Barclays Trust Company (Jersey) Ltd & others v Ernst & Young LLP (2016)
The High Court firmly rejected a claim against Ernst & Young LLP (EY), in which it was alleged that EY had been negligent in due diligence performed on behalf of its purchaser client.
The claim, described by the judge, Mr Justice Phillips, as "opportunistic" and "ill founded", centred on Bell Leisure Group's ("BLGs") £474.3m acquisition of high-end health club chain, Esporta, in 2007.
EY were engaged in December 2006 to provide 'top up' financial due diligence in connection with the purchase. By this time, the claimants had already executed a sale and purchase agreement and paid a non-refundable deposit of circa £23.5m.
EY provided its due diligent reports in early 2007, which included an analysis of EY's proposed alterations to Esporta's management forecasts. Esporta's business plan had predicted a 2.73% growth in new members for 2007, whereas EY's revenue sensitivity took a more conservative approach, revising forecast growth down to 0.8%.
The nature of the claimants' allegations shifted focus but, by the end of trial, the central contention was that EY had received updated information that should have led them to reduce the sensitivity forecasts even further. The claimants alleged that in reliance upon EY's due diligence they purchased the company at an artificially high price. They argued that, but for EY's negligence, they would have sought to renegotiate the price, failing which "they would not have completed the transaction, but would have withdrawn and forfeited the deposit." The claimants sought to recover £18m plus interest, calculated as the difference between the purchase price of £474.3m and the alleged true value of £433m, less the deposit they would have forfeited.
On the evolution of the claimants' case throughout trial, the judge commented that "the 'shift' in the claimants' case was an opportunistic and unprincipled attempt to rely on a minor and irrelevant change in EY's account of the chronology of their work, designed to salvage their case on liability, which had otherwise been exposed as lacking in merit."
On breach of duty, the claimants' expert's evidence was that, had the latest available membership figures been taken into account, the new membership growth rate would have reduced to 0%. The judge found the difference of just 0.8% between that and EY's figures was immaterial.
On causation, the judge concluded that EY's reports would not have affected the nature of the deal since the parties had already reached an agreement in relation to the sale price prior to EY's instruction. Mr Halabi (the controlling mind behind BLG) accepted during cross-examination that, even if EY had produced a different set of figures, "there is no way I would have asked…for a price reduction after I'd already committed the deposit…I would look like an idiot." The judge found it was highly unlikely that the claimants and/or their lenders would have withdrawn from the transaction: EY's alleged failures had not made any difference to the claimants' decision to proceed with the transaction. Whilst incidental, the judge found that the price paid by the claimants was "so close" to the revised valuation they could not reasonably say that they overpaid in any event.
The case illustrates that, from time to time, there are professional indemnity claims that need to be defended all the way to judgment, regardless of the sums at stake and the reputational risk of putting witnesses in the box. The court dismissed what it described as an opportunistic claim against professionals based on an immaterial breach of duty and framed with the benefit of hindsight. EY's engagement was limited in scope (being instructed at a late state of the due diligence procedure, after the acquisition price had been agreed between the parties, contracts had been executed and a sizeable deposit had been paid) and the judge was not persuaded that had EY presented a more negative forecast, it would have made a material difference to the outcome.
Whilst each case will turn on its own facts and the decision is not new law, the judge's robust approach to breach of duty and causation will be welcomed by professionals and their insurers.
The full decision can be found here.