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Court of Appeal addresses the application of SAAMCO in the context of audit negligence

The Court of Appeal has today unanimously dismissed an appeal by Manchester Building Society against a judgment of Teare J holding that the Society’s former auditor, Grant Thornton, was not liable for mark-to-market losses incurred by the Society in relation to various long-term swaps.

The proceedings arose out of hedge accounting advice provided to the Society by its auditor which was admitted to have been negligent. In reliance on this advice, the Society entered into a program of fixed rate mortgages hedged against long term swaps. As a result of the financial crisis and consequent fall in interest rates, the swaps went heavily out of the money. During a subsequent audit, the error in the hedge accounting advice came to light and the Society paid c.£33 million to close out the swaps, £32.7m of which was attributable to their (negative) mark-to-market value at the date of the break and approximately £300,000 was attributable to transaction costs. The Society sued its auditor for negligence and claimed, in addition to a number of other smaller heads of damage, the amounts paid to close out the swaps. Teare J, at first instance, held that, applying the principles in SAAMCO and the recent Supreme Court decision in Hughes-Holland, although the auditor’s negligence had caused the substantial losses claimed, they almost all fell outside the scope of the auditor’s duty. Of the claimed losses, totalling £48.5 million, the claim was dismissed save only for some £315,000, the majority of which concerned the transaction costs on breaking the swaps.

The Society appealed only in respect of Teare J’s decision that the £32.7m attributable to the mark-to-market element of the sums paid on breaking the swaps fell outside the scope of the auditor’s duty. The Court of Appeal unanimously dismissed the appeal, holding that Teare J came to the right result but for the wrong reason. The Court of Appeal decision explains the steps a Court should take in dealing with any SAAMCO issue, analyses how the “advice” and “information” distinction applies to the auditor’s role in the case, addresses the burden of proof on SAAMCO counterfactuals and applies the SAAMCO cap to the loss incurred.

Adam Rushworth acted for Grant Thornton UK LLP with Simon Salzedo QC and Sophie Shaw, instructed by Taylor Wessing LLP.  You can view the full judgment here