Home > Assetco v GT: A chink in SAAMCo’s armour? And a lost chance to sort out loss of a chance?

Assetco v GT: A chink in SAAMCo’s armour? And a lost chance to sort out loss of a chance?

5th November 2020

Assetco v GT: A chink in SAAMCo’s armour?  And a lost chance to sort out loss of a chance?
Introduction

The recent decision of Assetco Plc v Grant Thornton UK LLP [2020] EWCA Civ 1151, in which judgment was handed down at the end of August, is well worth professional liability lawyers paying attention to whether they are predominantly claimant practitioners, defendant ones or, like me, act for either side.  It is a useful illustration of the application of the SAAMCo[1] principle/doctrine (and also contains an interesting, if not entirely novel, analysis regarding loss of a chance).

The facts and the first instance decision

The appellants, GT, were auditors for the respondents Assetco.  GT appealed against an order awarding damages of over £22.36 million to Assetco for the negligent audit of its accounts.

GT’s unqualified audit report showed that the group, of which Assetco was the holding company, was successful and increasingly profitable, but in fact the group was insolvent. GT admitted breach of duty in failing to identify management fraud, and that absent negligence the it would have been revealed that the business of the respondent was ostensibly sustainable only because of dishonest representations made by senior management. The true situation became apparent two years later and Assetco entered into a scheme of arrangement. It succeeded in its claim for damages in respect of (i) the sums it had provided to loss-making subsidiaries during the period when it should not have continued its business, expenses that would not have been incurred absent the negligence and had Assetco then had the opportunity to enter into a scheme of arrangement at the appropriate earlier time, and (ii) a payment made under a fraudulent related-party transaction.

GT’s appeal

GT appealed on the grounds that the judge had been wrong to find that the losses for which Assetco claimed damages were within the scope of its duty of care and that its breaches were the legal cause of those losses, to find that the counterfactual scenario had been established without making any discount for contingencies, and to fail to give credit for benefits received by the respondent that would not have been available absent the negligence.

The Court of Appeal dismissed the appeal, save that it found the judge below should have given credit for the proceeds of a share issue which had been undertaken in the course of the continuation of  Assetco’s ostensibly sustainable business.

A chink in SAAMCo’s armour?

The ‘SAAMCo principle’ is the accepted shorthand for the principle that a professional is liable only for those losses that fall within the scope of their duties, so that there will recovery of losses falling outside that scope[2]: it is frequently distilled (as it was in BPE v Hughes-Holland (aka Gabriel v Little) [2017] UKSC 21[3]) to a distinction between a duty to provide either ‘information’ or ‘advice’.  Did the professional assume responsibility only for the correctness of the information, or did they assume and advisory role and guide the client on the merits of the transaction or process itself?

The Court of Appeal unequivocally confirmed the application of the SAAMCo principle to this case, and also confirmed that the SAAMCo principle is the general and default prism through which to view scope of duty and loss in all professional negligence cases.

However, it was particularly interesting to see the Court of Appeal expressly contemplating that there will be scenarios where the SAAMCo principle will not apply.  The principle was considered to be capable of being effectively applied to most types of loss that could be claimed in respect of a negligent audit, but it was not a rigid rule of law: it was simply a tool for determining the loss flowing from the negligently wrong information as opposed to the loss flowing from entering into the transaction at all.  See, in particular, paragraphs 78, 89, 101 and 102 in the judgment.  At paragraph 102, David Richards LJ said: “the SAAMCo principleis not a rigid rule of law but, as Lord Sumption in [sic] Hughes-Holland at [45], “simply a tool” for determining the loss flowing from the negligently wrong information as opposed to the loss flowing from entering into the transaction at all. If, in a particular class of case it is incapable of achieving that determination, it is not a tool which the court will use”.

