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.)

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.

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.

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

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),

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 precise purpose for which the

statement was made,

• the purpose for which the

statement was communicated,

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.

Morgan Crucible pic

-v-

Hill

Samuel Bank Ltd

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

company accountants that the

forecast had been prepared in

104