New guidance - Duty of care in claims against professionals

01 July 2021

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On 18th June 2021, the Supreme Court handed down important judgements in the cases of Khan v Meadows [2021] UKSC 21 and Manchester Building Society v Grant Thornton [2021] UKSC 20. Although factually very different cases, the Supreme Court was dealing with the same issue in both. How shall a Court determine the scope of a professional’s duty of care and therefore, the loss for which they will be held liable? Professionals will not be liable for all the losses flowing from their negligence, but only for those losses which fall within the scope of their duty of care.

The Facts

In Khan v Meadows, a GP negligently advised the claimant that any baby she would have would not be at risk of having haemophilia. She subsequently had a baby boy who had haemophilia and autism, an unrelated condition. Was the GP liable in respect of both conditions or only in relation to the baby’s haemophilia?

In Manchester Building Society v Grant Thornton, accountants advised a building society that, if it entered into swaps to be matched against its portfolio of lifetime mortgages, it could use hedge accounting in order to reduce the appearance of volatility in the society’s profits. This would greatly reduce the level of capital the society would have to maintain to meet its regulatory requirements. This proved incorrect and the building society had to break the swaps early, thereby incurring significant losses. Were the accountants liable for those losses or did they fall outside the scope of their duty of care?

The Previous Approach

Previously, Courts have drawn a distinction between “advice” and “information” cases. In advice cases, where a professional gave negligent advice as to whether to enter into a transaction, the professional would be liable for all the losses caused as a result of entering into that transaction. In information cases, the professional would only be liable for the loss caused as a result of the information they provided being incorrect. They would not be liable for all the losses incurred by their client as a result of entering into the transaction. This has sometimes been referred to as the “SAAMCO cap” in reference to the seminal case of South Australia Asset Management Corpn. v York Montague Ltd (1997), known as SAAMCO. To determine the extent of the losses suffered as a result of the negligent information, the Court would ask what is known as the ‘counterfactual question’: What would have been the consequences for the claimant had the information provided by the professional been correct?

The Approach in Khan and Manchester Building Society

In these two new judgements, the Supreme Court has clarified the law in this area in two main ways:

  1. The distinction between advice and information cases is too rigid. Instead, the focus should be on identifying the purpose to be served by the duty of care assumed by the defendant - what risk was the duty supposed to guard against and did the loss suffered represent the fruition of that risk? In other words, what was the purpose for which the professional gave the advice?
  2. The ‘counterfactual question’ cannot be allowed to drive the outcome in claims against professionals as it has the potential to cause confusion. It can be a useful cross-check, but it cannot replace the decision as to the scope of the duty of care.

The Supreme Court also set out a 6-stage approach to assess the extent of the loss for which professionals will be liable:

  1. Is the harm (which is the subject matter of the claim) actionable in negligence?
  2. What are the risks of harm to the claimant against which the law imposes on the defendant a duty of care?
  3. Did the defendant breach their duty by their act or omission?
  4. Is the loss for which the claimant seeks damages the consequence of the defendant's act or omission?
  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?
  6. Is a particular element of the harm (for which the claimant seeks damages) irrecoverable because it is too remote, has a different effective cause, or because the claimant has mitigated their loss or failed to avoid loss?

The Supreme Court emphasised that the issue in these cases (and in the previous case law including SAAMCO) was the scope of the professional’s duty of care (stages 2 and 5 in their approach set out above), not causation.

The Outcome

In Khan v Meadows, the Supreme Court held that the purpose of the GP’s advice related to the risk of haemophilia only, not autism, and therefore the GP was not liable for the losses related to the baby’s autism.

In Manchester Building Society v Grant Thornton, the Court held that, having regard to the purpose of the accountants’ advice, the loss suffered was the very risk that their advice was intended to guard against. The loss therefore fell within the scope of the accountants’ duty of care, so they were liable in respect of the losses claimed by the building society. However, this was subject to a reduction of 50% due to contributory negligence on the part of Manchester Building Society.

Conclusion

The impact of these judgements on how Courts deal with future claims against professionals remains to be seen. However, they appear to pave the way for a more straightforward approach to be taken by the Courts. Instead of having to grapple with confusing counterfactual questions, Courts will focus on the purpose of the advice given by the professional and will ask if the loss suffered by the claimant is the fruition of the very risk that their advice was intended to guard against. The take home message for Claimants seeking to bring civil actions against professionals is that they must not assume that one negligent act by their professional advisor will enable them to recover all the losses they have suffered as a result of entering into a transaction. Rather, the burden of proof is on Claimants to demonstrate that their specific loss fell within the scope of the duty of care assumed by their professional advisor. It is also worth noting that the award of damages was reduced by half in the Manchester Building Society case due to contributory negligence. For professionals, it has never been more important to have a written retainer with their clients which clearly sets out, in a restrictive manner, the purpose for which they are providing advice.

If you would like any further information or advice on these issues, please contact Hugh McGrattan, Timothy Cockram or Gillian Greenfield from our Professional Indemnity team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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