Auditors’ liability – English case casts doubt on effectiveness of disclaimers in negligence actions

In the English High Court case Amathus Drinks Plc & Others v EAGK LLP [2023] EWHC 2312 (Ch), the court refused EAGK's application to strike out Amathus's action in tort.

The first and second claimants were buyers who entered into an SPA to purchase a company, the third claimant. The buyers engaged EAGK, an accountancy firm, to conduct due diligence for acquiring the company. EAGK was also engaged to prepare the completion accounts. The parties disputed who engaged EAGK as no engagement letter beyond an engagement schedule addressed to the company being acquired, not the buyers, was found.

This schedule included a Bannerman disclaimer, a form of exclusion of liability (commonly relied on by professionals or industry experts) which typically attempts to avoid liability for negligence by denying the existence of any duty of care. The disclaimer stated that the report was to the company's members and that EAGK would:

"to the fullest extent permitted by law…not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for the audit report or for the opinions we form."

EAGK prepared the completion accounts with an audit report, also addressed to the company, which included an additional Bannerman-type statement that:

"This report has been prepared for the sole use of [the company]. It must not be disclosed to third parties, quoted or referred to, without our prior written consent. No responsibility is assumed by us to any other person."

Following completion, the buyers alleged that they had discovered several frauds committed on the company. These included double-counting assets, inflating cash receipts and logging false invoices. The buyers argued that this resulted in them overpaying for the company and therefore claimed for breach of contract and in negligence against EAGK.

EAGK brought motions to receive summary judgment in its favour and to strike out the buyers' claim. The reasons for these applications, respectively, were the buyers' failure to identify a contract between the parties for the completion accounts and the Bannerman disclaimers, which, EAGK argued, precluded a claim in negligence.

The decision

The court found that summary judgment for the breach of contract claim should be granted as the buyers had failed to identify a contract between the parties and there was no realistic prospect of further material being provided before trial.

In respect of the tort action, the court refused the strike out application. The court determined that there was a realistic prospect of the buyers' negligence claim succeeding. This differed from a 2015 English High Court decision where a similarly worded Bannerman clause prevented a company's auditor from incurring liability towards one of the company's lenders in relation to its audit work.

The court distinguished the earlier case on its facts. In the 2015 case, the auditor and the lender were in communication in the early stages of the transaction but when the auditor was appointed, communication had stopped. With the buyers and EAGK, there was a "continuing and direct commercial relationship" of a kind not present in the earlier case. The buyers could argue that not only did EAGK know that the buyers were relying on the completion accounts but positively intended for the buyers to rely on the accounts.

Key lessons

In Hong Kong, courts are likely only to find the existence of a duty on the part of a professional where there has been a clear assumption of responsibility to the plaintiff by the professional.

Bannerman clauses are standard practice in the accounting industry. The clause is meant to confirm that an accountant’s report is prepared on the instructions of a designated contracting party and no liability is accepted with respect to third parties should they rely on the information contained within the report.

Amathus Drinks may yet be persuasive in Hong Kong and so serves as a reminder of the importance of maintaining accurate records of the engagement of professional advisors to preserve and protect any claims for breach of contract.

Parties wishing to ensure that no duty of care to third parties arises in an ongoing relationship may need to consider including explicit wording in their agreement and in their work products to make it more difficult for a third party or a court to find such a duty in the tort of negligence.  

Authored by Rupert Sydenham, Mark Lin, Ashleigh Gray, and Nigel Sharman.