Man Nutzfahrzeuge AG v Freightliner Ltd
| Jurisdiction | England & Wales |
| Judge | Chadwick,Dyson,Thomas L JJ. |
| Judgment Date | 12 September 2007 |
| Court | Court of Appeal (Civil Division) |
| Date | 12 September 2007 |
Court of Appeal (Civil Division).
Chadwick, Dyson and Thomas L JJ.
Geoffrey Vos QC and Andrew Twigger (instructed by Clifford Chance) for Freightliner Ltd.
Justin Fenwick QC and Simon Salzedo (instructed by Linklaters) for the Pt. 20 defendant, Ernst & Young.
The following cases were referred to in the judgment of Chadwick LJ:
ADT Ltd v BDO Binder HamlynUNK[1996] BCC 808.
Candler v Crane Christmas & CoELR[1951] 2 KB 164.
Caparo Industries plc v DickmanELR[1990] 2 AC 605.
C & E Commrs v Barclays Bank plc[2006] 1 CLC 1096; [2007] 1 AC 181.
Electra Private Equity Partners v KPMG Peat MarwickUNK[2001] 1 BCLC 589.
Galoo Ltd v Bright Grahame MurrayWLR[1994] 1 WLR 1360.
Hedley Byrne & Co Ltd v Heller & Partners LtdELR[1964] AC 465.
Henderson v Merrett Syndicates Ltd[1994] CLC 918; [1995] 2 AC 145.
James McNaughton Paper Group Ltd v Hicks Anderson & CoELR[1991] 2 QB 113.
Morgan Crucible Co plc v Hill Samuel Bank & Co LtdELR[1991] Ch 295.
Peach Publishing Ltd v Slater & Co[1998] PNLR 364.
Phelps v Hillingdon London Borough CouncilELR[2001] 2 AC 619.
Sasea Finance Ltd v KPMGUNK[2001] 1 All ER 676.
Smith v Eric S Bush (a firm)ELR[1990] 1 AC 831.
South Australia Asset Management Corp v York Montague Ltd[1996] CLC 1179;[1997] AC 191.
Spring v Guardian Assurance plc[1994] CLC 766; [1995] 2 AC 296.
Sutherland Shire Council v HeymanUNK(1985) 60 ALR 1.
White v JonesELR[1995] 2 AC 207.
Williams v Natural Life Health Foods LtdWLR[1998] 1 WLR 830.
Negligence Duty of care Auditors Accountants Special audit duty Sale of business Deceit Purchaser induced to enter agreement to buy subsidiary by fraudulent misrepresentations of subsidiary's financial controller Vendor liable in deceit claimed against auditors for breach of duty of care Auditors did not assume responsibility to parent for liability to purchaser arising from fraudulent statements made by subsidiary's financial controller Not foreseeable that nature of financial controller's participation in negotiations would give rise to parent incurring liability to purchaser Not foreseeable that financial controller would make representations as to accuracy of accounts which went beyond or were outside those contained in share purchase agreement Even if that position had been foreseen auditors did not provide their audit statement with the intention that the accounts to which it related would be used in that context.
This was an appeal by the defendant and Part 20 claimant (Freightliner) against a judgment in favour of the Part 20 defendant, Ernst & Young (E&Y).
In March 2000 the claimant, Man, bought a UK truck manufacturer, ERF, from a Canadian truck manufacturer, Western Star. E&Y were the auditors of Western Star and ERF. After ERF had been sold to Man, Western Star was acquired by Freightliner, a subsidiary of Daimler-Chrysler AG, and Freightliner became responsible for any liabilities incurred by Western Star in connection with the sale of ERF to Man.
After Man's acquisition of ERF it came to light that the financial controller of ERF had been fraudulently manipulating its reported accounts. ERF's statutory accounts for the years ending 30 June 1998 and 1999 had been audited by E&Y, who accepted that, had the audits been carried out with proper skill and care, defects in the accounts would have been identified.
Man brought proceedings against Freightliner and the judge held that Freightliner was liable in deceit because Man had been induced to enter into the agreement to buy ERF by fraudulent statements made by ERF's financial controller. In the Part 20 proceedings Freightliner sought to recover from E&Y any liability it incurred to Man.
The judge held that although E&Y owed a general audit duty to Western Star, as the owner of all the shares in ERF, the loss which Freightliner sought to recover was not within the scope of a general audit duty of that kind because the loss was not one which arose out of the mismanagement of ERF but one which was caused by dishonest statements made by the financial controller of ERF on behalf of Western Star in the course of negotiations for the sale of the company. The judge further held that E&Y had not assumed responsibility to Western Star for the loss which Freightliner sought to recover and that E&Y had not been in breach of duty in connection with the due diligence exercise performed before the acquisition of ERF.
