The recent High Court case of Barclays Bank Plc v Grant Thornton UK LLP  considered the use of disclaimers of responsibility in protecting auditors against the risk of third party claims.
In 2006 Barclays Bank Plc (Barclays) entered into a facility agreement with Von Essen Hotels Limited and its subsidiaries (together VEH Group) in respect of loan facilities totalling £250 million (the Facility Agreement). The Facility Agreement provided that VEH Group was obliged to provide Barclays with annual financial statements and management accounts. Qualification by the auditors of the financial statements would constitute an event of default under the Facility Agreement.
Grant Thornton UK LLP (GT) was appointed as auditor of VEH Group and produced non-statutory audit reports in respect of the financial statements for 2006 and 2007 (the Reports). GT’s engagement letter with the ultimate parent company of VEH Group, to which Barclays was not a party, provided that GT did not accept responsibility to anyone other than the company.
The Reports were addressed to the sole director of the VEH Group and included the following:
“In accordance with the engagement letter... and in order to assist you to fulfil your duties under the terms of your loan facility, we have audited the non-statutory group financial statements (the financial statements) of Von Essen Hotels Limited which comprise the group profit and loss account, the group balance sheet and the related notes.”
There was also a disclaimer as follows:
“This report is made solely to the company’s director. Our audit work has been undertaken so that we might state to the company’s director those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s director as a body, for our audit work, for this report, or for the opinion we have formed.”
The disclaimer was in a standard form produced by the Institute of Chartered Accountants in England and Wales save for the reference to the company’s director in place of the company’s members. Hence the words “as a body” make no sense and should have been deleted.
In 2011 VEH Group went into administration and an investigation revealed deliberate manipulation by two employees of VEH Group of the 2006 and 2007 financial statements so that VEH Group appeared to meet its covenants under the Facility Agreement. Barclays brought a claim in negligence against GT, stating that GT owed it a duty of care on the basis that the Reports were prepared for the purpose of providing information to Barclays and that the duty of care had been breached because of GT’s failure to uncover the fraud of the two VEH Group employees. The Reports were negligent misstatements on which Barclays had relied in advancing sums to VEH Group which are irrecoverable. The amount of the claim was about £45 million.
Barclays’ arguments included:
- Barclays relied on the Reports;
- The audits were carried out for the express purpose of providing information to Barclays and GT knew that;
- There was no practical way in which Barclays could have obtained an audit of the VEH Group other than by using GT;
- GT had previously advised Barclays in relation to VEH Group’s finances;
- There existed the necessary degree of proximity between them;
- It was reasonably foreseeable that Barclays would suffer loss in the event that GT was negligent;
- GT knew or ought reasonably to have known that Barclays was relying on GT to perform the audits competently; and
- GT voluntarily assumed responsibility towards Barclays.
Barclays also argued that the disclaimer paragraph in the Reports did not come to the attention of Barclays. Barclays’ representative checked that the audit certificate was not qualified and then went straight to the accounts to review the numbers.
GT’s arguments included:
- Barclays was a sophisticated commercial party used to reading auditor’s reports and had legal advice readily available;
- GT was not engaged by Barclays;
- If the disclaimer was ineffective, Barclays would be in a better position than if it had engaged GT directly because GT’s engagement letter included a cap on liability;
- Barclays could have requested a direct engagement letter but chose not to do so;
- Barclays had previously engaged GT directly and was aware of the terms which would apply; and
- The disclaimer was clear and obvious on the face of the report.
GT sought summary judgment in relation to Barclays’ claim on the basis that it disclosed no reasonable cause of action.
The law relating to an auditor’s duty to third parties and disclaimers
In Caparo Industries Plc v Dickman , the House of Lords considered the position of auditors in relation to duties of care owed to the shareholders and potential investors in respect of a statutory audit and applied the threefold test of foreseeability of damage, proximity of relationship and the question whether it is fair, just and reasonable to impose a duty. In essence, the House decided that, in order to establish a duty to a third party, it was necessary to show that the auditor knew that his conclusions would be communicated to a third party in connection with a specific transaction and that the third party would be likely to rely upon those conclusions in relation to it.
