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27 June 202111 minute read

UK Supreme Court revises SAAMCo principle: Manchester Building Society v Grant Thornton

In Manchester Building Society v Grant Thornton1 the Supreme Court has given a key judgment on one of the most well-known principles governing recoverable loss in professional negligence law: the SAAMCo principle established in the 1990s.

The judgment has taken a significant step away from the established advice/information distinction in determining the scope of a professional’s duty, branding that distinction as “too rigid” and instead set out that the purpose of the professional’s instruction is the focus.

The implications of the judgment will no doubt be debated for some time to come, particularly where there are three separate judgments (as well as express reference to the judgment in Khan v Meadows to be read alongside this judgment). However, it may mean that claimants, in some types of claim, will find it easier to establish more extensive claims for loss than previously, although the scope of duty test is still likely to present issues.

In the briefing below we consider this important decision for auditors and professional defendants more generally.

Factual background

The claimant building society had a book of fixed rate lifetime mortgages, and took the commercial decision to enter into a number of interest rate swaps to match those mortgages. However, the society would be subject to a higher regulatory capital requirement where its financial activities were subject to volatility (assessed by reference to its accounts). The society’s auditor, the defendant, advised in 2006 that the use of hedge accounting would be permitted in drawing up the accounts (so essentially that the value by which the swaps decreased and the mortgages increased in value was a good match). This, in essence, reduced the volatility introduced by the swaps and allowed the society to pursue its chosen business model.

Going forward, the society entered into more swap contracts, and the auditor each year signed off the annual accounts, drawn up on the basis of hedge accounting. Following the 2008 financial crisis the value of the swaps reduced substantially.

In 2013, the auditor realised that the advice it had provided, that hedge accounting could be used, was incorrect meaning that the society had to restate its accounts. As a result they showed substantially reduced assets and insufficient regulatory capital. To address this it closed the swaps at a cost of GBP32 million and sought to recover this sum (less the value of the mortgages) from the auditor. The auditor admitted that it had been negligent in auditing the society’s accounts but defended on the grounds that it should not be held liable for the extent of the losses claimed by the society. At first instance the High Court, and then the Court of Appeal, rejected the claim.

Legal background

The SAAMCo2 principle is long established in professional negligence claims, and has often been expressed as providing a distinction between “advice” given by a professional and “information”. Where the professional gives a client “advice”, such as whether to enter into a transaction at all then if the advice is negligent they will be responsible for all of the consequences of the advice being wrong. If the professional only gives information then they are only liable for the consequences of the information being wrong. The classic example of information, is where a valuer confirms the value of property offered as proposed security for a lender, who then chooses whether to make the loan based on a number of factors. If negligent, the valuer is liable for the amount by which the property was overvalued, but not the full loss of the lender on a failed transaction which may arise from a drop in the property market – often referred to as applying the “SAAMCo cap”. There is a long line of authorities applying SAAMCo.

Although in some professional negligence cases the SAAMCo principle is relatively straightforward to apply (usually those where information is provided and the transaction is straightforward), in others it is more difficult. The present case marks the second time the Supreme Court has been required to consider the principle in recent years.


Majority judgment

Although the Supreme Court unanimously allowed the appeal, Lord Leggatt and Lord Burrows gave their own judgments. The leading judgment, given by Lords Hodge and Sales, focussed on the purpose of the duty owed by the professional as the key question in order to determine its scope. The judgment was, however, clear that the previous categorisation of cases as “advice” or “information” explained above was not helpful, and these descriptions should be disposed of as terms of art.

The majority judgment set out that six questions arise within the framework of negligence (which were characterised by Lord Burrows as a novel approach to the tort):

  1. Is the harm 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 a duty on the defendant to take care? (scope of duty question)
  3. Did the defendant breach the duty by an act or omission? (the breach question)
  4. Is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission (the factual causation question)
  5. Is there 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? (the duty nexus question)
  6. Is a particular element of the harm for which damages are sought irrecoverable because it is too remote or because there is a different effective cause or because the claimant has mitigated his or her loss or failed to avoid loss they could have been expected to avoid? (the legal responsibility question)

It is clear from the majority’s reasoning that they intend that these questions will be considered by the courts and professional practitioners holistically. As a result, the exercise of determining the scope of the duty in each case continues to be based on the SAAMCo-derived ‘holistic’ analytical approach to the issue of the scope of duty that the courts have previously applied, rather than signalling any departure to an approach requiring the prescriptive consideration of each question.

