Useful stuff in Arrowhead Capital Finance Ltd v KPMG LLP,  EWHC 1801 (Comm). Arrowhead, an investment fund, loaned money to Metro II LLC, a special-purpose vehicle, which in turn made a loan to Dragon Futures, which traded in grey-market mobile telephones. Dragon bought phones and resold them, claiming back from the revenue authorities the sales tax (VAT) it paid on the original purchase as an input tax. Dragon’s business model depended, in fact, on being able to recover the VAT on purchases, so it retained KPMG to implement a strategy to ensure it could continue to do so. The KPMG strategy was referred to in documents provided to potential investors, including Arrowhead. As it turned out, Dragon’s VAT claims were denied, it went out of business and left Arrowhead with some US$53 million in unpaid debt. Arrowhead sued KPMG in tort, alleging that because the firm knew that Dragon would relay the fact that it had been advised by KPMG to investors, KPMG owed both Arrowhead and Metro a duty of care in providing the services to Dragon. KPMG had, it was argued, made assurances that Dragon had proper systems in place and had been negligent in not detecting fraudulent transactions.
The English Commercial Court applied three approaches for determining whether a duty of care existed on the facts: (a) was there an assumption of responsibility by KPMG? (b) was a threefold test of foreseeability, proximity and fairness satisfied? and (c) would imposing a duty of care be incremental to previous cases or a more radical departure? (The three approaches come from Customs & Excise Commissioners v Barclays Bank plc  UKHL 28.) Under (a) KPMG had clearly assumed responsibility for Dragon, but not for Arrowhead or Metro. While Arrowhead could probably establish foreseeability and perhaps proximity under (b), it would be unfair, unjust and unreasonable to impose liability for Arrowhead’s losses, given that the contract between KPMG and Dragon was likely to have expressly limited KPMG’s liability to its client and very possibly to third parties. Dragon was engaged in a high-risk business, making it unlikely that KPMG would have accepted any responsibility to Arrowhead even if asked. The judge did not go on to consider (c). Arrowhead’s claim was also time-barred.