The role of a professional advisor – from solicitors and accountants to valuers, wealth managers and financial planners – almost always involves providing specialist information and advice that plays an important part in shaping a client’s decision making process.
With most advisors all too aware of the risks of being sued for negligence, this article explains the distinction in law between negligent ‘information’ and ‘advice’ cases, the significant difference in the scope of liability between them, and some practical considerations advisors might take in supplying their services in view of those circumstances.
What is professional negligence?
In principle, a professional who fails to perform their professional responsibilities to the required standard (in general terms, without reasonable care and skill), may be found liable in the context of professional negligence for claims brought on the basis of breach of contract and/or breach of a statutory duty.
What can a negligent advisor be liable for?
If a client is successful in proving that a breach of contract or duty has occurred, the next steps are typically to establish and quantify the losses that have been caused by the breach. In professional negligence cases, the “SAAMCO principle”, established by the House of Lords’ decision in the case of South Australia Asset Management Corp v York Montague Ltd  A.C. 191, if applicable, sets out the principles to be followed to determine the extent of a negligent advisor’s liability for a claimant’s losses.
The SAAMCO principle makes a distinction depending on whether the scope of an advisor’s duty is to:
- provide information for the purpose of enabling someone else to decide upon a course of action (“information cases”); and
- to advise someone as to what course of action he should take (“advice cases”).
In information cases, the advisor must simply take reasonable care to ensure that the information they give is correct and, if they are negligent, their liability should not extend beyond the foreseeable consequences of the information being wrong.
However, in advice cases the potential liability is much wider. If an advisor’s duty is to advise whether or not a course of action should be taken, they must take reasonable care to consider all the potential consequences of that course of action. If negligent, they will be responsible for all the foreseeable loss which is a consequence of that course of action having been taken.
Example application of the SAAMCO principle
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)  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.
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.