Repositioning the SAAMCO principle – the scope of duty owed by professional advisers gets a makeover by the Supreme Court

Has SAAM become “Johnny, no mates”?

For the last 24 years, the judgment in South Australia Asset Management Corp v York Montague Ltd [1997] AC 191, popularly referred to as SAAMCO, has been the leading authority setting out the principle of scope of responsibility that a court must consider when assessing a negligent adviser’s responsibility for a claimant’s losses. If the conduct complained of falls outside that scope there may be no claim at all.

Over the years,  multiple views on the application of the SAAMCO principle to differing facts has prompted the Supreme Court recently to give the control chain a tug and to provide a comprehensive approach of how the Courts are to measure and apply the scope of responsibility.

In its recent decision in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20, the Court provided authoritative guidance on the proper approach to determining the scope of duty and the extent of liability of professional advisers for negligence, including the proper application of the SAAMCO principle.  Coupled with the Supreme Court judgment in the clinical negligence case of Khan v Meadows [2021] UKSC 21, which also gave rise to the consideration of the principle, both Manchester Building Society and Khan are the most significant decisions on liability for professional negligence since SAAMCO itself. As such, the outcome and reasoning of these decisions are significant as they provide important guidance regarding assessing the recovery of damages for economic loss caused by professional negligence.

SAAMCO Principle

The SAAMCO principle provides that a claimant can only recover loss that falls within the scope of the duty of care assumed by the negligent defendant professional adviser. The application of this principle turned on guidance in relation to ‘information’ cases i.e. where the defendant is simply providing information or ‘advice’ cases, when the defendant is providing not just information but advice on a course of conduct. In information cases, the adviser is only liable for any foreseeable financial consequences of the information being wrong but not for the financial consequences of the claimant client deciding to take a specific course of action. This is irrespective of whether the information is integral to the claimant’s decision-making process. However, in advice cases, an adviser is liable for all losses that flow from an advised course of action taken. The application of the principle often leads to competing counterfactuals i.e. what would have happened but for the misinformation or mis-advice.

New leading authority – scope of duty of care

In both judgments of Manchester Building Society and Khan, the Supreme Court sought to abandon the “information v advice” test of SAAMCO and replace it with examination of the purpose of the duty, within the framework of the law of the tort of negligence. Of the distinction drawn between ‘advice’ cases and ‘information’ cases, Lord Hodge and Sales said that “the distinction is too rigid and, as such, it is liable to mislead.” Furthermore, Lord Leggatt said: “[R] ather 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.”

The Supreme Court concluded “in the case of negligent advice given by a professional adviser one looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk”.  Following this test the Supreme Court concluded that the scope of the duty of care of a professional adviser is:

• governed by the purpose of the duty; and
• is objectively determined on the basis of the purpose for which the advice was given.

The centrality of this assessment is illustrated by the decisions reached in the two cases.

In Manchester Building Society, Grant Thornton had advised the Society that by preparing its accounts, adopting a certain methodology, it could reduce volatility in the accounts arising from interest rate swaps entered into to hedge against money borrowed to fund its lifetime mortgage business. The Society relied on this advice. Some years later, Grant Thornton realised that its advice was incorrect and the Society subsequently had to restate its accounts with reduced assets and insufficient regulatory capital. The Society closed out the swaps at a loss. The Court found that this was the very loss that the Society had sought to guard against by asking for the advice, and that it therefore fell within the scope of Grant Thornton’s duty of care.

The question asked was whether the Society would still have incurred a loss had it acted the same way in maintaining the swap arrangements if Grant Thornton’s initial advice had been correct (i.e. that the Society could use the methodology it recommended). The answer to this question was no and therefore the loss was recoverable.

In Khan, a patient had been negligently advised by their doctor that she would not pass on the haemophilia gene. The patient subsequently gave birth to a child who had both haemophilia and autism. The Court found that the risk that the doctor had taken, and which the patient had wished to guard against, was that the baby would be born with haemophilia and not the risk that it would be born with unrelated autism. Thus the losses associated with the child’s autism were not recoverable.

The question for the Court here was whether the patient would have incurred the loss if she had acted the same way by having the baby if Dr Khan’s advice had been correct (i.e. that the patient was not carrying the haemophilia gene). The answer was yes because the baby would have been born with autism, therefore the loss arising from the autism was irrecoverable.

Ultimately, the two Supreme Court decisions of Manchester Building Society and Khan have provided clarity to the application of the SAAMCO principle and a comprehensive approach to determining the scope of duty and the extent of liability of professional advisers – two often hotly contested issues at the core of many a dispute between professional advisers and their clients in negligence claims.

If you  have any questions about this matter, please contact David Greene or any member of the Commercial Litigation team.

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