The second question was the central question in the appeal.

The majority decision found that the scope of duty of care assumed by a professional is governed by the purpose of the duty, judged on an objective basis by reference to the reason why the advice is sought and being given (and usually paid for). Therefore, the correct approach is to look to see what risk the duty was supposed to guard against and see whether the loss suffered represented fruition of that risk. The Court’s view is that this is in accordance with leading authorities.

As set out above, the Court held that the advice/information dichotomy was too rigid and liable to mislead. Whilst some cases may be at one end of the spectrum or the other, many will be on a spectrum somewhere between. Cases should not be shoe-horned into a category. Instead, the focus should be identifying the purpose to be served by the duty of care assumed. This, the Court held, offers a more appropriate and refined basis to identify the factors for which the defendant is responsible from a wide range that contributed to the loss.

Turning to the counterfactual test set out in SAAMCo and the “SAAMCo cap”. This is a way of identifying the loss the claimant suffered that fell within the scope of the duty by asking in an “information” case whether the claimant’s actions would have resulted in the same loss if the advice given by the defendant had been correct. The majority found that the counterfactual analysis may be a useful cross-check in some cases, but should not be regarded as replacing the decision that needs to be made with regard to the scope of the duty of care.

The Court noted that although the auditor was not required to provide commercial judgment on the question of entering into the swaps and the society made its own judgement that this business model was commercially attractive the Court found that there was another distinct commercial perspective, with the purpose of the advice to maintain the society’s regulatory capital. The purpose of the auditor’s advice on hedge accounting was clear: the society could employ hedge accounting to reduce volatility on its balance sheet and keep regulatory capital at a level it could afford in relation to the swaps being held to term as they were matched against the mortgages. The negligent advice that it could do so had the effect that the society adopted that business model, was exposed to risk from breaking the swaps, and was then exposed to the capital demands which the hedge accounting was supposed to avoid. Therefore, having regard to the purpose of the advice showed that the loss fell in the scope of the auditor’s duty of care, and this was analogous to a dividend payment case, where an auditor negligently advised it has capital resources for a dividend when it does not.

Therefore, the society was able to recover the net cost of breaking the swaps from the auditor. However, the Court also held that the first instance judge had been right to reduce the damages by 50% on the basis of the society’s own contributory negligence. The society had implemented the business model in an overly ambitious manner.

Other judgments

Lord Burrow’s judgment contained similar reasoning to the majority but stressed that the decision on the scope of duty of care is underpinned by the policy of achieving a fair and reasonable allocation of risk. In contrast, the majority did not consider it necessary to re-introduce a policy-based analysis which creates uncertainty. However, Lord Burrows took the view that the majority judgment had taken a novel approach to the tort of negligence in their six questions: by not starting with the question of establishing a duty of care, and seeing the SAAMCo principle as concerned with the “duty nexus” question.

Lord Leggatt placed more emphasis on the issue of causation, and set out in some detail how the counterfactual analysis had been wrongly applied by the courts below. The auditor was only liable for the foreseeable consequences that resulted from matters that made its advice wrong. The correct counterfactual question to be asked was whether, if the defendant’s advice had been correct, would the actions taken by the claimant have resulted in the same (actionable) loss. Lord Leggatt found it was plain that there was a causal connection between the accounting errors and the society’s basic loss. The cost of closing out the swaps resulted from a risk that the society would have not have been exposed to if the auditor’s advice had been correct, and which the auditor owed a duty of care to protect against. Therefore the loss was within the scope of the duty.


This is a very significant judgment in the professional negligence sphere and one that is likely to cause some uncertainties in its application to the facts, even though the majority considered it should create a more straightforward test than SAAMCo. This will be partially driven by the requirement that the courts and professional practitioners consider the issue of the scope of the duty owed in tort and the duty nexus: it will be necessary to consider in each case what risk the defendant had a duty to take care against and whether the loss suffered is the fruition of that risk. In straightforward cases (that were at one end of the previously termed “information” or “advice” spectrum) this may be a straightforward question. In others, where the advice is more complicated, and involves a number of factors and underlying transactions and assumptions this is likely to be more complicated.

For professionals, the judgment emphasises the importance of issuing on a timely basis, and updating where necessary, retainer letters making clear what duties are within the scope of the retainer and any limitations.

1 The judgment was given at the same time as a medical negligence judgment also concerning SAAMCo – Khan v Meadows with the judges indicating that both judgments should be read together.
2 South Australia Asset Management Corpn v York Montague Ltd (1997)