AUDITOR’S DUTY OF CARE: DISCLAIMERS ARE NOT A UNIVERSAL PANACEA FOR AVOIDING LIABILITY TO A THIRD PARTY
January 2024Amathus Drinks PLC and others v EAGK LLP and others [2023] EWHC 2312 (Ch)
The High Court in an application by a defendant auditor to strike out a claim alleging that it owed a third party buyer of shares in a company a duty of care when preparing a Completion Certificate under a Share Purchase Agreement concluded that, despite the defendant auditor including a Bannerman clause disclaiming the assumption of responsibility to anyone other than the company, the buyers still had a reasonable prospect of success in establishing at trial, that the auditor owed them a duty of care. This demonstrates that the inclusion of a disclaimer clause does not automatically prevent liability being owed to a third party.
The Facts
The case involved the acquisition of the entire share capital of a company via a share purchase agreement (SPA) in August 2015. The SPA set out a provisional purchase price with an arrangement for a final purchase price to be agreed upon completion with reference to the completion accounts.
Before the completion of the SPA, the claimant buyers (Buyers) retained the defendant accounting firm (Accountants) to conduct due diligence in relation to the sale.
The price paid for the shares would be subject to adjustment if the completion accounts showed that the company’s net assets were less than the agreed price. The completion accounts were prepared by the Accountants, who also produced statutory accounts for the company and issued a Completion Certificate for the purposes of the SPA in September 2016.
The completion accounts showed a modest refund due from the sellers (Sellers) to the Buyers, which the Sellers paid.
Subsequently, the Buyers alleged that they had discovered several frauds committed by the company. These included double-counting assets in the accounts, inflating cash receipts and logging false invoices. The Buyers said that the net assets of the company had been inflated and the Buyers ended up paying more than they should have done under the SPA.
The Claim
The Buyers brought a negligence claim against the Accountants for breaches of contract and a common law duty to exercise reasonable skill and care in failing to identify the fraud when preparing the statutory accounts and the Completion Certificate which in turn caused them loss, being the amount they allege they overpaid for the shares.
The Buyers claimed that the Accountants’ duty to them existed because the Accountants were cognisant of the fact that the statutory accounts would form part of the completion accounts and so the Buyers would place reliance upon them when proceeding with the purchase.
The Accountants denied liability and applied to strike out the claim or alternatively for summary judgment. They claimed that as they had been retained by the company and not by the Buyers and that the only entity to whom they owed any duty of care was the company.
The Accountants relied upon their inclusion of a Bannerman clause in the retainer documentation, which expressly disclaimed any liability to anyone other than the company and its “members as a body”, which they presented as an insuperable barrier to the Buyer’s claims.
The concept of a Bannerman clause was established during the Scottish case of Royal Bank of Scotland Plc v Bannerman Johnstone Maclay [2005] ScotCS CSIH 39. Following this case, the Institute of Chartered Accountants in England and Wales (ICAEW) issued guidance to assist auditors in managing the risk of inadvertently assuming a duty of care to third parties in relation to their audit reports. The ICAEW advised auditors to incorporate a disclaimer in the final section of the audit report, to the effect that an auditor will not accept or assume responsibility to anyone other than the company and the company’s members as a body, in relation to the reports or its audit work. This disclaimer has subsequently been widely used in the profession.
The Accountants relied upon Barclays Bank plc v Grant Thornton UK LLP [2015] EWHC 320 (Comm), where the High Court held that a Bannerman clause in a company auditor’s retainer prevented the auditor from incurring any liability to a third party lender to the company for failing to identify alleged fraud by two employees.
However, (conversely to the facts of the Amathus case) although the auditor and the lender were in communication in the early stages of the transaction, by the time the auditor had been appointed, communication had stopped.
The Judgment
As this was an application for summary judgment, the question for the court was not whether the Accountants were liable to the Buyers, but whether the Buyers had a realistic prospect of showing that the Accountants were liable if the case proceeded to trial.
Contract Claim
It was held that there was no realistic prospect of the Buyers showing that they were parties to the contract with the Accountants in respect of the preparation and audit of the statutory accounts, and that they had no interest in the company’s audit other than as shareholders. The court therefore granted summary judgment in favour of the Accountants in respect of the claim in contract.
Tort Claim
The court found that there was a realistic prospect of the Buyers succeeding in their claim for negligence.
The judge acknowledged the similarity between the current case and the Barclays case, particularly the fact that both cases dealt with possible liability of an auditor to a third party failing to identify historic fraud.
However, he also illustrated the differences between the two cases. In the Barclays case, although the auditor and lender had been communicating before the auditor had been instructed, those communications had finished by the time the auditor assumed its engagement. This suggested that the auditor had not intended to continue to owe the lender a duty of care.
In this case, however, the Accountants had continued to communicate with the Buyers after the acquisition completed. Indeed, the Accountants had specifically agreed to carry out the completion accounts valuation.
In the judge’s view, this suggested a “continuing and direct commercial relationship” of a kind that did not exist in the Barclays case. In fact, the judge went further and suggested that the Accountants might well not only have known that the Buyers were relying on them to ascertain the correct figure for the completion accounts, but even have intended for the Buyers to rely on them.
The court referred to McCullagh v Lane Fox & Partners Ltd [1995] EWCA Civ 8 for the point that a disclaimer is not a contractual exclusion to be strictly construed. It stated that the correct approach is to treat the existence of the disclaimer as one of the facts relevant to the question of whether of the defendants have assumed responsibility for the relevant statement. This question must be answered objectively by reference to what a reasonable person in the claimant’s position would have understood at the time they finally relied upon the representation.
The court also appears to have been persuaded by the fact that the original engagement letter between the company and the Accountants could not be found, removing a key piece of evidence.
As a result, the court allowed the Buyers to proceed with their tortious claim, holding that the Buyers had an entirely realistic prospect of succeeding at trial.
Comment
This was a decision on an application for summary judgment, so it does not create any new law. However, the findings are a useful reminder that, in certain circumstances, an assumed duty of care might be able to override an express disclaimer of liability.
The decision illustrates that, while a contractual disclaimer will be a powerful factor in determining whether the maker of a statement has assumed responsibility toward a third party, it is not an absolute solution and will not always be determinative where there are factors which point in the other direction, such as, in this case, where the auditor acted to the contrary of the terms of the disclaimer in that there were direct communications between the auditor and the third party. The nature and extent of those communications and their relevance to whether, on the facts, there was an assumption of responsibility, is a matter to be pursued at trial.
As far as practical take aways from this judgment are concerned, it does highlight the importance of ensuring documentation for all engagements clearly states which party the adviser is assuming responsibility towards and that any professional arrangements are thoroughly documented, including safeguarding copies of key engagement documentation.
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