Professional negligence for advisers: SAAMCO gets put back in its box
The Supreme Court sets out a revised approach to assessing a negligent adviser’s responsibility for a claimant’s losses.
Background: the SAAMCO principle
It is almost a quarter of a Century since Lord Hoffmann gave the leading judgment in the SAAMCO case, setting out the principles that the court must consider when assessing a negligent adviser's responsibility for a claimant's losses. The judgment was never an easy one to understand, or to apply in different situations, and the challenges to which it has given rise can be seen from the vats of ink that have been spilled on articles about mountaineers, knees and avalanches, and the plethora of cases in which the courts have 'applied', 'clarified', re-stated', reinforced', 'revisited' and generally 'explained' how what came to be known as the 'SAAMCO principle' is intended to operate.
For all the analysis and explanation, the SAAMCO principle remained problematic, and with a new generation of Justices now installed, the Supreme Court has taken the opportunity to attempt to draw another line in the sand by providing a comprehensive explanation of how the Courts should approach this issue.
To emphasise the importance of the exercise, the same panel of Justices was convened to hear two very different cases, both of which gave rise to consideration of the principle. One was a professional liability claim: Manchester Building Society v. Grant Thornton UK LLP; the other was a clinical negligence dispute: Khan v. Meadows. The panel was extended to seven Justices so as to be able to deal fully with any submission by the claimants that the Supreme Court should formally depart from SAAMCO, although in the event, neither claimant made that submission. The two judgments are interwoven, frequently cross-refer to one another, andmust therefore be read together in order to get the full picture of the Supreme Court's thinking.
The SAAMCO principle was intended to provide a filter for eliminating losses that fall outside the scope of the defendant's duty. The application of the principle turned on guidance that, where a professional is responsible only for providing information on which a decision will be taken, rather than providing advice on the merits of the transaction overall, the professional's liability will be limited to the consequences of the information being wrong, and will not extend to any wider losses resulting from the transaction, even if those losses would not have occurred if the adviser had given the correct advice.
This outcome was to be achieved by carrying out a cross-check against the relevant counterfactual scenario, i.e. would the losses still have been incurred, had the information been correct? If they would, those losses are not recoverable. The application of this part of the principle became known as the "SAAMCO cap." It was designed specifically for application in the glut of surveyor's negligence cases in the late 1990s, but subsequently came to be applied in a wide range of other situations.
Repositioning SAAMCO
The views of the Supreme Court Justices who convened to hear Manchester Building Society and Khan regarding the clarity and ease of application of the SAAMCO cap aren't particularly hard to discern. Lord Burrows referred to a long list of academic articles which he said he had "found especially helpful in seeking to understand SAAMCO". Lords Hodge and Sales said: "The distinction drawn by Lord Hoffmann in SAAMCO between "advice" cases and "information" cases has not proved to be satisfactory. Put shortly...the distinction is too rigid and, as such, it is liable to mislead. The decision in SAAMCO, although perceived at the time by practitioners and academic commentators alike as being of great importance, gave rise to difficulty and a good deal of controversy in understanding its rationale and implications....Lord Leggatt said: [R] ather than continuing to use labels which are misleading, it seems to me that it would be desirable to dispense with the descriptions "information" and "advice" as terms of art."
The Supreme Court didn't go so far as to say that SAAMCO was wrongly decided, or that the SAAMCO cap should no longer be applied. But it has effectively removed the "information/advice" distinction and re-positioned the SAAMCO cap lower down the hierarchy of points that the court needs to consider, emphasising that it ought not to be determinative of the outcome if the other criteria point in a different direction: "...counterfactual analysis of the kind proposed by Lord Hoffmann in SAAMCO should be regarded only as a tool to cross-check the result given pursuant to analysis of the purpose of the duty...but one which is subordinate to that analysis and which should not supplant or subsume it." In other words, the SAAMCO cap tail shouldn't be wagging the scope of duty dog.
The "six questions" approach
The lead judgments (given by Lord Sales and Lord Hodge, with whom three of other five justices agreed) attempt to draw a line under previous discussion about SAAMCO and to start again. Their judgment in Manchester Building Society runs to fewer than 40 paragraphs (their judgment in Khan is slightly longer) and the centrepiece is what they term "a helpful model for analysing the place of the scope of duty principle in the tort of negligence", consisting of six questions to be asked in sequence. Although they caveat this by noting that it is "not an exclusive or comprehensive analysis", they express the hope that it "may bring some clarity to the role of the scope of duty principle which SAAMCO highlighted".
Whilst the other two Justices agreed with much of the reasoning in the lead judgments, and with the decisions in the two cases, they were clearly less enamoured with the idea of coming up with a new one size fits all approach. Lord Burrows said, "With great respect...I do not consider it necessary or helpful... to advocate what appears to me to be, in some respects, a novel approach to the tort of negligence as formulated in the six questions." Rather, he put forward his own list of seven "relatively conventional" questions. Lord Leggatt expressed similar concerns, saying that he thought it "undesirable as well as unnecessary" to get into a wider discussion of the "conceptual structure of the whole tort of negligence".
Those reservations notwithstanding, the 'six questions' approach taken in the lead judgments are now likely to become the starting point for the courts' approach to this issue.
