“146. To say that the Defendant’s negligence merely provided the opportunity for the Claimant to suffer loss caused by the financial crisis of 2008 and the resulting substantial and sustained fall in interest rates and was not an effective cause of the Claimant’s loss would, in my judgment, seriously underplay the causative potency of the Defendant’s negligence. The use of hedge accounting was intended, as recognised by the Defendant in November 2005, to mitigate the effects of volatility in the fair value of the swaps. Once it was appreciated that hedge accounting was not available in 2013 the Claimant’s balance sheet was exposed to the full and unrestrained effects of volatility in the fair value of the swaps and it was those effects which led to the Claimant deciding to close down the swaps and thereby to incur a substantial loss. In my judgment the Defendant’s negligence was an effective cause of the loss suffered in 2013 when the swaps were closed down. Applying the Claimant’s submission there was a very close connection between the negligence and the loss. Applying the court’s common sense, as the Defendant submitted the court should do, it is sensible to find that the Defendant’s negligence was an effective cause of the loss suffered in 2013 in circumstances where the use of hedge accounting was intended to mitigate the effects of volatility in the fair value of the swaps and it was such volatility which led to the closure of the swaps in 2013.”
“…although it is obviously right to say that the accounting treatment does not cause the volatility of interest rate swaps, the accounting treatment nevertheless has a real effect in determining the extent to which that volatility affects the reported profits and hence the Claimant’s available regulatory capital. It also affects the regulator’s view of what amount of regulatory capital is required. It was the volatility of the balance sheet which led to the swaps being closed in 2013. Of course, the decision of the Claimant to purchase the swaps and the subsequent fall in interest rates were also effective causes of the Claimant’s loss in 2013 but there can be more than one effective cause of loss; and in the case of the Claimant’s loss in 2013 I consider that there were.”
“150. It is now well established that when assessing a defendant’s responsibility for losses the court must, having determined that the defendant’s negligence was an effective cause of the losses (as opposed to providing the occasion or opportunity for the losses to be incurred), then determine whether the losses were within the scope of the defendant’s duty. In determining the latter question it is not possible to lay down hard and fast rules. In Hughes-Holland v BPE Solicitors[2017] 2 WLR 1029 Lord Sumption, having postulated two extreme cases, one involving a valuer or conveyancer and the other an investment adviser, none of which are to be found in the present case, said at paragraph 44: “Between these extremes, every case is likely to depend on the range of matters for which the defendant assumed responsibility and no more exact rule can be stated.” 151. In determining the matters for which the Defendant assumed responsibility Lord Sumption said the question to ask is whether the loss flowed from the particular feature of the defendant’s conduct which made it wrongful; see paragraph 38. The court must obviously pay close attention to the particular facts of the case before the court. Little is to be gained by considering whether the present case is to be regarded as an “advice” case or an “information” case (labels which have been used in the cases) because, as Lord Sumption said at paragraph 39 in Hughes-Holland v BPE Solicitors: “Turning to the distinction between advice and information, this has given rise to confusion largely because of the descriptive inadequacy of these labels. On the face of it they are neither distinct nor mutually exclusive categories. Information given by a professional man to his client is usually a specific form of advice, and most advice will involve conveying information.”” “Between these extremes, every case is likely to depend on the range of matters for which the defendant assumed responsibility and no more exact rule can be stated.” “Turning to the distinction between advice and information, this has given rise to confusion largely because of the descriptive inadequacy of these labels. On the face of it they are neither distinct nor mutually exclusive categories. Information given by a professional man to his client is usually a specific form of advice, and most advice will involve conveying information.””
“161. Applying this guidance there is a cogent argument in support of the Claimant’s case. The context in which the Defendant approved the Claimant’s Hedge Accounting Policy on11 April 2006 was that the change in accountancy standards from UK GAAP to IFRS required derivatives such as interest rate swaps to be entered on the Claimant’s balance sheet. Before that change the Claimant’s balance sheet was not affected by changes in the fair value of the derivatives. After that change the balance sheet had to record such changes. In consequence, the balance sheet was exposed to volatility in interest rates which would affect the fair value of the swaps and hence profits and regulatory capital. The use of hedge accounting was designed to protect the balance sheet from such volatility and its consequences. It was in those circumstances that the Defendant approved the Claimant’s Hedge Accounting Policy. The nature of the advice given, by approving the Hedge Accounting Policy, was that the Claimant could use hedge accounting. It was given in circumstances where the Defendant knew that the Claimant wished to use it to protect itself from volatility in the fair value of interest rates swaps and the consequences that such volatility had on the balance sheet of the Claimant and hence on its profits and regulatory capital position. The losses incurred when breaking the swaps were fairly attributable to that negligent advice because, in circumstances where hedge accounting was discovered to be not available, the balance sheet was fully exposed to volatility in the fair value of the interest rate swaps and they had to be closed out at a cost which reflected their fair value. Of course, the losses were also attributable to the sustained fall in interest rates which had occurred following the financial crisis of 2008. But having regard to the context in which the Defendant’s advice was given and its nature the losses remain fairly attributable to the Defendant’s negligence. Can it properly be concluded that the Defendant assumed responsibility for losses of the type which were sustained in 2013 when, following the realisation that hedge accounting was not available, the interest rate swaps were closed? Since the Defendant had advised, by approving the Claimant’s hedge accounting policy, that the Claimant could protect its balance sheet, and hence its regulatory capital position, from volatility in the interest rate swaps and since the losses were sustained, when that advice was found to be incorrect, because the Claimant could not allow its balance sheet, and hence its regulatory capital position, to be exposed to that volatility, those losses, which reflected the fair value of the swaps, were not only the reasonably foreseeable consequence of the Defendant’s negligence but also flowed from the particular feature of the Defendant’s conduct which made its advice wrongful. It can therefore be concluded that the losses were the type of loss in respect of which the Defendant assumed responsibility.”
