Two judgments by a bench of seven Justices of the UK Supreme Court have attempted to clarify the approach to ascertaining the scope of a defendant's duty of care in cases alleging professional negligence.
Lord Reed (President), Lord Hodge (Deputy President), Lady Black, Lord Kitchin, Lord Sales, Lord Leggatt and Lord Burrows have given guidance on applying the 1997 decision in South Australia Asset Management Corporation v York Montague Ltd ("SAAMCO"), in the context of professional advice given by accountants in one appeal, and clinical negligence resulting in additional costs in bringing up a child in the other. The court said it was "desirable that the judgments in the two appeals should be read together as reflecting and supporting a coherent underlying approach".
In Manchester Building Society v Grant Thornton UK the court unanimously allowed an appeal by the building society and held that it could recover the cost of closing out interest rate swap arrangements entered into after Grant Thornton incorrectly and negligently advised the society that preparing its accounts according to a method known as "hedge accounting" gave a true and fair view of its financial position. The misstated accounts served to hide volatility in the society’s capital position and what became a severe mismatch between the negative value of the swaps and the value of the mortgages which the swaps were supposed to hedge. The trial judge and the Court of Appeal held that the society could not recover the closing out costs, amounting to more than £32m, based on their understanding of the scope of duty principle illustrated in SAAMCO.
In Khan v Meadows, however, the court dismissed an appeal by Ms Meadows, whose son Adejuwon was born with both haemophilia and autism, against a decision that only the additional costs attributable to his haemophilia were recoverable from Dr Khan, who had negligently advised before Ms Meadows became pregnant that she was not a carrier of the haemophilia gene. Had Ms Meadows known of the gene, she would have undergone foetal testing for haemophilia and would have chosen to terminate her pregnancy.
In the Manchester appeal the court held that the society suffered a loss falling within the scope of the duty of care assumed by Grant Thornton, while reducing the damages awarded by 50% for contributory negligence, due to "an overly ambitious application of the business model by the society's management", as found by the trial judge.
Lord Hodge and Lord Sales, giving the lead judgment with which Lord Reed, Lady Black and Lord Kitchin agreed, said the scope of the duty of care assumed by a professional adviser was governed by the purpose of the duty, judged on an objective basis by reference to the reason why the advice was being given. The question was what risk the duty was supposed to guard against, and whether the loss suffered represented the fruition of that risk. The distinction drawn between "advice" and "information" in SAAMCO should not be treated as a rigid rule: the focus should rather be on identifying the purpose to be served by the duty of care assumed by the defendant. The SAAMCO "counterfactual" of asking whether in an "information" case the claimant’s actions would have resulted in the same loss if the advice given by the defendant had been correct, was simply a tool to cross-check the result and should not supplant or subsume that analysis.
The purpose of Grant Thornton's advice was to establish whether the society could use hedge accounting within the constraints of the applicable regulatory environment to implement its proposed lifetime mortgages business model. The advice was supposed to allow the society to assess the risk of loss from breaking the swaps, and consequent exposure to regulatory capital demands, and its negligence caused the society to fail to understand that risk. The loss suffered therefore fell within the scope of the duty of care assumed by Grant Thornton, in light of the purpose of its advice.
Lord Burrows, concurring, closely followed this reasoning but placed greater emphasis on the scope of duty principle as underpinned by the policy of achieving a fair and reasonable allocation of the risk of the loss between the parties. Lord Leggatt, also concurring, considered the question to be determined was whether there is a sufficient causal relationship between what made the information or advice wrong and the "basic loss". In this case, there was. Properly applying the SAAMCO counterfactual, if Grant Thornton's advice had been correct and there had been effective hedging, as Grant Thornton advised there was, the loss would not have occurred.
In Khan v Meadows the court, rejecting an argument for Ms Meadows, held that there was no principled basis for excluding clinical negligence from the ambit of the scope of duty principle. Dr Khan was liable only for losses falling within the scope of her duty of care to advise Ms Meadows on whether or not she was a carrier of the haemophilia gene, and not for costs associated with Adejuwon’s autism.
In a lead judgment delivered or agreed by the same five Justices, the court considered that a helpful model to analyse the place of the scope of duty principle within the scheme of the tort of negligence was to answer the following six questions in sequence: (1) Is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence? (the actionability question); (2) What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care? (the scope of duty question); (3) Did the defendant breach his or her duty by his or her act or omission? (the breach question); (4) Is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission? (the factual causation question); (5) Is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant's duty of care as analysed at stage 2 above? (the duty nexus question); and (6) Is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote, or because there is a different effective cause or because the claimant has mitigated his or her loss or has failed to avoid loss which he or she could reasonably have been expected to avoid? (the legal responsibility question).
In cases where the scope of duty question was concerned with the quantification or extent of a particular kind of loss, the duty nexus question (stage 5) should be addressed separately after the court had determined that there was a breach of duty and factual causation. The SAAMCO counterfactual, which was used to address this question, was best understood as an analytical tool which is useful in some but not all circumstances.
Applying the six-step model to the present case, first, the economic costs of caring for a disabled child were clearly actionable. Secondly, Dr Khan's advice was concerned with a specific risk, the risk of a child having haemophilia for which Dr Khan owed a duty of care to Ms Meadows. Thirdly, Dr Khan was in breach of her duty. Fourthly, as a matter of factual causation, there was a causal link between Dr Khan's mistake and Adejuwon's birth. Fifthly, it followed from the second stage that the law did not impose on Dr Khan any duty in relation to unrelated risks (such as autism) which might arise in any pregnancy. In any case, applying the SAAMCO counterfactual, if Dr Khan's advice had been correct and all else remained the same, Adejuwon would have been born with autism. Sixthly, there being no questions of remoteness, other effective cause or mitigation of loss, the law imposed on Dr Khan responsibility for the increased cost of caring for a child with haemophilia [67-68].
Lord Burrows and Lord Leggatt again gave their own reasons for dismissing the appeal.