Equitable Life Assurance Society v Ernst & Young
| Jurisdiction | England & Wales |
| Judge | Lord Justice Brooke,LORD JUSTICE BROOKE,Lord Justice Rix,LORD JUSTICE RIX,LORD JUSTICE DYSON |
| Judgment Date | 03 November 2003 |
| Neutral Citation | [2003] EWCA Civ 1114,[2003] EWCA Civ 1721 |
| Docket Number | A3/2003/0372(A),Case No: A3/2003/0372, |
| Court | Court of Appeal (Civil Division) |
| Date | 03 November 2003 |
[2003] EWCA Civ 1114
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Langley J
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Brooke
Lord Justice Ri and
Lord Justice Dyson
Case No: A3/2003/0372,
A3/2003/0372A, A3/2003/0989
Iain Milligan QC, Robert Miles QC & Guy Morpuss (instructed by Herbert Smith) for the Appellants
Mark Hapgood QC & Cyril Kinsky (instructed by Barlow Lyde & Gilbert) for the Respondents
SUMMARY
(Note: This summary forms no part of the judgment)
By this judgment the Court of Appeal has substantially allowed an appeal by Equitable Life Assurance Ltd ("Equitable") from a judgment by Mr Justice Langley in the Commercial Court on 10 th February 2003. It has dismissed a cross-appeal by Equitable's former auditors Ernst and Young ("E&Y") against that judgment. It has also dismissed an appeal by E&Y against a later judgment in this case by Mr Justice Langley on 4 th April 2003.
In this action Equitable claims damages from E&Y for negligence in its conduct of the audit of its statutory accounts for the financial years 1997, 1998 and 1999. It asserts that E&Y was negligent in two respects. First, they failed to ensure that the "technical provisions" in the accounts complied in each of these three years with the requirements of company law (paras 9–16). Equitable says that if its accounts had not been audited negligently, its directors would have appreciated that the Society's working capital was much lower than what was shown in the accounts (paras 17–21). Secondly, E&Y failed to ensure that the 1998 and 1999 accounts contained a note, prepared in accordance with standard accounting practice, which would have warned the directors of the scale of the untoward financial consequences that would ensue if Equitable lost the litigation relating to its differential terminal bonus policy, as indeed happened in July 2000 (paras 25–26).
Equitable advanced its claim in two different ways. By its "lost sale claims" or "loss of a chance of a sale claims" it asserted that if the directors had appreciated the true position they would probably have decided to raise more working capital by an orderly sale in 1998, or by an orderly sale soon after the House of Lords' decision in July 2000. Equitable claims the money that would probably have been achieved by such sales, boosted by the adoption of a more restrictive bonus declaration policy. Alternatively, it claims damages for the loss of the chance of achieving such sales (paras 27 and 35). It also claims as damages the sums which it would not have paid out as terminal bonuses, or to which it would not have committed itself by way of reversionary bonuses, as a result of the new bonus declaration policy the directors would have instituted if they had known the true position ("the bonus declaration claims") (paras 36–37).
The judge struck out the lost sales claims and the loss of a chance of a sale claims in their entirety (paras 42–47). By his first judgment he gave Equitable the opportunity to reformulate the bonus declarations claims, and by his second judgment he allowed it to advance them on a more restricted basis, with its maximum claim being reduced from £1.6 billion to £500 million (paras 48–55).
E&Y strongly dispute that they were negligent in any way, but for the purposes of their applications to strike out the claims or to be awarded summary judgment because the claims have no real prospect of success, it had to be assumed that negligence would be proved against them. Their arguments before the judge and in the Court of Appeal were based on their contentions that Equitable's claims were bound to fail on the facts (see in particular the four main elements of the factual issues in para 61), alternatively that they were bound to fail on the law (see in particular the main legal issues identified in para 105 and the subsidiary issues discussed in paras 89–101).
The Court of Appeal has restored the lost sale claims in principle, but it has ruled that they must be formulated in terms of the loss of a chance of a sale (see paras 87–88). It has restored the bonus declaration claims in their entirety, in each case subject to the qualification contained in para 81 of the judgment.
In the Conclusion at the end of the judgment (paras 136–138) the Court of Appeal has summarised its broad reasons. Although the court expressed some sympathy for E&Y's complaint that the sheer size of Equitable's claims represented an unwarranted burden for a litigant to have to bear in the particular circumstances of the present case, it did not see how on the material before it it could slice individual heads of claim and say they could not succeed for more than a given amount. There might still be other procedural opportunities for E&Y to capitalise on their scepticism about the size of Equitable's claims (para 136–137), but it was not appropriate to adopt the course which the judge took.
