Practice and Procedure


PUBLISHED October 8, 2003

Applications by auditors to set aside and strike out Part 20 claims against them in respect of allegedly negligent audit work failed since there were real issues of breach of duty and causation to be tried.Applications by Canadian accountants ('EYC') to set aside service of Part 20 proceedings on them out of the jurisdiction and by UK accountants ('EYUK') to strike out the Part 20 claim against them. In 2000 the first and second claimants ('M') bought the shares in an English company ('ERF') from a Canadian company ('W'). M claimed damages from W's successor in title ('F') in respect of the sale on grounds of breach of warranty, deceit and fraudulent misrepresentation. It was common ground that ERF's company secretary and financial controller ('E') acted fraudulently in preparing certain of ERF's financial records with a view to hiding trading losses. F denied M's claims and brought Part 20 claims against EYC, which was the auditor of the W group of companies at the relevant time, and against EYUK, which was the auditor of ERF. F claimed that the EYC and EYUK negligently failed to detect the falsification of accounting records by E with the result that the audited accounts of ERF and W's consolidated accounts did not give a true and fair view for 1998 and 1999. EYC and EYUK also allegedly failed to act on certain "tip-off" information relating to E's activities. If EYC and EYUK had not been negligent E's fraud would have been detected and W would not have sold ERF to M and would not have been exposed to M's claims. EYC and EYUK argued that their duties as auditors did not extend to liability for losses of the kind sustained by W and that the losses claimed by W were irrecoverable.HELD: (1) F had an arguable case with a real prospect of success that: (i) EYUK was aware that the financial statements were to be relied on as the basis of a proposed sale of ERF by W to M; (ii) that its audit was critical in that respect; and (iii) that it must be taken to have assumed responsibility for it to W in relation to that sale. (2) F had an arguable case that W had engaged EYC to advise and provide information to M in relation to the potential sale of ERF to M. Any engagement to provide information to M would self-evidently involve advice to W should anything untoward arise out of the process. (3) F had realistic prospects of succeeding against both EYC and EYUK in respect of the allegations of failure properly to investigate the "tip-off" information. There were real prospects of establishing that EYC failed properly to monitor and review what EYUK did. (4) The issues of duty and causation that arose on the cases put forward by the parties were fact sensitive and inappropriate for determination on a summary basis. Whether EYUK assumed a responsibility for the audit to W and/or M in the context of the sale, what obligations EYC and EYUK undertook in the context of the work relating to M's due diligence and whether there was a breach of them, and what obligations and breaches arose in relation to the tip-off information all raised issues of fact to which principles of law could only be applied when the facts were found (Caparo Industries plc v Dickman (1990) 2 AC 605, Galoo Ltd v Bright Grahame Murray (1994) 1 WLR 1360 and Sasea Finance Ltd v KPMG (2000) 1 All ER 676 considered). The causation issues raised were equally questions that should be answered once a full factual determination had been made. There were real issues to be tried and F had real prospects of success on each of its claims.Applications dismissed.

[2003] EWHC 2245 (Comm)