Canada: Accountability - May 2016

Gowling WLG's dedicated professional liability team bring you their regular update on the cases and issues affecting accountants and other financial professionals on a range of liability risk management issues.

No merit in professional negligence claim in respect of due diligence services

The high court has held that a firm of accountants was not negligent when providing due diligence services. The analysis provided was reasonable and complete on the basis of information that had been provided to it.

In Barclays Trust Co (Jersey) Ltd (as Trustee for the Ironzar III Trust) & others v Ernst & Young the claimants sought damages for the alleged professional negligence of the defendant (EY) for due diligence services provided in relation to the claimants' acquisition of a health and fitness business (the Business).


The second to seventh claimants were companies in a group (the Group) formed to acquire the Business on behalf of the Ironzar III Trust (the Trust), of which the first claimant was the trustee (the Trustee).

EY were retained by the second claimant to provide 'top-up' due diligence in relation to the acquisition. At the time of EY's appointment the second and third claimants had already agreed to purchase the Business; a Sale and Purchase Agreement had been executed and a non-refundable deposit of £23,386,250 had been paid.

EY were retained by the second claimant to provide 'top-up' due diligence in relation to the acquisition. At the time of EY's appointment the second and third claimants had already agreed to purchase the Business; a Sale and Purchase Agreement had been executed and a non-refundable deposit of £23,386,250 had been paid.

In forecasting revenue the Business Plan had assumed that the number of people joining mature clubs in the Business would grow by 2.7% in 2007. EY reduced that assumed growth to 0.8%. The claimants contended that given the information available to EY in relation to membership numbers and other circumstances relating to the Business, EY should have reduced the assumed growth even further.

The purchase of the Business was completed for a total of £474.3 million. The Claimants asserted that but for EY's negligence in failing to further reduce the assumed growth they would not have completed the transaction - rather they would have withdrawn from the sale and forfeited their deposit.

The claimants alleged the actual value of the Business on 22 February 2007 was £433 million and as a result they sought to recover almost £18 million - representing the difference between the amount paid and the actual value, minus the deposit the claimants had already paid and which would have been lost had they withdrawn from the sale.


EY had actual membership numbers available to it until October 2006 and made it clear that predicted numbers were used after that - although actual figures for December 2006, January 2007 and part of February 2007 subsequently became available.

The actual data for December 2006 showed poor performance as against EY's forecast. However, the figures for January showed membership numbers ahead of the forecast total. As a result the actual number of memberships was only 246 less than had been forecast by the end of January - that shortfall was immaterial.

The actual data for January 2007 (acknowledged by the claimant to be the most important month of the year) more than supported EY's views as to forecast revenue. The court therefore held that EY's analysis was entirely reasonable and complete on the basis of the information provided to it by 21 February 2007. EY had not acted in breach of duty or negligently in any respect.

The court went on to hold that even if EY had breached the duties it owed to the claimants, the claimants suffered no loss as a result. By the time EY were retained the claimants had already exchanged contracts to purchase the Business and had paid a non-refundable deposit.

Furthermore the court held that the appropriate valuation of the Business - based on the facts before it - should have been £468.75 million. That sum was so close to the actual purchase price of £474.3 million that "it cannot sensibly be said that the claimants paid above the true market value" when they acquired the Business on 22 February 2007 and, in any event, given the credit that must be given for the deposit, the claimants had suffered no loss or damage as a result of the matters alleged.


If advice is given based on information provided to an advisor that information must be considered as a whole. The fact that EY's growth forecast could well have been lower had the actual figures for December 2006 been used the fact remains that the actual figures for January 2007 meant that EY's forecast as at the end of January 2007 was accurate.

This case is also a good reminder that even if there is negligence no damages will be payable unless the negligence causes loss. Here, the claimants had already agreed to purchase the Business and had paid their deposit before the defendant was retained.

Audit firm ordered to provide non-party disclosure

In the context of unfair prejudice proceedings relating to a joint venture company (the Company), the Chancery Court allowed the petitioners' application for non-party disclosure against the Company's auditors.

