In this case the court dealt with the role of third party disclaimers (or Bannerman clauses) in audit reports. A Bannerman clause allows accountants to negate duties to third parties arising out of audit work. The effectiveness of such a clause was upheld in this case.

By way of background, Barclays relied on two non-statutory audits carried out by Grant Thornton for the Von Essen Hotels Group (VEH) in 2006 and 2007. Barclays was funding VEH under a £250m loan facility. Barclays alleged the auditors had been negligent in their failure to uncover fraudulent overstatements of VEH’s financial position by two employees, causing the bank considerable losses when VEH became insolvent and was unable to repay the loan.

Each of the audit reports contained a disclaimer in standard wording produced by the ICAEW in respect of statutory audit reports (with some changes to reflect the fact these were non-statutory audits). The disclaimer stated that the reports were solely for the use of VEH’s directors and that GT did not accept responsibility for anyone other than VEH and its directors using the audit reports. Barclays argued the clause had not been brought to its attention, and under the Unfair Contract Terms Act 1977 (UCTA), such a disclaimer was unreasonable, and therefore could not be relied upon.

Sitting in the High Court, Cooke J awarded Grant Thornton summary judgment. He upheld the validity of the disclaimer, and on this basis, deemed that Barclays had no realistic prospect of success. Summarising, Cooke J held the disclaimer was “clear on its face” and “could not have been misunderstood”. The Court also made it clear that such a disclaimer is evidently applicable to a sophisticated commercial party such as Barclays.

This case is particularly noteworthy as it is the first instance of a Bannerman clause being scrutinised by the Courts. It will no doubt provide reassurance to auditors that its validity was upheld.

Given that the Court placed some reliance on the fact that the clause was “an industry standard clause used in statutory reports”, it is hoped that the Court would also have upheld the validity and effectiveness of the clause in the context of a statutory audit.