Man Nutzfahrzeuge AG and another v Freightliner Ltd and Others

JurisdictionEngland & Wales
JudgeLord Justice Moore-Bick
Judgment Date28 October 2005
Neutral Citation[2005] EWHC 2347 (Comm)
Docket NumberCase No: 2002 Folio 1041
CourtQueen's Bench Division (Commercial Court)
Date28 October 2005
(1) Man Nutzfahrzeuge AG
(2) Man AG
(3) ERF Limited
(4) ERF (Holdings) Plc
(5) Man Erf Uk Ltd
Freightliner Ltd
(1) Ernst & Young (a limited liability partnership practising in Canada)
(2) Ernst & Young (a firm practising in the United Kingdom)
(3) The Individuals Listed in Schedule a to the Pt.20 Claim
Part 20 Defendants

[2005] EWHC 2347 (Comm)


The Right Honourable Lord Justice Moore-Bick

Case No: 2002 Folio 1041




Mr. Dominic Kendrick Q.C. and Mr. Timothy Kenefick (instructed by Slaughter and May) for the claimants

Mr. Geoffrey Vos Q.C. and Mr. Andrew Twigger (instructed by Clifford Chance) for the defendant

Mr. Justin Fenwick Q.C. and Mr. Simon Salzedo (instructed by Linklaters) for the Part 20 defendants

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version may be treated as authentic.

The Rt. Hon. Lord Justice Moore-Bick


A. Introduction and Background

1. The parties

2. The origins of the dispute

(a) Fraudulent manipulation of ERF's accounts and false VAT claims

(b) Events leading to the purchase by MN of ERF

(c) Events following the purchase

(d) Developments following the discovery of the fraud

3. The Share Purchase Agreement

4. The claims and defences being advanced in these proceedings

(a) MN's claims against Freightliner

(b) ERF's claim against Freightliner

(c) Freightliner's claims against E&Y (UK)

(d) Freightliner's claims against E&Y (Canada)

B. MN's claims against Freightliner

1. MN's claim in deceit

(a) Did Mr. Ellis make false and dishonest representations?

(b) Is Freightliner liable for Mr. Ellis's false representations?

(c) Did Mr. Ellis's representations about ERF's accounts induce MN to enter into the Share Purchase Agreement?

(d) Section 14.10 of the Share Purchase Agreement

(e) Was MN fraudulently induced to retain the services of Mr. Ellis?

(f) Conclusions

2. MN's claim under the Share Purchase Agreement

(a) The representations on which MN relied

(b) The nature of the representations

(c) The unqualified representations and warranties

(d) The qualified representations and warranties

(e) The representations relating to ERF's tax position – Section 4.1(oo)

(f) The construction of Article 12

(g) The Settlement Agreement

(h) Conclusions

3. Causation and remoteness of damage

(a) The principles

(b) The facts

4. Quantum

5. Interest

6. Summary of conclusions

C. Freightliner's claim against E&Y (UK)

1. Was E&Y (UK) in breach of a duty of care owed to Western Star in relation to the audit of ERF?

(a) Did E&Y (UK) owe Western Star a duty of care to ensure that the accounts of ERF gave a true and fair view of its financial position?

(b) Were E&Y (UK) in breach of duty?

(c) What were the consequences of E&Y(UK)'s negligence?

(d) The scope of E&Y (UK)'s liability

(e) Limitation

2. Were E&Y (UK) in breach of a duty of care owed to Western Star in relation to the conduct of the due diligence exercise?

(a) What duty did E&Y (UK) owe to Western Star in relation to the conduct of the due diligence exercise?

(b) Were E&Y (UK) in breach of duty?

3. Contributory fault

(a) Early invoicing

(b) Spanish invoicing

(c) Weakening of ERF's management

(d) Unreasonable pressure on ERF to produce results

(e) The introduction of BaaN Financial

(f) Accepting management reports based on estimates

(g) Failure to monitor and control ERF

(h) Failure to respond properly to the tip-off

(i) Failure to understand ERF's business

(j) The representations and warranties in the Share Purchase Agreement

4. The Contribution claim

(a) Did E&Y (UK) owe a duty of care to MN?

(b) Was there a breach of duty?

(c) For what damage might E&Y(UK) be held liable to MN?

