Avoiding the fruition of risk

Businesses in the technology sector will frequently engage with other professional businesses, for the provision of services, such as consultancy, design, accountancy, process analysis, or even legal assistance. Most of the time, those services are provided to a high standard. Sometimes, though,  mistakes occur. 

When things go wrong, that can have multiple effects on your business. For example, it might impact on your ability to deliver to clients on time or on budget, or impact on your own costs, or cause you difficulties in other ways. If those impacts are sufficiently serious, then it may be necessary to seek compensation. 

What the courts say

The Courts recently considered the relationship between what a professional does wrong, and the losses that they could be expected to compensate for, in a case known as “Manchester Building Society -v- Grant Thornton (2021)”, which considered the consequences of advice given by Grant Thornton (accountants) to Manchester Building Society, about how financial hedging products should be treated in their accounts. When that advice was discovered to be wrong, Manchester Building Society had little option but to exit the financial hedging products, at a cost of around £32m. Manchester Building Society therefore pursued a claim against Grant Thornton for that loss, and it fell to the Court to decide the extent of Grant Thornton’s liability. 

In reaching its decision, the Court designed and applied a six-part test:

  • Was the “harm” which is the subject matter of the claim actionable in negligence (the actionability question);
  • 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);
  • Did the defendant breach his or her duty by his or her act or omission (the breach question); 
  • Is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission? (the factual causation question); 
  • Is there 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
  • 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 in relation to it 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). 

When it applied this test, the Court concluded that Grant Thornton should compensate Manchester Building Society for about £13m; this took into account a 50% deduction because the building society had taken out unsuitable interest hedging products irrespective of Grant Thornton’s advice on their accounting treatment.

However, the test provides guidance that goes beyond the particular facts of that case, and hence assists in considering whether loss might be recoverable in other cases too. That said, the test is subjective, and not necessarily easy to apply, particularly in relation to the “duty nexus” question. Fortunately, the Court made a further helpful comment: 

“in the case of negligent advice given by a professional advisor one look to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk.” 

In other words, it is necessary to consider why the professional was engaged in the first place, and hence whether the loss resulting from a mistake was a risk that the professional’s involvement was supposed to prevent. 

That provides a useful principle to consider when engaging professionals to act for you, or indeed when drafting your own terms of engagement. Setting out the purpose of the professional’s role at the outset, as well as any requirements or limitations on the scope of what they will do, will not only help determine the limits of liability if things go wrong, but may also help focus everyone’s understanding of the reasons for the engagement in the first place, which in turn is likely to help in providing a top quality service and reducing the likelihood of claims arising.