In the matter of TPD Investments Ltd (Destiny Investments (1993) Ltd v TH Holdings Ltd (2016)) concerned an application by petitioners - who were alleging unfair prejudicial conduct in relation to the Company - for disclosure of audit files to help them understand disputed transactions and to assist in valuing the Company.


The petitioners and the first respondent (Tonstate) had been joint venture partners who owned the full shareholding in the Company. The third to sixth respondents were directors of the Company.

The Company was formed initially for the purpose of acquiring the business of two hotels. As a consequence of that acquisition a number of subsidiaries were either acquired or established in connection with the Company's business.

A number of allegations were made by the petitioners, including that:

  1. Ownership of a hotel had wrongly moved from the Company's control for the benefit of the first respondent;
  2. The first respondent had renegotiated the company's borrowing and issued more shares in the company to itself - the petitioners' shareholding was unfairly diluted;
  3. Costs were incurred by the first respondent in connection with the refinancing - these were allocated to the Company and increased its debt;
  4. Costs were incurred by the first respondent in connection with the refinancing - these were allocated to the Company and increased its debt;

The petitioners also wanted a true valuation of the Company - since the principal relief sought by them was for the first respondent to buy out their interest at an appropriate valuation.

The petitioners sought disclosure of any trial balances, ledgers or underlying documents relating to the transactions in question, or relating to preparation of the Company's accounts. They issued a specific disclosure application but the respondents denied that such documents existed. An application for non-party disclosure was therefore made.

The auditors initially objected to the application on the grounds the description of the classes of document was too wide. A more narrowly defined disclosure schedule was subsequently sought and the auditors confirmed they would provide disclosure on that basis - either following consent received from its audit clients or on the basis of a court order. The respondents did not consent to disclosure being given and the matter was therefore brought before the court.


The court confirmed that to make an order as requested under the Civil Procedure Rules (CPR) part 31.17 it had to be satisfied of three matters:

  • The documents are likely to support the applicant's case or adversely affect the case of another party. Likely means 'may well do' - which means more than a mere possibility;
  • The documents must be clearly and sufficiently identified so that the order can be complied with without difficulty;
  • Disclosure must be necessary for the fair disposal of the claim to save costs.

On the facts before it the court was satisfied that the relevance and materiality of the documents being sought had been established. The class of documents had been narrowly defined, the disclosure sought was unambiguous and there should be no difficulty in the documents being provided.

On the third condition the court held that given the respondents had failed to disclose the documents in question and had even denied their existence, it was necessary in the interests of a fair trial that the documents retained by the auditors on their audit file should be disclosed to the petitioners.

The court also commented on the issue of confidentiality. Confidentiality is never an answer to disclosure, although it may be a highly material consideration on the question of necessity of ordering disclosure by non-parties. However, the issue did not feature in this case because all of the underlying documents were the documents of the Company and the petitioners and the first respondent were the only shareholders.


If the requirements for non-party disclosure are satisfied a court will normally make an order for disclosure to be given. The fact that the documents are confidential will not protect them from being disclosed.

Court of Appeal upholds exclusion clause agreed by parties of equal bargaining power

The Court of Appeal has confirmed that courts will be reluctant to interfere in a contract where commercially equal parties agree an exclusion clause which provides that neither party should be liable to the other for consequential losses.


In Transocean Drilling UK Ltd v Providence Respources Plc (2016) the owner of a semi-submersible oil-drilling rig (Transocean) entered into a contract with the respondent (the claimant at first instance - Providence) to drill an 'appraisal well' off the Irish coast (the Contract).

Drilling commenced in April 2011 but was suspended in December 2011, in the main because of problems with the rig. Drilling did not start again until February 2012 and various disputes arose between Transocean and Providence, including Providence's right to recover additional overheads - known as 'spread costs' - for the extended period caused as a result of the delay.

At first instance the court found that Transocean had failed to deliver the rig in a good working order and was therefore in breach of contract. Furthermore, Transocean's breaches of the Contract meant that Providence was entitled to recover 'spread costs' for the period of delay. The 'spread costs' were 'wasted costs' and were not caught by an exclusion clause that excluded recovery of consequential losses.

