Man Nutzfahrzeuge AG & Anor v Freightliner Ltd & Anor

This is an appeal from an order made on 28 October 2005 by Lord Justice Moore-Bick, 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.

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:

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.

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.

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.

Western Star was acquired by Freightliner LLC in June 2000: that is to say, after the sale of ERF to MN had been completed. Freightliner LLC is a subsidiary of Daimler-Chrysler AG. Western Star’s Canadian operations were merged into Freightliner Limited. It was common ground in the proceedings that Freightliner was responsible for any liabilities incurred by Western Star: in particular, that Freightliner was responsible for any liabilities in connection with the sale of ERF to MN.

Mr Stephen Ellis had joined ERF in August 1976. He had been employed in various positions in the finance department throughout the period up to the acquisition of ERF by MN (and for some twelve months thereafter). By 1998 he had risen to a senior position in that department as deputy to the financial controller. In May 1998 he was appointed financial controller of ERF and thus became the most senior member of staff responsible for ERF’s financial affairs.

As the judge observed (at paragraph [7] of his judgment) it was an unusual feature of the proceedings that it was common ground between the parties that, from about the middle of 1997, the accounts of ERF – both monthly management accounts and year-end statutory accounts – had been persistently manipulated by Mr Ellis. The judge explained the nature of Mr Ellis’ fraud at paragraphs [10], [11] and [13] of his judgment. I will return to his findings later in this judgment. For the present it is sufficient to note that the effect of the fraud was that neither the statutory accounts prepared by Mr Ellis and his staff as at 30 June 1998 (the end of ERF’s financial year) nor those prepared as at 30 June 1999 gave a true and fair view of its financial position and affairs. In particular, the accounts were founded on false journal entries in the purchase ledger control account. Those entries gave rise to a discrepancy between the purchase ledger itself and the purchase ledger control account; which Mr Ellis disguised by producing a false reconciliation between the two figures.

ERF’s statutory accounts for the years ending 30 June 1998 and 1999 were the subject of audit by E&Y (UK). The partner responsible for the audit, in respect of both years, was Miss Alison Cunningham (later to become Mrs Sinderson). The accounts were signed off by the auditors, on 4 May 1999 and 4 November 1999 respectively, without qualification. It was accepted by E&Y (UK) that, had the audits been carried out with proper skill and care, defects in the accounts would have been identified.

By July 1999 MN had expressed interest in acquiring ERF from Western Star and had been provided with copies of ERF’s audited accounts for the years ended 30 June 1997 and 30 June 1998. In August 1999 representatives of MN and Western Star met to open negotiations: in particular to discuss the method for establishing a price for ERF. Mr Ellis was present at that meeting. The judge found that the discussion proceeded on the basis of accounts prepared by Mr Ellis, including a profit and loss account for the year ended 30 June 1999 for ERF (Holdings) Plc, a balance sheet as at 30 June 1999 for that company, a comparison between ERF’s actual profit and loss figures for the year ended 30 June 1999 and its budget for the year ending 30 June 2000, and a comparison between ERF’s actual profit and loss figures for the year ended 30 June 1999 and the forecast figures for that year. The judge found that, during that meeting, MN representatives asked detailed questions about those documents; and that Mr Ellis provided answers to many of those questions.

Shortly before the June 1999 accounts were signed off by the auditors, MN had instructed accountants, Deloitte & Touche (“D&T”), to conduct a due diligence investigation of ERF and its affairs. D&T were given access to E&Y (UK)’s working papers on the terms of a “hold harmless” letter dated 19 October 1999. The due diligence exercise commenced on 2 November 1999 and continued until 19 November 1999. Mr Ellis was a key participant: his role was to respond to questions relating to the ERF accounts and other financial matters. As the judge found, throughout the course of the exercise:

On 18 January 2000 Mr Ellis sent MN a copy of ERF's management accounts for the period ending 31 December 1999. The management accounts showed net assets of £26.3 million and earnings before interest, tax, depreciation and amortisation (“EBITDA”) of £4.834 million. Both figures were generally in line with earlier forecasts. As the judge found (at paragraph [36] of his judgment), although an analysis of the accounts suggested that ERF's financial position had deteriorated slightly since June 1999, the change was not regarded as significant in the context of the negotiations as a whole.

