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16 Oct 2020

SAAMCO Returns: application of the principle to negligent audit claims


The Court of Appeal has recently considered the application of the SAAMCO principle in the context of an audit negligence case in AssetCo plc v Grant Thornton UK LLP.  The SAAMCO principle established in the landmark professional negligence case of South Australia Asset Management Corporation v York Montgue Ltd [1997] that where a defendant has negligently provided information, its liability is generally limited to losses caused by that information being wrong, rather than the full consequences of the claimant entering into a transaction in reliance on it. 

In a significant judgment, the Court of Appeal substantially dismissed an appeal by Grant Thornton (“GT”), against an order awarding AssetCo around £22 million in damages. In doing so, the Court confirmed that the SAAMCO principle – that a claimant must establish that its loss falls within the scope of the duty owed by the defendant to the claimant - applies to most negligent audit cases.


AssetCo was the holding company of a group carrying on businesses related to fire and rescue services. GT audited AssetCo’s accounts for the years ended 31 March 2009 and 2010, although the appeal was only concerned with the audit of the 2009 accounts. Whilst the 2009 accounts presented the picture that AssetCo was a profitable group, this picture was “entirely false” and the business was not sustainable. The then CEO, John Shannon, and CFO, Frank Flynn, acted dishonestly in the preparation of the accounts and documents were forged.

When new management was appointed in March 2011, the true state of affairs was revealed. To avert insolvent liquidation, short term financial support was obtained and a scheme of arrangement with AssetCo’s creditors (together with a restructuring of capital) was implemented.

It was accepted by GT that they should not have given an unqualified report on the 2009 accounts and that they would have uncovered many (if not all) instances of deceit had appropriate professional scepticism and competence been applied. AssetCo claimed that, had GT performed its duties competently in 2009, the same steps that ultimately occurred in 2011 would have taken place two years earlier, in 2009.

In a lengthy judgment spanning nearly 500 pages, Mr Justice Bryan awarded damages to AssetCo which were reduced on the grounds of contributory fault. Many of the issues before the judge at first instance did not arise on appeal.


GT appealed on the following three grounds: (1) the judge should have held that AssetCo had failed to establish that the losses for which it claimed damages were within the scope of GT’s duty of care and that its breaches were the legal cause of those losses; (2) the judge erred in finding that the counterfactual was established on a 100% basis and in the assessment of the chances for certain matters; and (3) the judge failed to give credit for benefits received by AssetCo. GT had partial success on grounds (1) and (3), reducing the damages by £9 million. This article will focus on the Court of Appeal’s findings in relation to grounds (1) and (2).

Scope of duty and legal causation

The Court of Appeal considered whether the trading and other losses of AssetCo fell within the scope of GT’s duty and whether its admitted breaches of duty were the legal cause of those losses.

The Court revisited the case law on the SAAMCO principle, including the recent decision of the Court of Appeal in Manchester Building Society v Grant Thornton UK LLP (MBS) in which it was held that GT was not liable for losses incurred by MBS when closing out swaps where GT had given negligent accounting advice (see further here). It noted that SAAMCO established the importance of distinguishing between whether a defendant was providing information or giving advice generally. MBS was held by the Court of Appeal to be an information case because the audit firm only gave advice on the accounting treatment for the swaps – just one part of the information used by MBS to enter into the swaps transactions.  In this type of case, the defendant is only liable for the financial consequences of the information being wrong (not of the claimant entering into the transaction). In an advice case, the defendant owes a duty to protect the claimant against the full range of risks associated with the transaction.

The judgment summarises the salient question posed by SAAMCO as: which of the losses are the result of the wrongness of the information as opposed to the transactions entered into as a causal result of the wrong information?  

GT submitted that: (i) the SAAMCO principle applies to claims against auditors, including general audit clams; (ii) such claims are “information” cases; and (iii) it is therefore essential for the claimant to establish that the losses would not have been suffered if the audit reports had been correct.

AssetCo, meanwhile, argued that the SAAMCO principle was useful and workable where professional advice is provided in the context of a specific transaction or course of conduct but was not applicable in the very different context of an audit report to a company and its shareholders. This, AssetCo contended, is because there is no specific transaction to which an audit report is directed and it does not therefore make sense to ask whether that person was providing information or assuming responsibility for the decision to enter into a transaction.

