Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 (18 June 2021)
Citation:Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 (18 June 2021)
Subjects invoked: 1. 'Nation'.15. 'Contract'.
Rule of thumb: If a professional gives advice outside their normal field of expertise, if it is wrong and they are sued, are they held to the same standard as a professional in that field? Yes, they have to do work to the same level as professionals in that field or they can be sued for negligence. Ie if an accountant gives one of their clients medical advice formally in their office then they can be found liable for medical negligence and held to the professional standards required of doctors/nurses.
Background facts:
This case invoked the subjects of accountancy and professional negligence.
The facts of this case were that Manchester Building Society were a company who gave people in society mortgages for the purchase of properties. They had a business model for doing this that involved them obtaining a standard, non-variable rate credit insurance policy for doing this. They also had safe financial reserves model in place for running this business model – this was compliant with the Financial Services Authority Guidelines on both capital requirements and the provision of acceptable accounts. Manchester Building Society operated a fairly safe, predictable and stable business model, and a fairly well-trodden accounts system. The Building Society contacted Grant Thornton, Chartered Accountant/Auditors, and asked if they could provide advice about switching to another business model called a 'hedging' system. They told Grant Thornton that they wanted to operate this ‘hedging’ business model because it allowed them to potentially hold a variable and more profitable insurance policy. The Building Society also wanted to use the hedging model so that this could allow them to lower the capital reserves they had, so they could then in turn use this freed up capital to do more marketing and give out more mortgages.
Although the hedging model was potentially a more profitable business model for Manchester Building Society, it was in reality also a far riskier business model than before which could also actually significantly reduce profits. Manchester Building Society therefore asked Grant Thornton if they could switch to the hedging system to make themselves more profitable. Grant Thornton advised the building society that they could switch to the hedging business model in the form they wanted to, and that this would make them more profitable. Grant Thornton effectively told Manchester Building Society everything they wanted to hear about switching to the ‘Hedging’ business model and rubber-stamped it as a profitable move.
The financial crisis of 2008 and its aftermath then hit, and everything changed. After the financial crisis the variation in interest rates went badly against Manchester building society, and their insurance became far dearer than it would have been if they had stuck with the more predictable fixed insurance rates. This led to Manchester Building Society making significantly less profit on the mortgages they gave out. The Bank of England, who took over regulation of the capital requirements of the banks from the Financial Services Authority after the 2008 financial crisis, also advised the Manchester Building Society that they were not allowed to implement the capital reserves system they were using. The Bank of England advised Manchester Building Society that their capital levels were below where they needed to be, and they had to up these or lose their license.
In response to this warning from The Bank of England, Manchester Building Society had to sell off many of their mortgages in quick fire sales to other bank for significantly less than their market value to get their capital levels up to the required level. This led to Manchester Building Society incurring major losses. All in Manchester Building Society lost 26.7 million out of their change from their standard and safe business model to the hedging business model. The Manchester Building Society sued Grant Thornton for the losses they had sustained because of their switch to the hedging model as Grant Thornton had advised that it would be a viable and profitable move – they pointed the finger of blame at Grant Thornton as being responsible for their losses.
The Building Society argued that standard professional liability laws applied to Grant Thornton. They argued Grant Thornton were liable for the clearly incorrect advice they had provided about switching to the hedging business model. They argued that the professional advice from Grant Thornton about this switch in business model was completely wrong, and they were not given sufficient warnings about their changes in their business model. Grant Thornton argued that the principle of 'professional liability not applying outside of a specialist field' to this matter. Grant Thornton argued that they were only professionally liable for the accounts advice they provided, and not the investment or insurance advice they provided. Grant Thornton stated that they clearly held themselves out only to be accountants, and not experts in all these fields, and they had therefore given sufficient to the bank about not being experts in these fields.
Judgment:
The Court upheld the arguments of the Manchester Building Society. The Court first and foremost held that the advice Grant Thornton provided to Manchester Building Society about switching to the hedging model was clearly wrong and in clear breach of professional standards in many different disciplines – once the financial crisis of 2008 struck and the advice about switching to the proposed hedging model was looked back with the benefit of hindsight it was grossly wrong.
Most importantly for this Judgment however, the Court affirmed that even although Grant Thornton did not specialise in the investment area, they provided advice in these areas in a formal context, and this meant that professional negligence applied to the standard of advice they were expected to provide. In short, the Court held that if a professional in any area of society gives formal professional advice outside of their chosen field, then this advice must still be at the standard of a professional in that sector who is University educated and professionally qualified in that field. In short, Grant Thornton lost and The Manchester Building Society won. Grant Thornton were ordered to pay 16 million in damages (around half of the losses) for the losses caused by their negligent professional advice.
Ratio-decidendi:
Lord Burrows, 204-211, ‘204. ... It is not in dispute that Grant Thornton was negligent in advising that hedge accounting could be used. But very importantly, it is also not in dispute that, in the context of that advice, Grant Thornton negligently misstated the underlying financial position of the society in the specific respect that, in truth, there was no effective hedging relationship between the swaps and the mortgages (see Lord Leggatt’s judgment at para 168). 205. As we have seen in paras 184-185 above, had Grant Thornton performed its contractual or tortious duty of care properly, the society would not have suffered the overall factual loss of £26.7m. The question posed by the SAAMCO principle is whether the factually caused net loss (£26.7m) was within the scope of the auditor’s duty of care. That is a question of law, focusing especially on the purpose of the advice or information, and rests on the underlying policy as to the fair and reasonable allocation of the risk of loss as between the parties. 206. It was of critical importance to the society, in pursuing its business model, to know whether hedge accounting was acceptable or not. Grant Thornton advised the society that it was. The purpose of that advice was clear to Grant Thornton in that it knew that the society was explicitly relying on that advice in pursuing its business model. That in itself might, perhaps, not have been enough to reach the conclusion that the risks consequent on adopting that business model were appropriately borne by Grant Thornton. But the crucial additional factor that makes it clear that it was fair and reasonable for the risk of the loss to be borne by Grant Thornton was the negligent specific misrepresentation that there was an effective hedging relationship between the swaps and the mortgages. It was that specific misrepresentation, in the context of the advice on hedge accounting, that meant that the business model was pursued despite the society having insufficient regulatory capital. Clearly Grant Thornton knew that the purpose of that representation was to provide a true picture of the society’s financial position on which the society would rely in pursuing its business model. In my view, therefore, the society has established (the burden of proof being on the society, as claimant) that the loss was within the scope of Grant Thornton’s duty of care. ...211. Two final points should be made. … Teare J thought that the relevant contributory negligence should be 50% (para 255) and there has been no appeal against that figure', Lord Burrows
‘Grant Thornton was negligent in advising that hedge accounting could be used… the negligent specific misrepresentation that there was an effective hedging relationship between the swaps and the mortgages. It was that specific misrepresentation, in the context of the advice on hedge accounting, that meant that the business model was pursued despite the society having insufficient regulatory capital’, Lord Burrows at 204-211
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.