As I have said, the judge explained the nature of Mr Ellis’ fraud at paragraphs [10], [11] and [13] of his judgment. I gratefully adopt that explanation for the purposes of this judgment:

In fairness to Mr Ellis, it should be noted that, as the judge observed (at paragraph [9] of his judgment), there was nothing to suggest that he or anyone connected to him benefited financially from his activities. But the judge had no doubt that Mr Ellis knew that he had been “manipulating the accounts of ERF and systematically falsifying its VAT returns”. Three findings of fact are of importance in the context of the present appeal. First (at paragraph [77] of the judgment), that no-one other than Mr Ellis was aware that he had been falsifying the ERF accounts. Second (also at paragraph [77]), that no-one other than Mr Ellis made any representations to MN in the course of the negotiations for the sale of ERF which he did not believe to be true. Third (at paragraph [83]), that:

As I have said, the share purchase agreement made on 30 January 2000 contained a large number of representations and warranties relating to the state of ERF’s business. Copies of ERF's audited accounts for the year ending 30 June 1999 (“the June accounts”) and management accounts for the six months ending 31 December 1999 (“the December accounts”) were annexed to the agreement and formed the basis for a number of those representations and warranties. For the purposes of this appeal it is necessary to note only the following:

Some of the representations and warranties on which MN relied were qualified by Western Star's state of knowledge. In that context, it is relevant to note article 1.6:

Article 12 contained important limitations on the indemnity given by Western Star in respect of inaccuracy in the representations made or breach of the warranties given:

Proceedings were commenced against Freightliner in 2002: that is to say, after the period of twelve months from closing in relation to which article 12.3 imposed a limitation on claims for breach of warranty and non-fraudulent misrepresentation. The claimants were MN and MAN AG (“the MN claimants”), ERF Limited, ERF (Holdings) Plc and MAN ERF UK Limited (a successor to the business of ERF Limited) (together “the ERF claimants”). As the judge explained (at paragraph [65] of his judgment) the MN claimants sought to recover from Freightliner all the losses incurred arising out of the purchase of ERF on the basis that Western Star was liable in deceit at common law and liable for fraudulent misrepresentation under the share purchase agreement. The ERF claimants – or, more precisely, MAN ERF UK Ltd to whom the claims of ERF (Holdings) Plc and ERF Limited had been assigned – sought to recover by way of an indemnity under article 12 of the share purchase agreement; but (as the judge noted at paragraph [74] of his judgment), after he had raised the question whether there were any circumstances in which ERF might be entitled to succeed in a claim against Freightliner if MN itself could not do so, the ERF claim was not pursued.

Although Freightliner does not, now, pursue an appeal against the judgment against it in the main proceedings, it is necessary – in order to address its appeal in the Pt 20 proceedings - to understand the basis upon which Freightliner was held liable to the MN claimants. At the risk of doing less than justice to the judge’s careful analysis of the issues before him in the main proceedings, the position can, I think, be summarised quite shortly.

The judge explained (at paragraph [66] of his judgment) that MN's primary case was that it was induced to purchase ERF by false representations on the part of Mr Ellis that the June and December accounts provided a true and fair picture of ERF's financial position. It sought to hold Freightliner liable for that deception on the grounds that, from the time of his attendance at the meeting in August 1999, Mr Ellis was speaking on behalf of Western Star whenever he provided MN with information about ERF's accounts or its financial position generally. It contended that in the course of that meeting and the various meetings and discussions that followed (including the due diligence exercise) Mr. Ellis made a series of representations, both explicit and implicit, to the effect that the accounts of ERF which formed the basis for the parties' discussions had been prepared in good faith and that as far as he was aware they gave a true and fair picture of ERF's financial position, whereas to his knowledge that was far from the truth. It therefore sought to recover by way of damages for deceit at common law the whole of the amount that it paid to acquire ERF together with the amount that it had spent to keep it going until the completion of its ultimate reorganisation in April 2003, less its value as a going concern at that date. The total amount claimed was in the order of £350 million.

