Arrowhead Capital Finance Limited (in Liquidation) v KPMG LLP [2012]EWHC 1801 (Comm)


The High Court has provided guidance on the circumstances in which professional advisers owe a duty of care to third parties. Arrowhead's claims for damages against KPMG was summarily dismissed after the court held that it was 'inconceivable' that a reasonable businessman would have considered that KPMG was voluntarily assuming responsibility towards potential investors in the company to which KPMG had provided advice.


KPMG's client was a company called Dragon Futures Limited ("Dragon"). It traded in mobile telephones and its business plan was reliant on being able to recover VAT from HM Customs & Excise ("HMCE").  Dragon required funding and knew that potential investors would want to be comfortable about its ability to reclaim VAT, particularly given HMCE's recent focus on VAT fraud. It engaged KPMG to implement a due diligence strategy to address the threat posed by HMCE. The engagement documentation provided various exclusions and limitations of liability and stated that the contract between Dragon and KPMG would not create any third party rights. 

To attract investors, Dragon prepared and distributed marketing material, which referred to KPMG having carried out an independent due diligence exercise. That material was provided to Arrowhead Capital Finance Limited ("Arrowhead"). In January 2004, Dragon succeeded in negotiating a loan facility with Arrowhead and Dragon started trading on a larger scale with the new financing.

There was no direct contact between Arrowhead and KPMG until March 2004, when a call took place between Arrowhead, Dragon and KPMG explaining KPMG's experience in challenges for VAT reimbursements. That followed HMCE's announcement that it was investigating all transactions from December 2003.

HMCE subsequently rejected Dragon's VAT claims and Dragon ceased trading.


Arrowhead was not able to recover any of its loan to Dragon. Arrowhead claimed that KPMG owed it a duty of care in tort. It argued that KPMG should have understood the relationship between Arrowhead and Dragon, that it would not have invested unless KPMG's services were being provided to a reasonable standard so that they were reliably assured that the VAT repayment claims would be successful and reliance was placed on the content of the March 2004 call.

Arrowhead argued that KPMG owed it a duty of care because there had been an assumption of responsibility or because a threefold test of foreseeability, proximity and 'fairness, justice and reasonableness' had been met.


The court held that KPMG did not owe a duty of care to Arrowhead. The court believed that it was inconceivable that any reasonable businessman would consider that KPMG would voluntarily assume an unlimited responsibility towards potential investors in Dragon. In reaching its decision, the court highlighted the specific limitations KPMG had placed on the extent of the responsibility it was prepared to assume to Dragon and the fact that there was no direct contact between Arrowhead and KPMG until it had decided to make the loans. Finally, if the question had been asked of KPMG, they would have confirmed that they were not assuming any liability to Arrowhead.

Based on similar reasoning, the court held that it would not be fair, just and reasonable for a duty to be imposed on KPMG. KPMG's relationship with Dragon was governed by engagement documentation limiting KPMG's liability and excluding liability to third parties, the business Dragon was engaged in was high risk and KPMG would not have accepted liability to Arrowhead if they had been asked.


This is an area of law which is still developing and professionals have in previous cases been held to owe a duty to third parties. However, this case demonstrates the court's unwillingness to extend a duty of care too widely and the emphasis placed on the detailed circumstances of a particular case and particular relationship between the parties. The fact that KPMG knew that its advice had been passed on to a third party, who may rely on it for investment purposes, may have been sufficient to impose a duty of care but as Stephen Males QC pointed out in this case, that is generally more likely to be the case when the third party claimant is a consumer and the context is an ordinary transaction, than in a carefully structured business context.