What was the case about?

The initial dispute between the parties arose as follows:

• The Claimants purchased a company (the Company). 
• Before completion of the share purchase agreement (the SPA), the Claimants retained the Defendants to conduct due diligence in relation to the acquisition. 
• The Defendants also prepared the Completion Accounts for the acquisition and the Company's statutory accounts. 
• The Claimants alleged that:
  • following completion of the purchase it was discovered that fraud had been committed on the Company before the SPA was entered into (e.g. double counting of assets and inflation of cash receipts);
  • this fraud resulted in a significant overpayment by the Claimants for the Company;
  • the Defendants had a contractual and common law duty to exercise reasonable skill and care in preparing the Company's accounts and the Completion Certificate, including a duty to undertake a reasonable and proper investigation of the Company's accounts and draw to the attention of the Claimants any material irregularities which they discovered;
  • the Defendants had breached this duty and consequently the Claimants had suffered loss and were unable to take the steps they would have taken had they been aware of the apparent fraud much sooner. 

This was a trial of preliminary issues following an application by the Defendants for a strike out or summary judgment on the grounds that their schedule of engagement and audit report included a standard Bannerman disclaimer (a disclaimer in the form advised by the ICAEW following the Scottish case of Royal Bank of Scotland v Bannerman Johnstone Maclay (2005), which had a significant impact on the treatment of auditor liability): 

"Our report will be made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of CA 2006.  Our audit work will be undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we will not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for the audit report or for the opinions we form."

The Defendants argued that this disclaimer presented an "insuperable barrier" to the claim.  

What did the Court decide?

The contractual claim

The contractual claim was based on an assertion by the Claimants that the Defendants had entered into a retainer with them.  The Court dismissed this claim on the basis that the judge did not consider that there was a realistic prospect of success at trial.

The tortious claim

The tortious claim was that the Defendants owed the Claimants a common law duty of care to exercise reasonable care and skill in preparing the Company's accounts and the Completion Certificate.  This relied on the argument that there was an assumption of responsibility by the Defendants.  A number of facts were given in support of this argument, including that there was an existing business relationship between the Claimants and the Defendants and that the Defendants knew the Claimants would rely on the Completion Certificate to calculate the final price to be paid under the SPA.  

In defending this claim, the Defendants principally relied on the authority of Barclays Bank plc v Grant Thornton UK LLP [2015] 1 CLC 180.  In Barclays, there was a Bannerman clause substantially the same as the one used by the Defendants which was held to prevent a claim. The Court considered this case in detail and how the facts differed to the case at hand, with the most weight being given to the fact that in Barclays there had been "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", whereas in this case there was a "continuing and direct commercial relationship".  The conclusion reached was that the Claimants had a realistic (as opposed to a fanciful) prospect of succeeding at trial in showing that there was an assumption of responsibility by the Defendants towards the Claimants in relation to the Completion Certificate.  On this basis, the judge rejected the Defendant's application for a strike out of, or summary judgment in relation to, this claim.

Key takeaways

This was a preliminary decision by a master of the High Court to determine the outcome of an application made by the Defendants rather than a full trial of the issues raised.  However, it is still worthy of note by advisors and those wishing to rely on work created by advisors as follows:

• Advisors: The presence of a disclaimer may not be determinative, instead the Court will consider the wider circumstances, such as any relationship or communication between the advisor and the third party making the claim. 
  
  As such, advisors should be careful to make clear not only in the contractual documentation and the reports they produce, but also in their day to day dealings, who a particular work product has been produced for and who is entitled to rely on it and maintain a good paper trail in relation to the same.  
• Those wishing to rely on work created by advisors: Disclaimers may not be an insurmountable hurdle to a claim against the advisor should an issue arise.  However, best practice continues to be to put a formal contract in place directly with the advisor.