AssetCo V Grant Thornton: Scope Of Duty Back In The Spotlight

• Published date: 21 September 2020
• Subject Matter: Accounting and Audit, Litigation, Mediation & Arbitration, Audit, Trials & Appeals & Compensation
• Law Firm: Mayer Brown
• Author: Mr Jim Oulton and Tim Shepherd

Following its decision last year in Manchester Building Society v Grant Thornton UK LLP [2019] EWCA Civ 40, the Court of Appeal has handed down another judgment analysing issues of scope of duty, and the application of "SAAMCO" principles, in the context of a claim against auditors.

Background

AssetCo Plc and its subsidiaries carried on business related to fire and rescue services. Grant Thornton (GT) were appointed to audit the accounts of AssetCo for the years ending 31 March 2009 and 31 March 2010.

GT admitted that, during its audit work, it failed in its duty to identify certain instances of management fraud. GT accepted that it should not have given an unqualified audit report on the 2009 and 2010 accounts. GT also accepted that, if it had applied appropriate professional scepticism and competence, it would have uncovered many (if not all) of the dishonest misrepresentations and false evidence provided to it by the AssetCo senior management during the audit process.

It was common ground between the parties that, but for such admitted breaches of duty, the business of AssetCo would more quickly have been shown to be unsustainable. AssetCo alleged that, had this been revealed by GT, then steps would have been taken to (among other things) stop the management of AssetCo from continuing to make substantial payments to AssetCo's loss-making subsidiaries.

GT denied that such a "counterfactual" situation would have unfolded as alleged by AssetCo, or that any such trading losses were recoverable from GT in any event.

At First Instance, the Judge found that the alleged counterfactual scenario would have occurred. The Judge also held that the trading losses suffered by AssetCo from 2009 onwards fell within the scope of GT's duty as auditors, and were not too remote to be recoverable. GT was ordered to pay damages totalling '23.36 million.

The Appeal

The appeal was brought by GT on three grounds. The first of these grounds, which is the focus of this article, was that the Judge at First Instance had failed properly to apply "SAAMCO" principles when deciding whether the trading losses suffered by AssetCo could be said to fall within the scope of GT's duty as auditor.

GT's appeal was, for the most part, dismissed.

The lead Judgment in the Court of Appeal was given by Richards LJ. On this "scope of duty" issue, the Judgment provides a summary of the principles governing the extent of a defendant's duty to protect a claimant against loss caused, on a "but for"...