Freightliner appealed arguing that E&Y did owe a special audit duty to Western Star.
Helddismissing the appeal:
1. The existence of a special audit duty could be determined by the application of an assumption of responsibility test. (C & E Commrs v Barclays Bank plc[2006] 1 CLC 1096; [2007] 1 AC 181applied.)
2. The loss which Freightliner sought to recover was the direct result of the dishonesty of the financial controller of ERF rather than the inaccuracy of the accounts themselves and therefore the relevant question was whether E&Y undertook a special audit duty to Western Star (or, so far as relevant, to Man) in respect of representations made by the financial controller as to the accuracy of the ERF accounts to which E&Y's audit statements related. The determinative issue was whether, having found that it was foreseeable that Western Star would rely on the accuracy of the accounts in its dealings with Man, the judge was wrong to hold that it was not foreseeable that the nature of the financial controller's participation in the negotiations would give rise to Western Star incurring a liability to Man for fraudulent misrepresentation.
3. The judge had been correct to decide that E&Y did not assume responsibility to Western Star for the use which the financial controller made of the ERF accounts in the context of his dishonest assurance to Man that the information on which those accounts were based was accurate. There was no factual basis for a challenge to the judge's finding that it was not foreseeable by E&Y that Western Star, and, in particular, ERF's financial controller on behalf of Western Star, would make any representations as to the accuracy of ERF's accounts which went beyond, or were outside, those contained in the share purchase agreement. It was foreseeable, as the judge held, that the share purchase agreement would contain representations and warranties. But it would also have been expected, that Western Star, as seller, would be concerned to limit its exposure to those representations and warranties which were contained in the share purchase agreement. There was no reason for E&Y to think that Western Star would allow a position to arise in which it was exposed to liability for extra-contractual representations made by ERF's financial controller.
4. Mere foresight was not enough. Even if E&Y could have foreseen that Western Star might allow a position to arise in which it was exposed to liability for extra-contractual representations made by ERF's financial controller, it was impossible to conclude that the judge was wrong to hold that (viewed objectively) E&Y did not provide their audit statement with the intention that the accounts to which that statement related would be used in that context. To hold that the auditors assumed responsibility for the use which a dishonest employee of the audited company might make of the accounts in the context of the parent company's negotiations for the sale of the company would be to impose on them a liability greater than they could reasonably have thought they were undertaking. It was impossible to hold that E&Y (rather than Western Star) assumed responsibility for the use by ERF's financial controller, on behalf of Western Star, of the information which E&Y had provided to Western Star. (Caparo Industries plc v DickmanELR[1990] 2 AC 605 and C & E Commrs v Barclays Bank plc applied.)
Chadwick LJ:
1. This is an appeal from an order made on 28 October 2005 by Moore-Bick LJ, sitting as a judge of the Commercial Court, in proceedings brought by MAN Nutzfahrzeuge AG (MN) and others against Freightliner Limited (Freightliner) and in related proceedings brought under CPR Pt 20 by Freightliner against Ernst & Young, a limited liability partnership practising as accountants in Canada (E&Y (Canada)'), Ernst & Young, a firm practising in the United Kingdom (E&Y (UK)') and certain named individuals who were members of the Canadian partnership. The judge gave judgment for the claimants against Freightliner with damages to be assessed. The appeal from that part of his order has been compromised. He gave judgment for the Part 20 defendants against Freightliner. It is Freightliner's appeal from that part of his order which is now before this court.
2. The underlying facts are fully set out by the judge at paragraphs [1] to [55] of his judgment, [2005] EWHC 2347 (Comm). The following summary is, I think, sufficient to provide the context for the issues which this Court needs to decide:
(1) MN is a subsidiary of MAN AG, the holding company of a large German industrial group. MN has responsibility within the group for the operation of the commercial vehicle division. By a share purchase agreement dated 30 January 2000 MN agreed to purchase from Western Star Trucks Holdings Limited (Western Star), a Canadian truck manufacturer, the whole of the issued share capital of ERF (Holdings) plc for the sum of 65.3 million, subject to certain adjustments. The sale was completed on 8 March 2000.
(2) ERF (Holdings) plc, through its subsidiary ERF Limited, (together ERF) was a manufacturer of trucks in the United Kingdom. ERF had been acquired by Western Star in June 1996.
(3) E&Y (Canada) had been appointed as auditors to the Western Star Group in March 1991. Following the acquisition of ERF Holdings plc, E&Y (UK) were appointed auditors of that company and its subsidiary.
(4) Western Star was acquired by Freightliner LLC in June 2000: that is to say, after the sale of ERF to MN had been...
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