Manchester Building Society v Grant Thornton: stairway to heaven or highway to hell?

Posted: 27/10/2021

In June 2021, the Supreme Court handed down judgment in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 (MBS v GT). The key consideration was whether losses suffered by the building society lender, MBS, as a result of negligent advice provided by the accountancy firm, GT, fell within the scope of GT’s duty of care.

MBS had devised a business model whereby it would match long term interest rate swaps and lifetime mortgages. In 2006, GT negligently advised MBS that it could use ‘hedge accounting’, an approach that would allow MBS to reduce the volatility of the swaps as shown on its balance sheet. MBS relied on this advice and entered into the swaps and mortgages. A monster had unwittingly been created.

In 2013 the monster rose from its slumber and wrought havoc on the MBS balance sheet. It was discovered that GT’s advice had been incorrect; hedge accounting was not available to MBS; and MBS’s balance sheet was exposed to volatility from the swaps. MBS corrected the accounting errors but, in doing so, no longer held sufficient regulatory capital and had to close out the swaps at significant loss. MBS claimed these losses from GT.

The Commercial Court and Court of Appeal applied the traditional distinction in professional negligence claims between ‘information’ cases and ‘advice’ cases (the SAAMCO Test). Both courts held that GT had provided information and did not advise MBS on the course of action to take. GT was therefore not liable for all of MBS’s loss.

MBS v GT: a new dawn for lenders or the dawn of the dead?

MBS appealed to the Supreme Court and, in MBS v GT, the court dispensed with the information/advice distinction as the primary mechanism of determining recoverability of loss. Instead, they focused on six key questions:

1. Is the harm (injury, loss or damage) which is the subject matter of the claim actionable in negligence (the actionability question)?
2. What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care (the scope of duty question)
3. Did the defendant breach his or her duty by his act or omission (the breach question)?
4. Is the loss for which the claimant seeks damages the consequences of the defendant’s act or omission (the factual causation question)?
5. Is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant’s duty of care as set out in question 2 above (the duty nexus question)?
6. Is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote or because there is a different effective cause (including novus actus interveniens) in relation to it or because the claimant has mitigated his or her loss or has failed to avoid loss which he or she could reasonably have been expected to avoid (the legal responsibility question)?

It is clear from the judgment that the second of these questions will be of particular importance when determining whether the professional advisor could meet with a gloomy fate.

In the case of MBS v GT, GT was found liable for all of MBS’s losses (albeit the figure was reduced for MBS’s contributory negligence) on the basis that GT’s advice did not guard against the specific risk of protecting MBS against the volatility of its swaps. Further, Lord Leggatt held that GT was liable for “overall factual loss” and emphasised how “crucial” the information provided by GT to MBS was to MBS’s business model.

In redrawing the test for recoverability of losses, has the court created another monster and what does this mean for lenders?

The door appears to be open for lenders to claim losses that would previously have been prohibited under the SAAMCO regime which capped damages in ‘information’ cases. The scope of duty owed by the professionals has potentially widened and lenders are particularly likely to smell blood and have an increased chance of recovery if the professional knew the details of the proposed loan and the nature of the lender’s business.

The devil is, therefore, very much in the detail. The “purpose” of the advice/information therefore seems to be the key consideration for the courts from now on. Whether they were providing advice or information is of less relevance.

It follows that not only could professionals be on the hook for greater levels of responsibility but the losses recoverable from them also look likely to have broadened. Therefore, lenders could well be on a highway to heaven in terms of receiving full recovery for loss caused by negligent advice.

More will be known as the test is applied in future by the courts but, in the interim, professionals may be having a few nightmares.

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