The search for consistency in the law of professional negligence: Manchester Building Society v Grant Thornton and Khan v Meadows in the Supreme Court

On 18 June 2021, the same seven-judge constitution of the Supreme Court handed down judgment in two appeals.  Both cases arose from acts of professional negligence, one on the part of accountants (who were acting under contract), the other on the part of a GP (who was not so acting).  In both cases, the Court once again sought to make sense of the analytical tool which was effectively created by Lord Hoffmann in SAAMCo.  This brief note explains the parameters of the debate, the context into which the majority of the Court decided to frame their deliberations, and what was decided.

In summary, the cases contain four valuable insights: first, that the need to discern the scope of the defendant’s duty – i.e., to use the SAAMCo tool – arises in all cases concerning professional defendants.  It is part of the law of negligence; is not excluded from clinical negligence cases; and is not confined to cases involving pure economic loss arising in commercial transactions: Khan at [62].

Second, that the use of counterfactuals in seeking to apply SAAMCo has been rightly reined in:

“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 further one moves from the relatively simple valuer case addressed in SAAMCo… the better approach is to focus more directly on the purpose for which the defendant gave the advice in question.  There is no need to apply a counterfactual test to arrive at the correct conclusion and it has the potential to confuse rather than assist the correct analysis” Manchester Building Society at [26].

Third, the use of the terms “information” and “advice” in this context should cease:

“… rather 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 and to focus instead on the need to identify with precision in any given case the matters on which the professional person has undertaken responsibility to advise and, in the light of those matters, the risks associated with the transaction which the adviser may fairly be taken to owe a duty of care to protect the client against. What determines whether the adviser has a duty to protect the client against the full range of risks associated with a potential transaction, or only against some of those risks, is whether or not the adviser’s contribution to the decision-making process is limited.” MBS at [92]; see also [19].

Fourth, the concept of the “SAAMCo cap” (an expression often used by practitioners) is evidently not helpful: MBS at [100] and following.

More controversially, the cases have been used as a vehicle by the majority in each case to advance a particular analytical framework for analysing the scope of duty principle.  The framework goes beyond what was necessary to decide the cases before the Court; and, in seeking to be a comprehensive guide, is arguably vulnerable to being misapplied or misunderstood in future cases.

The facts of the two cases

Manchester Building Society

Between 2004 and 2010, Manchester Building Society (“MBS”) purchased and issued “lifetime” mortgage loans. These were loans designed to release equity in a borrower’s home; interest was charged at a fixed rate, but neither interest nor capital were to be paid to MBS until the borrower died, moved out of the property, or chose to repay the loan.  Until that time, interest was compounded.

MBS funded these lifetime mortgages by borrowing at variable rates of interest.  That this was so created a commercial risk: the interest eventually received when the mortgages were repaid might be less than the sum of the interest paid out to fund the loans.  MBS accordingly entered interest rate swap contracts.  It agreed to pay its swap counterparties a fixed rate of interest on a notional sum; and in return, the swap counterparties agreed to pay a variable rate of interest on the same notional sum.  The payments due were netted off against each other at regular intervals, with the balance payable by one party to the other at that netting off point.  The intention was that (a) the variable rate of interest due to MBS from the swap counterparties should match the variable rate of interest MBS paid to borrow the money it loaned to the lifetime mortgage borrowers and (b) the fixed rate payable by MBS to its swap counterparties would hopefully be less than the interest due from the lifetime mortgage borrowers.  In this way, MBS hoped to hedge against, albeit not remove entirely, the commercial risk of borrowing at a variable rate but lending at a fixed rate.  The supposed hedging itself created another risk because the swaps were for defined lengths of time whereas the mortgages were not.

In 2005 – after the creation of the hedged lifetime mortgage product – MBS was required to change the way that it prepared its accounts.  Pursuant to the International Financial Reporting Standards, MBS had to account on its balance sheet for swap contracts at their fair value.  That meant accounting for them at their Mark to Market (“MTM”) value; and as interest rates fluctuated, so the value of the swap contracts fluctuated.  The value of the mortgage loans, by contrast, was to be ascertained at their amortised or book value.  The consequence, in accounting terms, was that MBS’s reported financial position would henceforth seem more volatile, as the commercial effect of MBS’s hedging against the risks described above would not be mirrored in the accounts.

This is where the defendants, Grant Thornton (“GT”) came in.  MBS asked GT if it would be permissible to use “hedge accounting”.  Under that convention, the value of the hedged item (the lifetime mortgages) can be adjusted to offset changes in the fair value of the hedging instrument (the swaps contract).  The result of such a change would be that the reported volatility previously described would no longer arise.

The relevance of this was that the way MBS reported its financial position had a direct impact on the assessment made by its regulator, the Financial Services Authority (“FSA”), of its ability to withstand financial stresses.  Under the FSA’s regulatory regime, MBS was obliged to maintain levels of certain types of capital capable of being deployed in the event MBS’s finances came under stress due to market movements: this capital was termed “regulatory capital”.  The more MBS’s business was subject to reported volatility, the higher the level of regulatory capital required as a safeguard; and the higher the level of regulatory capital, the less lending MBS was able to undertake.