The judge examined the claim in deceit at paragraphs [77] to [129] of his judgment. He held that MN were entitled to succeed in that claim. At paragraph [130] he expressed his conclusion:

As an alternative to its claim in deceit MN had argued that it was entitled to recover damages in the same amount under one or more of the provisions of the share purchase agreement: on the grounds that the representations made by Western Star about the conduct of ERF's business, its accounts and its tax position had been false and that the warranties given in respect of them had been broken. Recognising that article 12 of the agreement imposed restrictions on the right to recover for simple misrepresentation or breach of warranty, MN asserted that its claim was a claim for fraudulent misrepresentation because, in each case, the knowledge of Mr Ellis was to be attributed to Western Star. In response to that claim (as the judge explained at paragraph [71] of his judgment) Freightliner accepted that there had been breaches of many (though not all) of the warranties on which MN relied; but it did not accept that it was affected by Mr Ellis' knowledge except in those cases where the agreement expressly so provided. In that context it is important to keep in mind that the circumstances in which knowledge held by one person (in this case, Mr Ellis) can be attributed to another (in this case, Western Star) are not the same (or not necessarily the same) as those in which a principal is held vicariously liable for the tort of deceit committed by his agent. As the judge put it:

The judge examined that question at paragraphs [142] to [167] of his judgment. He concluded, first as a matter of general principle, that the knowledge of Mr Ellis as to the falsity of the representations on which MN relied could not be treated as the knowledge of Western Star for the purposes of deciding whether the representations contained in the share purchase agreement were made fraudulently (paragraph [161]); and, second, that the provisions in article 1.6 of the agreement did not lead to a different conclusion in the present case.

The alternative claim, founded on the representations and warranties in the share purchase agreement, raised a number of other points. Freightliner argued (amongst other matters) that article 12 was intended to provide an exhaustive code regulating MN's right to recover for breaches of the agreement. Although it accepted that claims for fraud could be made outside the twelve month time limit, it contended that the remedy for a breach of any kind was limited to the indemnity provided in Article 12.1 which provided a more limited measure of recovery than that available at common law in respect of the tort of deceit. The judge addressed that question at paragraphs [182] to [197]. It is not, I think, necessary (in the context of this appeal) to set out his reasoning in relation that question – or in relation to each of the other contentions advanced before him in the main proceedings. It is sufficient to note his conclusions:

The Part 20 claim was commenced on 12 May 2003. The judge described Freightliner’s claim against E&Y (UK) at paragraph [75] of his judgment:

The judge addressed the first of what may be described as the direct claims against E&Y (UK) – that is to say, the claim which he had identified under (i) of paragraph [75] – at paragraphs [323] to [411] of his judgment. He did so by posing five questions: (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) what was the scope of E&Y (UK)’s liability; and (e) to what extent had E&Y (UK) limited their liability under the terms of their engagement letter.

Although the judge gave a definitive answer to each of those questions – other than the last, on which he preferred to express only a provisional view – he recognised that, having held (at paragraph [360]) that E&Y (UK) owed no duty of care to Western Star to protect it from a loss of the kind which it sought to recover in the present case, it was unnecessary to go on to consider whether E&Y (UK) were in breach of duty. But, nevertheless, he did so; on the basis (as he said at paragraph [361]) of an assumption that “in carrying out their audits of ERF's 1998 and 1999 annual accounts E&Y (UK) owed a duty of care to Western Star to protect it from such loss as it might suffer in connection with the sale of ERF to MN as a result of any material inaccuracy in the accounts”. He concluded that, in a number of respects (some of which were not contested), E&Y (UK) had been negligent. But, in the judge’s view (paragraph [395]), it was only the failures, when conducting the audit of each of the 1998 and 1999 financial years, to verify the purchase ledger control account reconciliation and properly to investigate the VAT position that were of any real significance.

It was on that basis that the judge went on to consider what consequences flowed from that negligence. He concluded (at paragraphs [400] to [402]) that, had E&Y (UK) identified the flaws in the 1998 or 1999 accounts the probable consequences would have been that Mr Ellis was dismissed, that Western Star put ERF into liquidation, and that the sale of ERF to MN did not proceed.

