Caribbean Steel Company Ltd v Price Waterhouse (A Firm)
| Jurisdiction | UK Non-devolved |
| Judge | Lord Toulson |
| Judgment Date | 09 July 2013 |
| Neutral Citation | [2013] UKPC 18 |
| Date | 09 July 2013 |
| Docket Number | Appeal No 0055 of 2012 |
| Court | Privy Council |
[2013] UKPC 18
Lord Hope
Lord Wilson
Lord Sumption
Lord Carnwath
Lord Toulson
Appeal No 0055 of 2012
Privy Council
Appellant Denise E. Kitson QC Trudy-Ann Dixon-Frith Mark Reynolds (Instructed by MA Law (Solicitors) LLP)
Respondent Sandra Minott-Phillips QC Alexis Robinson (Instructed by Myers, Fletcher & Gordon)
Heard on 16 April 2013
On 14 May 1998 the plaintiff appellant ("Carib Steel") issued a writ and statement of claim against the well-known firm of accountants Price Waterhouse ("PW") claiming damages arising from Carib Steel's acquisition, on 14 February 1995, of 50.1% of the shares of a company called Caribbean Cable Company Limited ("Carib Cable") at a cost of J $32,173,400. Prior to the acquisition Carib Steel had obtained a valuation report on Carib Cable from PW. PW was at that time the auditor of Carib Steel and Carib Cable. Carib Steel alleged negligence and/or breach of contract by PW in the preparation of the valuation report. The allegations centred on PW's treatment in the report of a surplus in Carib Cable's pension fund which amounted to $13,849,000 according to a valuation provided to Carib Cable by a firm of consulting actuaries, Watson & Sons.
After the acquisition PW continued to act as Carib Steel's auditors, and the consolidated financial statements of Carib Steel included the financial statements of Carib Cable. On 22 September 1995 PW issued a report on the consolidated financial statements for the 15 months ended 31 March 1995. Carib Steel alleged negligence and/or breach of contract and breach of statutory duty on the part of PW in relation to its treatment of Carib Cable's pension fund in the post-acquisition audit.
Carib Steel claimed special damage of $38,389,308. This included the cost of acquisition of the shares and the fees paid to PW for the pre-acquisition valuation report and the post-acquisition audit. There were also claims for aggravated and exemplary damages.
In its defence and counter-claim, dated 17 June 1998, PW denied liability and counter-claimed $937,783 in respect of unpaid fees for auditing Carib Steel's accounts for the year ended 31 March 1996.
The case was tried by Jones J. The witnesses for Carib Steel were its chairman, Mr Richard Lake, and an expert witness, Mr Collin Greenland. The witnesses for PW were the partners responsible for the valuation report and the post-acquisition audit, respectively, Mr Richard Downer and Mr Colin Maxwell, and an expert, Mr Stephen Holland.
The judge preferred the views of Mr Greenland to Mr Holland and found that PW was negligent both in the pre-acquisition valuation and in the post-acquisition audit. He held that the correct measure of damages was to be ascertained by calculating what would have been paid for the shares if the advice or information given to Carib Steel had been correct, compared with what was actually paid. He found that Carib Steel's loss was the amount attributed by PW in its valuation to Carib Cable's pension fund surplus, ie $13,849,000, and he awarded damages in that sum together with interest and costs. In effect, he appears to have proceeded as if the claim were for breach of a warranty as to the value of the pension fund surplus and to have regarded its value as nil. In his reasons for judgment, given on 24 May 2006, the judge made no reference to the counter-claim, which was treated by the parties as dismissed although no formal reference was made to it in the order.
On 29 July 2011 the Court of Appeal (Panton P, Cooke JA and Smith JA [Ag]) set aside the judgment of Jones J and entered judgment for PW on the claim and counter-claim with interest and costs. The court considered that the trial judge had not given satisfactory reasons for rejecting the evidence of PW's expert and had been wrong to prefer the evidence of Carib Steel's expert, who in the court's view was lacking in relevant expertise. The court considered also that Carib Steel's claim failed on causation of loss.