Although the Court of Appeal (of course) cited, and considered it was following, BPE v Hughes Holland, its comments would appear to run counter to Lord Sumption’s analysis in BPE v Hughes-Holland which, in my view, made clear that SAAMCo always applies: it is a fundamental principle.  It may not be easy to apply on the facts of a particular case, but applied it must be.  Lord Sumption’s reference to the SAAMCo ‘cap’ being “simply a tool” did not, in my view, mean to suggest that the SAAMCo principle was a tool that could be picked up and used, or not, depending on the circumstances of a given case.  It is clear (from the overall tenor of his judgment, and particularly from paragraphs 29, 31 and 46) that Lord Sumption simply meant that there was no ‘special magic’ to the SAAMCo principle and that it was merely the crystallisation of and driven by the logic (as Lord Sumption, and Lord Hoffmann before him in SAAMCo itself, saw it) of distinguishing between loss flowing from incorrect information and loss flowing from advice guiding the claimant as to whether to enter into the transaction at all.  It remains debatable (and debated) whether that is an appropriate distinction to make, but under SAAMCo and BPE v Hughes-Holland that is the state of law, like it or not[4]; and there is no suggestion in either case that the principle is an optional one.

The problem (or, perhaps if you are a claimant lawyer, the attraction), with respect, with the Court of Appeal’s characterisation in Assetco of the SAAMCo principle as an optional ‘tool’ is that it may serve to revive arguments made prior to BPE v Hughes-Holland namely that, for one or other special defining characteristic, a given case falls outside of SAAMCo’s ambit entirely.

I certainly remember arguing this point on behalf of lenders in the lender claims of the late 2000s and early 2010s, where the defendant was a solicitor and where the mortgage transaction involved some element of fraud by the borrower: relying on the distinction between the Colin Bishop and Steggles Palmer cases that were part of the litigation reported under Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 572.  Steggles Palmer was believed to be authority for the principle that, if a lender could show that the defendant’s negligence had deprived it of information that would have shown that the borrower was dishonest (and therefore someone to whom the lender would never have lent), then the lender could recover all the losses sustained as a result of entering the transaction without any SAAMCo ‘cap’ (see also Portman Building Society v Bevan Ashford [2000] Lloyd’s Rep PN 354).  Yet that rationale espoused in Steggles Palmer (and Portman v Bevan Ashford) was expressly disapproved by Lord Sumption in BPE v Hughes-Holland.  It is hard to reconcile that disapproval with the suggestion in Assetco that there may well be context- and fact-specific exceptions to the application of the SAAMCo principle.

Loss of a chance revisited

The other interesting aspect of the appeal in this case is the analysis of the principles relating to loss of a chance.  This has been a famously difficult area of the law for decades now.  The leading case remains Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 though the principles were reconfirmed in Wellesley Partners LLP v Withers LLP [2016] Ch 529.

In Assetco the trial judge found that Assetco would have successfully completed a scheme of restructuring in 2009. He found that Assetco had established that it would have taken all the steps necessary to achieve this and that the chances of third parties doing what was necessary for this purpose were in each case either 100% or so high that they fell to be treated as 100%. He accordingly did not discount the amount awarded as damages to take account of any chance that the scheme and restructuring would not have been put in place.

On appeal, GT asserted that, even on his own findings, the trial judge was wrong to treat each third party contingency as a certainty. Where the judge had assessed a chance as “not less than 90%” he should have treated them as 90% (not rounding them up to 100% as he did) and multiplied the percentage chances of each contingency in order to find the overall chance of a successful scheme and restructuring in 2009.  In addition, GT challenged the percentage prospects found by the judge in the cases of four specific contingencies, though the Court of Appeal rejected the specific challenges.

In terms of the appropriate overall approach to the loss of a chance issue, as summarised in paragraphs [122] and [123] in the Court of Appeal’s judgment, there were ten steps/events relevant to Assetco’s counterfactual case and at least five categories of third parties whose actions or decisions were relevant to causation.  The Court of Appeal noted that the trial judge had been taken to a number of previous decisions which pointed either towards or away from a strictly mathematical approach to evaluation of discounts for contingencies in loss of a chance cases.  GT also accepted that a purely mathematical approach was not appropriate where the contingencies in question were not all independent of one another; such as in the case of the first five steps of the ten listed at paragraph [122] in the judgment (which involved notification of the audit concerns and appointment of Mr Davies as an interim executive chairman of Assetco).  There was argument about the independence of these and each of the other steps, but the Court of Appeal considered that the ten steps boiled down to four clearly independent contingencies.

