The latest appellate decision on the SAAMCO principle has provided welcome clarification.
Key points
- The Court of Appeal has stressed the importance of the distinction between advice and information cases when applying the SAAMCO principle
- Crucially, it has confirmed that, in order to be an advice case, the advice must involve responsibility for guiding the entire decision-making process
Cases involving allegations of negligence against accountants are rather a novelty for Legal Notes. However, the Court of Appeal’s decision in Manchester Building Society v Grant Thornton UK LLP [2019] EWCA Civ 40; [2019] PLSCS 21 merits inclusion because it provides welcome clarity in relation to the application of the SAAMCO principle, a much more regular feature on these pages.
The principle
South Australian Asset Management Corporation v York Montague Ltd [1996] 2 EGLR 93 (SAAMCO) deals with the situation where a professional (many of the reported cases involve surveyors) gives a client negligent advice, but some or all of the loss that the client suffers has nothing to do with that advice. What damages should the client recover?
Lord Hoffmann, who gave the leading judgment, differentiated between situations where the professional provides information for the purposes of enabling the client to make a decision (information cases) and those where the professional has advised the client which course of action it should take (advice cases). The SAAMCO principle only applies to information cases, and protects the wrongdoer from any damages liability for losses that would still have been suffered even if the information had been correct.
Or, as Lord Sumption put it when giving the judgment of the Supreme Court in BPE Solicitors and another v Hughes Holland [2017] UKSC 21; [2017] EGLR 23, it is “simply a tool for giving effect to the distinction between, on the one hand, loss flowing from the fact that as a result of the defendant’s negligence the information was wrong; and, on the other, loss flowing from the decision to enter into the transaction at all”. In information cases, the SAAMCO principle means that damages under the second of Lord Sumption’s limbs are irrecoverable.
Confusingly, when discussing the distinction between advice and information cases, Lord Sumption also referred to the “descriptive inadequacy of these labels” since “information given by a professional man to his client is usually a specific form of advice, and most advice will involve conveying information”. It is this conundrum that Manchester Building Society clarifies.
Applying the principle
It is fair to say that the SAAMCO principle is tricky to apply in practice – and it is not just us humble legal hacks who can struggle. Last year, in Lloyds Bank plc v McBains Cooper Consulting Ltd [2018] EWCA Civ 452, the Court of Appeal partly overturned Stuart-Smith J for his incorrect application of the principle to a case involving the damages that flowed from the negligence of a bank’s monitoring surveyor.
In Manchester Building Society, although the decision of Teare J was ultimately upheld, the Court of Appeal (Hamblen and Males LJJ and Dame Elizabeth Gloster) felt that the judge had been led somewhat astray by Lord Sumption’s reference to “descriptive inadequacy” when reaching his decision at first instance.
The facts
Grant Thornton (GT) was Manchester Building Society’s auditor. In April 2006, it advised the Society to enter long-term interest rate swaps using the hedge accounting rules of the International Accounting Standard 39.
The swaps allowed the Society to hedge the risk that the interest rates it paid when borrowing funds to lend to its mortgage customers would exceed the fixed rate of return it agreed with those borrowers. The Society followed that advice and, between February 2006 and February 2012, entered into 28 interest rate swaps on mortgages relating to UK and Spanish properties.
GT admitted that the advice had been negligent, not least because the duration of the swaps was longer than the duration of the mortgages. For regulatory reasons, the Society had to extricate itself (a concept known as “closing out”) from the swaps. In doing so, it suffered losses of £32.7m and transaction fees of £294,460. It sought to recover that from GT.
The appeal
Influenced by Lord Sumption’s suggestion that the distinction between advice and information cases was inadequate, Teare J considered whether GT had assumed responsibility for the Society entering into the swaps. He decided that it had not.
The Society’s appeal was unsuccessful. Hamblen LJ stressed that, when considering the SAAMCO principle, the courts must consider whether it is an advice case or an information case and that Teare J “did err in approaching the issue of liability on the basis of assumption of responsibility”.
This is because answering the advice or information conundrum also decides what the defendant has assumed responsibility for: “If it is an ‘advice’ case, as determined by Lord Sumption, then the defendant will have assumed responsibility for the decision to enter the transaction; if it is an ‘information’ case, the defendant will only have assumed responsibility for the consequences of the advice or information being wrong.”
The important clarification
Hamblen LJ was satisfied that this was an information case, since GT had given accountancy advice and it “was not involved in the decision to enter into the swaps”.
Crucially, and although Hamblen LJ accepted that GT had given advice as opposed to mere information, that was not enough to make it an advice case. What matters is not just whether advice is given, but the purpose of that advice: “In order to be an ‘advice’ case, the advice needs to involve responsibility for ‘guiding the whole decision-making process’, which GT’s accounting advice manifestly did not.”
The Society also failed to show that it would not have suffered the loss on the swaps but for GT’s negligence. There was no evidence to support that assertion and GT escaped any liability.
Stuart Pemble is a partner at Mills & Reeve
