Auditors will welcome the important decision of the Commercial Court in Barclays Bank plc v Grant Thornton UK LLP [18 February 2015] which is the first authority on a Bannermandisclaimer negating duties to third parties arising out of audit work.
The court made clear that sophisticated commercial parties relying on an auditors' report are bound by a third party disclaimer. It is not unreasonable for auditors to include a disclaimer stating that auditors do not accept or assume a responsibility to anyone other than the addressees of the audit report.
Such disclaimer clauses in audit reports have become known as Bannerman clauses (following the Scottish case), and are recommended by the ICAEW. This is the first time theBannerman clause has been tested in court.
The claim arose out of the administration of the luxury hotels chain, Von Essen, in April 2011. Barclays claimed to have relied on two non-statutory audit reports produced by Grant Thornton for Von Essen in continuing to fund the Von Essen Hotels Group under a £250m loan facility.
Barclays asserted that Grant Thornton owed it a direct duty of care in its audit work since the auditors knew that the bank would rely on the audited financial statements. The bank claimed Grant Thornton had failed to uncover (allegedly) fraudulent overstatements in the hotels group's accounts and that, as a result, the bank had suffered loss when the group could not repay the loan.
Grant Thornton sought summary judgment on the claim on the basis that Barclays had no real prospect of success because the reports contained a Bannerman disclaimer. Grant Thornton expressly denied any negligence, but accepted that the Court would assume, for the purposes of the application only, that the bank could prove the facts upon which it relied in contending that Grant Thornton owed it a duty of care.
Barclays argued that the disclaimer had not been brought to the bank's attention (although it was included in the audit report) and that it constituted an unreasonable exclusion clause caught by the Unfair Contract Terms Act 1977 ("UCTA").
The High Court found in favour of Grant Thornton. Cooke J held that the claim had no realistic prospect of success "in the face of the disclaimer" and there was "no good reason" why the action should proceed to trial.
As to bringing the disclaimer to Barclays' attention, the judge said it was "hard to see what else Grant Thornton could be 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."
Further, the disclaimer was reasonable under UCTA. Cooke J concluded that there was "nothing unreasonable in that stance, as between two sophisticated commercial parties, where the approach of auditors limiting their responsibilities is well known and, in the statutory context, is the subject of a standard form ICAEW clause."
This is a significant decision for the profession. It confirms the importance of Bannermandisclaimers to protect auditors against the risk of third party claims. There may be scope for arguments as to UCTA reasonableness for small companies or consumers, but certainly sophisticated third parties (such as banks) can expect to be bound by their terms.