(d) Apportionment of loss

5. Conclusion

D. Freightliner's claim against E&Y (Canada)

1. Breach of duty as auditor

(a) Failing to make appropriate reports to management

(b) Failing to respond adequately to the tip-off and the Misener rumour

2. Failing to act with reasonable skill and care in connection with the due diligence exercise

3. Contributory fault

4. Conclusion



























































Lord Justice Moore-Bick

Lord Justice Moore-Bick

A. Introduction and Background


The parties


In 1933 Edwin Richard Foden began building motor lorries at Sandbach in Cheshire. That business eventually developed into the ERF group of companies of which ERF Holdings Plc was the parent and ERF Limited the principal trading company which continued to build a range of trucks sold under the 'ERF' badge, mainly to buyers in this country. (References in this judgment to "ERF" generally refer to ERF Holdings Ltd and thus to the group as a whole, but where the production of trucks is under discussion it should be understood to refer to either or both of the companies as the context requires.) ERF did not produce its own components, but assembled trucks using components obtained from suppliers in this country and abroad. One of the most popular features of ERF trucks was the Cummins engine produced in the United States which was highly regarded for its reliability and fuel efficiency. Although it did produce a standard range of vehicles, ERF specialised in making trucks to meet the particular requirements of individual customers and was to that extent producing a bespoke product. As a result the brand commanded a high degree of loyalty among customers, many of whom also liked to buy trucks made in Britain.


For some years the truck manufacturing industry has been undergoing a period of consolidation as manufacturers have sought to obtain the benefits of economies of scale. Margins on the sale of new trucks have been low and many smaller manufacturers have been taken over by larger groups as they have come under intense financial pressure. In June 1996 ERF was acquired by a Canadian truck manufacturer, Western Star Trucks Holdings Ltd ("Western Star"), whose operations were directed by its chairman, Mr. Terence Peabody. Western Star's operations were based in Kelowna, British Columbia, but its subsidiaries included a company called Orion Bus Industries Inc. ("Orion") based in Toronto. Following the take-over of ERF by Western Star Mr. John Bryant, who had been managing director of ERF since November 1991, was appointed to the board of Western Star and at the same time also became managing director of Orion, dividing his time between that company and ERF.


In July 2000 Freightliner LLC, an American subsidiary of Daimler-Chrysler AG, acquired the whole of the share capital of Western Star. Western Star's Canadian operations were merged into Freightliner Ltd, the defendant in this action. It is common ground that as a result of the merger Freightliner is the successor in title to Western Star and responsible for any liabilities incurred by Western Star prior to the merger.


MAN AG ("MAN") is the holding company at the head of a large German industrial group whose operations range from the development and production of diesel engines (including the well-known marine engines), through the manufacture and sale of printing presses and a wide range of other industrial machinery to the provision of commercial and financial services. The first claimant, MAN Nutzfahrzeuge AG ("MN"), is a subsidiary of MAN and is responsible for the operation of the group's commercial vehicle division. As such it is a manufacturer of heavy trucks and was one of ERF's competitors in the European market. It carried on business in the UK through its subsidiary MAN Truck & Bus UK Ltd.


Ernst & Young are well-known accountants with a world-wide practice which is carried on through associated partnerships established in different jurisdictions. This case concerns two of those partnerships, Ernst & Young, a limited liability partnership practising in Canada ("E&Y (Canada)") and the firm of Ernst & Young that is established and practises in this country ("E&Y (UK)"). E&Y (Canada) were appointed auditors to the Western Star group in March 1991. At the time with which this case is concerned Mr. Edward Kendrick was the partner with principal responsibility for Western Star's affairs.


Following the acquisition of ERF in June 1996 E&Y (UK) were appointed auditors of ERF. Miss Alison Cunningham (later to become Mrs. Sinderson) was responsible for the group's affairs. For convenience I shall refer to her throughout this judgment as Mrs. Sinderson.

2. The origins of the dispute

(a) Fraudulent manipulation of ERF's accounts and false VAT claims


This is an unusual case, not so much because it has its roots in fraud, but because the existence and general nature of that fraud is accepted and recognised by all parties to the action. It is common ground that from about the middle of 1997 the accounts of ERF, both the monthly management accounts and the year-end statutory accounts, were persistently manipulated by its financial controller, Mr. Stephen Ellis, who from around the same time was also responsible for systematic frauds on H.M. Customs and Excise by means of false claims for the repayment of VAT.


Mr. Ellis joined ERF in August 1976 and was subsequently employed in various positions in its finance department until July 2001 when his activities were discovered. He was not a qualified accountant, but had learnt his accountancy and bookkeeping skills in the course of his employment, rising by 1998 to a senior position within the department as deputy to the then financial controller, Mr. Andrew Williamson.


Confronted with the results of the investigations into ERF's...

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