Auditor – Audit report – Disclaimer – Claimant bank commencing action against defendant auditor for negligence in failing to uncover alleged fraud in hotel group as part of audit work – Defendant applying for summary judgment and/or strike out in respect of claim – Whether defendant entitled to rely on disclaimer of responsibility in audit report – Whether claim having real prospect of success – Application granted
The claimant bank provided lending facilities to a hotel group. It brought a fraud claim against two employees of the group who, it said, had allegedly acted dishonestly, using their positions within the group to present untrue representations of the group’s performance. This had caused the claimant to maintain lending facilities and advance further sums to the group. The claimant also brought a negligence claim against the defendant, which was the group’s auditor. It contended that the defendant owed it a duty of care in tort in relation to the contents of non-statutory audit reports and had been negligent in failing to uncover the dishonesty as part of their audit work and signing off the group’s accounts without qualification.
The defendant expressly denied negligence but applied for summary judgment in relation to the claim pursuant to CPR 24.2 and/or an order that it be struck out pursuant to CPR 3.4(2)(a) on the basis that the particulars of claim disclosed no reasonable cause of action so that the claim had no real prospect of success. Further, there was no other compelling reason for the case to proceed to trial.
The key issue was whether a disclaimer of responsibility in the audit report took effect to negate a duty of care which could otherwise be owed by the defendant to the claimant and was reasonable in accordance with the Unfair Contract Terms Act 1977.
Held: The application was granted.
(1) The existence of the duty of care was tied up with the issue of the disclaimer which would, if effective, negate any such duty. The right approach was to treat the existence of the disclaimer as one of the facts relevant to answering the question whether there had been an assumption of responsibility by the defendant for the relevant statement. That question had to be answered objectively by reference to what a reasonable person in the position of the claimant would have understood at the time that he finally relied upon the representation. It was self-evident that, if the “assumption of responsibility” test was applied, no-one could be taken as assuming responsibility in circumstances where it was specifically negatived by him. The recipient was being told that, if he chose to rely upon the representation, he had to realise that the maker was not accepting responsibility to him for the accuracy of it: McCullagh v Lane Fox & Partners Ltd [1996] 1 EGLR 35 applied.
(2) The critical question, accepting that the terms of the 1977 Act applied, was whether the term satisfied the requirement of reasonableness. Under section 2 of the 1977 Act, a person could not exclude or restrict his liability for negligence except insofar as the term or notice satisfied the requirement of reasonableness and where a contract term or notice purported to exclude or restrict such liability, a person’s agreement to or awareness of it did not of itself indicate his voluntary acceptance of any risk. The requirement of reasonableness under section 11 was defined as meaning, in relation to a notice, that it should be fair and reasonable to allow reliance on it, in the circumstances obtaining when the liability arose or, but for the notice, would have arisen.
It was for the party claiming that a notice satisfied the requirement of reasonableness to show that it did. Matters to be taken into account in applying the reasonableness test, as set out in Schedule 2 to the 1977 Act, included: (i) the strength of the bargaining positions of the parties relative to each other taking into account alternative means by which the customer’s requirements could have been met; (ii) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept similar terms; (iii) whether the customer knew or ought reasonably to have known of the existence and extent of the term; and (iv) whether the goods were manufactured, processed or adapted to the special order of the customer: Omega Trust v Wright, Son & Pepper [1977] 1 EGLR 120, Ross v Caunters [1980] Ch 297, George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 12 AC 803 and Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600 considered.
(3) On the evidence, the claimant had not only been aware that auditors did not like undertaking responsibility to persons other than their clients and often sought to avoid it but also that the defendant, in particular, sought the negate or restrict its liability in different ways both for statutory and non-statutory reports. The disclaimer of responsibility was clear on its face and would have been read and understood by anyone at the claimant who had read the two page reports for the relevant years. In the face of an express disclaimer, it was not enough to say that both the defendant and the claimant expected the claimant to rely upon the terms of the report in the context of the lending facility. The claimant was being told expressly that it relied on the reports at its own risk. The defendant had made it clear that it was not prepared to assume responsibility to the claimant in respect of the reports. There was nothing unreasonable in that stance, as between two sophisticated commercial parties, where the approach of auditors limiting their responsibilities was well known and, in the statutory context, was the subject of a standard form ICAEW clause. The claimant should have anticipated the existence of such a clause and must have expected some such clause to be present.
(4) In those circumstances, the defendant was entitled to summary judgment on the basis that the claimant had no realistic prospect of success on the action in the face of the disclaimer and there was no good reason why the action should go to trial.
David Halpern QC and Benjamin Wood (instructed by Addleshaw Goddard LLP) appeared for the claimant; Simon Salzedo QC and Oliver Jones (instructed by Taylor Wessing LLP) appeared for the defendant.
Eileen O’Grady, barrister
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