The High Court recently ruled that accountants did not owe a duty of care to a third party investor1. Although the case reaffirms the longstanding principle that accountants will not owe a duty of care to a third party investor in these circumstances, it also highlights the danger of contact with third parties and the importance of the terms of the engagement letter which should set out clearly the scope of the duties and to whom they are owed.
KPMG was engaged to provide due diligence services to a company. The issue was whether KPMG owed a duty of care to Arrowhead, a third party investor in the company. KPMG’s relationship with its client was governed by the terms of the contract set out in the engagement letter and its terms and conditions. These included specific limitations on the extent of its responsibility and a cap on liability.
The Court held that it was inconceivable that any reasonable businessman would have considered KPMG would voluntarily assume an unlimited responsibility towards potential investors in its client. While Arrowhead did not know of the particular express exclusion in KPMG’s general terms of business in relation to third party rights, this was not an unusual term. KPMG did not assume responsibility to Arrowhead, but was only discharging its duty to its client. It would not be fair, just or reasonable to impose such a duty on KPMG. KPMG’s relationship was with its client, which was governed by an engagement letter which was likely to contain limitations on the extent of KPMG’s liability to its client and very possibly to third parties.
The decision is a welcome confirmation of longstanding existing principles. Whilst third parties may be affected by advice given by accountants, that alone will not give rise to a duty of care on the accountant to the third party. The decision demonstrates that it is important to set out the scope of the retainer at the outset and act within those parameters throughout the business relationship.