS would still have entered into the same mortgages and hedged them with a different form of swaps, so the same losses would have been incurred.

Mr Justice Teare held that:

  • ‘but for’ GT’s negligence MBS would not have suffered the costs of closing out the swaps in 2013;
  • GT’s negligence was an effective cause of the loss; the losses would not have occurred had GT’s advice been correct; and
  • the losses were not too remote.

The decisions in SAAMCO and BPE v Hughes-Holland, however, required the court to form a view as to whether GT assumed responsibility for the type of loss incurred by MBS in 2013 when MBS decided, in light of the discovery that hedge accounting was not available, to close the swaps out.  And here is the sting in the tail: Teare J held that the losses fell outside the scope of GT’s duty. Applying Lord Sumption’s guidance in Hughes-Holland, he concluded that it would be “a striking conclusion to reach that an accountant who advises a client as to the manner in which its business activities may be treated in its accounts has assumed responsibility for the financial consequences of those business activities.” In his view, looking at the situation “broadly, sensibly and in the round”, the losses flowed from market forces for which GT had not assumed responsibility.

In what might be read as an invitation to MBS to apply for permission to appeal, Teare J noted that the assumption of responsibility question had not been an easy one to answer and that his mind had “wavered” during its consideration. Ultimately he decided that just as GT had not assumed responsibility for the losses which would have been incurred had a counterparty exercised its right to terminate a swap, so it had not assumed responsibility for the very same losses which were incurred when MBS decided to close the swaps out, notwithstanding that that decision was taken because GT’s advice had been wrong. The accounting treatment of the swaps was to be distinguished from the actual economic consequences of the swaps which would have occurred whatever the accounting treatment; the losses would have arisen in any event.

The decision illustrates the difficulty of determining the extent of a defendant’s liability in the context of a claim for professional negligence. The nature of the duty of care owed by the defendant, whether the defendant is providing information or advice and what types of loss have been assumed are all questions of law. In practice, however, ascertaining the extent of an advisor’s liability is an intensely fact sensitive exercise and every case depends on the range of matters for which the defendant assumed responsibility having regard to the particular facts.

Ben Ogden