The Scope of Duty of Care Test in cases of Professional Negligence: UK Supreme Court Ruling in Manchester Building Society v Grant Thornton LLP [2021] UKSC 20

The UK Supreme Court has recently taken the opportunity to clarify the scope of the duty of care assumed by a professional adviser in the context of negligence claims.

Manchester Building Society (“the Society”) v Grant Thornton LLP (“the Auditor”)

In reliance on advice by the Auditor on the appropriateness of using “hedge accounting”, the Society carried on a strategy of entering into long-term interest rate swaps as a hedge against the cost of borrowing money to fund its lifetime mortgages business.

The method of accounting disguised the volatility of the Society’s capital position and led to serious inconsistency between the negative value of the swaps and the value of the mortgages to be hedged by the swaps. When the Auditor realised its error, the Society had to restate its accounts. To remedy the situation, the Society had to close the interest swap rate contracts early at a cost of more than £32 million.

Scope of Duty of Care

The principle of the scope of duty of care is that a defendant is liable only for losses which fall within the scope of his or her duty of care to the claimant.

In this case, the Court found that the scope of the duty of care assumed by a professional adviser will be governed by the purpose of the duty. In other words, one looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk.

The Court commented that a distinction is often drawn between “advice” and “information” given by professional advisers. The Court emphasised that this distinction should not be treated as a rigid rule and the focus should rather be on identifying the purpose to be served by the duty of care assumed by the adviser.

The Court found that the purpose of the Auditor’s advice was clear. The Society had looked to the Auditor for technical accounting advice. The advice it received was negligent. The Society had adopted a business model on the basis of that negligent advice and suffered a loss as a result. The advice the Society sought from the Auditor was supposed to allow the Society to assess the risk of the business model. The Auditor’s negligence caused the Society to fail to understand the risk. Accordingly, the Court held that the loss suffered by the Society fell within the scope of duty of care assumed by the Auditor.

Implications for Professional Advisers

Those engaged in professional services should be aware of the new test for the scope of duty of care when advising their clients. The test now formulated will likely make the presentation of a claim easier from a claimant’s perspective than it may have been previously.

Advisers should ensure that they record the terms of their engagement for any piece of work and that said terms are very clear on the agreed purpose of the advice being sought.

For any advice in relation to any particular aspects of the above, please contact a member of the Wright, Johnston & Mackenzie Conflict Resolution Group.