“175. But there is also a cogent argument to the contrary. First, hedge accounting is concerned with the manner in which swaps and mortgages are presented in the published accounts of the Claimant. It is not concerned with protecting the Claimant from losses which would flow from its purchase of interest rate swaps in circumstances where there had been a sustained fall in interest rates, for example, the cost of putting up collateral or the costs of termination of the swaps in the event that a counterparty exercised its right to terminate the swap. Second, although hedge accounting had the effect of protecting the Claimant’s published profit and capital (and in particular its regulatory capital) from changes in the fair value of the swaps, such changes were nevertheless real and exposed the Claimant to the risk of considerable loss notwithstanding the application of hedge accounting. It was because of such changes that the Claimant had to put up collateral (see paragraph 111 above) and that the regulator feared that a counterparty might exercise its right to terminate the swaps (see paragraphs 104 and 112 above) as Mr. Cowie appreciated (see paragraph 114 above). Third, that risk of loss came about by reason of the risk that interest rates might fall, as they in fact did after the financial crisis of 2008. Fourth, had the parties been asked in 2006 whether the Defendant, by advising that hedge accounting could be used, was assuming responsibility for the risk of loss to the Claimant in the event that there was a sustained fall in interest rates I do not consider that they would have replied that the Defendant was. Certainly the Defendant would not have said that it was doing so. I also think it improbable that Mr. Cowie would have said that the Defendant was doing so. He would have recognised, as Mr. Gee did in his evidence, that the decision to purchase the swaps was taken for commercial reasons on which the Defendant gave no advice. An impartial observer of the dealings between the Claimant and Defendant from November 2005 until April 2006 would not have concluded that the Defendant was assuming responsibility for the risk of loss to the Claimant in the event that there was a sustained fall in interest rates. He (or she) would have appreciated that, although the apparent availability of hedge accounting enabled the Claimant to make use of interest rate swaps, the decision whether or not to use interest rate swaps as a hedge was one for Mr. Cowie and the board to take depending upon their assessment of the commercial wisdom (or otherwise) in doing so.”
“179. Ultimately, as with so many questions with which courts must wrestle, it is necessary, having examined the evidence and the opposing arguments, to stand back and view the matter in the round. Having done so it seems to me a striking conclusion to reach that an accountant who advises a client as to the manner in which its business activities may be treated in its accounts has assumed responsibility for the financial consequences of those business activities. I do not consider that the objective bystander, or indeed the parties themselves, viewing the matter in 2006 would have concluded that the Defendant had assumed responsibility for the Claimant “being out of the money” on the swaps in the event of a sustained fall in interest rates. Although it can be said, as I have attempted to explain, that the particular manner in which the Claimant suffered the loss on the swaps (that is, by deciding to close the swaps out when it was appreciated that the Defendant’s advice was wrong) flowed from the particular feature of the Defendant’s conduct which made it wrongful, the very same loss would have been sustained had the counterparty decided to close the swaps, as the regulator feared might well happen and as Mr. Cowie appreciated. That circumstance illustrates, it seems to me, that the loss suffered by the Claimant, looked at broadly, sensibly and in the round, was not in truth something for which the Defendant assumed responsibility or the “very thing” to which the Defendant had advised the Claimant would not be exposed. Rather, the loss flowed from market forces for which the Defendant did not assume responsibility. Just as the Defendant had not assumed responsibility for the losses which would have been incurred had a counterparty exercised its right to terminate a swap, so the Defendant had not assumed responsibility for the very same losses which were incurred when the Claimant decided to close the swaps out, notwithstanding that that decision was taken because the advice given by the Defendant had been wrong.”
