SAAMCo and BPE re-affirmed: the proper approach to loss in professional negligence cases

A recent Court of Appeal decision [1] reaffirms the importance of the "information" and "advice" categories when considering the losses for which a professional should be held liable.

It also sets out a clear explanation of what those categories are and dismisses any suggestion that Lord Sumption's reference to their "descriptive inadequacy" in BPE^[2] means that they can relegated to an open-ended consideration of the extent of the professional's assumption of responsibility.

The Facts

Between 2004 and 2009 Manchester Building Society (MBS) made a number of fixed-interest lifetime mortgages. Those were mortgages that did not require repayment of any capital or interest until the owner died or went into a care home. They exposed MBS to the risk that the rates it would have to pay on its own borrowing would exceed the fixed rate it received from borrowers. MBS sought to hedge against this risk by entering into interest rate swaps. This in turn created an accounting problem. Under the IFRS the swaps had to be brought onto MBS's balance sheet at their fair market value which in turn was affected by interest rates. This meant MBS's balance sheet would be affected by movements in the market value of the swaps creating "accounting volatility".

In April 2006 MBS's auditor incorrectly advised that it could apply "hedge accounting" treatment. This would have the effect of reducing the accounting volatility. MBS relied on this advice in preparing its accounts from 2006 and entering into further lifetime mortgages and interest rate swaps.

In 2013 it was discovered that the "hedge accounting" treatment had not in fact been available in the specific circumstances. The consequential change to the accounting meant that MBS's profit for 2011 reduced to a substantial loss and its net assets were very significantly reduced. In addition it did not have sufficient regulatory capital. After discussions with its regulator, MBS decided in 2013 to close out its swaps at a cost of £32,290,000 rather than expose its balance sheet to the full force of market volatility on them. That cost arose out of the fact that the value of the swaps in 2013 was affected by the fall in interest rates following the 2008 crash. MBS claimed the cost of closing out the swaps in 2013 from its auditors. 

The First Instance before Teare J

It was not in dispute that the 2006 advice was incorrect. The trial judge went on to find that:

• factual and legal causation was established; and

• the 2013 losses were reasonably foreseeable and were not too remote; but

• they fell outside the losses for which the auditors had assumed responsibility.

The trial judge sought to apply the principles in SAAMCo and BPE. He declined to categorise the case as an "information" or "advice" case and held that the issue was whether the auditor had "assumed a responsibility" for MBS's losses. Taking his cue from paragraph 38 of Lord Sumption's judgment in BPE, he held "… the question to ask is whether the loss flowed from the particular feature of the defendant's conduct which made it wrongful."

He did not find this easy to answer and admitted that his mind had wavered. However, he concluded that the loss suffered by MBS "was not in truth something for which the Defendant assumed responsibility or the 'very thing' to which the Defendant had advised the Claimant would not be exposed. Rather, the loss flowed from market forces for which the Defendant did not assume responsibility.".

He held that MBS was only entitled to recover its transaction costs of £285,460 and not its wider losses. Although (on his approach) it was not necessary for his decision, he went on to consider two further issues. The first was whether MBS's losses would still have been incurred if the advice had been correct. On this he found that the swaps would not have been closed out in 2013 and the losses would not have been incurred. The second was whether MBS would have avoided its loss had it been able to close out the swaps at some point in the future. On this he found that MBS had failed to discharge the burden of proof - it had failed to show that it would have been able to avoid the losses if it had closed the swaps at a future date.

The Court of Appeal Judgment

A key issue before the Court of Appeal was whether the trial judge was wrong to dismiss the information/advice distinction in favour of an "assumption of responsibility" approach and whether it was an advice or information case. The leading judgment was given by Lord Justice Hamblen. He held that the trial judge had erred in this respect but had arrived at the correct result. He acknowledged that the trial judge had relied on Lord Sumption's comments (in BPE) regarding the "descriptive inadequacy" of the "information" and "advice" labels:

"On the face of it they are neither distinct nor mutually exclusive categories. Information given by a professional man to his client is usually a specific form of advice, and most advice will involve conveying information. Neither label really corresponds to the contents of the bottle."

He said that this did not, though, undermine the fact that there is a "clear and important distinction between the two categories of case. …"

Hamblen LJ summarised the distinction as follows. A case will be an "advice" case if it can be shown that:

• it has been left to the professional to consider what matters should be taken into account in deciding whether to enter into the transaction;

• the professional owes a duty to consider all relevant matters (and not only specific matters that may form part of the overall decision whether to proceed with the transaction); and

• the professional is responsible for guiding the whole decision-making process.

If the above factors are not present, and the professional's role is more limited, then it will be an "information" case.

The distinction has important consequences for the scope of the professional's liability. In an "advice" case, the professional will be liable for all the foreseeable losses flowing from the decision to enter into the transaction (leaving aside other legal "filters" such as the duty to mitigate, remoteness etc.). In an "information" case, the professional will only be responsible for the foreseeable consequences of the information being wrong.

On the facts, Hamblen LJ found this was clearly an "information" case and indeed that conclusion appears to have been inevitable. The auditors gave specific accounting advice and were not involved in the decision to enter into further swaps. MBS did not leave it to the auditors to consider what matters should be taken into account in deciding whether to enter into the swaps and it was not their duty to consider all matters that were relevant to MBS's decision. Nor were they responsible for guiding the whole decision making process.

The result of this was that the auditors would only be liable for losses that would not have arisen if the 2006 advice had been correct. The court found the trial judge had erred in concluding that MBS would not have suffered loss if the advice had been correct. It was not enough to show that the swaps would not have been closed out in 2013. MBS had to show that a better result would have been achieved by holding onto to them whether to their full term or some specific date. That point had not been proven and therefore the losses were not recoverable.

Comment

The case emphasises the continuing relevance of grappling with the "information" and "advice" labels. In reaffirming the importance of the distinction the Court of Appeal has produced a helpful judgment with clear and consistent principles. They are clearer to apply than the trial judge's approach focused on the question of whether the professional assumed a responsibility to protect their client from a particular type of loss. In this case, both approaches led to the same result but the reasoning of the Court of Appeal is clearer and correctly applies the judgment of Lord Sumption in BPE.  

There will remain some challenging cases. Lord Justice Hamblen looked at the very exceptional judgment in Giambrone^[3] where Lord Justice Jackson held that the solicitor's role had crossed to the line to the "advice" category by their "guiding the whole decision-making process". There may in unusual cases be disputes as to the extent of the requisite "guiding" but none of that was engaged in this decision. It was a clear "information" case.