The Supreme Court’s recent decisions on scope of duty – implications for claims against lawyers

Many will be aware of the Supreme Court decisions in Manchester Building Society v Grant Thornton UK LLP and Khan v Meadows, handed down together on 18 June 2021, and their recasting of the principle set out in SAAMCo that a Defendant is liable only for losses which fall within the scope of its duty of care to a Claimant – a principle which has been a significant tool in limiting the losses recoverable from professional Defendants.

These decisions have been widely reported, not least by our firm – our accountants’ liability team’s briefing note on Manchester can be found here, our healthcare team’s analysis of Khan here and our cross-professions webinar (still available to watch on demand) here, explaining the decisions and considering their practical implications for the defence of professional liability claims of various different types.

In this article, we focus in more detail on their implications for the defence and prevention of claims against lawyers. 

Recap of the decisions

• The majority decisions set out a new general framework for dealing with all claims in the tort of negligence by reference to 6 questions.   Of those, questions 2 (the scope of duty question) and 5 (the duty nexus question) will determine whether losses fall within the scope of the Defendant’s duty of care to the Claimant.
• The scope of duty question asks “What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care?”.  For a professional adviser, this should be answered by reference to the purpose of the duty, judged on an objective basis by reference to the purpose for which the advice is being given.  “One looks 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”
• The duty nexus question asks “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?”.  No real guidance was given on how this should be answered.
• Those two questions replace the former approach, per SAAMCo,  of deciding 1) If this was an “advice” or “information” case (a distinction now discredited) and 2) (for information cases) applying the SAAMCo counterfactual[1] to identify the losses resulting specifically from that information being wrong.  The SAAMCo counterfactual should now only serve to cross-check the result under the new test and is subordinate to it.

Outstanding questions

These findings leave a number of outstanding questions.  Will the proposed new framework be widely adopted?   From whose perspective should the purpose of the duty be judged – and with reference to what facts/whose knowledge (implied/constructive, as the reference to objectivity suggests, as well as actual)?  Should it take account of the entirety of the professional’s role, or just its role in relation to the particular advice which is the subject of the claim?  What is the nature of the duty nexus question?  When is it still going to be appropriate to apply the SAAMCo counterfactual and how can it serve as an effective cross-check if it is always going to be overruled by any different outcome under the purpose of duty analysis? 

Such uncertainty is only underscored by the concurring but separate judgments of Lord Leggatt and Lord Burrows, which leave open the possibility of future litigants running arguments based on their different reasoning. 

Our current observations

So where does this leave us?  We will hopefully start to have more clarity as cases come through the Courts showing direct application of the new approach.  But in the meantime, these are our current observations:

• This may be more a change of form rather than substance as regards the outcome in many cases –  particularly as it is our view that construction of any contractual retainer will be key to assessing the purpose of the advice (as it was with determining the old SAAMCo distinction between advice and information).
• However, the new test for scope of duty (based on purpose) and duty nexus (undefined) seems looser and less rigid than the old advice/information distinction and counterfactual analysis and to give the Courts more flexibility on outcomes. 
• The risk to lawyers must be lower where they are providing a more commoditised service (such as residential conveyancing), where the purpose of the advice is likely to be more easily – and narrowly – determined.  (Further, in relation to such services which are provided on a large scale, the Courts are more likely to be wary about any outcome under the new test departing significantly from that under the old test because of the consequent risk of “opening the floodgates”).
• Conversely, in more complex transactions, there is likely to be more reliance by the client on professional advice and so more scope for the purpose of the advice to be determined more broadly.  So even if a lawyer were only giving advice on specific/discrete aspects of a transaction (ie an old-style “information” case) it may be more vulnerable to an argument that the purpose of that advice was to help the client determine whether it could proceed with the whole transaction and should therefore be liable (cf the position under the “information” analysis) for all foreseeable losses resulting from entering into it. 
• Manchester itself is a demonstration of that.  The auditors advised the client about the accounting treatment of complex financial hedging instruments.   The Supreme  Court held that the purpose of this advice was to allow the client to determine whether it could enter into a business model which involved those instruments (notwithstanding that its decision to do so was based on a number of other/commercial factors) and accordingly held the auditors liable for the losses of closing the hedges early when it became clear that advice was wrong.  
• It remains to be seen how this will play out in other types of cases.  For example in the context of claims by lending institutions whether the new test will reopen the possibility in certain cases of recovering all losses flowing from the transaction in the event of a failure to report a feature critical to its viability – something which appeared to have been closed down by Lord Sumption in Hughes-Holland v BPE in his strong criticism of the Steggles Palmer and Bevan Ashford cases in which this had been allowed on the basis of a so-called “non-viability” exception to SAAMCo.
• Just as complex transactions create more risk for the lawyer under the new test, so too may longstanding/close client relationships in which the lawyer has developed a good understanding, for example, of a client’s commercial objectives.  
• So overall the “looser” test, the unresolved questions set out above and the separate judgments of two of the judges all give a lack of certainty which will for the most part assist claimants, and not defendant lawyers (or other professionals) in marginal cases and also, as a matter of settlement dynamics, in many cases.

Risk management

What can lawyers do to protect their position? 

As regards the purpose of the duty, there is obvious value in a written retainer put in place at the outset of a matter which sets out the ambit of the advice/services to be provided by the lawyer and which ideally also explicitly addresses the purpose of the advice and the risk(s) it is intended to address.  While engaging with a client’s broader/commercial purposes at all may create a risk that the lawyer is perceived as accepting responsibility for them, this should be capable of being cauterised with clear language.  The retainer should be kept under review and updated as a matter develops to keep pace with the evolution of the instruction and any “mission creep”.

Alongside that, solicitors should be more alive than ever to the importance of contemporaneous documents (whether emails, file notes or otherwise) accurately recording  what was understood by the parties as regards purpose/risk(s) at relevant times during the life of a matter. Courts generally prefer contemporaneous records over retrospective witness testimony, particularly where a trial happens many years after the events in question.  This preference will only be strengthened by the changes to the production of witness evidence introduced into the Business and Property Courts from 6 April 2021 by Practice Direction 57AC and its Appendix, which seek to simplify and reduce the amount of evidence provided by witnesses and ensure it is placed in the witness’ own words.

Conclusion

Given the uncertainties outlined above resulting from the looser test, the unresolved questions and the different reasoning of two of the judges, it is safe to say that these cases will not be the last word on the scope of duty principle.  We will watch with interest how the reframed test is applied in future cases and return to the subject again in a future bulletin.