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The Supreme Court's reformulation of the conceptual framework for negligence claims in the context of auditors' negligence claims - Manchester Building Society v Grant Thornton UK LLP

Posted on 21 June 2021

The Supreme Court handed down on Friday 18 June 2021 landmark decisions in the cases of Manchester Building Society v Grant Thornton UK LLP and Khan v Meadows. The cases were heard by a specially constituted panel of seven Supreme Court justices to provide general guidance regarding the proper approach to determining the scope of duty and the extent of the liability of professional advisers in the tort of negligence.

In allowing Manchester Building Society's appeal, the Supreme Court held that the losses which Manchester Building Society suffered in closing out swaps were (a) within the scope of Grant Thornton's duty and (b) legally caused by Grant Thornton's negligence.

As regards scope of duty, the view of the majority (Lord Hodge, Lord Sales, Lord Reed, Lady Black and Lord Kitchin), with whom Lords Leggatt and Burrows were in agreement only in part, was that:

  1. The scope of duty question should be located within a general conceptual framework in the law of negligence;
  2. The scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty, judged on an objective basis by reference to the purpose for which the advice is given;
  3. The distinction between "advice" and "information" cases in SAAMCO should not be treated as a rigid straitjacket;
  4. The SAAMCO counterfactual analysis should only be regarded as a tool to cross-check the result of the analysis of the purpose of the duty, and is subordinate to it.

Applying these principles, the Supreme Court held that the following questions arise when a claimant seeks damages from a defendant for negligence:

  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 upon the defendant a duty to take care? (the scope of duty question)
  3. Did the defendant breach his or her duty by his or her 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 a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the duty of care as analysed at stage 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)

The application of this analysis was held by the Supreme Court to value the claimant's claim for damages in accordance with the principle that the law seeks to place the claimant in the position that he or she would have been in, absent the defendant's negligence, so far as money can.

It follows from this judgment that the scope of the duty owed by an auditor is to be governed by the purpose of the duty, judged objectively. In Caparo Industries PLC v Dickman [1990] 2 AC 605 the House of Lords held (in the context of deciding what duty was owed to shareholders) that the purpose of a statutory audit was to provide the company and its shareholders with accurate information about the company's finances on which to base management and governance decisions. It was also held that insofar as a negligent failure of the auditor to report accurately on the state of the company's finances deprives shareholders of the opportunity to hold the directors to account, the shareholders ought to be entitled to a remedy. It would seem clear, therefore, that in the absence of any additional considerations (such as the terms of the audit engagement itself) that losses caused by an auditor's negligence which prevent the shareholders from holding management to account are likely to fall within the scope of an auditor's duty. It is worth bearing in mind that audits have a wider purpose in the sense of instilling confidence in the operation of capital markets, and that other stakeholders too have an interest in the reliability of audit opinions. It will be interesting to see how the law develops as to the scope of an auditor's duties given the guidance now handed down in Manchester Building Society, and how the precise scope of an auditor's duty will be formulated in light of the purpose of an audit objectively assessed.

It would also seem that once it has been established that a claimant's loss was within the scope of the auditor's duty, there may no longer be any room for argument that the loss was not legally caused by the auditor's negligence. This is because, as Lord Leggatt explained in Manchester Building Society, "in order to decide that the claimant's loss was within the scope of the defendant's duty, the court must be satisfied that the loss was caused by the particular maters which made the defendant's advice incorrect and not by other matters unrelated to the subject matter of the defendant's negligence. That seems… sufficient to demonstrate that the defendant's conduct was an effective cause of the loss. This statement was expressly approved by the majority of the Supreme Court."

This decision is the second recent landmark decision against Grant Thornton UK LLP, following on from the Court of Appeal's rejection of their appeal in the case of AssetCo PLC v Grant Thornton UK LLP [2020] EWCA Civ 1151. These cases represent unwelcome developments in the law for the audit profession generally, but will be well received by the corporate victims of negligent audits who have suffered loss caused by the auditor's failings, depriving them of the opportunity to hold management to account.

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