If an adviser is instructed by a client to advise whether to enter into a transaction, and is negligent in doing so, the client is entitled to recover all losses flowing from entering into the transaction.

Assetco Plc v Grant Thornton UK LLP [2020] EWCA CIV 1151

However, if an adviser is providing information or a piece of advice which is only one of many factors taken into account by the client, before it makes its own decision to enter into a transaction, then the advisor is only liable for the financial consequences of that information/piece of advice being incorrect – regardless of the significance of that information/piece of advice to the client's decision.

For our update on the outcome of the Supreme Court appeal in this case click here.

Headline Summary 

The Court of Appeal decided that the SAAMCO principle should be applied in audit cases. In dismissing the auditor's appeal, the Court of Appeal found that the auditor, Grant Thornton, had deprived AssetCo plc of the ability to address the loss-making areas of its business, by failing to identify management fraud within the accounts. This led to AssetCo's significant losses continuing to increase in the years following Grant Thornton's audit. 

Factual Background

AssetCo plc (AC), a company involved in fire and rescue services, was audited in 2009 and 2010 by Grant Thornton (GT). The accounts had shown a successful and profitable group. However, this was an entirely false picture. AC was, in fact, insolvent. The management team had fraudulently prepared the accounts and made false representations to GT. AC brought a claim against GT which stated that, had GT performed its duties as an auditor with due professional skill and care, the group would have been able to restructure its business and save losses in the following years, including by ceasing to pay significant sums to loss-making subsidiaries. 

The court awarded £22.36 million in damages to AC for the negligent audit of its accounts by GT, which had failed to identify the management fraud. Given AC's contributory fault (in dishonest representations having been made to GT during the audit), damages had been reduced by the Judge by 25% (from just over £29.8 million). This decision was appealed by GT, primarily on the grounds that the losses for which AC claimed damages were not within the scope of GT's duty of care.

In assessing whether the scope of GT's duty and its admitted breaches were the legal cause of AC's losses, the Court of Appeal applied the SAAMCO principle (as set out above), established in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191.

Key Points

Where a defendant (D) (here: GT) was responsible only for providing a piece of information used by a claimant (here: AC) to make a decision and not for advising the claimant (C) on the actual merits of making a decision/entering into a transaction, then D will only be liable for the financial consequences of the information being wrong – not for the full consequences of C entering into the transaction. 

The SAAMCO principle can be used as a "tool" to determine the difference between losses arising from negligently provided information and losses arising from a transaction itself (which are usually greater). However, it is "not a rigid rule of law" and, if a case is incapable of achieving that determination (due to the specific facts of a case), then the principle will not necessarily be applied by the Court.

By applying SAAMCO, the Court found that, in failing to identify the management fraud, GT had deprived AC of the ability to hold its management to account and to take the steps necessary to cease AC's loss-making activities. Identifying the performance of the business and recommended actions are the principal purpose of an audit and, done properly, would have saved substantial losses that AC incurred in supporting its loss-making subsidiaries during FY2010 and FY2011. A substantial amount of the losses that AC suffered were therefore found to be within the scope of duty owed by GT to AC.

A particularly useful aspect of the Court of Appeal's decision was the distinction between an "advice" case and an "information" case.

In an "advice" case, D's scope of instruction (providing advice on whether C should enter a transaction) is such that it has a duty to protect C against the full range of risks associated with entering into that transaction.  

In an "information" case, D is providing C with only part of the material on which C relies in deciding whether or not to enter into a transaction. Identifying other considerations and assessing the merits of the transaction are matters for C. In an information case, D is not liable for consequences which would have occurred even if the information it provided had been correct.

The distinction between an information case and an advice case will depend on the facts of the dispute, including the scope of instruction, materiality of information/advice to the transaction and level of reliance placed on the information/advice by a claimant. In the present case, the "information" provided by GT to AC was negligently incorrect. Crucially, GT's negligent information was not merely incidental to the losses which AC continued to incur, but was a substantial cause of those losses.

Commentary

This decision makes it clear that SAAMCO should generally be used to determine which losses fall within the scope of D's duty, although it may well be subject to exceptions. 

For auditors (and their insurers), this decision highlights the extent of responsibility that they assume when conducting an audit, and submitting an audit opinion. If an auditor/advisor, in breach of his/her duty, fails to identify dishonest conduct by a company's management, then the losses flowing from such failures could be significant. Such losses may well be recoverable from the auditor (or their insurer), and the extent of those loses will depend on the scope of the advice/information provided and their connection to the transaction a customer enters into and/or losses it suffers.

From C's perspective, one must consider the SAAMCO principle in assessing whether the losses suffered flow from negligently incorrect information/advice or from the transaction itself. In order to pursue its losses, C should seek to show that the auditor/advisor not only provided high-level information, but also necessarily addressed the merits of a decision/transaction, in order for the losses to be properly recoverable.

Authors: Anouj Patel and Rosalind Davies