In the recent case of Assetco plc -v- Grant Thornton LLP [2020] EWCA Civ 1151, the Court of Appeal clarified the extent of losses for which an auditor was liable for a negligent failure to identify in its audit that a business was insolvent. The case addressed issues relating to the SAAMCO cap on losses where a professional has provided 'information only' advice in respect of a transaction.
Background facts
Assetco plc (Assetco) was the holding company of a group of business that provided various services related to fire and rescue. Its 2009 accounts (Accounts) audited by Grant Thornton, painted a picture of a healthy, expanding and profitable group of businesses, however, this was not the case. In fact, Assetco's chief financial officer and chief executive officer had acted dishonestly in the preparation the Accounts. This was common ground between the parties, and the Court of Appeal recognised that the individuals in question had 'duped Grant Thornton into giving an unqualified audit report by lying and forging documents'.
It was two years until the true state of affairs was realised. New management assessed the prospects of the group and entered a scheme of arrangement with its creditors and the group avoided insolvent liquidation.
Assetco claimed against Grant Thornton in negligence, seeking losses principally in respect of sums it had paid to Assetco's loss-making subsidiaries. Assetco's position was that Grant Thornton's negligent failure to spot the true position had deprived it of the chance to restructure in 2009. Had it known the true position, it would have been able to enter a scheme in 2009 and avoid the losses it suffered.
First instance
At first instance, the High Court found in favour of Assetco and ordered Grant Thornton to pay damages of circa £22.36 million (with a 25% reduction for contributory negligence).
Grant Thornton appealed on the basis that:
- The trial judge had erred in his conclusion that the losses claimed by Assetco fell within the scope of its duty of care, and that the breaches of duty it admitted were the legal or effective cause of those losses
- In finding for the Assetco, the trial judge was wrong to conclude that in the counterfactual scenario where Grant Thornton were not negligent, it was a certainty that Assetco would successfully have entered into and completed a scheme and restructuring in 2009 (thereby avoiding the losses it suffered)
In its judgment, The Court of Appeal clarified points in respect of both causation and duty of care. It also addressed loss of chance claims, although we have not addressed that element of the Court's judgment in this article.
Causation and loss
In revisiting the High Court's decision, the appellate court considered general principles on scope of duty and legal causation. It addressed in particular the SAAMCO principal, by which a claimant is not able to recover losses it would still have suffered if the erroneous information the defendant supplied as part of its advice had been true.
For the proposes of applying the principle, it is necessary to distinguish whether a defendant is providing 'information only' in respect of a transaction, or advising more generally on the transaction's merits (an Advice case). The court referred to the judgment of Lord Sumption in the earlier case of Hughes Holland -v- BPE Solicitors [2017] UKSC 21 as the authority for applying this distinction. It reiterated that in an Advice case, a defendant has a duty to protect the claimant against all of the risks associated with entering into a transaction. By way of contrast, where a defendant provides information only, it is only liable 'for the financial consequences of [the information] being wrong and not for the financial consequences of the claimant entering into the transaction, as far as these are greater'. It is up to a claimant to show that it would not have suffered the loss in question if the information provided had in fact been correct.
The Court of Appeal clarified that the SAAMCO principle applies to general audit cases, but that it may not always need to address the principle in such cases. It found that the court should not apply the principle mechanistically, but use it as a tool to assist in determining whether losses fall within the scope of a defendant's duty of care.
In the present case, Assetco had not in fact asked the High Court to determine whether it would have suffered the losses it claimed if the information set out in the audit reports Grant Thornton provided were correct. In keeping with the court's rationale that the principle is a tool, it found that Assetco's failure to raise the point was not fatal to its case. The court's view was that Grant Thornton's negligence was a substantial cause of the loss suffered, and the losses Assetco suffered fell within the scope of Grant Thornton's duty as a provider of 'information advice'.
In coming to its decision, the Court of Appeal also addressed the case of Manchester Building Society -v- Grant Thornton UK LLP [2019] EWCA Civ 40. The Supreme Court is to hear an appeal in that case in the coming year. It may therefore be the case that the court will revisit SAAMCO principles; affected parties, watch this space.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
