The Court of Appeal has confirmed the correct approach to be taken when assessing the extent to which a professional adviser will be liable for losses suffered when a transaction is entered into based on its incorrect advice.
The Court will first consider whether the adviser provided advice for the purpose of enabling the client to decide what to do (known as an “information” case), or advice as to whether the client should do something (in the sense that they were guiding the decision-making process and known as an “advice” case). In the former (information) case, they will only be liable for the foreseeable consequences of the information/advice being wrong, and this will exclude any losses which would have been suffered even if the information given had been correct. They are not taken to have assumed responsibility for the decision to enter into the transaction. In the latter (advice) case, the professional will be liable for the foreseeable losses which will be suffered as a result of the transaction being entered into because they are taken to have assumed responsibility for the decision to enter into the transaction.
In the case of Manchester Building Society v Grant Thornton LLP  EWCA Civ 40 a lender entered into interest rate swap contracts having received advice that it was able to take advantage of an accounting treatment which minimised the impact on its balance sheet of any volatility in the value of the swaps. That advice turned out to be wrong so that, instead, the balance sheet had to reflect the valuation of the swaps from time to time. The lender’s balance sheet was unable to support the liability which resulted from the sudden falling of interest rates after the financial crisis, leaving the lender with no option but to close down the swaps. In doing so it crystallised a very substantial loss on the swaps which it sought to recover from the advisers.
On the information/advice question, the Court of Appeal held that the advisers had provided information only, i.e. they had not assumed responsibility for the lender’s decision to enter into the swaps. As to the loss which the advisers were thereby responsible for, it said that the loss suffered on closing down the swaps merely reflected their value at that time (which in turn reflected the market’s expectation of the cost to the lender over the term of the swaps). It was therefore a loss which the lender would have suffered even if the advice given as to accounting treatment had been correct and the swaps maintained for their full term, with the result that the adviser was not liable.
This case illustrates well how a negligent adviser will rarely be liable for a loss which, although it would not have been suffered but for the incorrect advice having been given, has more to do with the steps taken in reliance on the advice than the advice itself.
For any further information, contact Andrew Quick or your usual S&B contact.
Manchester Building Society v Grant Thornton LLP  EWCA Civ 40