Building society loses negligence claim against Grant Thornton
Manchester Building Society has lost its £48m negligence claim against the accountancy firm Grant Thornton.
The claim arose because Grant Thornton had audited the society’s accounts from 1997 until 2012. In 2006, the society began a policy of hedging lifetime mortgages by entering into 50-year interest rate swaps. The 2008 financial crisis led to a sustained fall in interest rates.
In 2013 the society discovered that hedge accounting was not permitted under International Accounting Standard 39 (IAS39) and that its profits and losses were exposed to the full movement in the value of the swaps.
As a result, its profit for 2011 became a loss.
Grant Thornton admitted that it had negligently advised that the society's hedge accounting policy complied with IAS39 and had negligently conducted the audits of the accounts for the years ending 2006-2011.
The society sought damages of £48.5m.
The High Court held that although Grant Thornton had provided negligent auditing advice in relation to the availability of hedge accounting, it had not assumed responsibility for the losses incurred when the society was obliged to break long-term swaps.
Such losses flowed from market forces for which Grant Thornton did not assume responsibility and were not recoverable as damages.
However, the firm was liable for "termination" or "penalty" costs of breaking the swaps together with other factors which led to a total compensation figure of £315,345.
The Court of Appeal has upheld that decision. It said that there was a well-established legal principle that "a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong."
The building society had not proved that the losses would not have been suffered if the Grant Thornton’s advice had been correct.
Please contact Neil O'Callaghan if you would like more information about the issues raised in this article or any aspect of professional negligence and protecting your business.