The Court went on to conclude that on a proper construction of the trial judge’s judgment on two of the four independent contingencies, the judge had effectively found that they were certainties (not 90% chances that he had arbitrarily rounded up).  On the other two contingencies he had effectively found that they were ‘greater than 90%’ and whilst that was imprecise, any specific figure such as 93%, 96% or 99% would lend “a spurious degree of precision”.  Given that the evaluation of loss of a chance cannot be a fully scientific, empirical exercise then “Having reached an assessment of greater than 90% for each contingency, [the trial judge] was…entitled in this case to treat it as being, in counsel for GT’s phrase, a “racing certainty”. This was not rounding up a 90% chance to a certainty but a conclusion that, within the confines of judicial decision-making, it was a certainty.”

The inherent problem with the loss of a chance doctrine (versus the binary approach to damages where causation does not involve third parties; the court finds on a balance of probabilities whether something ‘would’ or ‘would not’ have happened and then awards all or nothing accordingly) is that it is open to significant, sometimes massively important differences of interpretation.

What contingencies must be accounted for?  Should each contingency be assessed precisely and the results averaged?  To what extent should groups of certain types of contingencies be averaged? What makes one event in a chain of events sufficiently ‘independent’ from another will often be a matter of pure opinion and spin.  How does one even assess a chance at 90% as opposed to ‘greater than 90%’?

Should all contingencies simply be lumped together in some overall ‘broad brush’ exercise looking for a single composite, value judgment percentage?  The latter has attractions for the non-mathematically-minded and for those seeking an overall measure of justice: after all, litigation and its results are never a fully scientific exercise, the truth is never actually reached and successful claimants are inevitably over- or under- compensated to a greater or lesser degree, perhaps in all cases.  Certainly, there have been cases where an overly mathematical approach may arguably have resulted in an overly precise, artificial-feeling discount (see, for example, the obiter comments at paragraph [181] in the judgment in Altus Group (UK) Limited v Baker Tilly Tax and Advisory Services LLP [2015] EWHC 12 (Ch) including a finding of a chance of 7.2%).

However, the lack of a rigorous mathematical approach and the relative judicial inconsistency of application of the principles in this area, and sheer number of value judgments that have to be made on the hypothetical steps withing a given counterfactual (or even as to a whole set of possible counterfactuals[5]), does not assist lawyers in advising their clients or promote early settlement, particularly in higher value cases where there are multiple contingencies in play.

In Assetco, a hybrid (and therefore, perhaps, most fair) approach of grouping certain contingencies together, but not others, and treating ‘over 90%’ as equivalent to a ‘certainty’ seems likely to have achieved a fair result with both an element of scientific method but also not slavish adherence to mathematics.  However, it once again highlights the real difficulties and tensions of this part of the law of causation and quantum.  Also, the appeal in Assetco highlights the need for clarity in the trial judge’s judgment as to which approach (mathematical, impressionistic or a hybrid) is being adopted in a given case.

 

[1] South Australia Asset Management Corp v York Montague Ltd [1997] AC 191.

[2] Put another way, a professional has no duties, and therefore cannot have breached any duty, in relation to matters falling outside the scope of their duties.

[3] See also Manchester Building Society v Grant Thornton UK LLP [2019] EWCA Civ 40, [2019] 1 WLR 4610. The judgment of the Supreme Court on the claimant’s appeal in this case is awaited.

[4] It is possible, of course, that the Supreme Court (from which Lord Sumption has since retired) will alter or in some way ‘water down’ the SAAMCo principle when it considers the appeal in Manchester Building Society v Grant Thornton UK LLP.

[5] As Freedman J observed in Moda International Brands Ltd v Gateley LLP [2019] EWHC 1326 (QB), where there were several possible outcomes (i.e. several plausible counter-factuals, which was not what the Court was dealing with in Assetco), the court sometimes assesses the separate chances of each outcome and adds them together, and sometimes it averages them off.

 

This article was written by James Hall with thanks to Tom Bell for his invaluable assistance and input into the final version.  

 

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