UK: Avoiding Liability Even Where There Is Negligence

Last Updated: 21 May 2018
Article by Susan Hopcraft

The recent case of Manchester Building Society v Grant Thornton 2018 is a striking example of the inability to recover certain losses from a professional adviser, even where their advice has been negligent.

In a claim for negligence, a claimant can only claim for losses for which a defendant adviser has assumed responsibility. The Manchester Building Society ('the Society') has this month felt the full force of this principle, being awarded just £315,345 of the £48.5 million claimed from its accountants, and potentially facing a bill for a portion of the accountant's legal costs.

Background

The Society entered into 'lifetime mortgages' with borrowers, under which equity was released and no payments were due until the owner entered a care home or died. From 2006, it hedged the interest rate risk by purchasing interest rate swaps.

Under the International Financial Reporting Standards ("IFRS") the swaps had to be entered onto the balance sheet. This created 'volatility' on the balance sheet because the fair value of the swaps would fluctuate with changes in present and estimated future interest rates.

The Society's accountants, Grant Thornton, approved the use of hedge accounting as a method of limiting that volatility, by allowing an adjustment to be made to the value of the hedged asset, the mortgage. That advice, however was negligent. When the Society realised this and drew up its accounts without the use of hedge accounting in 2013, the Society's financial position took a serious downturn, resulting in substantial losses.

The Society sued its accountants in 2015 for breach of contract, negligence and breach of statutory duty, alleging negligent advice on how to account for interest rate swaps in their balance sheet, leading to losses of £48.5 million.

The case was decided by Mr Justice Teare on 2 May 2018 who held that whilst the advice given between 2006 and 2011 was negligent, the accountant advisers had not assumed responsibility for the whole £48.5 million losses.

The decision

What is interesting about this case is that it appeared to have all the ingredients for a successful negligence claim; the judge finding that:

  • the losses would not have occurred if the advice had been correct;
  • the accountant's negligence was an effective cause of the loss; and
  • the losses were foreseeable

The critical requirement that was found to be missing, however, was the assumption of responsibility, by the accountants, for the extent of the losses suffered. Mr Justice Teare stated:

the loss suffered by the Claimant, looked at broadly, sensibly and in the round, 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
Mr Justice Teare Manchester Building Society v Grant Thornton UK LLP [2018] EWHC 963 (Comm)

An impartial observer of the dealings between the Claimant and Defendant from November 2005 until April 2006 would not have concluded that the Defendant was assuming responsibility for the risk of loss to the Claimant in the event that there was a sustained fall in interest rates
Mr Justice Teare Manchester Building Society v Grant Thornton UK LLP [2018] EWHC 963 (Comm)

There have been numerous cases which have debated what constitutes an assumption of responsibility and what test should be applied by the courts in deciding this. In basic terms, the court will look at whether the defendant advisor accepted responsibility for the potential losses that could be incurred should their advice be wrong. In this case the judge concluded that whilst the losses were fairly attributable to the accountant's negligent advice, the accountants had not accepted responsibility for the total losses suffered.

Mr Justice Teare recognised a number of practical and commercial factors when allowing the accountants in this case to largely escape liability as follows:

  • The accounting treatment of business activities can be different from the actual economic consequences of those business activities;
  • Even if the material which the adviser supplies is critical to the decision to enter into the transaction, he is only liable for the consequences of that being wrong and not for the financial consequences of the claimant entering into the transaction so far as these are greater, meaning advisers will not necessarily be responsible for what is a commercial decision; and
  • There were other causes of the loss including the decision of the claimant to purchase the swaps in the first place and the subsequent fall in interest rates which occurred following the financial crisis of 2008.

Mr Justice Teare did find the accountants liable for the relatively modest termination/penalty costs of breaking the swaps in the sum of £315,345 which he considered were losses for which the accountants had accepted responsibility.

Every case is different

The practical difficulty for both potential claimants and professional advisers that is highlighted by this case is the fact that many of these cases will turn entirely on their factual matrix. The court will look at the context in which the advice was given, what the adviser was engaged to do, what work the adviser assumed responsibility for and whether the losses suffered were "fairly attributable to the negligently proffered advice/information" (Main v Giambrone and others [2015] EWHC 1946 (QB), Foskett J).

One has some sympathy for the claimant in this case because whilst the legal principles have been with us for some time, their interpretation and application to the facts at hand can vary greatly. Mr Justice Teare stated in his judgment:

It is not possible to lay down hard and fast rules as to how to determine whether the losses were within the scope of the defendant's duty
Mr Justice Teare Manchester Building Society v Grant Thornton UK LLP [2018] EWHC 963 (Comm)

In the earlier case of Hughes-Holland v BPE Solicitors 2017 Lord Sumption said:

every case is likely to depend on the range of matters for which the defendant assumed responsibility and no more exact rule can be stated
Lord Sumption Hughes-Holland v BPE Solicitors 2017

The costs hearing is due to take place on 18 May 2018, following which we will see whether or not the Society is going to appeal the decision.

In the meantime, those engaging professional advisers and advisers themselves should give careful thought to what liability, and the extent of that liability, is being accepted in respect of work carried out at the outset. It may be that we start to see more clarifications of this responsibility being addressed head on in retainer documentation to avoid similar drastic reductions to a claimant's expectation on loss.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions