Quick Summary
- The case concerned negligent advice given by auditors and advisors, Grant Thornton UK LLP to the Manchester Building Society in relation to their application of hedge accounting under international financial reporting standards, which negligent advice resulted in significant financial losses for the Society.
- The Supreme Court rejected the rigid distinction between “advice” and “information” cases traditionally used to determine the scope of a professional’s duty of care.
- The court concluded that the primary factor in determining liability is the “purpose of the duty” owed by the professional, assessed from an objective standpoint.
- Grant Thornton was held liable for the substantial financial losses suffered by the Manchester Building Society, underscoring the need for professional advisors to have a deep understanding of their client’s business models and the intended outcomes of their advice.
- This landmark decision carries significant implications for professional negligence claims, potentially broadening the scope of liability for advisors by placing greater emphasis on the purpose and context of their advice.
- Our law firm firm, Go Legal, has over 100+ 5* reviews on Trustpilot & has been rated as Excellent with 4.9 out of 5 rating putting us amongst one of the best law firms in the UK.
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Case summary
Manchester Building Society v Grant Thornton UK LLP is an important case in the law of professional negligence. The case was about Grant Thornton giving bad advice to Manchester Building Society about using hedge accounting under the international financial reporting standards for their business model, which included matched interest rate swaps and lifetime mortgages. This poor advice caused the building society to lose a lot of money when they had to close out the swaps at a high cost, raising questions about the scope of GT’s duty of care.
The Supreme Court disagreed with the Court of Appeal’s earlier decision. They said that the difference between “advice” and “information” is not as clear-cut. Instead, they focused on the “purpose of the duty” to decide how far a professional advisor’s responsibility goes, particularly considering the scope of the professional advisor’s duty. This important ruling explained that the scope of duty relies on the risks the advice was meant to manage and if the losses came from those specific risks.
Manchester Building Society v Grant Thornton
Key Parties Involved
The case involved the Manchester Building Society (MBS), which is a mutual building society. MBS wanted to get back the large losses they faced because they said their auditors, Grant Thornton UK LLP (GT), gave them negligent advice.
GT, the defendant, is a well-known accounting firm. They said their responsibilities were limited and did not cover the specific losses that MBS suffered.
The Supreme Court looked at the case. Lord Leggatt and Lord Burrows were important in helping to clarify the duty of care in cases of professional negligence, particularly regarding whether there is a sufficient nexus regarding a particular element of the harm in determining the elements of this duty. Their decisions changed the way we understand the duty of care, shifting from a simple view of “advice” versus “information” to a clearer focus on the purpose of the duty.
Background of the Case
The main issue was with the Manchester Building Society’s (MBS) plan to manage the risk of interest rates linked to lifetime mortgages. These mortgages had fixed interest rates. This put MBS at risk for losses if interest rates grew higher.
To deal with this risk, MBS followed the advice of their auditors, Grant Thornton. They used interest rate swaps to protect themselves from changes in interest rates. This method aimed to shield MBS from any bad effects of changing rates.
Unfortunately, this strategy depended on hedge accounting. Grant Thornton wrongly told MBS that it was acceptable to use in their case. When this mistake was found out later, MBS had to change its financial records. This led to a big loss in capital, and they no longer held sufficient regulatory capital, forcing them to end the swap contracts at a high cost.
Timeline of Events
The legal fight started in the High Court. There, the judge decided in favour of Grant Thornton. The judge believed that MBS’s losses from closing the swaps were not covered by Grant Thornton’s duty of care.
MBS was unhappy with this result, so they appealed to the Court of Appeal. The Court of Appeal agreed with the High Court’s decision. They also highlighted the traditional difference between “advice” and “information” in cases of professional negligence.
Not giving up, MBS took the case to the Supreme Court. The Supreme Court changed the decisions of the lower courts. They made an important ruling that changed how professional negligence is looked at, focusing on the “purpose of the duty” to decide what counts as liability.
Arguments Presented by Both Parties
MBS claimed that they trusted Grant Thornton’s careless advice about hedge accounting. They believed that GT, as their auditors, should have given them correct advice. MBS said the losses from closing the swaps happened directly because GT did not fulfil their duty of care.
On the other hand, Grant Thornton said their job was to give accounting advice only. They argued that they were not responsible for the financial results of MBS’s choices, including the choice to go into the swaps.
