How to avoid a professional negligence claim

Professional negligence claims against accountants are on the rise, as for other professionals, partly owing to the recent growth of litigation funding options for potential claimants. We can expect such claims to increase yet further during a recessionary environment with administrators looking to clawback some value for distressed estates and assets.

Claims against professionals are most likely to be brought by the professional’s clients, however claims can also be brought by third parties in circumstances where a duty of care has been assumed by the professional to the third party.

The case of Amathus Drinks Plc & Ors. v EAGK LLP & Ors [2023] EWHC 2312 (Ch) published late 2023 provides a useful reminder that even well drafted disclaimers of liability are not determinative in this area and as such the case decision merits further explanation.

What is professional negligence?

Definition

Broadly, professional negligence is where a professional fails to perform their responsibilities to the required standard of a reasonably competent professional operating in that specific field. In the context of accountancy/audit, this would mean falling below the standard of a reasonably competent accountant or auditor. 

The elements for a successful claim

To bring a successful claim in professional negligence requires satisfying to the Court the following elements:

1. That the professional owed the claimant a duty of care;
2. That the professional breached that duty of care;
3. That the breach had caused the claimant loss; and
4. That the loss was a direct result of the breach, and is quantifiable.

In order to be recoverable, the loss must have been a foreseeable consequence of the professional’s breach of duty and a claimant cannot recover damages for any part of a claim which they could have avoided (mitigated) by taking reasonable steps.

A claimant has 6 years from the accrual of the cause of action to bring a professional negligence claim (or 3 years from the date of their knowledge of the material facts, their loss or the defendant’s identity).

Examples of professional negligence against accountants/auditors

Common examples of negligence against accountants/auditors include:

1. Tax filing errors- For example failing to accurately calculate tax or missing deadlines for filing tax returns.
2. Advice errors- For example providing unsound or inaccurate advice concerning tax-relief, tax exemptions and/or company valuations.
3. Financial statement errors- For example failing to draw up accurate accounts or including errors which impact on company decision making.
4. Auditing errors- For example failing to identify discrepancies in documents or fraud in financial statements.

Failure to detect fraud when auditing accounts can have serious implications for a company, and was the foundation of the negligence claim brought in Amathus Drinks.

The case of Amathus Drinks

In August 2015, Amathus Drinks PLC and Chariton Platon Georgiou (the “Buyers”) entered into a Share Purchase Agreement (the “SPA”) for the acquisition of Bablake Wines Limited (“Bablake”). EAGK LLP (“EAGK”) were a firm of accountants retained by the Buyers to conduct due diligence on Bablake in relation to the purchase.

In September 2015, EAGK undertook a statutory audit of Bablake for the period of 1 April 2014 to 31 July 2015 and issued completion accounts. The letter sent by EAGK to the directors of Bablake enclosing the audit report contained a “Bannerman” disclaimer stating that the report had been prepared for “the sole use of [Bablake]. It must not be disclosed to third parties, quoted or referred to, without prior written consent. No responsibility is assumed…to any other person.”

Curiously, no engagement could be located for EAGK’s work in relation to the statutory audit and completion accounts. However, a “schedule of engagement” (to be read alongside a letter of engagement) from EAGK to Bablake existed and contained disclaimer wording that EAGK would not: “accept or assume responsibility to anyone other than [Bablake] and [their] members as a body”.  

On 22 September 2016, the completion certificate for the purchase of Bablake was issued. The Buyers then discovered that fraud had been committed on Bablake in the period prior to the purchase, which had resulted in the Buyers overpaying for the company. The Buyers subsequently issued proceedings against EAGK alleging negligence in their failing to identify fraud in relation to their work on the statutory audit and completion accounts.

EAGK applied for summary judgment of the grounds that the retainer for the statutory audit and completion certificate work was between EAGK and Bablake alone, and so there was no real prospect of the Buyers’ claim succeeding.  

The Court’s Decision

The claim in contract

The Buyer’s claim was initially struck out in contract. Absent an engagement letter, the Court considered it fanciful that the Buyers were party to the contract with EAGK and Bablake for the preparation of the statutory audit accounts. Further, the Master stated that even if such a letter could have been discovered, it would be inconsistent with the schedule of engagement document which set out the scope of works and made no reference to the SPA by the Buyers. The report was also addressed to the company’s members as a body together with a disclaimer of liability to third parties.

The claim in tort

With regard to the claim in Tort, EAGK argued that the disclaimer provided an “insuperable barrier to the [tort] claim”.

In reaching a decision, the Court considered the case of Barclays Bank Plc v Grant Thornton UK LLP [2015] EWHC 320 (Comm), in which it was held that a disclaimer in Grant Thornton’s non-statutory audit reports addressed to a hotel group prevented a claim from Barclays for negligent mismanagement.

However, the facts in Amathus Drinks were distinguished from those in Barclays Bank Plc, with the Court highlighting that:

1. Unlike in Barclays Bank Plc, the Buyers in Amathus Drinks were not sophisticated commercial clients; and,
2. That there had been continuing communications between the parties after the date of the audit engagement.

The Master held that the communications between a member of EAGK and the Buyers, which the Buyers’ solicitors (and not Bablake’s solicitors) were party to, were particularly relevant in conveying that a member from EAGK (Mr Christofi) considered themselves as part of the Buyers’ supporting team. The Court subsequently held that the Buyers had a realistic prospect of showing at trial that EAGK had assumed a responsibility to the Buyers. 

Practical tips for accountancy professionals in light of Amathus Drinks
 

In light of the decision in Amathus Drinks, accountancy/audit professionals should be mindful of inadvertently assuming responsibilities to third parties and should put into practice the following:

1. Whilst continuing to ensure the wording disclaimers is detailed and clearly sets out who duties are owed to between parties, be conscious that disclaimer wording alone cannot be relied upon to limit liability.
2. Ensure a carefully drafted engagement letter accompanies all retainers between you and a client and sets out clearly to whom duties are owed and the scope of the work involved. Had EAGK ensured a formal engagement letter was in place with Bablake in relation to the statutory audit and completion accounts, it is unlikely the claim would have been brought by the Buyers.
3. Be mindful of who you communicate with and the potential to inadvertently assume duties to third parties. It is good practice to limit communications to your client alone, and where it is absolutely necessary for third parties to be involved, ensure that your client (and their solicitors) remain copied into all correspondence.
4. Avoid non-written communications with third parties. Should such communications occur, reaffirm that your duties are to your client and prevent giving any advice during verbal communications. Ensure such communications are contemporaneously documented in a clear attendance note, with the date, time and detail of the discussion.

 

This article was first published in Accountancy Daily on 23rd April. 

Further information 

If you have any questions or concerns about the topics raised in this blog, please contact Jemma Brimblecombe or Elliot Grosvenor-Taylor. 

About the authors 

Jemma Brimblecombe has a wide range of experience in dealing with a variety of commercial disputes, including breach of contract, breach of trust and contractual disputes. Jemma also has experience of dealing with civil fraud claims.

Elliot Grosvenor-Taylor is an Associate in the Dispute Resolution Team at Kingsley Napley. Elliot’s practice covers a wide-range of areas but he has a particular interest in civil fraud and professional negligence related disputes. Elliot also acts in high-value international arbitrations.