It was submitted to the judge that, even if E&Y (UK) did owe a duty of care to Western Star in making its audit statement, the loss which Freightliner was seeking to recover did not fall within the scope of that duty. The judge observed (at paragraph [403] of his judgment) that that “was just another way of approaching the question whether E&Y (UK) owe a duty of care to Western Star at all”. He said this (ibid);

The judge accepted that, in the present case, it was foreseeable that Western Star would rely on the accuracy of the accounts in its dealings with MN and that, if a contract were concluded between them for the sale of ERF, it might contain warranties which would be broken if the accounts were inaccurate. Loss in the form of liability to MN for breach of warranty would, therefore, fall within the scope of the duty of care. But, in the light of his decision that Western Star (and Freightliner) was not liable for breach of warranty (save to the limited extent which he had identified at paragraph [211]), that was of little materiality.

The judge went on to say this:

The views which the judge expressed at paragraphs [403] and [405] reflect the basis upon which he had concluded (at paragraph [360]) that E&Y (UK) owed no duty of care to Western Star to protect it from a loss of the kind which it sought to recover. It is, I think, necessary (in the context of this appeal) to analyse the reasoning which led him to that conclusion:

The judge identified (at paragraph [325] of his judgment) what had been described by counsel for Freightliner as the “general audit duty”: that is to say, “a duty to shareholders as a body who can be expected to exercise their rights and powers in a general meeting on the basis of audited accounts” as recognised in Caparo Industries Plc v Dickman [1990] 2 AC 605. It was not in dispute – and the judge accepted – that E&Y (UK) owed the general audit duty to Western Star, as the owner of all the shares in ERF. But he rejected the submission, made on behalf of Freightliner, that the loss which it sought to recover in these proceedings could be brought within the scope of a general audit duty of that kind. He said this (at paragraph [327]):

The judge’s conclusion that Freightliner could not rely on the general audit duty owed by E&Y (UK) to Western Star to recover loss in the present proceedings led him to the further conclusion (at paragraph [331]) that, for Freightliner to succeed, it had to establish what its counsel had described as a “special audit duty”: that is to say, “a duty at common law to take reasonable care when carrying out their audit to protect Western Star from the kind of harm that it suffered in this case”. On the basis of Lord Justice Denning’s well-known dissenting judgment in Candler v Crane Christmas & Co [1951] 2 KB 164, approved by the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, the judge noted that:

After referring to the facts in Candler, to the analysis of that case in the speech of Lord Oliver of Aylmerton in Caparo, and to two decisions in this Court – Galoo Ltd v Bright Graham Murray [1994] 1 WLR 1360 and Electra Private Equity Partners v KPMG Peat Marwick [2001] 1 BCLC 589 – the judge observed (at paragraph [339]) that he found it a matter of no surprise that it was common ground that “whether an auditor has assumed responsibility to someone other than his client is a matter to be determined objectively by reference to all the circumstances of the case”. He accepted the submission on behalf of E&Y (UK) that “when a claim is made by a third party against a company's auditors based on an alleged duty of care in relation to the statutory accounts, close attention must be paid to the particular statement on which the claimant seeks to rely, the circumstances in which and purpose for which that statement was made and the type of loss which the claimant is seeking to recover.” He went on to say this:

The judge then went on to consider whether that test was satisfied on the facts in the present case. He said this:

With this analysis in mind - and at the risk of over-simplification - the basis upon which the judge dismissed the claim that E&Y (UK) were liable for the loss sustained by Freightliner in the present case by reason of breaches of duty in carrying out the 1998 and 1999 audits may be summarised as follows: (i) Freightliner could not rely on the general audit duty owed by E&Y (UK) to Western Star to recover loss in the present proceedings; (ii) for Freightliner to succeed, it had to establish the existence of a “special audit duty”; (iii) to establish a special audit duty it was necessary to show that E&Y (UK) knew and intended that their statement as to the company's accounts would be communicated to and relied on by a particular person or class of persons for a particular purpose in connection with a particular transaction; (iv) the transaction which gave rise to the loss in the present case was the sale of ERF by Western Star to MN; (v) the loss suffered by Freightliner took the form of liability in damages for deceit arising from the statements made by Mr. Ellis in the course of the negotiations with MN; (vi) in order to succeed in its claim Freightliner must show that E&Y (UK) owed Western Star a duty to take reasonable care to protect it from liabilities of that kind; (vii) knowledge that the 1998 audit statement would be relied upon by Western Star for the purposes of making decisions about the future conduct of ERF’s business did not lead to the conclusion that E&Y (UK) had assumed liability to Western Star, in respect of the 1998 audit reports, for liabilities of that kind; (viii) nor was the knowledge (which E&Y (UK) had by the middle of November 1999) that Western Star intended to provide MN with a copy of the 1998 accounts sufficient to lead to that conclusion; (ix) there was a distinction to be drawn between the 1998 accounts and the 1999 accounts, because E&Y (UK) (through Mrs Sinderson) could foresee, and must be taken to have known, that Western Star would itself rely on the 1999 accounts in the negotiations with MN as presenting a true and fair view of ERF's financial position; (x) but that was not enough to give rise to a duty of care - it was necessary, also, for Freightliner to show that E&Y (UK) knew the particular purpose for which its audit statement was required; (xi) on the facts in the present case Freightliner had not shown that E&Y (UK) knew that Western Star was intending (through Mr Ellis) to make representations as to the accuracy of 1999 accounts in its negotiations with MN; (xii) it could not be said that, in making the audit statement as to the 1999 accounts, E&Y (UK) was assuming responsibility to protect Western Star from liability for dishonest statements which Mr Ellis might make as to the accuracy of those accounts.

I turn now to the second of the direct claims against E&Y (UK) – that identified by the judge under (ii) of paragraph [75]. The judge addressed that claim at paragraphs [412] to [414] of his judgment. In the light of the conclusions which he had already reached on the first direct claim he was able to do so shortly. He observed that, although E&Y (UK) had agreed to provide Western Star with some assistance in connection with due diligence and (in so far as they did provide advice and assistance in that context) they were under a duty to act with reasonable skill and care, it had to be said that the part they played in the due diligence exercise was extremely limited.

At paragraph [413] the judge set out the four respects in which it had been alleged that E&Y (UK) were in breach of duty in connection with the due diligence exercise. The breaches alleged were: (i) failing to take reasonable care to ensure that the accounts provided to MN gave a true and fair picture of ERF's affairs; (ii) failing to inform Western Star about Mrs. Sinderson's concerns as to Mr. Ellis's competence and integrity; (iii) failing properly to respond to or investigate the tip-off and a related rumour that there was something wrong with ERF's accounts; and (iv) failing to inform Western Star that financial information being provided to MN was, or might be, inaccurate. He noted that the last of these complaints had not been pursued before him in evidence or argument and could be taken to have been abandoned. He went on to say this:

Freightliner contended before the judge that it had acquired a right to contribution under section 1 of the Civil Liability (Contribution) Act 1978 on the grounds that if Freightliner was liable to MN, E&Y (UK) was also liable to MN at common law in respect of the same damage, having negligently provided misleading information to MN in connection with the purchase of ERF. The judge addressed that claim at paragraphs [469] to [487] of his judgment.

After setting out the provisions of sections 1(1) and 6(1) of the 1978 Act the judge reminded himself that, in the present case, the damage suffered by MN was the loss it had sustained as a result of the purchase of ERF. Freightliner was liable in respect of that damage because it was vicariously liable for the fraud of Mr Ellis which had caused MN to enter into and complete the Share Purchase Agreement. He observed that:

In addressing the first of those questions the judge drew the same distinction between the position in relation to the 1998 accounts and that in relation to the 1999 accounts as he had drawn earlier in his judgment when considering whether E&Y (UK) had owed duties of care to Western Star. It could not be said to have been in the reasonable contemplation of E&Y (UK) that any particular prospective purchaser would rely on the audit statement in respect of the 1998 accounts in connection with any particular transaction. But, by the time the 1999 audit statement was issued, the position had changed. In a passage which echoes the views which he had already expressed at paragraphs [345] and [347], the judge said this:

The judge reminded himself that, in Electra Private Equity Partners v KPMG Peat Marwick [2001] 1 BCLC 589, this Court had no difficulty accepting the concept that an auditor could incur liability to a potential investor in the company; and he expressed the view that no distinction could be drawn between a potential investor and a potential purchaser. He referred to the decision of Mr Justice May in ADT Ltd v Binder Hamlyn [1996] BCC 808; which (as he said) was an illustration of a case in which the purchaser of a company had succeeded in its claim against auditors after they had given the purchaser a direct confirmation that they stood by the audited accounts. He noted that, in that case (ibid, 834A-C), Mr Justice May had taken the view that, in doing so, the auditors had made an independent statement to the purchaser that the accounts were reliable. He went on to say this:

The judge observed that the conclusion that he had reached – that E&Y (UK) owed no duty of care to MN - made it unnecessary for him to consider the second and third of the questions which he had posed. Nevertheless, he did so (briefly) at paragraphs [479] and [480] to [485] of his judgment. For the purposes of this judgment it is sufficient to note that the judge held that the nature of any duty owed by E&Y (UK) to MN would have been the same as that which was said to have been owed to Western Star; and that (for the reasons which he had already given when addressing that issue earlier in his judgment) there would have been a breach of that duty. He held, also, that if E&Y (UK) had been liable to MN for negligent misstatement, they would have been liable in respect of the same damage as Freightliner, but to a limited extent.

In the circumstances that Freightliner had filed an appellant’s notice challenging the judge’s conclusion in the main proceedings as well as his conclusion in the Part 20 proceedings, it is no criticism of the elaborate skeleton arguments filed by the parties to the present appeal that they address a number of issues which no longer arise. By the time that the present appeal was opened before us it was accepted on behalf of Freightliner that it could not succeed in its claim against E&Y (UK) on the basis of what had been described by the judge as the general audit duty. It was necessary, in this case, for Freightliner to establish that E&Y (the abbreviated form by which, hereafter in this judgment, I shall refer to E&Y (UK), given that the claim against E&Y (Canada) is no longer pursued) owed a special audit duty to Western Star.

It was accepted, also, that Freightliner could not succeed in its contribution claim against E&Y unless it could establish that E&Y owed a special audit duty to MN. But I should add that, for my part, I have found it impossible to envisage circumstances (on the facts in this case) in which it could be held that E&Y owed a special audit duty to MN if they did not also owe a parallel duty to Western Star. And, further, I have found it impossible to envisage circumstances in which, if E&Y did owe a special audit duty to Western Star (and were in beach of that duty), Freightliner would need to rely on a contribution claim based on breach of a special audit duty owed by E&Y to MN.

At the time when the parties filed a first round of skeleton arguments in preparation for this appeal the House of Lords had not heard and decided the appeal in Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28; [2007] AC 181. The arguments to be advanced on this appeal were revised in the light of the guidance given in the Barclays Bank case. The revised skeleton arguments were set out, respectively, in two documents: Freightliner’s Supplemental Skeleton Argument (dated 28 November 2006) and Ernst & Young’s Revised Skeleton Argument (dated 16 February 2007).

Part II of the Freightliner document (which related to the claim against E&Y) identified five issues:

E&Y’s Revised Skeleton Argument did not respond to the issues identified by Freightliner – at least, not in quite those terms. In that document E&Y addressed the five relevant grounds of appeal (as set out in an attachment to the appellant’s notice); and, in addition, three further issues arising from the respondent’s notice. But it is convenient, having regard to the way in which the arguments developed up to and in the course of the hearing, to note the seven propositions of law advanced at paragraph 15:

Three tests have been approved in the cases for the imposition of duties of care for economic loss. If properly applied, each test will often yield the same result, but need not necessarily do so.

At the highest level of abstraction, the framework for considering the duty of care incorporates the ‘threefold test’: was there forseeability of damage, and a proximate relationship between the parties, and is it fair just and reasonable to impose the duty?

Especially in cases of economic loss, a core issue will be the assumption of responsibility test: did the defendant, viewed objectively, assume responsibility to the claimant for undertaking a particular task with care with a view to saving the claimant from the type of loss claimed?

The ‘incremental’ approach may also be considered: is the precise duty contended for consistent with other duties which have been accepted by the courts?