The questions are these:
The actionability question: Is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence?
The scope of duty question: What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care?
The breach question: Did the defendant breach his or her duty by his or her act or omission?
The factual causation question: Is the loss for which the claimant seeks damages the consequence of the defendant's act or omission?
The duty nexus question: Is there a 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 as analysed at stage 2 above?
The legal responsibility question: 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 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?
Centrality of the scope of duty question
The first, and most important, point arising from this list of questions, and the judgments as a whole, is that the scope of the duty is absolutely key. One must ask in every case: What was the purpose for which the advice was given? What risk was the advice meant to guard against? And do the losses that are now being claimed represent that risk coming to fruition?
The centrality of this question is best illustrated by the decisions reached in the two cases.
In Khan, a GP had negligently advised a patient that she was not carrying the haemophilia gene. The patient went on to have a baby who sadly had both haemophilia and autism. It was accepted that, had the patient known she was a carrier of the gene, she would have had testing and would have terminated her pregnancy if it was discovered the foetus had the disease. The Court found that the risk that the doctor had taken on, and which the patient had wished to guard against, was that the baby would be born with haemophilia and not the risk that it would be borne with autism. The losses associated with the child's autism were therefore not recoverable.
In Manchester Building Society, GT had advised the Society that its accounts could be prepared according to the "hedge accounting" method and that this would reduce volatility in the accounts arising from interest rate swaps entered into in order to hedge against the cost of money borrowed to fund its lifetime mortgage business. In reliance on that advice, the Society decided not to close out its existing swaps but to keep them and enter into further long-term swaps with the intention of holding them to term. Some years later, GT realised that its advice had been erroneous, with the result that the Society had to restate its accounts, showing reduced assets and insufficient regulatory capital. To remedy the situation, the Society closed out the swaps early, at a loss. The Court found that this was the very loss that the Society had sought to guard against by asking for the advice, and that it therefore fell within the scope of GT's duty of care.
Notably, none of the individual judgments concerned themselves with the SAAMCO distinction as to whether these were 'information; or 'advice' cases, which as noted above has now been swept away. That distinction had been central to the Court of Appeal's decision in Manchester Building Society, because it held that this was an information case: GT had provided one piece of information about hedge accounting and, whilst MBS's decision was based on that information, it was also based on other commercial considerations on which GT had not given any advice. Applying the 'SAAMCO cap' counterfactual, the Court of Appeal also found that the Society could not prove that it wouldn't still have suffered the losses even if GT had provided the correct information about hedge accounting.
Importance and role of the Counterfactual
The second point to emerge very strongly from the judgments is the importance of precision in whatever counterfactual is put forward (if one is put forward at all).
Lord Leggatt put this most clearly, saying that the point of the counterfactual test is not to consider whether, if the advice had been correct advice to give, the claimant would have acted in the same way, because "self-evidently it would". Rather, it is to consider whether, in that situation, the claimant's actions would still have resulted in loss. By putting the question in that way, one can home in on whether the loss claimed is attributable to the defendant's actions or is a consequence of risks which the claimant would have taken even if the true position had been as the defendant represented it to be.
Applying that analysis, Lord Hoffmann's mountaineer would still have been injured in the avalanche if his knee had in fact been sound as the doctor negligently advised that it was. Likewise, the lenders in SAAMCO would still have suffered from the property market collapse if the property had in fact been worth what the valuer advised that it was worth. In an audit case, the question will be whether the audited entity would still have suffered loss if its financial position had in fact been as the auditor represented it to be by its audit opinion.
Applying that test to the particular cases the Court was deciding:
If GT's advice had been the correct advice to give (i.e. that the Society could use hedge accounting) and the Society had acted in the same way (by entering into the swap arrangements), would it still have incurred the loss? Answer: no, because the hedge accounting approach would have stopped it from needing to break the swaps at that time. Therefore, the loss is recoverable.
If Dr Khan's advice had been the correct advice to give (i.e. that the patient was not carrying the haemophilia gene) and the patient had acted in the same way (by having her baby), would she still have incurred the loss? Answer: yes, because the baby would have been born with autism. Therefore, the loss is irrecoverable.
This is likely to be a very significant point in practice. In Manchester Building Society, the Society had gone down something of a rabbit hole, putting forward a counterfactual whereby it would have held the swaps to full-term, rather than breaking them. The Court rejected that approach and expressed concerns about arguments about counterfactuals leading to parallel and costly litigation: "[T]he more one moves from the comparatively straightforward type of situation in the valuer cases, as illustrated by SAAMCO, the greater scope there may be for abstruse and highly debatable arguments to be deployed about how the counterfactual world should be conceived. One has to take care, therefore, not to allow the counterfactual analysis to drive the outcome in a case. To do so would create a risk of litigation by way of contest between elaborately constructed worlds advanced by each side, which would become increasingly untethered from reality". The Court is sending a clear message here that parties must think carefully about any counterfactual they put forward and make sure that it is grounded in the reality of what actually took place.
One final point: Lord Leggatt's judgment in Manchester Building Society provides additional guidance on particular types of cases - be it a classic audit negligence case (providing particular commentary on the recoverability of trading losses following the recent AssetCo decision) or valuer cases. Those categories of cases are worthy of commentary in their own right and more will follow from us on that.