GT knew that the regulatory capital issue was central to MBS management’s decision-making regarding how (or whether) to continue its lifetime mortgage business after the move to IFRS reporting standards in 2005.  If MBS could properly use hedge accounting, reported volatility would be lower and the regulatory capital requirement would be lower; if it could not use hedge accounting, then it would have to unwind the swap contracts it had already entered and redesign or exit from the product.

GT advised that the proposed hedge accounting was an appropriate and permissible use of the convention.  That advice was admitted in the Defence to be negligently wrong.

The consequences of these events manifested themselves in two stages some years after the financial crisis of 2008.  There was a sustained fall in interest rates, which caused the MTM value of the swap contracts to become a liability.  To meet that liability, MBS was required to provide cash collateral to its swap counterparties, amounting to £39 million by the end of Q3 2012.  That liability was offset on MBS’s balance sheet by the adjustment made to the reported value of the lifetime mortgages using the hedge accounting convention.  In 2013, however, GT informed MBS that it could not, after all, employ hedge accounting.  MBS now had to account for the MTM value of the swap contracts without making the corresponding adjustment to the lifetime mortgages.  The result was that MBS’s profit for 2011 became a loss and its net assets were reduced from £38 million to just under £10 million.  That in turn meant that MBS was not holding adequate regulatory capital.

To extricate itself from that situation, MBS was obliged to terminate all its swap contracts early at a cost of £32.7 million.  It also sold its book of lifetime mortgages, on which it achieved a profit of £5.96 million.  The net position was that the financial loss sustained by MBS was £26.7 million (i.e., £32.7 million less £5.96 million).

The basis on which MBS advanced its case was criticised as being one which “obscured the correct way of analysing its claim” (per Lord Leggatt at [166]), but the central issue was whether that £26.7 million loss sustained by MBS (less a further 50% deduction for contributory negligence) was recoverable from GT.

Khan v Meadows

Ms Meadows knew that there was a possibility she was a carrier of the haemophilia gene.  She wished to have a child; but not a child with haemophilia.  She went to see her GP to establish whether she was a carrier.  She was given a blood test to determine whether she personally had haemophilia.  She did not, as a GP, Dr Khan, explained to her upon reviewing the tests; but what Dr Khan failed to do was point out to her that her status as a carrier for the haemophilia gene remained undetermined and that to establish whether she was a carrier she needed a test available from a haematologist.

Ms Meadows, thus reassured, became pregnant.  Her son was born with haemophilia.  Upon genetic testing, it became clear that Ms Meadows was a carrier.  The son’s haemophilia is severe.  Ms Meadows would have undergone foetal testing had she known that she was a carrier and upon receiving the results, would not have proceeded with the pregnancy.

At 5 years old, Ms Meadows’ son was diagnosed as suffering from autism as well as haemophilia.  The autism gravely complicates the management of the haemophilia.

To bring up a child with haemophilia alone would result in extra costs of £1.4 million.  To bring up her actual son, with autism and haemophilia, would result in extra costs of £9 million.

The question raised by the litigation was whether Dr Khan was liable to compensate Ms Meadows for the extra costs of haemophilia alone, or for all the extra costs associated with the son to whom she gave birth.

The legal issue

The point raised on both appeals was framed as being the ascertainment of the “scope of duty” owed by the respective professional defendants. In MBS, the majority explained that it had decided to give “general guidance regarding the proper approach to determining the scope of duty and the extent of liability of professional advisers”; in Khan, the question was framed by the majority as being “how does the scope of duty principle fit into the conventional analyses of negligence, and has it any application outside claims for pure economic loss?”.

The majority and minority approaches

In each case, there was a majority comprising Lords Hodge, Sales, Reed, Lady Black and Lord Kitchen; and two separate judgments, upholding the decision of the majority albeit with rather different analytical emphases, one from Lord Leggatt and one from Lord Burrows.  The main focus of this note is, inevitably, on the judgments of the majority (delivered by Lords Hodge and Sales jointly), but the judgments of the majority are written on the basis that the reader has absorbed the judgment of Lord Leggatt in MBS.

It is worth making three observations here.  First, the substantive disagreement between the majority and Lord Leggatt appears to be small (Lord Leggatt expressly says so himself at Khan [97]).  Second, the majority describe important parts of Lord Leggatt’s judgment in MBS as “illuminating” and agree with all he says in analysing the valuer cases (MBS at [3]).  Third, the reasons given by Lord Burrows for not associating himself fully with the judgment of the majority (who say they broadly agree with him: MBS at [3]) arise from a difference of view between him and them regarding the correct conceptual structure to explain the tort of negligence.

In this respect, the judgments in these two appeals are relatively unusual.  On the substantive legal question at issue – what the SAAMCo principle is, how it should be applied to the facts of the cases before the Court – there is not a great deal of difference between the majority and either of the two minority judgments.  The split in the Court comes from competing approaches as to how best to explain the law in the abstract, not from the application of the law to the facts at hand – and certainly not from any dispute about the outcome.

