Barclays Bank Plc v Grant Thornton UK LLP
| Jurisdiction | England & Wales |
| Judge | Mr Justice Cooke |
| Judgment Date | 18 February 2015 |
| Neutral Citation | [2015] EWHC 320 (Comm) |
| Docket Number | Case No: 2014 FOLIO 271 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 18 February 2015 |
[2015] EWHC 320 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Cooke
Case No: 2014 FOLIO 271
Simon Salzedo QC and Oliver Jones (instructed by Taylor Wessing LLP) for the applicant
David Halpern QC and Benjamin Wood (instructed by Addleshaw Goddard LLP) for the respondent
Hearing dates: 12th February 2015
Introduction
The defendant (Grant Thornton) seeks summary judgment in relation to the claim by Barclays Bank Plc (Barclays) pursuant to CPR 24.2 and/or an order that it be struck out pursuant to CPR 3.4(2)(a) on the basis that the Particulars of Claim disclose no reasonable cause of action and that the claim therefore has no real prospect of success. There is also said to be no other compelling reason for the case to proceed to trial.
The key issue relates to the effectiveness of a disclaimer of responsibility in an auditors' report. The underlying claim concerns audit services provided by Grant Thornton to the Von Essen Hotels Limited Group in non-statutory audit reports. Barclays, in its Particulars of Claim, contends that Grant Thornton owed it a duty of care in tort in relation to the contents of those reports and that it was negligent in their production because of their failure to uncover the fraud of two employees of Von Essen Hotels Ltd ("VEH") who had deliberately caused Grant Thornton to be misled about (inter alia) the true sales and expenses position. One of the two has admitted that he "encouraged a culture of obfuscation and diversion amongst hotel accounts staff in their dealings with Grant Thornton" and acted in concert with the other to "provide misleading explanations to Grant Thornton".
For the purpose of the application, the allegations set out in the Particulars of Claim must be taken as true. The evidence before the court consists of three witness statements from the solicitors engaged by the parties and documents attached thereto.
The introduction to the Particulars of Claim reads as follows:
"These Particulars of Claim are served in relation to two claims: folio 2014–271 ("the Negligence Claim") and folio 2014–1053 ("the Fraud Claim"). The Fraud Claim is brought against Ms Stephanie Gibbs and Mr Simon Tate, who used their positions within the Von Essen hotel group ("the Group") to present untrue representations of the Group's performance. Those representations caused the Claimant ("Barclays") to maintain lending facilities and to advance further sums to the Group. Ms Gibbs and Mr Tate acted dishonestly. The Negligence Claim is brought against Grant Thornton UK LLP ("Grant Thornton"), who were the Group's auditors, because they should have uncovered the dishonesty as part of their audit work. Instead, they signed off the Group's accounts without qualification. The claim relates to the Group's accounts for the financial years 2006 and 2007. Barclay's losses are set out in Annex 9. Barclays will apply to have the two Claims consolidated."
The audit reports in question for the years ending 2006 and 2007 each consisted of two pages followed by the audited accounts. On the first page the following appeared under the heading "REPORT OF THE INDEPENDENT AUDITOR TO THE COMPANY'S DIRECTOR ON THE NON-STATUTORY FINANCIAL STATEMENTS OF VON ESSEN HOTELS LTD".
"In accordance with the engagement letter dated 18 December 2006, and in order to assist you to fulfil your duties under the terms of your loan facility, we have audited the non-statutory group financial statements (the "financial statements") of Von Essen Hotels Limited which comprise the group profit and loss account, the group balance sheet and the related notes. These financial statements have been prepared under the accounting policies set out therein and do not contain comparative information.
This report is made solely to the company's director. Our audit work has been undertaken so that we might state to the company's director those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's director as a body, for our audit work, for this report, or for the opinion we have formed."
(The 2007 Report replaced the word "them" in the second sentence of the second paragraph with the word "him".)
The rest of the first page of the two reports referred to the respective responsibilities of directors and auditors and the basis of the auditors' opinion in accordance with International Standards on Auditing (UK and Ireland).
