SAAMCO is dead – long live SAAMCO!

Litigators have been grappling with the existence and application of the SAAMCO principle in professional negligence cases for over 24 years since Lord Hoffman delivered his leading judgment in the House of Lords[1]. The recent Court of Appeal decision of Assetco Plc v Grant Thornton UK LLP [2020] EWCA Civ 1151 is the latest higher court authority[2] to confirm that the SAAMCO principle is here to stay. The Court of Appeal have also confirmed that the SAAMCO principle:

• is a free standing legal tool available to the judiciary to determine what losses are recoverable from a negligent professional and
• can be applied in professional negligence claims against auditors and is not limited to facts involving an underlying transaction.

As professional indemnity defence lawyers, Tim Barr and Beth Caygill consider AssetCo by reference to these headline points in order to highlight the continued expansion of the SAAMCO principle into the professional indemnity world.

Recap: the SAAMCO principle

The SAAMCO principle determines that a claimant must establish that its loss fell within the scope of the duty owed by the defendant to the claimant or, to put it another way, the issue is the extent of the defendant’s duty to protect the claimant against the loss caused on a but for basis by the breach of duty. It also established the importance of determining whether the defendant was providing information or was giving advice generally. The correct categorisation will determine the extent of the defendant’s liability. If it is an advice case, the defendant's duty is to protect the claimant against the full range of risks associated with entering into the transaction. In an information case, the defendant supplied only a part of the material on which the claimant decided whether to enter into the transaction, and the identification of other relevant considerations and the overall assessment of the merits of the transaction were matters for the claimant: the defendant is “liable only for the financial consequences of [the information] being wrong and not for the financial consequences of the claimant entering into the transaction so far as these are greater”[3]. The defendant is not liable for consequences which would have occurred even if the information had been correct.

First instance decision[4]

The AssetCo Group (AC) retained Grant Thornton (GT) to perform its audits in 2009 and 2010. GT failed to identify management fraud, particularly dishonest representations and evidence provided by AC's senior management, in the course of the audits. GT then produced an unqualified audit report showing that AC was successful and increasingly profitable, when AC was in fact insolvent. The true situation was revealed two years later when AC then took corrective action to avoid trading at a significant loss and to regain its solvency.

The focus of the dispute and the 20 day trial centred on causation as breach was largely admitted. GT accepted that it should not have produced an unqualified audit report and that if it had applied appropriate professional scepticism and competence, it would have uncovered the many, if not all, instances of deceit by the senior management.

Mr Justice Bryan found that by failing to detect the fraud and by presenting an insolvent company as successful and profitable, GT deprived AC of the information that would have resulted in it taking corrective action to avoid trading at a significant loss and regaining its solvency. Had GT fulfilled its duty, the action that was taken in 2011 would have been taken in 2009 thereby avoiding the losses that AC incurred after GT had provided its unqualified audit report ("AC's Counterfactual case").

The Judge also accepted AC's Counterfactual case on a 100% lost chance basis. In light of these findings, Bryan J ordered GT to pay AC damages in excess of £22.36m. The amount of damages reflected all trading losses[5] flowing from GT's negligent audit.

Court of Appeal decision

GT sought to appeal the first instance decision on three grounds. The focus of this article is on the first; the issue of legal causation. GT submitted that Bryan J should have held that AC had failed to establish that the alleged losses fell within the scope of GT’s duty of care and that GT’s breaches of duty were the legal cause of those losses. Most importantly, GT sought to argue that the proper approach to determining these issues was by reference to the SAAMCO principle, which was not done at the first instance hearing.

The SAAMCO principle as a free standing legal tool

The Court of Appeal considered whether it was appropriate to determine legal causation by reference to the SAAMCO principle in circumstances where neither party had sought to do so during the first instance trial. AC sought to argue that GT was no longer entitled to do so and GT argued that the burden lay on AC to allege and prove this essential part of its case and it had failed to do so at first instance.

However, the Court of Appeal concluded that, as per Lord Sumption in Hughes-Holland, the SAAMCO principle is simply a tool for determining the losses which fall within the scope of the defendant’s duty. There may be cases in which a claimant cannot succeed without specifically alleging and separately proving that the loss would not have been suffered if the information provided by the defendant had been correct. But the answer is established by the evidence as a whole without any need for the SAAMCO principle to be separately addressed in the course of the evidence.

