How much of a client's loss is recoverable in a professional negligence claim depends on whether the loss falls within the scope of the duty owed. For nearly a quarter of a century the courts approached that through the framework in South Australia Asset Management Corp v York Montague [1997] AC 191 — SAAMCO. In 2021 the Supreme Court reframed it. Two judgments handed down the same day, Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 and Khan v Meadows [2021] UKSC 21, replaced the old binary with a six-step analysis.
Under SAAMCO, courts distinguished two categories. An 'advice' case was one where the professional's role was to guide the whole decision. If the advice was negligent, the professional was liable for all foreseeable consequences of the client's decision to proceed.
An 'information' case was different. The professional supplied a discrete piece of information into a wider decision the client took for itself, and was liable only for the consequences of the information being wrong. The Supreme Court in BPE Solicitors v Hughes-Holland [2017] UKSC 21 confirmed that the great majority of professional cases fell into the information category. But the binary was fragile; cases sat awkwardly on the border.
In Manchester Building Society, Grant Thornton had negligently advised that hedge accounting could be applied to the society's interest-rate swaps. The society entered swaps in reliance, and when the accounting treatment was corrected the society was forced to close out at a large loss. Lords Hodge and Sales held that the advice/information binary should no longer be the primary framework. Courts should apply a six-step test, restated in identical terms in Khan v Meadows:
The counterfactual — what would have happened had the duty been performed properly — sits at the heart of the analysis, both at factual causation and at the nexus stage.
Illustrative worked example, not a real matter. A bank retains an auditor to sign off a borrower's accounts. The auditor negligently fails to spot fraudulent revenue-recognition. The accounts show the borrower as solvent. In reliance the bank advances further tranches. The borrower fails and the further advances are lost.
Under the old binary the court would first have asked whether the auditor was giving 'advice' on the lending decision (unlikely) or supplying 'information' that fed into it. If information, the loss recoverable was only the shortfall attributable to the accounts being wrong.
Under the six-step test the court asks instead: what would have happened had the audit been performed properly? The counterfactual is that the fraud would have been detected, the accounts qualified or restated, and the bank would not have advanced the further tranches. The loss attributable to the breach is the further advances made in reliance, less any recovery on the borrower's assets.
Claims alleging negligent audit turn on the counterfactual: what would the lender have done had a properly qualified opinion been issued? Expect closer scrutiny of the purpose for which the audit was commissioned.
SAAMCO itself was a valuer's case and the old cap on recoverable loss remains available. But the framework is now the six-step test, and the old cap will not apply automatically.
The distinction between advising on a transaction and reporting on a specific point (title, planning, tax) is now analysed through the scope-of-duty and nexus stages. Retainer letters describing the purpose of the instruction matter more. See the guide on solicitors' professional indemnity insurance.
Suitability advice cases ordinarily allow recovery for the full loss of the transaction entered into in reliance. But the counterfactual — what would the client have done had suitable advice been given — is central. See the guide on IFA professional indemnity insurance.
Accountants advising on tax structures, due diligence or forecasts should document scope carefully. Surveyors preparing valuations or condition reports for lending, purchase or dilapidations decisions face the same analysis. See the guides on accountants' PI insurance and surveyors' PI insurance.
The reframing has not changed the underlying insurance need. Every regulated profession still requires PI cover to a level set by its regulator, and the wording of that cover continues to determine how a claim is met. What has changed is the analysis a claims-handling insurer will apply when assessing quantum. Firms whose retainer documentation makes the purpose of the instruction clear are better placed under the new framework than those whose scope is left to be inferred.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.