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Hi,
I am trying to get my head around professional negligence, in particular the relevant cases. Can you tell me if I am correct in the following, or offer guidance to put me on the right path?
Hedley Byrne & Co Ltd v Heller and Partners Ltd 1963
Here it was decided (as obiter dicta) that a duty of care to avoid financial loss as a result of negligent misstatement can exist even though there is no contractual or fiduciary relationship. This was then extended by:
JEB Fasteners Ltd v Marks, Bloom & Co 1982
Where again it was decided as obiter dicta that the defendants did owe a duty of care to all persons whom they could reasonably foresee would rely on the accounts.
Here is where I am a little confused. From the above case, did the courts then move away from this idea – that a duty is owed to all those who would foreseeably rely on the accounts? Because in:
Caparo Industries Plc v Dickman and Others 1990
It was decided that auditors do not owe a duty of care to the public at large or to shareholders increasing their stakes. It seems to me that either of these groups could foreseeably rely on audited accounts, which then leads me to think that the JEB case is no longer relevant?
In the Caparo case as with JEB, the accounts were in general circulation and there was no indication that either party would rely on them when contemplating a transaction. So, my ultimate question is:
Is it the situation that the obiter dicta decision in the JEB case was ignored in the Caparo case, and the Caparo now has set the binding precedent? So that the JEB case is just a stepping stone to the current situation?
Any help would be greatly appreciated.
Hi,
A very good point inedeed and to be honest your analysis is quite right as well.
I read this; as per Lord Justice Neill the court will take into consideration the purpose of statements (annual accounts as a statutory requirements), purpose of communication (i.e. annual accounts), relationship (directors and auditors) etc.
From this it is correct that the first 2 cases mentioned by you were stepping stone and it seems now they have moved away from foresight test (as in JEB) and have gone towards knowledge of the user of the statements.
I understand that Caparo is the binding precedent as the JEB management had dual purpose in acquiring the company secondly it seems that the risk of a claim of negligence is more towards direct advice (take overs etc.) and not so towards general accounts prepared for the members of the company.
Marks Bloom should have known that the Jeb accounts would be shown to potential white Knights, so they did owe a duty of care – even though they did not know the identity of B&D Fasteners. They avoided liability because Jeb were already committed to the takeover – all their reliance affected was the amount of the loss, not the fact of the loss.
But it cannot be the case that auditors should be held liable to an “indeterminate group of people for an indeterminate time for an indeterminate amount” ( Ultramares Corporation v Touche ) ( or was it Candler v Crane Christmas?! )
So the courts have established that there should be some limitation placed and auditors ARE liable to those who they could reasonably foresee would be likely to rely on the audit report. ( RBS v Bannerman )
So auditors have now started to put a “limitation of liability” clause into their audit reports limiting their liability to the company and its member as a group and not as individuals.
In ADT v BDO, the defence was that an audit report is NOT intended to be used as the basis of an investment decision. ADT won because they showed that they didn’t rely on the audit report – they relied on the oral statement by a partner from the audit firm.
Touche successfully defended the Caparo action by showing that Touche liability was to THE COMPANY’S MEMBERS AS A GROUP and was not a duty to individual members
If that is the case then what about Creditors? Most agencies will look at filed accounts to set a credit limit and if the accounts are incorrect can the Creditors sue the auditors? Otherwise what is the point of all the ratio analysis and liquidity check? Any thoughts?
Yes, some thoughts.
Credit reference agencies should NOT rely solely on the financial statements. Apart from any other considerations the fin stats are, by definition, 3 months ( or so ) out of date. And their references are “their opinion” about the credit worthiness of the company involved. If there is an element of doubt about the company – maybe it’s the first time they have dealt with the company – there are other ways of securing the debt for example, pro-forma invoice or directors’ guarantee.Credit reference agencies give an indication of their own thoughts about the creditworthiness of a company. If they get it wrong, can an unsatisfied creditor sue them? I think not
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