Application in professional negligence claims against auditors

AC also argued that, although the SAAMCO principle was a useful test where professional information or advice is provided in the context of a specific transaction, it was not applicable to the very different context of an audit report to a company and its shareholders. In the case of the single transaction, the information or advice will form only part of the material which the recipient will consider before committing to the transaction. It is directed to the recipient taking a decision. In those circumstances, the provider of the information is liable only for the consequences of that information being wrong, determined by asking whether the loss resulting from the transaction would have been suffered even if the information had been correct.

By contrast in the case of an audit report, AC argued there is no specific transaction to which it is directed. Accordingly, it makes no sense to ask whether the professional person was only providing information or was assuming responsibility for the decision of the recipient to enter into the transaction. In such circumstances, AC submitted that the court should apply the usual rules of factual causation, scope of duty, legal causation and remoteness, without any need to add the further complication of the SAAMCO principle.

The Court of Appeal disagreed. It did not see any substantial reason why the SAAMCO principle cannot or should not, in most circumstances, be applied to determine whether particular losses fall within the scope of the auditor’s duty when signing an unqualified audit report. Its purpose is to distinguish the negligent audit that is merely the occasion for the loss from the negligent audit that gives rise to a liability to make good the loss. The Court therefore held that the SAAMCO principle is capable of being effectively applied to most types of loss that may be claimed in respect of a negligent audit.

Application of the SAAMCO principle to the facts

GT accepted that but for its negligence, AC would not have continued trading after GT's unqualified audit report on the 2009 Accounts (except arguably by way of AC's Counterfactual case). However, applying the SAAMCO principle, GT argued its liability to AC was limited to the losses attributable to it producing an unqualified audit report (ie the wrong information), and the losses which AC thereafter suffered arose principally from the risks of the continuation of a loss-making business, against which GT had no duty to protect AC. 

AC argued that its claim satisfied the SAAMCO principle: had GT not breached its duties, it would have disclosed that AC’s business was insolvent and significantly loss-making. Accordingly, if one applies the SAAMCO principle and asks whether AC would have suffered the losses claimed if the accounts and audit reports had been true, the answer must be “no”.

The Court of Appeal found in AC's favour. It held that by failing to detect that the accounts were deliberately prepared on a false basis, presenting an insolvent company and group as successful and profitable, GT deprived AC of the very information that would have caused it to cease its loss-making activities and to take the steps necessary to regain its solvency. GT’s duty was to provide that information, precisely to enable AC, acting by its shareholders or its non-executive directors, to consider whether to take those steps. Consequently, AC's losses arose from the consequences of the information being inaccurate. In addition, GT’s negligence was not therefore merely the occasion for the losses which AC continued to incur but was a substantial cause of those losses. Accordingly, it held that Bryan J was right to conclude that GT was liable for the losses[6].

The future of SAAMCO

The higher courts have sent a consistent message over the last three years that the SAAMCO principle should play an important role when determining legal causation in professional negligence claims. Although it is not a prescriptive and rigid rule that neatly fits the facts of all cases, legal advisers and the courts need to carefully consider its application in all professional claims. In fact, we query in what circumstances it would be appropriate to disregard SAAMCO altogether when assessing recoverability of loss and the extent of a professional's liability. As a consequence, the courts are likely to see a rise in defence lawyers seeking to rely on the SAAMCO principle and its wide ranging applicability as a tool to limit liability in professional negligence cases. And this now includes claims against auditors.

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[1] https://www.bailii.org/uk/cases/UKHL/1996/10.html

[2] Following BPE Solicitors v Hughes-Holland [2017] UKSC 21 and Manchester Building Society v Grant Thornton UK LLP [2019] EWCA Civ 40.

[3] See Lord Sumption at [41] in Hughes-Holland [2017] UKSC 21.

[4] [2019] EWHC 150 (Comm)

[5] Subject to a 25% discount for ACs contributory negligence.

[6] Subject to a particular head of loss arising from a transaction where it was held there was no effective causal link between the transaction and GT’s negligence in the 2009 audit.