Additionally, Grant Thornton said the losses were due to MBS deciding on their own to close the swaps. They pointed out this decision was made considering the market conditions at the time. They insisted that the losses were too far removed from what their duty covered.
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Revisiting SAAMCo – The end of the ’information vs advice’ dichotomy
For many years, cases of professional negligence focused on the difference between “information” and “advice.” This difference came from the case South Australia Asset Management Corp v York Montague Ltd (SAAMCo). It was meant to clarify how much a professional could be held responsible based on their input.
But, in the case of Manchester Building Society v Grant Thornton, the Supreme Court took a close look at this idea. They found that labelling cases as either “information” or “advice” can be too simple. This approach often leads to inconsistencies, especially in complicated financial situations.
Downplaying the SAAMCo counterfactual
The SAAMCo counterfactual came from the case South Australia Asset Management Corp v York Montague Ltd. This tool helps us evaluate if someone was negligent. It asks a question: if the professional gave the right advice or information, would the client still face the loss?
In the past, this counterfactual was important for understanding liability in “information” cases. But the Supreme Court re-evaluated it and saw some limits.
While the court agreed that the SAAMCo counterfactual can help as a check, they warned against using it too strictly. They said it should not take away from understanding the main duty and purpose that the professional advisor owes to the client.
Six-part test for negligence liability
The Supreme Court gave a clear guide for checking if someone is responsible for negligence. This guide includes six main points:
- Actionability: Is the harm being claimed valid in terms of negligence?
- Scope of Duty: What potential dangers was the duty expected to protect against?
- Breach: Did the person accused fail in their duty?
- Factual Causation: Did the breach lead to the loss?
- Duty Nexus: Is there a strong connection between the harm and the duty?
- Legal Responsibility: Are there reasons to reduce damages, like being too far removed or a chance to lessen the loss?
The court highlighted the “scope of duty” issue. The main goal of this duty, looked at from an objective point of view, was very important. It helped decide if a strong link was there between the negligent act and the specific harm faced.
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Legal Framework Preceding the Case
Before the case Manchester Building Society v Grant Thornton, the legal rules were mostly based on the SAAMCo case. This important case made a line between “advice” and “information.” It aimed to clarify how much responsibility a professional has for giving negligent advice.
Still, using SAAMCo often made it hard to figure out the right scope of duty in tricky cases. This was especially true in cases that involved complex financial products and professional services. The distinction between “advice” and the consequences of the information provided seemed simple at first. However, it turned out to be hard to apply clearly in real situations.
Professional Negligence Explained
Professional negligence happens when someone in a profession does not use the skill and care that is expected from a good professional in their field. This failure can cause harm or loss to their client, which could be considered the consequence of the professional’s negligence. A major part of these cases is showing that there was a duty of care between the professional and the client. This duty means the professional is legally required to work at a certain level of skill and attention while giving services.
Figuring out the extent of a professional’s duty is very important in these cases. This means understanding what they can be held responsible for. The extent is based on the professional relationship, the services given, and whether harm to the client could have been predicted.
In short, professionals should have and use the knowledge and skills that are normal for their job. If they do not meet these standards and this leads to harm for a client, the client may have a claim for professional negligence.
Previous Landmark Decisions
The case South Australia Asset Management Corp v York Montague Ltd (SAAMCo), decided by the House of Lords (now called the Supreme Court) in 1996, changed the rules of professional negligence, especially for valuers. This case showed the difference between giving “information” and giving “advice,” as highlighted by Lord Hodge. This change had a major effect on how much responsibility professionals have.
Another important case was Khan v Meadows. This case was about medical negligence and was heard at the same time as Manchester Building Society v Grant Thornton. Both cases were looked at by the same group of judges from the Supreme Court. Khan v Meadows helped better explain the scope of duty principle. It showed how important it is to think about the purpose of the duty in the context of what the professional does.
Lord Reed played a big part in both cases. He highlighted the need for a more careful approach. Instead of sticking to strict categories, he suggested focusing on the purpose of the duty. This idea is key when figuring out a professional’s responsibility for negligence.
Detailed Analysis of the Judgments
The Manchester Building Society v Grant Thornton case moved through the courts in the UK. Each court offered important insights. In the first ruling, the High Court recognized the complicated issues but ultimately supported Grant Thornton. The Supreme Court, led by Lord Sales, later made a final decision that changed how we understand professional negligence, which went against the decisions of the lower courts.
