Negligence Claim Against Accountants Can Proceed To Trial Despite Contractual Disclaimer

• Jurisdiction: European Union
• Law Firm: Herbert Smith Freehills
• Subject Matter: Accounting and Audit, Corporate/Commercial Law, Litigation, Mediation & Arbitration, Audit, Corporate and Company Law, Trials & Appeals & Compensation, Professional Negligence
• Author: Ms Natasha Johnson, Maura McIntosh and Nihar Lovell
• Published date: 19 October 2023

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...