Part 4 of the judgment (paras 38–41) contains the court's approach to the complex factual material before it, and Parts 8 and 9 (paras 89–135) contain the analysis of the principal arguments of law the court had to resolve on these appeals.
| Part 1 INTRODUCTION | Para No |
| Introductory | 1 |
| The background to Equitable's claim | 4 |
| Part 2 THE ALLEGED NEGLIGENCE | |
| E&Y's duty as auditors: the missing technical provision | 9 |
| The alleged effect of the missing technical provision | 17 |
| Regulatory returns | 23 |
| The absence of a contingent liability note | 25 |
| Part 3 THE TWO TYPES OF CLAIM | |
| The lost sale claims | 27 |
| The bonus declaration claims | 36 |
| Part 4 THE LEGAL APPROACH | 38 |
| Part 5 THE JUDGMENTS | 42 |
| Part 6 THE FACTUAL ISSUES | 56 |
| Part 7 LOSS OF SALE OR LOSS OF A CHANCE OF SALE? | |
| THE CORRECT APPROACH | 83 |
| Part 8 NO LOSS OF BONUS DECLARED | |
| The bonus declaration claims: no loss | 89 |
| The bonus declaration claims: mitigation | 97 |
| Part 9 THE SCOPE OF E&Y'S DUTY OF CARE, AND CAUSATION | |
| Issues relating to the scope of E&Y's duty of care and causation | 101 |
| (i) The duty of care arises in contract | 107 |
| (ii) The scope of E&Y's duty of care: the contractual documents | 108 |
| (iii) The harm, or kind of harm, from which Equitable was to be protected | 117 |
| (iv) The breach of duty is assumed | 129 |
| (v) Was the loss complained of caused by the breach? | 130 |
| PART 10 CONCLUSION | 136 |
This is the judgment of the court.
Part 1 INTRODUCTION
Introductory
This is an appeal by the claimants, the Equitable Life Assurance Society ("Equitable"), against an order of Langley J in the Commercial Court on 14 th February 2003 which had the effect that paragraphs 7 to 98 of the Re-Amended Particulars of Claim were struck out as they then stood. The judge directed that if within 14 days Equitable sought permission to amend the Re-Amended Particulars of Claim, paragraphs 68–94A, 98(a)(i)-(ii), 98(b)(i) and 98(d) (which relate to what are described as the "lost sale claims") should nevertheless remain struck out, and that he should consider any outstanding matters at the same time as he considered the proposed amendments. In due course he made a further order on 4 th April 2003 whereby he allowed the proposed amendments and made certain ancillary directions. The effect of his second order was to permit Equitable's alternative case, described as the "bonus declarations claims", to proceed to trial, but only in an amount limited to £500 million. The defendants Ernst & Young ("E&Y") appeal against that order and also cross-appeal against the judge's first order, in so far as he did not there and then strike out the whole of Equitable's claim. The judge delivered two judgments, reflecting his two orders.
At all material times E&Y acted as Equitable's auditors. By this action Equitable claims damages from E&Y for negligence in the performance of their audit duties in connection with the audit of its statutory accounts for 1997, 1998 and 1999. E&Y vigorously dispute that they were in any way negligent, but for the purposes of the present appeals, which arise out of their applications to the judge under both CPR 3.4 and CPR 24.2, they accept, as they did below, that a finding of liability is to be assumed. Nevertheless they say that Equitable's claims are both unrealistic in fact and unsustainable in law. The effect of the judgments below is that Langley J considered himself unable, sometimes with some hesitation or even reluctance, to say that all Equitable's allegations failed summarily as a matter of pure fact. Nevertheless, he limited the bonus declaration claims to the amount of £500 million repleaded by Equitable after his first judgment and struck out the lost sale claims both as a matter of fact and legal analysis. His reasons included a finding that these lost sale losses did not fall within the scope of E&Y's duty to Equitable.
On these appeals Equitable submits that the judge was wrong to limit its bonus declaration claims and wrong to regard its lost sale claims as unsustainable in law. E&Y for their part submit that the judge was wrong to regard either set of claims as realistic in fact or available in law.
The background to Equitable's claim
The story of the way in which Equitable got into severe financial difficulties in the summer of 2000 is set out in the judgments of the Court of Appeal and in the speeches of Lord Steyn and Lord Cooke of Thorndon in the House of Lords in Equitable Life Assurance Society v Hyman [2002]...
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