The scope of auditor’s duties back under the spotlight – Amathus Drinks Plc v EAGK LLP

Following the recent spate of decisions in professional negligence cases against auditors, the judgment in the case of Amathus Drinks PLC and others v EAGK LLP and others [2023] EWHC 2312 (Ch) adds more colour to the judicial leanings in consideration of the common law duty of care owed by auditors.

In his judgment, Master Brightwell sitting in the High Court, determined that there was a realistic prospect of the claimants succeeding at trial in showing there was an assumption of responsibility by the auditors and rejected an application by the defendant to strike out a claim in tort.

The facts

The first and second claimants ("the Buyers") entered into a SPA for the acquisition of the entire share capital of the third claimant company ("the Company"). The defendant was a firm of accountants engaged to conduct transaction due diligence including preparation of the Completion Accounts for the purposes of the SPA and a Completion Certificate. It also audited the statutory accounts of the Company.

In the schedule of engagement for the audit work, the defendant issued a disclaimer of responsibility. The audited accounts contained a similarly worded disclaimer.

The Buyers alleged that fraudulent accounting had been committed on the Company prior to the SPA being entered into with the result that the Buyers paid the Sellers c £480,000 more than they should have.

The claim in contract

The claimants asserted that the Buyers retained the defendant and that a formal engagement letter was entered into between the Buyers and EAGK. Whilst the letter was not put in evidence, a schedule of engagement headed “Bablake Wines Ltd” was. The court found that the schedule of engagement was not at all consistent with the contract having been entered into with the Buyers. As such, the court held that there was no realistic prospect of the Buyers showing that they were parties to the contract with the defendant in respect of the preparation and audit of the statutory accounts.

The claim in tort

The claimants plead separately that the defendants owed a common law duty of care to the Buyers to exercise reasonable care and skill in preparing the Company’s accounts and the Completion Certificate. In particular, they relied on the allegation that the common law duty arose as a result of an assumption of responsibility, or because it is fair, just and reasonable in the circumstances to impose such a duty.

The defendant argued that the disclaimer provided an insuperable barrier to the claim relying on the judgement in Barclays Bank plc v Grant Thornton UK LLP [2015] 1 CLC 180 in which the court held that a similar disclaimer prevented a duty from arising.

Decision

The court disagreed with this aspect of the defendant’s submissions and Master Brightwell distinguished the case from Barclays on the basis that there were continuing communications between the parties after the date of the audit engagement. The court reiterated the findings in McCullagh v Lane Fox & Partners Ltd [1996] PNLR 205 that one looks at the facts right up to the date of actual reliance (and thus not merely to whether there was objectively an assumption of responsibility as at the date of the contract with the company). A further determining factor for the court was that if the claim proceeded to trial there would be disclosure and witness evidence of fact as to what was said orally and in writing over a period of many months which may be relevant to the question of assumption of responsibility.

Accordingly, the court concluded that the claimants had an entirely realistic prospect of succeeding at trial in showing that there was an assumption of responsibility by the defendant towards the Buyers in relation to the Completion Net Assets figure shown in the Completion Certificate.

Conclusion

Decisions on duties owed by accountants and auditors are few and far between in Scotland and this decision will undoubtedly be persuasive. It will be of keen interest to those considering claims against auditors as it establishes that there may be circumstances in which an auditor will owe a duty of care notwithstanding a widely drafted disclaimer of assumption of responsibility.

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