On the second page of each Report under the same capitalised heading as on the first page appeared the Opinion, stating:
"In our opinion the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the group's affairs as at 31 December [2006/2007] and of the group's profit for the year then ended."
The reports were dated 7th June 2007 and 2nd June 2008.
The language of the "disclaimer clause" on the first page follows the standard wording produced by the Institute of Chartered Accountants in England & Wales in respect of statutory audit reports except that the standard wording uses the phrase "the company's members" as opposed to "the company's director". Hence the reference to "as a body" has been retained from the standard wording when it can have no application. A statutory audit is of course essentially directed to the company and its members "as a body" since the accounts require approval in general meeting. Such a clause is often now referred to as a Bannerman clause.
It is said that four issues arise for determination in the present application:
i) First, whether the disclaimer prevents a duty of care arising in common law.
ii) Second, whether the Unfair Contract Terms Act 1977 ("the 1977 Act") applies to the disclaimer.
iii) Third, whether if the 1977 Act does apply, the statutory requirement of reasonableness is satisfied.
iv) Fourth, if Barclays does not have a real prospect of success, whether there is some "other compelling reason" for the action to go to trial.
As I have already indicated, the key issue in the present case, given the other facts pleaded by Barclays which must be accepted for the purposes of the application, is whether the disclaimer takes effect to negate a duty of care which could otherwise be owed by Grant Thornton to Barclays and is reasonable in accordance with the 1997 Act. For the purposes of its present application, Grant Thornton was prepared to accept that the 1997 Act did apply to the disclaimer.
The background facts
I recite the background facts which are largely set out in Grant Thornton's skeleton argument and about which there is, for the purposes of this application, no dispute.
Von Essen Hotels Limited
VEH and its subsidiary companies (together, the "VEH Group") operated a number of luxury hotels in the UK and one in France. Mr Andrew Davis was the sole director of VEH and each of the companies in the VEH Group and the 100% shareholder of VEH's parent company, Von Essen Mining & Development Corporation UK Limited ("VEMDC"). Mr Davis was also the sole director of VEMDC. VEMDC held various companies that sat outside the hotels business (including an aviation business).
Project Barry
In July 2006, Barclays and Lloyds Banking Group ("Lloyds") appointed Grant Thornton to complete a limited scope review of certain of the VEH Group's financial affairs in connection with the then proposed re-financing of VEH. The project was carried out under the name "Project Barry".
Grant Thornton entered into a direct engagement with Barclays, Lloyds and VEH in relation to this work pursuant to an engagement letter dated 24 July 2006 and signed by Barclays on 25 July 2006 (the "Project Barry Engagement Letter"). The Project Barry Engagement Letter:
(a) Was addressed to, and confirmed that it was addressed to, the directors of Barclays, Lloyds and VEH and was prepared for their purposes only (clause 4.1). It was confidential to the addressees.
(b) Set out the scope of work to be conducted at Appendix 2. This included a review of the timeliness and accuracy of management information, cash controls and the adequacy of internal reporting in relation to capital expenditure.
(c) Noted that if the VEH Group's auditors, Mazars LLP ("Mazars") required a disclaimer in relation to any negligent statements made to Grant Thornton, Grant Thornton would not be liable for repeating those statements to Barclays and Lloyds (clause 2.3).
(d) Included a limitation of liability clause pursuant to which Grant Thornton's liability in connection with the engagement was limited to £25 million, and whereby Grant Thornton would only be liable for that part of any loss which was proportionate to its responsibility (clause 6.1).
(e) Included a further clause limiting Grant Thornton's liability to the proportion of any loss which "may justly and equitably be attributed to the firm, after taking into account contributory negligence (of any) of the Addressees…" (clause 3.4 of Appendix 1).
Grant Thornton engaged in a number of direct discussions with Mr Robert Silk of Barclays during the production of its due diligence report. That work was ultimately completed, and Barclays has made no complaint in relation to it.
The 2006 Facility
On 11 August 2006, the VEH Group entered into a Facility Agreement with Barclays and Lloyds in respect of loan facilities totalling £250 million (the "2006 Facility"). VEH and the individual borrowing companies, as part of the arrangements, gave various financial undertakings including compliance with set ratios...
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