Royal Bank of Scotland Plc v Bannerman Johnstone Maclay
| Jurisdiction | Scotland |
| Judgment Date | 23 July 2002 |
| Docket Number | No 7 |
| Date | 23 July 2002 |
| Court | Court of Session (Outer House) |
Outer House
Lord Macfadyen
PracticeProcessPleadingsRelevancyLenders relying on audited accounts prepared for borrowerWhether averments instructed a proximate duty of care where no averment that the auditing accountants intended the lenders to rely on accountsWhether averments sufficient to establish vicarious liability of accountants for employee seconded to and under control and direction of third partyWhether averments should be remitted to probation
The pursuers raised an action of damages against the defenders in relation to losses said to have been sustained through a breach of duty of care on the part of the defenders and fraud on the part of an employee of the defenders for whom they were vicariously liable. The pursuers averred that they were a bank which provided working capital to two companies by lending money to the companies through overdraft facilities, term loans and taking up in stages an option to purchase shares in the second of the companies. They did so in reliance on audited accounts of the second company audited by the defenders and which were allegedly erroneous in certain respects due to lack of reasonable care on the part of the defenders. The two companies went into receivership with the result that the sums lent were to a substantial extent lost. Had the accounts not contained the errors in question, the pursuers would not have provided the working capital they did. The defenders were closely involved in the financial affairs of the two companies and were aware of the pursuers' role in providing working capital. They also knew because of the terms of the companies' overdraft facility letters that the audited accounts would be passed to the pursuers and relied upon by them for the purpose of making lending level decisions. In the circumstances the defenders owed a duty of care to the pursuers in respect of the audited accounts and were liable in damages to them for the loss sustained. The pursuers further averred that their loss was caused by a fraudulent scheme in which an employee of the defenders was a participant, to overstate the profitability of the first company and that these fraudulent actings were within the scope of the employee's authority. Accordingly the defenders were liable for loss suffered by the pursuers as a consequence of the employee's wrongdoing.
The defenders contended that the case plead was irrelevant as the pursuers required not simply to show that the adviser knew the identity of the person to whom advice or information is to be communicated, the purpose for which the person is to be so provided and that the person is likely to rely thereon for the known purpose, but also that it must be averred that the adviser intended that the person should rely on the information, ie the audited accounts. In relation to the averments anent fraudulent actings of the defenders' employee, the defenders argued that the pursuers' averments did not relevantly support the proposition that at the material time he was in the employment of the defenders. He was said to have been seconded to the first company as its financial controller at the material time and could not therefore be considered as being in the defenders' employment.
The pursuers argued that intention was not essential and that even where the defenders were under a statutory duty to audit accounts, the absence of a disclaimer in present circumstances inferred that an assumption of responsibility had arisen from the act of providing the information. The pursuers also contended that the defenders were under an onus to aver that the employee had been transferred to the employment of the first company.
Held (1) that the authorities established that proximity in relation to a duty of care in circumstances such as the present was determined by whether there had been an assumption of responsibility by the party sought to be made liable (p 153CE); (2) that where no disclaimer of responsibility was made that enabled an assumption of responsibility to be inferred and the averments were relevant to show a duty of care (pp 154H156H); (3) that on the pursuers' pleadings the employee had been transferred to the pro hac vice employment of the first company and the defenders were not vicariously liable for his actings (pp 166E168E); and averments anent vicarious liability excluded from probation and quoad ultra proof before answer allowed.
The Royal Bank Of Scotland raised an action of damages against Bannerman Johnstone Maclay, a firm of chartered accountants, and the individual partners thereof.
The cause called before the Lord Ordinary (Lord Macfadyen) for debate on the commercial roll on the defenders' plea to the relevancy.
