The Supreme Court has backed a building society’s claim against its former auditor, in a ruling that provides a ‘more generous’ test for the duty of care owed by professional advisers.
Manchester Building Society brought action against Grant Thornton after the accountancy firm negligently advised its client to use a method known as ‘hedge accounting’ from 2006. The building society relied on this advice, entering into various fixed rate mortgages hedged against long term swaps.
It was discovered in the wake of the financial crash that the society could not apply hedge accounting, and the negative swing in its reported profit and loss and capital position compelled it to exit the business model, breaking the swaps and selling the mortgages. Manchester Building Society closed out the swaps at a cost of over £32m.
The Supreme Court was asked to decide whether the society can recover this cost as damages from the accountants, reduced by 50% for the society’s contributory negligence. Both the trial judge and the Court of Appeal ruled that it could not.
However, a panel of seven justices unanimously allowed the building society’s appeal in a judgment handed down this morning. The court found that Manchester Building Society had suffered a loss falling within the scope of the duty of care assumed by Grant Thornton, in light of the purpose of its advice.
'The loss was caused by a matter - the lack of an effective hedging relationship between the swaps and the lifetime mortgages which they were supposed to hedge - which Grant Thornton negligently failed to appreciate and report to the society and which made its advice wrong,' the court said. 'By the same token, if Grant Thornton’s advice had been correct and there had been an effective hedging relationship between the swaps and the mortgages, as Grant Thornton advised that there was, the loss would not have occurred.’
It ruled that Manchester Building Society is entitled to recover damages of £13.4m.
City firm Squire Patton Boggs, which represented the appellant, said: ‘Claimants who have suffered loss as a result of negligent advice are likely to turn to this judgment as providing both a more generous and more common sense test for scope of duty. Professionals giving advice should pay heed to the “purpose of duty” question and make sure that their terms of engagement are absolutely clear on the agreed purpose of the advice being sought.’
Commenting on the ruling, Janine Alexander, financial services partner at Collyer Bristow LLP added that professional advisers are under growing scrutiny: ‘This case forms part of an intensifying focus on the duties owed by accountants, and in particular, auditors when scrutinising the finances of large enterprises - a reminder that the courts and regulators expect more from them than a box ticking approach,’ she said.
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