Appeal judges rule on difference between ‘advice’ and ‘information’

Rushton: Court provided flow chart for claims

The Court of Appeal has set out a series of steps courts should take when deciding whether a professional negligence case involves ‘advice’ or ‘information’.

Nicola Rushton QC said appeal judges, in a ruling involving hedge accounting and interest rate swap agreements, had created “what was practically a flow chart” which could also be applied to claims against solicitors.

Lord Justice Hamblen said a case was an ‘advice’ case if it could be shown that it had been left to the adviser to consider what matters should be taken into account, that he was under a duty to consider all relevant matters and was responsible for guiding the whole decision-making process.

Hamblen LJ went on: “If it is an ‘advice’ case, then the negligent adviser will have assumed responsibility for the decision to enter the transaction and will be responsible for all the foreseeable financial consequences of entering into the transaction.

“If it is not an ‘advice’ case, then it is an ‘information’ case and responsibility will not have been assumed for the decision to enter the transaction.

“If it is an ‘information’ case, the negligent adviser/information provider will only be responsible for the foreseeable financial consequences of the advice and/or information being wrong.

“This involves a consideration of what losses would have been suffered if the advice and/or information had been correct. It is only losses which would not have been suffered in such circumstances that are recoverable.”

Hamblen LJ said the SAAMCO principle – which limits the recovery of damages from a negligent advisor to losses which fall within the scope of the advisor’s duty – had led courts to draw a distinction between ‘advice’ and ‘information’.

He said that the case before him was clearly an ‘information’ case because although Grant Thornton gave advice, it was not involved in the decision by Manchester Building Society (MBS) to enter the interest rate swaps.

Grant Thornton was not left to decide what matters to take into account, under a duty to consider all relevant matters or responsible for guiding the whole decision-making process.

The Court of Appeal heard in Manchester Building Society v Grant Thornton [2019] EWCA Civ 40 that Grant Thornton admitted that its advice to the building society that it could apply hedge accounting, an accounting treatment that reduces the effect in the accounts of volatility in the value of swaps, was negligent.

As a result of this advice, MBS applied hedge accounting to its financial statements for the years ending 31 December 2006 to 31 December 2011.

When Grant Thornton informed MBS that hedge accounting “may not be applicable” and the accounting position was changed, MBS “did not have sufficient regulatory capital”.

A profit for 2011 of £6.35m became a loss of £11.4m. The building society’s net assets were reduced from £38.4m to £9.7m.

“The restated financial position was so bad that the regulator would not permit MBS to continue new lending,” the judge said.

Hamblen LJ said a “striking feature” of the case was that MBS’s claim for damages consisted of the “fair value” of the swaps which it held, and receiving fair value did not ordinarily give rise to any loss.

MBS argued that all that needed to be proved was the loss suffered on the closing out of the swaps in 2013, £32.5m, but this loss reflected market forces.

“The closing out of the swaps at fair value on 6 and 7 June 2013 crystallised the loss resulting from the swaps being ‘out of the money’, but it did not create that loss.”

Hamblen LJ said the trial judge was wrong to find that these losses would not have been incurred had the information or advice been correct, but his overall conclusion was right in dismissing MBS’s claim.

Lord Justice Males and Dame Elizabeth Gloster agreed that the appeal should be dismissed.

Nicola Rushton QC, based at Hailsham Chambers, said the courts had taken an “analytical approach” when applying the SAAMCO test.

“The Court of Appeal rejected the trial judge’s open-ended question of whether the adviser had ‘assumed responsibility’ for that type of loss.

“Instead they set out what was practically a flow chart – which will also be useful for claims against solicitors.”

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