The 'SAAMCO principle' makes an important distinction between negligent 'information' and 'advice' cases in determining the scope of a professional advisor's liability.
By way of example, the SAAMCO principle was recently applied by the Court of Appeal in the case of Manchester Building Society (MBS) v Grant Thornton UK LLP (GT) [2019] EWCA Civ 40. A brief summary of the facts and decision in this case are as follows:
- GT, acting as auditors of MBS, negligently advised that MBS could apply hedge accounting to reduce the effect in its accounts of the volatility of the MTM value of swaps;
- relying on that advice, MBS entered into a programme of fixed rate mortgages hedged against long term swaps;
- as a result of the financial crisis and consequent fall in interest rates, the MTM value of the swaps became negative and MBS could no longer apply hedge accounting;
- MBS therefore closed out the swaps and, in doing so, had to pay the MTM losses on the swaps and transaction fees from breaking the swaps early;
- MBS claimed significant damages from GT in the sum of £48.5 million;
- GT disputed liability for the MTM losses as well as for the closing related fees;
- the Court of Appeal held that this was an information case as GT merely advised on how MBS’s activities could be treated in its accounts but they did not guide the whole decision making process;
- accordingly, MBS had to prove that it would not have suffered the MTM losses if GT’s advice had been correct. In order to do so, MBS had to do more than establish the fact of the MTM losses; it also had to prove that the loss would not have been suffered had it continued to hold the swaps as an aspect of proof of loss; and
- MBS did not prove this and the claim for the MTM losses was therefore rejected.
It is crucial to note that the outcome may have been vastly different if on the facts GT’s duty was found to be an advice case.
Conclusions
Cases of professional negligence and the application of the SAAMCO principle will always be dependent on the specific facts. Nevertheless, advisors should benefit by making an analysis of their duties more certain by having suitable engagement documentation, including appropriate written detail of the terms of their client engagements and any caveats that may apply. Similarly, advice (be it in an “information case” or “advice case” context) should always be given or confirmed in writing to mitigate the risk of later questions over what had been communicated.
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