This important ruling had a unanimous outcome, but the justices had different ways of thinking. Lords Hodge and Sales focused on the “purpose of the duty” in their main judgment, which relates to the scope of duty question. Lord Leggatt, on the other hand, preferred a reason based on causation. These different viewpoints show the challenges of figuring out the limits of professional liability.
Initial High Court Judgment
In the first instance, the Commercial Court, which is part of the High Court, handled the case. The court decided in favour of Grant Thornton. They said that while Grant Thornton gave negligent advice, this did not directly cause the losses to Manchester Building Society from closing the swaps.
The court stated that MBS made the choice to enter the interest rate swaps on its own. Grant Thornton did not take responsibility for that choice or its financial results. Because of this, the court did not hold Grant Thornton liable for the major losses.
This judgment showed how hard it can be to figure out the scope of duty in cases where a professional’s advice has unexpected results. The court’s attention to Grant Thornton’s lack of direct involvement in the swaps’ decision-making process was important in shaping this first conclusion.
Court of Appeal Findings
The Court of Appeal agreed with the High Court’s decision. They said that the losses were not part of Grant Thornton’s scope of duty of care. The court focused on the difference between ‘information’ and ‘advice.’ They found that Grant Thornton only gave information, not advice that MBS could use to address their business decisions, noting potential contributory negligence.
The court did note that Grant Thornton was careless in giving wrong information about hedge accounting. However, they highlighted that MBS did not ask for advice on whether it was smart to enter into the swaps. Because of this, the court said that Grant Thornton could only be responsible for the problems that came from the wrong information, not for the financial issues caused by the business choices made from that information.
This ruling showed the current view on professional negligence liability, based on the principles from SAAMCo. It also emphasized the importance of the difference between “advice” and “information” when deciding the scope of duty and the level of responsibility.
Supreme Court’s Final Decision
The Supreme Court, in a unanimous decision, overturned the lower courts’ rulings, finding Grant Thornton liable for the losses suffered by Manchester Building Society. This landmark judgment marked a departure from the traditional “advice” versus “information” distinction in professional negligence cases.
The Supreme Court introduced a more nuanced framework, emphasizing the “purpose of the duty” as the guiding principle for determining the scope of liability. Lords Leggatt, in his judgment, stressed the importance of establishing a causal link between the professional’s negligence and the client’s losses.
The court held that Grant Thornton, in providing advice on hedge accounting, had a duty to protect MBS from the specific risks associated with that strategy, including the risk of having to unwind the swaps at a loss due to the lack of an effective hedging relationship, thereby clarifying the scope of its duty of care. The judgment recognized that the losses were not merely a consequence of market forces, but were directly attributable to Grant Thornton’s negligent advice.
| Court | Decision | Key Reasoning |
| High Court | Favoured Grant Thornton | Losses fell outside the scope of Grant Thornton’s duty of care. |
| Court of Appeal | Upheld the High Court’s decision | Grant Thornton provided information, not advice, limiting their liability. |
| Supreme Court | Favoured Manchester Building Society | Emphasized the “purpose of the duty” and found a causal link between Grant Thornton’s negligence and MBS’s losses. |
Analysis of the Supreme Court’s Ruling
The Supreme Court’s decision in Manchester Building Society v Grant Thornton is a big change in the law about professional negligence. It changed the scope of the duty of care, especially in complex financial situations. While the court kept the distinction between “advice” and “information,” it became less important. Now, the main focus is on why the services of the professional were needed based on an objective basis.
This ruling points to a new trend in professional negligence cases that looks closely at the details of each situation. Instead of sticking to strict categories, courts are now examining the unique details of each case, the type of relationship between professionals, and what everyone expected. This change shows the need for a clear and detailed look at the entire situation, aiming for fairer outcomes for all involved.
Criticisms and Controversies Surrounding the Case
The Supreme Court’s ruling gave much-needed clarity about the scope of duty. However, it has also received some criticism. Some experts believe that focusing on the “purpose of the duty” adds a level of personal judgment. This could make it harder for professionals to know exactly how liable they are.
There are worries that this decision might lead to a broader view of professional liability. This means professionals could face more claims than before. Still, others see this ruling as an important change in negligence law. They think it helps fit the law with the new challenges of modern professional services. It also makes sure clients are protected from harm they could expect.