In relation to all of these tests, but perhaps particularly clearly present in the context of ‘assumption of responsibility’, one element which is invariably required is that, viewed objectively, the defendant’s statement was made or communicated to the claimant for the purpose of protecting the claimant from the type of loss which the claimant suffers. The defendant cannot have assumed responsibility to protect against that type of loss unless, objectively judged such protection was a purpose for which his statement was made or communicated to the claimant.

In some of the authorities, judges have spoken of the defendant ‘intending’ that reliance be placed on his statement. That is another way of putting the requirement that, viewed objectively, the statement was given for the purpose of such use being made of it. The language of intention can be less clear than the language of purpose because it is more easily confused with a subjective criterion, namely what the defendant actually, subjectively, intended.

In order to show that protection from the type of harm suffered by the claimant was a purpose for which the defendant made his statement or communicated it to the claimant, it will normally be necessary for the claimant to show some kind of consent, permission, acceptance, agreement or objectively evinced intent on the part of the defendant that the claimant should rely on his statement for such purpose. Such consent or intent cannot be implied simply from the carrying out of an act (such as the provision of an audit report to the company) pursuant to a separate duty. This is not a separate test or rule of law, but a practical, evidential consequence of the requirement for the claimant to show that protecting him from the relevant loss was a purpose for which the statement was made by the defendant or communicated to the claimant.

The requirement for some form of consent etc is particularly important where, as here, the statement relied upon is one that the defendant was obliged to make for another purpose, after which the defendant had no control over its further publication. Unless the defendant has a choice as to whether to make the initial statement, any assumption of responsibility would in effect be involuntary.

Contrary to Freightliner’s submissions, there is no question of distinguishing between ‘the defendant’s purpose’ and ‘the claimant’s purpose’. The purpose for which a statement is made or communicated is judged objectively. The question is whether a reasonable person in the position of the claimant would conclude from the circumstances in which the statement is made or communicated to him that the purposes for which the statement was made or communicated to him included protecting him from the type of loss which he suffered in reliance upon the statement.”

In the course of his opening – and in the light of E&Y’s Revised Skeleton Argument - Mr Vos QC (on behalf of Freightliner) identified what, as he suggested, were the five points of difference which remained between the parties to this appeal. Those points of difference did not include the propositions made at (a) and (b) in paragraph 15 of E&Y’s Revised Skeleton Argument: those propositions were accepted as common ground. Mr Vos took issue with the propositions at paragraphs (c) and (d) in paragraph 15 in so far as it might be said that the relevant purpose was the purpose for which the defendant intended the statement should be used. But, as it seems to me, when paragraphs (c) and (d) are read with paragraph (g), it is clear that E&Y do not intend to suggest that the subjective intention of the maker of the statement is a material consideration. It is accepted that the purpose for which the statement is made or communicated is to be judged objectively. As it is put, at paragraph (g): The question is whether a reasonable person in the position of the claimant would conclude from the circumstances in which the statement is made or communicated to him that the purposes for which the statement was made or communicated to him included protecting him from the type of loss which he suffered in reliance upon the statement”. That, as it seems to me, is uncontroversial: it accords with the approach indicated by Lord Hoffmann in the Barclays Bank case (ibid [35]; 199C-D) which Freightliner accepts.

The five points of difference identified by Mr Vos in the course of his opening may, I think, fairly be summarised as follows:

The proposition – identified under Issue 7 and which Freightliner seeks to rebut - that it is necessary, before a special audit duty can arise in respect of a statutory auditor, to establish “some kind of consent, permission, acceptance, agreement or objectively evinced intent” is not found (at least, in those terms) in any passage in the judgment of Lord Justice Moore-Bick in this case. Its origin, I think, is to be found in paragraph 15(e) of E&Y’s first skeleton argument (dated 28 March 2006). That paragraph is repeated in the same terms in the corresponding paragraph of the Revised Skeleton Argument of 16 February 2007, which I have already set out. It may be seen as a gloss on the judge’s own formulation (at paragraph [339] of his judgment): that it is necessary to show that the auditors “knew and intended” that their statement as to the company’s accounts would be communicated to and relied on by a particular person or class of persons for a particular purpose in connection with a particular transaction. But, as E&Y accept in the proposition as stated, the need for some kind of consent, permission, acceptance, agreement or objectively evinced intent on the part of the defendant that the claimant should rely on his statement for the particular purpose – protection from the type of harm which the claimant has suffered – is not “a separate test or rule of law”. Rather, it is “a practical evidential consequence” of the requirement for the claimant to show that protecting him from relevant loss was a purpose for which the statement was made by the defendant or communicated to the claimant.