Whilst the Court of Appeal accepted that the purpose of an audit is not to assist the recipient in deciding whether to enter a specific transaction, it saw no reason why the SAAMCO principle cannot apply in most circumstances to determine whether losses come within the scope of an auditor’s duty when signing an unqualified audit opinion.

Having determined that the SAAMCO principle was applicable to cases of this nature, the Court of Appeal went on to conclude that the judge was right to find on the facts of the case that GT’s negligence deprived AssetCo of the information that would have caused it to take the necessary steps to regain its solvency. This was with the exception of one instance of the misappropriation of company funds by AssetCo’s CEO which had no causal link to GT’s negligence in the 2009 audit.  This loss may have been caused on a “but/for” analysis, but was quite different in character from the losses caused by the disguised insolvent trading that GT had admitted, and on this basis the loss through misappropriation was held to not flow from GT’s breach of duty.

Loss of chance

The Commercial Court held that AssetCo had established that it would have successfully completed a scheme of arrangement and restructuring in 2009 and, as the chances of this were so high, the likelihood was treated as 100%.

GT challenged this finding on the basis that: (i) the judge was wrong to treat each third party contingency as a certainty; and (ii) the percentage prospects in at least four instances should have been much lower.

The Court of Appeal restated the requirement that, where the loss claimed depends upon a hypothetical course, the claimant must prove what it would have done on the balance of probabilities but it need only show that there was a real or substantial chance of any necessary action by a third party (which is then assessed on the percentage chance basis)

As the conclusions of Mr Justice Bryan at first instance had been reached following detailed consideration of the evidence regarding the various hypothetical acts, the Court of Appeal recognised that it should be slow to interfere with findings of fact and did not do so.

As to the assessment of the loss of chance, GT’s position was that the judge should have adopted a mathematical approach (rather than finding the chance to be 100%).  The effect of combining several contingencies with (say) 90% prospects can reduce the damages quite substantially. The Court of Appeal said that the mathematical approach would not suit cases such as this where there was a high degree of interdependence between the third party counterfactuals.  Other cases where the third party acts are independent will be more ripe for discounts through the multiplications of percentage discounts. The Court of Appeal found that it was open to the judge to determine that the chances were so high that they were certainties, and that this was not because of a presumption equivalent to 90 or 100% but because a distinction between “certain” and “almost certain” was meaningless. 


This decision makes clear that the SAAMCO principle is here to stay in the context of negligent audit cases. 

It also shows that, with the right facts, companies can succeed in claims for trading losses. On the particular facts of this case, AssetCo was able to prove that the auditor’s failure to reveal the particular nature of the insolvent trading based on dishonest representations was the “very thing” that prevented it from ceasing its loss-making, which not only fell within the scope of the auditor’s duty but also was a proximate cause of its loss.  In future cases, with different facts, auditors may well still successfully defend trading loss claims based on the disconnect between the losses through poor trading and the specific scope of the auditor’s duties that were breached.

Also of particular note is the Court’s approach to the counterfactual, which was based on the quality of the evidence, which included both what it and the relevant third parties would have done, corroborated by the actual events. The relevant counterfactual was that, if GT had performed its duties as auditor competently in 2009 (and detected the dishonest misrepresentations made to it), AssetCo would have avoided the losses as the same sequence of events that prevented the losses would have occurred as in fact later played out in 2011. The judge at first instance regarded the events of 2011 as the best evidence of this, and the Court of Appeal, when noting that this was one of those “unusual” cases where the counterfactual actually occurred (albeit two years later), concluded that this was “the obvious thing to do”.  By contrast, in MBS, MBS could not establish its alleged counterfactual because the evidence did not establish that the losses would not have been incurred if GT’s advice had been correct. The contrast in these two cases serves to highlight that causation in purely hypothetical counterfactuals (i.e. where there is no direct evidence of the type in AssetCo) will be more difficult to prove, or at least more likely to result in significant reductions based on the loss of chance principles.

The SAAMCO principle is set to remain in the judicial spotlight as we await the judgment of the Supreme Court following the recent appeal hearing in MBS.  



Adam Culy

Adam Culy

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