UK: Negligence Claim Against Accountants Can Proceed To Trial Despite Contractual Disclaimer

A High Court Master has refused to strike out, or give summary judgment on, a claim by the buyers of a company alleging that accountants who prepared the completion accounts for the sale breached a duty of care to them in failing to detect an alleged fraud on the company. On the facts of the case, it was arguable that the presence of a disclaimer in the accountants' contractual documentation did not preclude the claim: Amathus Drinks PLC & Ors v EAGK LLP & Anor [2023] EWHC 2312 (Ch).

As a Master's decision, this will not bind other courts, but the decision will be of interest as an example of a factual scenario where it was found that a contractual disclaimer of responsibility to third parties did not necessarily preclude a claim for negligence misstatement.

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 a panacea and will not always be determinative where there are factors which point in the other direction – such as, in this case, the fact 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, was a matter to be explored at trial.

Background

Following the Scottish case of Royal Bank of Scotland Plc v Bannerman Johnstone Maclay [2005] ScotCS CSIH 39, 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 recommended that auditors use a disclaimer, to be placed 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 and is commonly referred to as a Bannerman disclaimer.

In August 2015, the claimant buyers entered into a share and purchase agreement (SPA) for the acquisition of the entire share capital of a company. Before the completion of the SPA, the claimants retained the defendant accounting firm to conduct due diligence in relation to the sale.

Under the SPA, 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 defendant, who also produced statutory accounts for the company and issued a completion certificate for the purposes of the SPA in September 2016.

The claimants alleged that it was later discovered that a fraud had been committed on the company, with the effect that the net assets of the company were inflated and the buyers paid more than they should have done under the SPA.

The claimants brought a claim against the defendant for breaches of contract and a common law duty to exercise reasonable skill and care in preparing the statutory accounts and the completion certificate.

The defendant applied to strike out the claim or alternatively for summary judgment.

Decision

The High Court (Master Brightwell) granted the defendant's application for summary judgment on the claim in contract, but dismissed the application relating to the tort claim.

Contract claim

The Master noted that the schedule of engagement that had been put into evidence was headed with the company's name, stated that the engagement was to produce an audit report in accordance with the provisions of the Companies Act 2006, and contained a Bannerman disclaimer. While the schedule of engagement indicated that it was to be read together with a separate engagement letter, no copy of the engagement had been put into evidence, and it seemed neither party was able to locate it.

When the audited accounts were sent out with an audit report they were addressed to the directors of the company, together with a statement that, "this report has been prepared for the sole use of the company. It must not be disclosed to third parties, quoted or referred to, without our prior written consent. No responsibility is assumed by us to any other person." The report itself contained a further disclaimer in terms almost identical to the schedule of engagement.

In the Master's view, the schedule of engagement was not at all consistent with the contract having been entered into with the buyers (ie the claimants). It referred exclusively to matters concerning the company, and not at all with the requirements of the SPA in relation to post-completion matters, nor to the rights of the buyers in such regards.

The claimants' real point was that the engagement letter might turn up before trial, but the Master considered it fanciful that it would cast a different light on the available documents.

Accordingly, the Master did not consider that there was any realistic prospect of the claimants establishing at trial that they were party to the contract with the defendant for preparation of the statutory accounts.

Tort claim

The defendant accepted that, apart from the disclaimer in the schedule of engagement, it would be reasonably arguable that it had assumed responsibility to the claimants for the accuracy of the accounts and the statement in the completion certificate. It contended, however, that the disclaimer presented an insuperable barrier to the tort claim.

The defendant relied on the judgment of Cooke J in Barclays Bank Plc v Grant Thornton UK LLP [2015] EWHC 320 (Comm). In that case, the court found that a Bannerman disclaimer in Grant Thornton's non-statutory audit reports addressed to a hotel group precluded a claim by Barclays for negligent misstatement.

Cooke J cited 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. The right 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.

In Barclays, Cooke J commented that, self-evidently, no one can be taken as assuming responsibility for a statement in circumstances where they have specifically negatived such responsibility, ie by informing the recipient that, if they choose to rely on the statement, they must realise that the maker is not accepting responsibility to them for its accuracy. He concluded that, in the face of a clear disclaimer, and the absence of any letter of engagement or any fee paid by Barclays to Grant Thornton, the factors Barclays relied on could not outweigh the points that negated the existence of a duty.

In the present case, the Master underlined that in Barclays there were two considerations which weighed heavily in the court's conclusion that Grant Thornton had not assumed responsibility to Barclays. First, Barclays was a sophisticated commercial party operating in the world of finance. The presence of disclaimers in auditors' statutory reports was well known and Barclays was well aware of them. Secondly, there was no direct communication between the parties, and thus nothing beyond the known purpose for which the reports were required which could give rise to an assumption of responsibility.

Here, in contrast, the fact that there were continuing communications between the parties after the date of the audit engagement was a relevant factor to be considered. The Master considered it potentially very relevant that there were emails after September 2015 between one of the buyers and a member of the accounting firm, whilst the auditing process was underway, to which the buyers' (but not the sellers') solicitors were party. These could be said to convey the sense that the relevant individual continued to see himself as part of or as a support to the buyers' professional team. In the Master's view, this suggested a continuing and direct commercial relationship of a kind which did not exist in the Barclays case and was potentially a distinguishing factor of some significance.

The Master also pointed out that, if the claim proceeded to trial, there would be disclosure and factual witness evidence on these matters, which might shed further light on the question of assumption of responsibility.

For these reasons, the Master held that the claimants had a realistic prospect of showing at trial that the defendant had assumed responsibility towards the claimants in relation to the net assets figure shown in the completion certificate.

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