When a professional provides services to a client, and third parties rely on those services being performed correctly, there is often uncertainty regarding the scope of the professional’s duty of care. Is it owed solely to the client, or also to the third parties? A recent decision from the Commercial Court (Arrrowhead Capital Finance Ltd v KPMG LLP (2012)) confirms the English courts’ reluctance to find that a professional owes a duty of care to anyone other than his client, unless a broader duty has been explicitly assumed in a letter or standard terms of engagement.
In Arrowhead the claimant invested indirectly in one of KPMG’s clients, an English company that traded in the grey market in mobile telephones. The client’s business depended on its being able to recover from HM Customs and Excise ("HMCE") the VAT paid when it purchased the telephones. To ensure that recovery was possible, the client decided to establish rigorous operating procedures which went beyond the steps recommended by HMCE, and to that end engaged the services of KPMG. Nevertheless, it eventually became apparent that VAT would not be recoverable, and the client ceased trading.
The claimant issued proceedings directly against KPMG, alleging that this outcome had been caused by the defendant’s negligence; since KPMG owed its client’s investors a duty of care, it should compensate them for the failure of their investments. KPMG applied for summary judgment against the claimant, arguing that there was no reasonable prospect of the claimant’s case succeeding. In the Commercial Court, the judge (Stephen Males QC) assumed for the purposes of the application that KPMG had been negligent, but ruled that it could not be liable to the claimant in any event, since KPMG's duty of care extended only to its client, and the claim was anyway out of time.
The Judge acknowledged that the law on this question has already been considered on many occasions by the higher courts, and he would not attempt to develop it. But he emphasised that different approaches were possible when considering whether a duty of care exists in specific circumstances, and these did not always lead to the same conclusion.
The different approaches that have been sanctioned by the House of Lords involve considering whether:
- there has been an assumption of responsibility;
- a threefold test of foreseeability, proximity and 'fairness, justice and reasonableness' can be satisfied; or
- the alleged duty would be "incremental" to previous cases.
(Lord Mance in Customs & Excise Commissioners v Barclays Bank PLC (2006))
No assumption of liability
In the present case it was inconceivable, the court found, that any reasonable businessman would have considered that KPMG was voluntarily assuming an unlimited responsibility towards any potential investors in its client, and particularly towards companies such as the claimant that were investing at several removes. The paradigm situation for an assumption of responsibility is "a relationship having all the indicia of contract save consideration" (Lord Bingham in Customs & Excise Commissioners v Barclays Bank PLC). One of the obvious and important indicia of a contractual relationship in such a context would be an engagement letter defining the services to be rendered and limiting liability, but no such engagement letter had been addressed to the claimant. Indeed there was no direct communication between the parties of any kind until relatively late in the day, when the claimant was already committed to the bulk of its investment.
Duty of care to claimant not "fair, just and reasonable"
The claimants also sought to rely on the second of Lord Mance’s approaches: the three-fold test involving considerations of foreseeability, proximity and what was fair, just and reasonable in the circumstances (derived from Caparo Industries v Dickman (1990)). Applying the test, the Judge was prepared to assume for the purposes of the summary judgment application that the claimant was able to satisfy the requirement of foreseeability, and possibly that of proximity too. However, in the circumstances he did not consider it fair, just and reasonable to impose a duty of care on KPMG that could result in unlimited liability. It would have been obvious to all concerned, first that KPMG's relationship with its client was governed by an engagement letter which was likely to contain limitations on the extent of KPMG's liability (and very possibly an exclusion of liability to third parties); second, that the business its client proposed to engage in was high risk; and third, that KPMG would not have been prepared to accept such a responsibility to the claimant if it had been asked to do so.
KPMG was able to resist Arrowhead’s claim with comparative ease, partly because the English courts are reluctant to find that a professional has assumed a duty of care to anyone other than its client. However, the case does serve as a reminder that the law in this area is far from straightforward, with multiple "approaches" (including a three-part test) being sanctioned by the House of Lords, and the outcome of each individual claim depending largely on the specific circumstances of the case. It demonstrates, among other things, how important it is for professionals to clarify matters at the outset by setting out what precise liability they have, and to whom, in their engagement letters and standard terms.