Manchester Building Society v Grant Thornton UK LLP
| Jurisdiction | England & Wales |
| Neutral Citation | [2021] UKSC 20 |
| Year | 2021 |
| Court | Supreme Court |
2020 Oct 14, 15; 2021 June 18
Negligence - Duty of care - Scope of duty - Auditor giving client negligent advice about use of hedge accounting to reduce volatility of interest rate swaps - Client entering into swaps in reliance on advice - Client having to close out swaps when value negative on discovering error in auditor’s advice - Whether auditor liable for cost of closing out swaps - Whether loss within scope of auditor’s duty of care
The defendant auditor negligently advised the claimant building society that it could apply hedge accounting to reduce the effect in its accounts of the volatility of the mark-to-market (“MTM”) value of interest rate swaps and that the accounts prepared using that method gave a true and fair view of the claimant’s financial position. In reliance on that advice, the claimant entered into long-term interest rate swap contracts as a hedge against the cost of borrowing money to fund its lifetime mortgage lending. The misstated accounts served to hide volatility in the claimant’s capital position and what became a severe mismatch between the negative value of the swaps and the value of the mortgage loans which the swaps were supposed to hedge. When after seven years the defendant realised its error, the claimant had to restate its accounts to show substantially reduced net assets and insufficient regulatory capital. The claimant therefore needed to close out the swaps, the MTM value of which had become negative as a result of a fall in interest rates. Consequently the claimant had to pay substantial MTM losses. The claimant brought a claim in negligence, seeking damages for, inter alia, the MTM losses. The judge held that the defendant was not liable for the MTM losses and the Court of Appeal upheld his decision.
On appeal by the claimant—
Held, allowing the appeal, that on a claim in negligence a defendant was only liable in damages in respect of losses of a kind which fell within the scope of his or her duty of care; that (per Lord Reed PSC, Lord Hodge DPSC, Lord Kitchin, Lord Sales, Lord Burrows JJSC and Lady Black; Lord Leggatt JSC agreeing in the result) the scope of the duty of care assumed by a profesional adviser was governed by the purpose of the duty, judged on an objective basis by reference to the reason why the advice had been given; that, thus, it could be unhelpful to consider whether the defendant had provided “information” rather than “advice” and carrying out a counterfactual analysis by asking whether the claimant’s actions would have resulted in the same loss if the advice given by the defendant had been correct should be regarded only as a tool to cross-check the result given pursuant to an analysis of the purpose of the duty; that, in the present case, the purpose of the defendant’s advice had been to advise whether the claimant could use hedge accounting in order to implement its proposed business model within the constraints arising from its regulatory environment; that, having regard to the purpose for which the defendant had given advice about the use of hedge accounting, the MTM losses fell within the scope of the defendant’s duty of care; that, however, the claimant had been overly ambitious in its application of its business model and, in particular, the matching of lifetime mortgages and interest rate swaps, and was 50% contributorily negligent; and that, accordingly, the defendant was liable for 50% of the MTM losses claimed (post, paras 4, 6, 17, 19, 22–27, 34–39, 175–176, 177, 201, 203, 206, 209–213).
Per Lord Reed PSC, Lord Hodge DPSC, Lord Kitchin, Lord Sales JJSC and Lady Black. Answering the following six questions assists in determining the extent of a claimant’s entitlement to damages on a claim in negligence. (1) The actionability question: is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence? (2) The scope of duty question: what are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care? (3) The breach question: did the defendant breach his or her duty by his or her act or omission? (4) The factual causation question: is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission? (5) The duty nexus question: 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)? (6) The legal responsibility question: 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 or her loss or has failed to avoid loss which he or she could reasonably have been expected to avoid? (post, para 6).