Transocean accepted the judge's conclusions in relation to its breach of contract. It did not accept it was liable to pay Providence in respect of its spread costs for the period of delay. Transocean's position remained that the spread costs were consequential losses and were therefore excluded. Transocean appealed to the Court of Appeal.


The Court of Appeal acknowledged the Contract contained provisions which allocated risk between the parties.

Clause 18, through a complex series of indemnities, allocated losses arising from or relating to the performance of the contract between the two parties, in the main regardless of cause. Clause 19 set out obligations to procure and maintain insurance cover.

Clause 20, contained mutual undertakings by the parties to indemnify each other against, and hold each other harmless from, its own consequential loss. The key part of this clause being:

"...the expression 'Consequential Loss' shall mean:

  1. Any indirect or consequential loss or damages under English law, and / or
  2. To the extent not covered by (i) above, loss or deferment of production, loss of use or the cost of use of property, equipment, materials and services including, without limitation loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption..."

Together these clauses contained a detailed and sophisticated scheme for apportioning responsibility for loss and damage of all kinds, backed by insurance.

The question the court had to answer was whether wasted spread costs incurred by Providence as a result of Transocean's breaches of contract were 'consequential losses' within the meaning of clause 20.


The basis of Providence's claim to recover spread costs was that they represented the cost of goods and services that were obtained and paid for but were wasted as a result of the delay caused by Transocean's breach of contract. They were not 'consequential costs' as described by clause 20.

The Court of Appeal rejected that argument. Clause 20 was not a typical exclusion clause. In this case the parties were of equal bargaining power, they entered into mutual undertakings to accept the risk of consequential loss flowing from each other's breaches of contract.

They held that in construing clause 20 the starting point must be the language of the clause itself. In this case the natural meaning of the words used by the parties were such as to include Providence's 'spread costs'.

The court acknowledged that one of the striking features of this Contract was the extent to which the parties agreed to accept responsibility for losses that might otherwise have been recoverable as damages for breach of contract.

Where parties have clearly expressed their intentions those intentions should not be overridden by the court. The court held that "the principle of freedom of contract, which is still fundamental to our commercial law, requires the court to respect and give effect to the parties' agreement".

If the clause was one-sided and genuinely ambiguous, it was equally capable of bearing two distinct meanings - the court could choose the meaning that is less favourable to the party seeking to rely on it. Here the words of the contract were clear and the clause was not one-sided. It worked to exclude consequential losses that might have been suffered by both parties. There was therefore no reason why the high court should have construed it 'contra preferentem'.

The court did not accept arguments made by Providence that clause 20 was devoid of legal content – it did not have the effect of relieving Transocean from all liability for loss and damage whatever the nature of the breach. Clause 20 could not be regarded as being devoid of legal content just because the parties had agreed that neither should be entitled to recover from the other consequential as opposed to direct losses.

The Court of Appeal's view was that the language of clause 20 was clear and worked to exclude liability for wasted costs in the form of the spread costs which Providence sought to recover - the first instance decision was overturned.


The Court of Appeal was very clear that parties of equal bargaining power are free to agree to exclude liability for consequential and other clearly defined losses - providing the words used are clear and unambiguous.

HMRC consultation on the offence of failure to prevent the criminalisation of tax evasion

HMRC is consulting on the new draft legislation and guidance for the new corporate criminal offence of failure to prevent the criminal facilitation of tax evasion.

The Consultation 'Tackling tax evasion: a new corporate offence of failure to prevent the criminal facilitation of tax evasion' confirms that it is seeking "stakeholder views on draft legislation and guidance for a new corporate offence of failure to prevent the criminal facilitation of tax evasion to ensure that the offence is both effective at meeting the stated objectives and not unduly burdensome".

The Consultation 'Tackling tax evasion: a new corporate offence of failure to prevent the criminal facilitation of tax evasion' confirms that it is seeking "stakeholder views on draft legislation and guidance for a new corporate offence of failure to prevent the criminal facilitation of tax evasion to ensure that the offence is both effective at meeting the stated objectives and not unduly burdensome".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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