Carib Steel submits that the Court of Appeal erred in substituting its views about the expert witnesses for those of the trial judge. He had the benefit of seeing and hearing them give their evidence, and the findings which he made were properly open to him. Carib Steel also submits that the judge was properly entitled to find that PW's negligence caused it to suffer loss, but it submits that the judge was wrong to limit that loss to the value ascribed by PW to Carib Cable's pension funds surplus. It is submitted that the judge should have found that Carib Steel was entitled to recover its full loss resulting from the acquisition.
PW submits that the Court of Appeal was right to set aside the judgment for the reasons which it gave. PW's expert was not only better qualified than Carib Steel's so-called expert, but no proper grounds had been shown for rejecting the views expressed by PW's expert. Carib Steel had also failed to establish any proper basis for the judge's finding of loss.
The arguments on the hearing of the appeal rightly concentrated on the valuation report rather than the post-acquisition audit. Carib Steel submitted in its written case that the Court of Appeal was wrong to set aside the judgment in its favour in respect of both parts of its claim. However, on the oral hearing it was rightly not submitted by Ms Kitson QC that, if the Court of Appeal was right to set aside Jones J's judgment in relation to the valuation, it would have a free standing claim for damages arising from the post-acquisition audit.
Before embarking on a closer examination of the issues raised by the appeal, it is important to remember that the valuation of the shares in a company is an exercise requiring professional skill and judgment. There may be more than one way of approaching it. The question facing the courts in this case is whether PW fell below the standards properly to be expected of an accountant carrying out such an exercise. In such a case, if a properly qualified and reputable independent expert expresses a reasoned opinion that the valuation met the required professional standard, it is for the claimant to establish why that view should be rejected.
Carib Steel manufactured, imported and traded in steel products for use in the construction industry. Carib Cable manufactured and distributed cables and wire products. Its shares were largely owned by two of its directors.
In October 1994 Carib Steel entered into non-binding heads of agreement with Carib Cable's controlling shareholders by which Carib Steel agreed to subscribe for a new issue of shares equivalent to 50.1% of Carib Cable's issued share capital at a price of $32,000,000. Before going ahead with the acquisition, Carib Steel instructed PW to carry out a valuation of Carib Cable. Carib Steel provided PW with Carib Cable's audited accounts to the end of 1993 and unaudited accounts for the first 8 months of 1994. In a letter dated 5 October 1994 PW gave details to Carib Steel of the scope of the work which it proposed to carry out. It disclaimed any responsibility for loss which might result from its use of unaudited financial statements and information provided by Carib Cable's management.
The valuation report was delivered in November 1994. In its overview of Carib Cable's historic performance PW commented:
"Despite the company's fairly consistent operational performance and results, its financial condition has steadily deteriorated …
Beginning in 1992, the company increased its indebtedness to finance capital expenditures which included the purchase of approximately US $500,000 of new machinery. This machinery was fully in place by the end of the first 1 st quarter of 1993. However, the planned expansion into US-type cables had to be postponed as a result of the strike in April 1993 and a drop in existing sales from the general uncertainty surrounding the elections in early 1993 and the delay of the budget until the summer of 1993. These circumstances combined to deplete Carib Cable's working capital. Since then, liquidity has progressively worsened as a result of depressed cash flow generation from operations attributable to general economic conditions, increased interest rates and devaluation losses. As a result, the company's revolving debt has increased and has been used mainly to pay interest charges, with none being available to provide the working capital required for the company's planned export expansion."
The balance sheet figures showed that the indebtedness by way of loans from banks had risen from nil at the beginning of 1992 to almost $77,000,000 by the end of August 1994. This obviously explained the reason for Carib Cable seeking an injection of equity capital.
In assessing the actual and potential value of the company, PW took three approaches. First, it estimated the earnings value of the company in its present circumstances but under the assumption that it was completely equity financed. That method involved estimating an annual maintainable net earnings figure to which an appropriate multiplier was applied. The resulting sum was then adjusted by certain additions and deductions. The additions were for the value of the company's equipment and pension fund surplus. There were deductions for the value of outstanding loans and leases.
PW assessed the annual maintainable earnings at J $15,589,000. In considering the appropriate multiplier, it noted among the company's strengths that it had an experienced management team and among its weaknesses that it was very highly leveraged. It assessed the appropriate multiplier as 6.5. The largest deduction was for its bank indebtedness. The additions included the...
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