The majority approach to explaining the law

The majority have suggested that it “may bring some clarity” to future cases where scope of duty is an issue if practitioners and judges ask themselves the following six questions (quoted verbatim from MBS at [6] and Khan at [28]):

  1. Is the harm (loss, injury and damage) 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 on 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 defendant’s 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 have avoided (the legal responsibility question).

Guidance such as this on the analytical process, even from the Supreme Court, is always to be treated as a valuable tool to stimulate thinking and never as a flow chart from which departure is impermissible.  The majority themselves recognised this; whether what Lord Burrows described as “a novel approach to the tort of negligence” (Khan at [78]; similar observation in MBS at [212]) will now gain traction, lead to further befuddlement, or both, remains to be seen. It will be surprising if there do not continue to be differences of opinion between the first instance and appellate Courts.

In particular, it is arguable that the new “duty nexus question” is rather vague: Lord Leggatt himself observed in Khan at [97] that he considered he and the majority were discussing the same substantive principles, for all that he considered he was considering a question of “causation” and they were focussing on the purpose of the duty of care (see MBS at [27]).

The sense of unusual disconnection between the analysis of Lord Leggatt and the majority also surfaces in a very interesting way in MBS at [38].  There, the majority said that their analysis was similar to that of Lord Leggatt at [166] – [168], where, they said, “he relies on [GT’s] misrepresentation about the existence of an ‘effective hedging relationship’ between the swaps and the mortgages as the reason why the society’s loss fell within the scope of its duty of care”.  In the cited paragraphs, however, Lord Leggatt does not expressly characterise his analysis using the word ‘misrepresentation’.

The correct use of the SAAMCo counterfactual

In SAAMCo, Lord Hoffmann proposed a form of counterfactual analysis as a way to assist in identifying the extent of the loss suffered by the claimant which falls within the scope of the defendant’s duty.  Where, he said, a defendant had provided “information”, one might test to see if the provision of that “information” caused the loss sought to be recovered by asking, would that loss have been sustained even if the “information” provided by the defendant had been correct.

Time has not been kind to the information/ advice distinction which many believed arose in SAAMCo.  In MBS, any remaining real utility to that distinction that might have survived Hughes-Holland v BPE [2017] UKSC 21, [2018] AC 599, has been swept away.  The counter-factual analysis suggested by Lord Hoffmann has been put into its proper place: it is now to be seen only as a “useful cross-check” – in some but not all cases – to test whether the loss claimed does indeed fall within the scope of the duty.  Even on that basis, the Court suggested that for valuers’ cases there may be an open question as to the mathematics in SAAMCo: MBS at [104], [105].

The application of the law to the facts in each case

In MBS, the answer was clear to the Supreme Court (although, just as in SAAMCo the highest Court was overturning a strong Court of Appeal): the purpose of GT’s advice was to permit MBS to decide whether it could use hedge accounting in order to offer its lifetime mortgage product within the constraints of the regulatory environment in which it operated.  GT wrongly said it could when it could not; the losses claimed were clearly within the scope of GT’s duty.

In Khan, the answer was said with comparable certainty also to be clear: Dr Khan had been asked to give advice on whether Ms Meadows was a carrier of the haemophilia gene; she was thus responsible for such part of Ms Meadows’ loss as was referrable to her breach of duty in omitting to give the right advice.


The answer given in the GT case is, in this author’s view at least, right: the purpose to which MBS intended to put the advice it sought from GT was precisely to attempt to manage its regulatory capital requirements, and that attempt spectacularly failed precisely because the advice given was wrong.

In Khan’s case, there must remain a lingering sense of unease that the analysis adopted by the Supreme Court continued to focus on the wrong question.  Ms Meadows went to see Dr Khan to find out if she could safely take to term the next pregnancy that she experienced.  If she had been given the correct advice, she would not have taken the next pregnancy she experienced to term but would have terminated it.  The specific child in relation to which advice was sought was born when had the advice been correct, it would not have been born.  It seems, to the current author at least, a triumph of logic over common sense to focus on the narrow fact that Dr Khan was asked about haemophilia when it is perfectly possible to characterise the question in which she was asked to advise as “can I safely take the next foetus to term without checking that it has haemophilia”.

Having ventured my own comment, it would be remiss of me not to note that a very eminent senior colleague of mine in Chambers who reviewed this article in draft said that he held the diametrically opposite view: MBS was wrong and Khan correct.  From that minute sample, I venture the further conclusion that lively debate about the application of the scope of duty principle to any given set of facts will continue unabated.

Post script

Keen readers of the judgments will note the reliance placed by their Lordships on 4 New Square’s Hugh Evans’ 2017 article “Solicitors and the scope of duty in the Supreme Court”: see MBS at [105], [187], [202].

Paul Mitchell KC

Disclaimer: This article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.

© Paul Mitchell KC of 4 New Square, June 2021

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