Auditor's duties to third parties: Amathus Drinks Plc v EAGK LLP

In a recently published judgment in the case of Amathus Drinks PLC and others v EAGK LLP and others [2023] EWHC 2312 (Ch), the High Court rejected an application by a defendant audit firm to strike out a claim in tort alleging that they owed a duty of care to the buyers of a company in preparing a Completion Certificate pursuant to a Share Purchase Agreement ("the SPA"), and ordered specific disclosure of the defendant's files.

The facts

On 28 August 2015, the first and second claimants ("the Buyers") entered into a SPA for the acquisition of the entire share capital of the third claimant company ("the Company").

The relevant defendant was a firm of accountants which (1) was retained by the Buyers before completion to conduct due diligence on the Company, and (2) prepared the Completion Accounts for the purposes of the SPA and issued a Completion Certificate dated 22 September 2016. It also audited the statutory accounts of the Company.

In a schedule to its letter of engagement for the audit work, the defendant issued a disclaimer of responsibility in the following terms: "To the fullest extent permitted by law, we will 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."

The Buyers alleged that a fraud had been committed on the Company prior to the SPA being entered into, as a result of which the balance sheet of the Company was inflated and the Buyers overpaid for the shares in the Company by c. £400,000.

The Buyers alleged that the defendant owed both contractual and common law duties to exercise reasonable skill and care in preparing the statutory accounts and the Completion Certificate, and in breach of these duties they failed to detect the fraud committed on the Company, causing loss to the Buyers.

The defendant applied to strike out the claim and, in the alternative, applied for summary judgment.

The claim in contract

Master Brightwell held that there was no realistic prospect of the Buyers showing that they were parties to the contract with the defendant in respect of the preparation and audit of the statutory accounts, and that they had no interest in the Company's audit other than as shareholders. He therefore granted summary judgment in favour of the defendant in respect of the claim in contract.

The claim in tort

In support of their claim that the defendant owed them a duty at common law as a result of an assumption of responsibility or because it was fair, just and reasonable in the circumstances, the Buyers relied upon the facts that:

1. There was an existing business relationship between the Buyers and the defendant, the defendant having been actively involved in negotiating the SPA;
2. The SPA required the Buyers to procure Completion Accounts as soon as practicable after Completion;
3. The accounts were prepared for the period required under the SPA and not for the Company's usual accounting period;
4. The defendant knew that the Buyers would use the Completion Certificate to calculate the final price to be paid under the SPA;
5. The defendant was in possession of the documents provided by the sellers for ascertaining the net asset value of the company in accordance with the SPA; and
6. The defendant provided the Completion Certificate to the Buyers separately from the accounts, and addressed it to both the sellers and the Buyers.

The defendant accepted that, were it not for the disclaimer in the schedule to the letter of engagement, it would be reasonably arguable that the defendant had assumed responsibility to the Buyers for the accuracy of the accounts and for the Completion Certificate. It argued, though, that the disclaimer provided an insuperable barrier to the claim and sought summary judgment accordingly, relying principally on the judgment in Barclays Bank Plc v Grant Thornton UK LLP [2015] 1 CLC 180, in which Cooke J held that a similar disclaimer in that case negatived the existence of any duty of care.

Master Brightwell accepted the Buyers' submission that it was relevant in the instant case that there were continuing communications between the parties after the date of the audit engagement, and that the direct communications with the Buyers' solicitors only in connection with the Completion Accounts was suggestive of a continuing and direct commercial relationship of a kind which simply did not exist in the Barclays case, and would therefore distinguish it. Taking into account also that there would be disclosure and witness evidence of fact as to these matters, Master Brightwell rejected the defendant's application for summary judgment, holding that the Buyers had an entirely realistic prospect of succeeding at trial.

Breach of duty

The defendant's summary judgment application was also pursued on the further basis that the Buyers had no real prospect of establishing breach, as the allegations of breach were insufficiently particularised.

The defendant relied upon the comments of Coulson J in Pantelli Associates v Corporate City Developments (No 2) [2011] PNLR 12 that an allegation of professional negligence must generally be supported by expert evidence, and the fact that the Buyers had not yet obtained such expert support. The Buyers indicated that they required disclosure and inspection of the defendant's' files before they could obtain expert evidence, and it was common ground at the hearing that if the court was minded not to dismiss the claim in negligence, then it should make an order for such disclosure to be provided.

The Buyers sought the order under CPR 3.1(2)(m) (power to make any order for the purpose of managing the case and furthering the overriding objective), but Master Brightwell made the order under Practice Direction 57 AD, paragraph 5.11, which provides:

In an appropriate case the court may, on application, and whether or not Initial Disclosure has been given, require a party to disclose documents to another party where that is necessary to enable the other party to understand the claim or defence they have to meet or to formulate a defence or a reply.

Master Brightwell pointed out that a party who issues a claim without having first sought an order for pre-action disclosure under CPR 31.16 is, on the face of Practice Direction 57AD, without a remedy if it wishes to seek disclosure of specific documents in order better to particularise the claim. He held that where a defendant pleads that a case should be dismissed for want of particularity and the defendant holds documents which would enable that particularisation to be given, disclosure is necessary to understand the defence (as it will enable the claimant to determine whether the particulars sought can be provided). He held also that if he was wrong about that, he would agree with the decision in White Winston Select Asset Funds LLC v Mahon [2019] EWHC 1014 (Ch) that there is a residual power to make such orders under the court's general case management powers in CPR 3.

Causation and loss

Finally, the defendant's application for summary judgment was also made on the basis that the Buyers' case on causation was incoherent and raised contradictory factual arguments.

Master Brightwell dismissed this argument, holding that it was open to the Buyers at this stage to reserve their position by pleading different (and contradictory) counterfactuals.

Conclusion

This case will be of interest to those who have potential claims against accountants/auditors for the following main reasons:

1. It establishes that there may be circumstances in which an auditor will owe a duty of care notwithstanding a widely drafted disclaimer of assumption of responsibility;
2. It provides a pragmatic solution to claimants who are unable to particularise their claim without access to the defendant's documents; and
3. It confirms that it is open to a claimant to reserve its position before disclosure and witness evidence by pleading different counterfactuals, even if they are contradictory.