The Commercial Court has held that accountants who prepared non-statutory audit reports could rely on disclaimers of liability in the reports and did not owe a duty of care to a third party lender.

Background

The accountants prepared non-statutory audit reports for Von Essen Hotels Limited, part of a hotel group (VEH).  The reports (which were 2 pages long) contained disclaimer clauses on the first pages in substantially the same form as the standard wording produced by the Institute of Chartered Accountants in England & Wales for statutory audit reports.  The clause said that the report was prepared solely for the company’s director and that “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…  for our audit work, for this report, or for the opinion we have formed.”  Such a clause is often referred to as a Bannerman clause.  
 
Barclays provided loans to VEH and, under the terms of the facility, VEH had to provide the bank with audited consolidated financial statements on an annual basis.  The audit reports were not addressed to Barclays and were sent to the bank by VEH, not by the accountants. 
 
VEH subsequently went into administration.  The bank contended that the accountants owed it a duty of care as the reports had been issued for the purpose of providing information to Barclays and that the accountants breached that duty of care because they failed to uncover the fraud of two VEH employees.  The alleged fraud of the employees meant that the accountants were misled about VEH’s true financial position.  

Decision

The accountants, whilst expressly denying any negligence, sought summary judgment on the basis that Barclays had no reasonable cause of action and the claim had no real prospect of success due to the existence of the Bannerman clause. Cooke J found that, applying the ‘assumption of liability’ test, an entity cannot be taken to have assumed responsibility in circumstances where they have specifically disclaimed responsibility.  Although the accountants had anticipated that the reports would be forwarded to Barclays, and in principle a duty of care was capable of existing, in the light of the clear disclaimer of liability, the absence of any letter of engagement between the accountants and the bank and the absence of any payment by the bank to the accountants, a duty of care did not arise.  
 
The question was therefore whether the disclaimer clause was ‘reasonable’ and did not fall foul of the Unfair Contracts Terms Act 1977.  Under section 2 of the Act, liability for negligence cannot be excluded or limited unless the requirement of reasonableness is met.  The judge held that the clause was reasonable.  The disclaimer of liability was clear on its face and would have been read and understood by anyone at the bank who read the reports.  In the face of an express disclaimer it was not enough for the bank to say that both it and the accountants had expected that it would rely on the reports; the bank was being told expressly that it relied on the reports at its own risk.  
 
There was nothing unreasonable in the accountants’ stance that they were not prepared to assume responsibility to the bank.  These were two sophisticated commercial parties, where the approach of auditors limiting their responsibilities is well known and, in the context of statutory audit reports, is the subject of a standard form ICAEW clause.  Cooke J found that the bank must have expected the reports to contain such a disclaimer.
 
Accordingly the judge granted summary judgment in favour of the accountants.

Comment

This is a significant decision which highlights the importance of accountants and other professionals including disclaimer clauses to limit or exclude liability to third parties.  If a disclaimer clause had not been included in this case, Cooke J was clearly of the view that a duty of care could have been owed to the third party bank.
 
The courts will look at the facts in each particular case and where consumers or small businesses are involved there may be room for argument as to the reasonableness of disclaimer clauses. Where, however, the terms of a disclaimer are clear and the parties are sophisticated commercial entities it is likely that a professional can restrict or exclude its liability to third parties.
 
Further reading: Barclays Bank PLC v Grant Thornton UK LLP [2015] EWHC 320 (Comm)