The Gazette 1989

GAZETTE

DECEMBER 1989

task was to vet the accounts and

provide the shareholders with inde-

pendent and reliable information on

the company's financial standing.

The facts of the case were that

fraudulent misrepresentations made

by the Chairman and Chief Execu-

tive of the company (F. pic.) had "

been included in the audited

accounts. The accounts had been

certified by the auditor who had

failed to detect the falsity of the

representations. The plaintiffs,

being the holders of 100,000

shares, purchased further shares

following the publication of the

audited accounts. They gave

evidence that they had relied on the

accuracy of the accounts when

purchasing the additional shares

and that the audited accounts had

also been instrumental in the

plaintiffs' decision to take over the

company six months later. The

potential liability of the auditors in

the circumstances was examined by

Lawson J. by way of preliminary

issue. The plaintiffs were suing both

in their capacities as individual

shareholders and as potential

investors holding no shares. Lawson

J. held at first instance that the

auditor did not owe them a duty of

care in either capacity, when

carrying out his statutory function.

The Court of Appeal, however,

(O'Connor L. J. dissenting in part)

held that the auditor owed a duty of

care not only to the general body of

shareholders, with whom he had a

relationship close to contract, but

also to the individual shareholder.

The relationship between the

statutory adutior and the individual

shareholder was su f f i c i en t ly

proximate to ground a duty of care

in carrying out his statutory duties.

It was just and equitble to recognise

the existence of that duty of care.

The relationship between the

auditors and the individual potential

investors was, their Lordships held,

less proximate. The auditor was not

engaged to report to them but to

the shareholders, the relationship

between them was not contractual

and the nexus or link between them

was tenuous. It would neither be

just nor equitable to find a duty of

care existed between the auditors

and the individual potential investor.

Lord Justice Bingham laid down

three clear tests to be satisfied

before a duty of care could be found

to exist between the plaintiffs and

the auditors -

IAGS

Irish Assessment and Guidance Service

IAGS

Skerries Medical Centre, Strand Street, Skerries, Co. Dublin.

Telephone: (01) 491717, 490420, 490429 Fax: (046) 28852

Psychological, Educational and Career Consultants

FOR PROFESSIONAL APPRAISAL OF EDUCATION

AND CAREER PROSPECTS IN PERSONAL INJURY CASES

(1) Foreseeability:

was it foresee-

able that the individual share-

holders and investors would

rely on the accuracy of the

audited accounts and the audit

report?

( 2 ) Proximity:

was the relation-

ship between the auditor and

the shareholders and potential

investors sufficiently close to

establish a duty of care?

(

) Fairness:

was it just and

reasonable that the Court

should impose a duty of care

on the auditor in the

circumstances?

His Lordship held the plaintiffs

had satisfied the three tests as

individual shareholders and Lord

Justice Taylor agreed that such a

liability had been established.

O'Connor L. J., dissenting in part,

held that in the circumstances of

the case before him he could see no

reason for imposing upon the statu-

tory auditor any duty to share-

holders at Common Law in addition

to the duties he owed to them under

Statute. Those duties, he said, were

owed to them as a body and not as

individuals. This would, of course,

mean that the plaintiffs would not

be entitled to sue in their individual

capacity for a breach of duty or

statutory duty. The Court was

unanimous, however, in holding that

the auditors did not owe the plain-

tiffs any duty of care in their

capacity as potential investors

holding no shares. The importance

of the case rests in the Court of

Appeal's acceptance that a com-

pany auditor can owe a duty of care

in the exercise of his statutory

function, not only to the company,

his employer, but also to individual

shareholders, who would then be

entitled to sue him in that capacity

for economic loss they have suffer-

ed as a result of his negligence.

Avoiding Liability

In the absence of a contractual

relationship with parties other than

the company (e.g. an agreement to

conduct a private audit) an ex-

clusion clause published with the

audited accounts and purporting to

except the auditor from liability

would be ineffective against such

parties due to lack of privity. The

auditor's contractual relationship is

with the company itself and he

cannot exclude his liability to the

company by means of an exclusion

clause or disclaimer by virtue of

Section 200 of the Companies Act

1963. That section prohibits any

provision "either in the company

Articles or any contract with the

company or otherwise" which pur-

ports to exempt a company auditor

from any liability "wh i ch by virtue

of any rule of law would otherwise

attach to him in respect of any

negligence, default, breach of duty

or breach of trust of which he may

be guilty in relation to the

company".

An auditor may enjoy a limited

indemnity from the company in

respect of his costs in successfully

defending himself against civil or

criminal proceedings, where the

company Articles or his contract

provide for such an indemnity. As

with other agents, however, the

auditor is not entitled to reimburse-

ment or an indemnity from the

company for loss occasioned to

another if it is due to his own

negligence. Where proceedings

contemplated by Section 200

(above) are taken against or

apprehended by a bona fide auditor

he may apply to the High Court

388