However, the assumption of responsibility can be specifically negated by a disclaimer which makes it clear that no responsibility is accepted for advice or information provided, i.e. that no duty of care is owed. In order to be effective, the disclaimer must be brought to the notice of the third party. A disclaimer is one of the factors relevant to answering the question whether there had been an assumption of responsibility. This question must be answered objectively by reference to what a reasonable person would think GT was doing.
Excluding or limiting liability using a disclaimer is restricted by the Unfair Contract Terms Act 1977 (UCTA). Section 2 of UCTA applies to liability for negligence arising from things done in the course of a business and requires that any clause purporting to exclude or limit liability for negligence, other than where the negligence results in death or personal injury, must satisfy the requirement of reasonableness, having regard to the circumstances which were, or ought reasonably to have been, known to or in contemplation of the parties at the time. Schedule 2 to UCTA sets out guidelines for the application of the reasonableness test.
In the absence of any disclaimer, it was clearly arguable that a duty of care would exist as between GT and Barclays, with the necessary foreseeability and proximity, if the Caparo v Dickman threefold approach was adopted.
The question of duty therefore narrowed down to whether the disclaimer was reasonable. Foreseeability and proximity were effectively accepted by GT but, if the disclaimer was reasonable and effective, it would self-evidently not be fair, just and reasonable to impose the very duty it purported to negate.
Was the disclaimer sufficiently brought to the attention of Barclays?
There was no doubt that GT anticipated that the Reports would be forwarded to Barclays, as the opening words of the Reports themselves indicated. The disclaimer appeared in the first two paragraphs of what was a short, two page report which was addressed to the sole director of VEH Group.
When considering whether the disclaimer was sufficiently brought to the attention of Barclays, Mr Justice Cooke said that it was hard to see what else GT could have been expected to do “save for capitalising, underlining or red handing that part of the report, something which would be considered wholly unnecessary when dealing with sophisticated bankers and business people who can be expected to read documents put before them and to be familiar with notices of disclaimer in auditors’ reports”. GT could not anticipate that any competent banker would fail to read the first two paragraphs of a two page report. It would be nonsense to expect GT to do anything more than it did for any bank to whom it anticipated the report would be shown, or indeed to any other third party of which it was unaware. Any auditor, when writing a brief report of the kind in question, could justifiably expect the terms of it to be read.
The disclaimer was clear on its face and would have been read and understood by anyone at Barclays who had read the Reports.
The duty of care and the reasonableness of the disclaimer
As it is self-evident that no-one can be taken as assuming responsibility in circumstances where it is specifically negatived by him, the critical question is whether the term satisfies the requirement of reasonableness under UCTA. The case ultimately depended on the reasonableness or otherwise of the disclaimer in all of the circumstances. If it was reasonable, it would have the effect of negating liability. If it was not reasonable, it would not.
Mr Justice Cooke stated that the test was whether a reasonable person in the position of Barclays could properly consider that GT was undertaking responsibility to it, or what a reasonable person would think GT was doing. He concluded that the disclaimer was reasonable. GT made it clear that it was not prepared to assume responsibility to Barclays in respect of the Reports and “there was nothing unreasonable in that stance, as between two sophisticated commercial parties, where the approach of auditors limiting their responsibility is well known and, in the statutory context, is the subject of a standard form clause”.
In conclusion Mr Justice Cooke said, “In the face of a clear disclaimer, the absence of any Letter of Engagement or any fee paid by Barclays to Grant Thornton, the factors upon which Barclays relies... cannot outweigh the points that negate the existence of such a duty [of care]. The court... can be confident of its answer in circumstances where sophisticated business parties are able to protect their own interests and do not require the protection of the 1977 Act [UCTA] in the same way as small companies or consumers.
The court struck out the claim.