Category: Insurance case law · Reviewed by Al Jabbar, Broker · Specialist Risks · Last reviewed June 2026
Supreme Court reformulated the SAAMCO scope of duty principle, holding the auditor liable where its negligent advice on hedge accounting fell squarely within the purpose of the engagement.
[verify date]Manchester Building Society (“MBS”), a mutual building society, entered into long-dated interest rate swaps as economic hedges for fixed-rate lifetime mortgages it had written. The accounting treatment of these instruments was critical: if the swaps could be designated as hedges under the relevant accounting standards (initially UK GAAP, subsequently IAS 39), the gains and losses on the swaps would be matched against the mortgages and would not produce undue volatility in MBS’s reported capital. If they could not be so designated, the swaps would have to be marked to market through profit and loss, with potentially serious consequences for MBS’s regulatory capital position.
Grant Thornton, as MBS’s auditor, advised that “hedge accounting” was available in respect of the swaps. In reliance on that advice, MBS continued to enter into and hold long-dated swaps. In due course it transpired that the advice was wrong: the swaps did not satisfy the hedge accounting criteria. MBS was required to restate its accounts. Faced with a substantial accounting loss and a damaged capital position, MBS closed out the swaps prematurely, incurring transactional break costs of some £32 million.
MBS sued Grant Thornton for negligence, seeking to recover the break costs as the loss flowing from the negligent advice. Grant Thornton accepted that its advice had been negligent but argued that the break costs fell outside the scope of its duty under the South Australia Asset Management Corpn v York Montague Ltd ([1997] AC 191, “SAAMCO”) principle. Grant Thornton’s argument was that the break costs were a consequence of market movements in interest rates and not a consequence of the matter on which it had advised (the availability of hedge accounting).
At first instance and in the Court of Appeal, Grant Thornton’s argument substantially succeeded: the break costs were held to fall outside the scope of the duty. MBS appealed to the Supreme Court.
The principal issue before the Supreme Court was the proper formulation of the scope of duty principle following SAAMCO and the subsequent line of authority including BPE Solicitors v Hughes-Holland [2017] UKSC 21. In particular, the court was required to clarify: (i) the relevance of the “information / advice” dichotomy associated with Lord Hoffmann’s speech in SAAMCO; (ii) the proper analytical method for determining whether a particular loss falls within or outside the scope of duty; and (iii) the application of the principle where the negligent advice concerns the accounting or regulatory treatment of a transaction rather than the transaction itself. The court also had to consider the proper approach to contributory negligence in this context.
The Supreme Court allowed MBS’s appeal by a majority. The leading judgment was given jointly by Lord Hodge and Lord Sales. The court took the opportunity comprehensively to reformulate the approach to scope of duty in professional negligence claims, downplaying the rigid “information / advice” dichotomy and emphasising instead a “purpose of the duty” analysis.
The proper approach, the court held, is to identify the purpose for which the defendant’s advice or service was provided and to ask whether the loss claimed falls within the scope of the risk against which the defendant was providing protection. Where the purpose of the engagement was to advise on a matter, the defendant is responsible for the losses that flow from the matter being other than as represented, subject to the ordinary principles of factual and legal causation, foreseeability and mitigation.
Applying that test to the facts, the court held that the purpose of Grant Thornton’s advice was to enable MBS to enter into and maintain hedging arrangements on the assumption that hedge accounting was available. The break costs, which arose because MBS had to close out swaps that it could not afford to maintain without hedge accounting, fell squarely within the scope of that purpose. The break costs were therefore recoverable, subject to a 50% deduction for contributory negligence which the court left undisturbed.
The scope of duty in professional negligence is determined by identifying the purpose for which the defendant’s advice or service was provided, and asking whether the loss claimed falls within the scope of the risk against which the defendant was protecting the claimant. The “information / advice” dichotomy is not the primary tool of analysis; it is at most a guide to identifying the purpose of the engagement. Where the loss falls within the purpose of the engagement, it is recoverable subject to ordinary principles of causation, foreseeability and mitigation.
Manchester Building Society v Grant Thornton is now the leading Supreme Court authority on the scope of duty principle in professional negligence and is of central importance to professional indemnity insurance covering accountants, auditors, solicitors, surveyors and IFAs. For PI insurers, the case has three principal consequences.
First, the reformulated test makes it harder for professionals to escape liability on scope of duty grounds where the loss flows from the very matter on which they advised. Insurers should expect a broader range of losses to be recoverable, and reserves should reflect that.
Second, the test directly affects the analysis of aggregation under “originating cause” wordings and under the FCA Minimum Terms for IFAs. The “purpose of the engagement” analysis can be used by insurers (and against them) to argue about the proper unit of aggregation, particularly where there are multiple negligent acts within a single retainer or campaign of advice.
Third, the case has clear implications for IFA defined benefit pension transfer claims, where the scope of the adviser’s duty to advise on suitability extends to the consequences of the client entering an unsuitable receiving scheme. Following MBS, an IFA’s liability for losses in the receiving scheme is more readily within the scope of duty.
The case has been applied in subsequent appellate decisions including Khan v Meadows [2021] UKSC 21 (decided on the same day by the same panel) and in numerous first-instance PI claims.
By Matt Bartlett, Director, on 2026-06-06. Next review: 2026-12-06.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-06. Apex Insurance Brokers Limited, FCA FRN 724952, Companies House 07014570. Not regulated advice — consult your broker on your specific position.
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