The extent of the responsibility assumed by a professional adviser, and the extent of their liability if they fail to act with reasonable care, have been the subject of many a dispute between professional advisors and their clients.

The judgment of the UK Supreme Court in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 has provided important guidance regarding the proper approach for determining the scope of duty and the extent of liability of professional advisers in the tort of negligence. Together with the judgment of the same expanded constitution of the court in the clinical negligence case of Khan v Meadows [2021] UKSC 21, this is the most significant decision on liability for professional negligence since the House of Lords’ decision in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 19 (“SAAMCO”).

The divergence of opinion about SAAMCO and the scope of duty principle served to emphasise to the court the importance of seeking to arrive at an authoritative view.

SAAMCO

SAAMCO has been the leading authority on recoverability of damages for economic loss caused as a result of professional negligence – harm that the professional advisor was engaged to protect the client against.

In SAAMCO, Lord Hoffman made a distinction between the duty to provide information to enable clients to decide on a course of action versus the duty to advise clients on the specific course of action. The negligent professional adviser is liable only for foreseeable financial consequences of the information being wrong, and not for the financial consequences of the client deciding to take a specific course of action. This holds even if the information is paramount to the decision-making process. On the other hand, the negligent professional adviser is liable for all losses that result from the advised course of action on the basis that the adviser is responsible for the action taken.

The realignment

The majority in Manchester Building Society observed that the scope of duty question should be located within a general conceptual framework in the law of the tort of negligence. The majority concluded that 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 being given. Notably, the majority observed that the focus on causation distracts attention from the primary task of identifying the scope of the defendant’s duty. A focus on the purpose of the duty is was both more principled and more in line with authority.

Therefore, in line with the judgment of Lord Sumption in Hughes-Holland v BPE Solicitors [2017] UKSC 21, the distinction between ‘advice’ cases and ‘information’ cases should not be treated as a rigid straitjacket. Further, the counterfactual analysis of the kind proposed by Lord Hoffmann in SAAMCO (often referred to as the SAAMCO cap) should only be regarded as a tool to cross-check the result given pursuant to analysis of the purpose of this duty; a tool which is subordinate to that analysis, and which should not supplant or subsume it.

Comment

This decision will significantly change the way damages for economic loss in professional negligence cases are assessed by English courts and arbitral tribunals.

Professional advisers and their clients would be well served by accurately reflecting the purpose of engagement in the terms of engagement.