Cases referred to:
Al Saudi Banque v Clark PixleyELR [1990] 1 Ch 313
Armagas Ltd v MundogasELR [1986] AC 717
Bank of Credit and Commerce International (Overseas) Ltd v Price Waterhouse (No 2)UNK [1998] BCC 617
Candler v Crane, Christmas & CoELR [1951] 2 KB 164
Caparo Industries plc v DickmanELR [1990] 2 AC 605
Esanda Finance Corporation Ltd v Peat Marwick HungerfordsUNK (1997) 71 ALJR 448
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 LtdELR [1995] 2 AC 145
Hercules Managements Ltd v Ernst & Young 146 DLR (4th) 577
James McNaughton Paper Group Ltd v Hicks Anderson & CoELR [1991] 2 QB 113
Law Society v KPMG Peat MarwickUNKUNK [2000] 1 All ER 515 and [2000] 4 All ER 540
Lister v Hesley HallELR [2002] 1 AC 215
Malley v London, Midland and Scottish RailwayELR [1944] AC 129
Marshall v William Sharp & Sons Ltd 1991 SLT 114
Merrett v BabbWLR [2001] 3 WLR 1
Mersey Docks v CogginsELR [1947] AC 1
Phelps v Hillingdon London Borough CouncilWLR [2000] 3 WLR 776
Smith v BushELR [1990] 1 AC 831
Stephen v Thurso Police Commissioners [1876] 3R 535
United Africa Co Ltd v Saka OwoadeELR [1955] AC 130
Williams v Natural Life Health Foods LtdWLR [1998] 1 WLR 830
Textbooks referred to:
Salmond, Torts, 1st Ed., p. 83
Salmond and Heuston, Torts, 21st Ed
At advising on 23 July 2002, the court sustained the defender's plea to the relevancy in respect of the averments anent vicarious liability, repelled the pursuers' second and sixth pleas-in-lawdismissed the fourth conclusion and quoad ultra allowed a proof before answer.
LORD MACFADYEN
Introduction
[1] The defenders are a firm of chartered accountants. During the period material for the purposes of this action they were the auditors of APC Limited (APC). During that period the pursuers lent substantial sums of money to APC and to its wholly-owned subsidiary APC Civils Limited (Civils). In September 1998 the pursuers appointed receivers of APC and Civils, and in the event the sums lent have to a substantial extent been lost. In this action the pursuers make various claims for damages against the defenders. The grounds of action fall into two broad categories. First, the pursuers allege that the defenders, as auditors of APC, owed them a duty of care, and that they have suffered loss as a result of the defenders' breach of that duty. Secondly, the pursuers allege that their loss was caused by fraud on the part of one Michael McMahon (McMahon), who was at the time of the acts in question an employee of the defenders seconded to act as APC's financial controller, and that the defenders are vicariously liable for the consequences of his wrongdoing. The defenders dispute the relevancy of the pursuers' pleadings in various respects, and the case was accordingly appointed to debate.
The Pursuers' Pleadings
[2] The pursuers conclude for payment of four separate sums by the defenders. The sums concluded for are, respectively, (1) 12,016,000, (2) 7,116,000, (3)1,947,000 and (4) 12,016,000. Each of the second, third and fourth conclusions, as they stood at the beginning of the debate, began with the word Separatim, but it became clear that the relationships among the conclusions were more complex than that form of words suggested. I shall return to that matter later, in the context of the averments and pleas-in-law relating to loss.
[3] In article 2 of the condescendence the pursuers aver that APC were incorporated (under a different name) on 11 October 1994, and began to trade as a plant hirer to the construction industry in December 1994. Civils were incorporated, as a wholly owned subsidiary of APC, on 15 January 1997, in order to carry out APC's contract work in particular on contracts relating to the M74 and M77 motorways. Civils began trading in September 1997.
[4] In article 3 of the condescendence it is averred that on 24 September 1998 the pursuers appointed joint receivers of APC. On 28 September 1998 they appointed the same persons as joint receivers of Civils. There is a dispute between the parties as to the circumstances which led to the appointment of the receivers, but nothing turns on that for present purposes.
[5] In article 4 of the condescendence the pursuers aver that the defenders were the auditors of APC's accounts. It is not said that they audited the accounts of Civils. It is averred that, in particular, the defenders audited the accounts of APC for the periods to 30 November 1995 and 31 March 1997. In respect of those periods the defenders signed unqualified audit reports dated 16 April 1996 and 15 January 1998 respectively. It is further averred that the defenders were in the course of finalising the accounts of APC for the period to 31 March 1998 when the receivers were appointed. They had already by then prepared the accounts for that period in draft.
[6] In article 5 of the condescendence it is averred that the pursuers were the principal bankers of APC and Civils from the dates on which those companies respectively commenced business. APC adopted that name in January 1995 after a management buy-out of Adam Bruce Plant Hire Ltd (Adam Bruce). At that time APC assumed liability for...
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