The Gazette 1992

GAZETTE

MARCH1992

they knew at all relevant times that their employer required the accounts to show to a third party such as an intending investor or intending creditor, who proceeded to act on them to his detriment (as in Kelly -v- Haughey Boland & Co. above.) 24 The development of liability for negligent statements as a broad genre of liability evolved due to an expansion of the liability of local authorities for certificates issued in relation to the safety of foundations. 25 Liability in negligence was at that time based on Lord Wilberforce's two stage test for negligence which tended to be expansionary in nature. However, this test has recently been looked on unfavourably and a period of contraction of areas of liability has begun to appear in the English judgements. The Supreme Court in Ward -v- McMaster considered the substitution of another test for that of Lord Wilberforce but decided to continue with the latter. 26 In line with the general English trend, the House of Lords recently rejected an extension of the liability of auditors. In Caparo Industries pic -v- Dickman 27 the plaintiffs, who already owned shares in a public company, launched a successful take- over bid shortly after the publication of the company's audited accounts. The plaintiffs said that they had made their take-over bid in reliance on the accounts which, they claimed, were seriously misleading. On the trial of a preliminary issue as to whether the auditors would be liable in the event of the plaintiffs establishing their allegation, Lawson J held they would not be liable. His decision was overturned by the Court of Appeal but approved by the House of Lords. It was held that auditors did not owe a duty of care to all prospective investors or indeed to individual shareholders. (The plaintiff was both of these). In their decision the Lords noted that the company audit was part of a general legislative scheme designed to protect the company itself and provide necessary information to those parties interested in the financial progress and stability of the

company. The auditors were held not to have a duty of care to persons receiving the statement through general circulation. The fact that such strangers relied on the statement of the auditors would not result in liability attaching because it would be indeterminate in amount, time, and class. In addition, the auditors were held not to have a duty of care to individual shareholders, and that the proper plaintiff in relation to a breach of auditor's duty was an action by the company itself. This decision is of major importance given the necessity for accurate information for the proper workings of the market system. The limitations placed on liability could be regarded as narrow. The Caparo case has been followed by similar judgements in related areas. In James McNaughton Papers Group pic -v- Hicks Anderson & Co (a firm), 2 * a case relating to accounts, the Court of Appeal held that the accountants of a company which was the subject of a take-over bid, owed no duty of care to a company which made a bid in reliance upon the draft accounts of the company. The chairman of the target company had asked the defendants to prepare draft accounts as quickly as possible so that they could be used in the negotiations for the takeover. The plaintiffs also alleged that they had relied upon a statement made by a representative of the defendants at a meeting with the plaintiffs to the effect that, as a result of rationalisation, the target company was breaking even or doing a little worse. In deciding whether or not to impose a duty of care in a case in which a plaintiff has suffered economic loss as a result of reliance upon a negligent statement, Neill LJ identified some relevant factors:

the relationship between the adviser, advisee and any relevant third party,

• the size of any class to which the advisee belongs,

• the state of knowledge of the adviser, and

• the reliance of the advisee (including whether the advisee was entitled to rely on the statement, whether he did so rely, whether he should have sought and obtained independent legal advice). On the facts the Court of Appeal held that no duty of care was owed because the accounts were produced only for the vendor, they were in draft form, the defendants were not participants in the negotiating process, the target company was, to the knowledge of the plaintiff, in poor financial health; the parties were experienced businessmen and in particular the plaintiffs had their own independent advisers and the statement of the representative of the defendants at the meeting with the plaintiffs was a general one and the defendants could not have known that the plaintiffs would rely on the statement without making further inquiry or seeking further advice. The case serves to underline the unwillingness of the courts in that jurisdiction to expand the scope of liability beyond the person directly intended by the maker of the state- ment to act upon it. In Morgan Crucible pic -v- Hill Samuel Bank Ltd 29 a takeover bid was again at issue, in this instance a contested one. The plaintiffs' action was brought against the directors of the target company and the bank and accountants of the target company. The plaintiffs made a takeover bid for a company. The directors responded by issuing circulars to the shareholders advising them to reject the offer and stating, inter alia, that the profits of the company were forecast to increase by 38 per cent. The latter circular was accompanied by a statement by the

• the precise purpose for which the statement was made,

company accountants that the forecast had been prepared in

• the purpose for which the statement was communicated,

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