The following cases are referred to in the judgments:
Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd
Assetco plc v Grant Thornton UK LLP
BTI 2014 LLC v PricewaterhouseCoopers LLP
Barings plc v Coopers & Lybrand (No 7)
Berg Sons & Co Ltd v Adams [
Bristol and West Building Society v Fancy & Jackson [
Caparo Industries plc v Dickman [
Deloitte & Touche v Livent Inc
Equitable Life Assurance Society v Ernst & Young
Galoo Ltd v Bright Grahame Murray [
Hughes-Holland v BPE Solicitors
Leeds Estate, Building and Investment Co v Shepherd (
London and General Bank (No 2), In re [
Meadows v Khan
Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (formerly Edward Erdman) (No 2) [
Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd (The Mamola Challenger)
Omega Trust Co Ltd v Wright Son & Pepper (No 2) [
Platform Home Loans Ltd v Oyston Shipways Ltd [
Portman Building Society v Bevan Ashford [
Practice Statement (Judicial Precedent) [
South Australia Asset Management Corpn v York Montague Ltd [
Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [
Sutherland Shire Council v Heyman (
Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas)
Western Steamship Co Ltd v NV Koninklijke Rotterdamsche Lloyd (The Empire Jamaica) [
The following additional cases were cited in argument:
Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [
Fulton Shipping Inc of Panama v Globalia Business Travel SAU (formerly Travelplan SAU) of Spain
Needler Financial Services Ltd v Taber [
APPEAL from the Court of Appeal
By a claim form issued on 14 November 2014 the claimant, Manchester Building Society, brought proceedings against the defendant auditor, Grant Thornton UK LLP, alleging that it had given negligent advice that the claimant could apply hedge accounting to reduce the effect in its accounts of the volatility of the mark-to-market (“MTM”) value of interest rate swaps. Subsequently the claimant suffered losses and brought proceedings seeking damages for, inter alia, the MTM losses arising from breaking the swaps early.
On 2 May 2018 Teare J sitting in the Commercial Court of the Queen’s Bench Division [2018] EWHC 963 (Comm); [2018] PNLR 27 rejected the break costs claim. On 30 January 2019 the Court of Appeal (Hamblen, Males LJJ and Dame Elizabeth Gloster) [2019] EWCA Civ 40; [
With permission of the Supreme Court (Baroness Hale of Richmond PSC, Lady Black and Lord Sales JJSC) given on 1 July 2019 the claimant appealed. The issue on the appeal was agreed to be whether the break costs claimed fell within the defendant’s duty of care.
The facts are stated in the judgment of Lord Leggatt JSC, post, paras 43–58.
Rebecca Sabben-Clare QC, Benjamin Parker and Harry Wright (instructed by
The central question is: what facts have to be established by a claimant in order to recover damages for breach by a professional of the duties which have been assumed by contract? The appeal is not on the facts but about what legal test has to be satisfied by a claimant.
The Court of Appeal held that the claim failed because it was an “information” rather than an “advice” case, with the result that only losses which would not have been suffered if the information had been...
To continue reading
Request your trial
-
Paul Richards v Speechly Bircham LLP
...identifying the scope of the defendant's duty. This is clear from the judgment of the majority of the Supreme Court in Manchester Building Society v Grant Thornton UK LLP [2021] 3 WLR 81, at [6], and their enumeration of the following questions: “(1) Is the harm (loss, injury and damage) w......
-
Anan Kasei Company Ltd v Neo Chemicals & Oxides (Europe) Ltd
...set out by the Supreme Court in relation to the tort of negligence, in the cases of Manchester Building Society v Grant Thornton [2021] UKSC 20, [2021] 3 WLR 81 and Meadows v Khan [2021] UKSC 21, [2021] 3 WLR 147, are of some relevance in considering the assessment of (in particular) scope ......
-
Ulster Bank Ireland Ltd, Paul McCann and Patrick Dillon v Brian McDonagh, Kenneth McDonagh and Maurice McDonagh
...below, some aspects of SAAMCO have recently been revisited by the UK Supreme Court in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20, [2021] 4 All ER 1. However, valuer cases continue to be approached generally on the basis that the scope of the valuer's duty is limited ......
-
The King on the application of Charles Street Securities Europe LLP v Financial Ombudsman Service
...Hughes-Holland”), Lord Sumption giving the single judgment. The Supreme Court then provided further clarification in Manchester Building Society v Grant Thornton (UK) LLP [2021] UKSC 20; [2022] AC 783 (“ MBS – Supreme Court”). That decision came after the Ombudsman's Final Decision. At th......
-
Behind The Façade Series: A Look At Key Professional Negligence Issues (Video)
...emphasis on the current law relating to professional negligence claims following Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20, Brie Stevens-Hoare QC, Katie Lee and Jack Dillon discuss the scope of duty owed by potential professional defendants. They address questions s......
-
What Happens When A Professional Gets It Wrong?
...professional negligence claims have strict time limits. Footnotes 1 [1997] A.C. 191 2 Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 3 Khan v Meadows [2021] UKSC 21 4 Hart v Large [2021] EWCA Civ 24 An earlier version of this article originally appeared in Engineering De......
-
The Fine Art of Acquiring Authentic Artworks.
...v. Friern Hospital Management Committee [1957] 1 W.L.R. 582. Following the case of Manchester Building Society v. Grant Thornton UK LLP [2021] UKSC 20 there is a renewed emphasis on the purpose for which the advice was sought (judged (60) Qatar Investment & Projects Development Holding ......