Implications for Future Professional Negligence Cases
The case Manchester Building Society v Grant Thornton has changed how we think about professional negligence law in the UK. This important case reminds professionals to be clear about what their duties are. They should understand what their clients want and make sure their advice meets those needs.
The decision highlights how important it is to keep good records, manage risks well, and communicate openly with clients. It also shows that professionals should have enough professional indemnity insurance to protect themselves from potential legal issues.
Impact on Accounting Practices
The case of Manchester Building Society v Grant Thornton has caused a big discussion in the accounting world. It has made many rethink how they handle risks and connect with their clients. This case shows how crucial it is to really understand a client’s business model. It also highlights how accounting advice can greatly impact their finances.
The court’s decision pointed out how important it is to do thorough checks before giving advice, even on simple accounting issues. Since then, accounting firms have started to look closely at their internal controls and quality checks. They see the need to manage risks more carefully and actively.
Additionally, the case has made it clear that good communication with clients is key. This is especially true when talking about complicated accounting ideas, such as hedge accounting. The judgment stresses that it’s important for clients to fully understand the risks and limits of different accounting methods.
Changes in Legal Approach Post-Case
The case of Manchester Building Society v Grant Thornton has changed how we view professional negligence law. The SAAMCO principle, which separates “advice” from “information,” is still important. However, this case has added extra details about the “purpose of the duty.”
Now, courts are willing to look deeper than the technical sides of professional advice. They want to know why the advice was requested in the first place. Because of this, professional advisors can’t just depend on contract rules or warnings to deny their responsibility.
They need to think about the bigger picture of their advice. This means looking at the client’s goals and the risks they might face. This change makes it important for advisors to fully understand what their clients expect and need.
Impact on Lenders and Auditors
For lenders, this case reminds us to carefully check professional advice. It is important that this advice matches their business needs and risk level. Lenders should do their own research and not just depend on outside professionals.
The ruling is also crucial for auditors. It shows why auditors must understand the client’s business well. They need to know how different accounting treatments can affect financial statements. This case stresses the need for clear communication with clients. It is important that clients understand the risks tied to certain accounting practices.
Expert Professional Negligence Lawyers in London
The case Manchester Building Society v Grant Thornton is very important. A close look at the judgments shows how professional negligence responsibility has changed and how it affects accounting and legal practices. This case changed the way we see the difference between information and advice. It also introduced a six-part test for negligence responsibility.
If you have suffered loss due to the professional negligence of a professional, please contact our expert professional lawyers today for a Free Consultion on 0207 459 4037 today or schedule one using our calendar booking form below at a time that is convenient for you.
Professional Negligence – Frequently Asked Questions
What was the significance of the Supreme Court’s focus on “the purpose of the duty”?
The Supreme Court’s emphasis on the “purpose of the duty” marked a shift away from the rigid “advice vs information” distinction. It means that courts now look at the specific purpose behind a professional’s duty and whether the losses suffered were directly linked to that purpose. This approach broadens the scope of professional liability and better aligns with clients’ expectations.
How did this case impact the SAAMCo principle?
The case refined the SAAMCo principle, which distinguishes between “advice” and “information” given by professionals. While the SAAMCo framework remains relevant, the ruling highlighted its limitations and placed more focus on the context and purpose of professional advice, rather than rigid categories.
What are the practical implications for professionals after this case?
Professionals, especially auditors, accountants, and other advisors, must be clear about the scope and intent of their duties when providing advice. Misunderstandings or overly broad advice can now more easily lead to claims. It also underscores the need to maintain detailed records of advice provided to clients.
What does this case mean for clients of professional advisors?
Clients can have more confidence that courts will carefully assess whether advice provided aligns with its intended purpose. This makes it easier to hold advisors accountable if their negligent advice leads to foreseeable losses.
How can businesses protect themselves from negligent professional advice?
Businesses should ensure that any professional advice received is documented and clearly outlines the scope of the professional’s duty. Engaging with experienced advisors and seeking second opinions for complex matters can also help mitigate risks.
What steps should I take if I believe my advisor has been negligent?
Document all relevant communications, advice, and evidence of financial losses. Contact a solicitor specialising in professional negligence to review your case and advise on next steps, which may include seeking compensation.