“193. I accept the submission of counsel for the Claimant. SAAMCO and Hughes-Holland identify the question, would the losses have been incurred had the information or advice provided by a defendant been true, as a “tool” for determining whether the defendant assumed responsibility for such losses (see Hughes-Holland at paragraph 45). I have already determined the question of responsibility in the Defendant’s favour. But I would not have reached the same decision by reference to this particular “tool”
“199. It is accordingly unnecessary for the court to consider the alternative case advanced by the Claimant in the event that it is, contrary to my decision, necessary for the Claimant to show, on the balance of probabilities, that the losses incurred in 2013 would not have been incurred in the future. I ought however to express my view on this alternative case in case my decision on the Claimant’s primary case is wrong. I shall do so shortly. Although Mr. Gee put forward two scenarios as to what might have happened in the future (which led to much expert comment and analysis and many pages of closing submissions) he fairly recognised that this was speculation and that what would in fact happen would depend upon “the attitude of the FCA and PRA toward lifetime mortgages, the capital position of the Society over time, the capital requirements imposed upon the Society over time, movements in interest rates, movements in the rate at which new lifetime and standard fixed rate mortgages could be written, house price inflation and the overall risk appetite and profile of the Society.” 200. In this he was, in my judgment, entirely correct. Trying to predict what is likely to happen to financial markets, interest rates, the fortunes of the Claimant and the views of the regulator over the next 30 or more years is an impossible task. Possibilities may be suggested but what is more likely than not to happen is a very different matter. Thus, if it is necessary for the Claimant to establish on the balance of probabilities that the sums paid in 2013 would not have had to be paid over the next 30 or more years the Claimant is, in my judgment, unable to do so. Indeed, the Claimant (inevitably) did not address the uncertainties mentioned by Mr. Gee. Rather, the Claimant concentrated upon seeking to establish a case that its mortgage business was profitable and that it would continue to be so well into the future when new (profitable) mortgages would be issued as existing lifetime mortgages were redeemed. But even if this could be established on the balance of probabilities the Claimant would still be unable to establish on the balance of probabilities that it would not continue to have had to pay out on the swaps for the remaining life of the swaps (over 30 years), thereby incurring the losses it incurred in 2013. I have therefore not addressed the many pages of closing submissions on the question of the alleged present and future profitability of the Claimant’s business. The Claimant submitted that the court’s task is “do its best to assess what would have happened.”
“It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them. The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong.”
“The nature of the distinction is, however, clear from its place in Lord Hoffmann’s analysis as well as from his language.”
“whether BPE Solicitors assumed responsibility for Mr Gabriel’s decision to lend money to Mr Little.”
“172. I accept that it can be said, as Mr. Gee accepted, that the Defendant provided one piece of information or advice and that the Claimant’s decision to enter into the swaps was based upon not only that information or advice but also upon other (commercial) considerations as to which no advice was given by the Defendant…”
“At the very least [the brokers] owed a duty to inform Aneco whether or not reinsurance was available. If they had performed that duty carefully, they would have told the insurers that reinsurance was not available, in which case “the whole thing would have collapsed”, as the brokers well knew.”
“…The critical feature of the case which led to this result was that the broker’s responsibility was found to extend beyond the placing of the retrocession to the entire transaction including the writing of the reinsurance itself: see paras 16–17 (Lord Lloyd of Berwick), para 40 (Lord Steyn)...”
“…In my judgment the decision in Aneco is not authority for any general proposition of law beyond the particular factual context of that case….”
“[82] The claimants were buying properties in Italy and had no knowledge of Italian law and conveyancing procedures. Giambrone decided what information the claimants needed and provided that information to them…Giambrone were (albeitimperfectly) guiding the whole decision-making process. They were telling the clients what protection they needed, what sums they should pay out and when it was safe to pay those sums out. [83] …in my view this is a category 2 case. Obviously theclaimants decided whether or not they wanted to buy holidayhomes in Southern Italy. But having taken that primarydecision, they put themselves into the hands of Giambrone astheir experienced Anglo-Italian lawyers.”
“…If the Defendant’s advice had been correct the Claimant would not have broken the swaps in 2013 and so would not at that time have incurred the loss which in fact it did.”
“The burden of proof 53. The Court of Appeal considered that the burden of proving facts which engaged the SAAMCO principle lay upon the claimant. This is not a straightforward question, but in my judgment they were right about this. The legal burden of proving any averment of fact lies upon the person who is required to assert it as part of his case. In the ordinary course, this means that the claimant has the burden of pleading and proving his loss, whereas the defendant has the burden of proving facts (such as failure to mitigate) going to avoid or abate the consequent liability in damages. The practical effect of the principle formulated in SAAMCO in cases such as this is to limit the amount of the damages recoverable in respect of loss flowing from the claimant’s decision to enter into a transaction. But it is not a principle of assessment, let alone of avoidance or abatement. It is an essential part of the claimant’s case that he was owed a relevant duty. As Lord Hoffmann expressed it in SAAMCO, at p 220: “The appearance of a cap is actually the result of the plaintiff having to satisfy two separate requirements: first, to prove that he has suffered loss, and, secondly, to establish that the loss fell within the scope of the duty he was owed.”
“…a striking conclusion to reach that an accountant who advises a client as to the manner in which its business activities may be treated in its accounts has assumed responsibility for the financial consequences of those business activities…”