I have analysed the development of the issues at some length. That analysis leads me to think that the careful and elaborate arguments addressed to this Court suffer, in some degree, from a lack of focus. Properly understood, as it seems to me, the real issue on this appeal is whether the knowledge of E&Y (as found by the judge) was sufficient to found a duty of care to Western Star (and, so far as relevant, to MN) in relation to the loss which was actually suffered.

It is, I think, essential, to keep in mind the nature of the loss for which Freightliner seeks to hold E&Y liable. That loss is the loss which Freightliner has suffered as a result of the judge’s conclusion that Western Star incurred a liability in damages to MN in connection with the sale of ERF. The judge held that liability arose because “MN was induced by fraudulent statements made by Mr Ellis about ERF’s accounts and financial statements” (paragraph [130] of his judgment). Although, in other circumstances, Western Star (and so Freightliner) might have been liable for breach of representations and warranties made in the share purchase agreement – including, in particular, the representations and warranties as to the accuracy of the ERF Financial Statements and the ERF December Financial Statements contained in article 4.1 of that agreement – the judge held that that was not a basis upon which to hold Freightliner liable to MN in the present case.

As I have sought to explain earlier in this judgment, the judge held that Freightliner was not liable for breach of representations and warranties made by Western Star in the share purchase agreement for two reasons: each peculiar to this case in that they turned on the particular terms of the share purchase agreement. First, he recognised that the effect of article 12.3 was to impose a time limit of twelve months for bringing claims in respect of non-fraudulent representations and warranties; and MN’s claims in the main proceedings were brought outside that time limit. Second, he held (at paragraph [161] of his judgment) that the knowledge of Mr Ellis as to the falsity of the representations and warranties on which MN relied was not to be treated as the knowledge of Western Star for the purposes of deciding whether the representations and warranties in the share purchase agreement were made fraudulently; and that the provisions in article 1.6 of the agreement did not lead to a different conclusion in the present case.

It follows, as it seems to me, that the relevant question, in this case, is not whether E&Y undertook a special audit duty to Western Star (or, so far as relevant, to MN) in respect of the use which they could foresee would be made of their (1999) audit statement as a basis for representations and warranties in the share purchase agreement. Although, on the facts found by the judge, E&Y might well have been found to have undertaken a special audit duty in that respect – and to have been in breach of that duty – it was not breach of that duty which gave rise to the loss which Freightliner has suffered and for which it seeks to hold E&Y liable. As the judge put it (at paragraph [351] of his judgment) that loss was “the direct result of the dishonesty of Mr Ellis rather than the inaccuracy of the accounts themselves”. The relevant question, in the present case is whether E&Y undertook a special audit duty to Western Star (or, so far as relevant, to MN) in respect of representations which might be made by Mr Ellis as to the accuracy of the ERF accounts to which their audit statements related.

In that context, it may be said that the determinative issue is that raised as point (4) of the five points of difference which Mr Vos identified in the course of his opening: whether, having found that it was foreseeable that Western Star would rely on the accuracy of the accounts in its dealings with MN, the judge was wrong to hold that it was not foreseeable that the nature of Mr Ellis’ participation in the negotiations would give rise to Western Star incurring a liability to MN for fraudulent misrepresentation.

Although we were taken by Mr Vos through no less than eighteen decided cases to make good the propositions of law on which he sought to rely, I do not think it necessary or useful to attempt an analysis of each of them. I take comfort from the speech of Lord Bingham of Cornhill in Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28; [2007] AC 181. After noting (ibid, [4]; 5H) that counsel had referred to the leading authorities in the House of Lords – which included Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, Smith v Eric S Bush [1990] 1 AC 831, Caparo Industries Plc v Dickman and others [1990] 2 AC 605, Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, White v Jones [1995] 2 AC 207, Spring v Guardian Assurance Plc [1995] 2 AC 296, Williams v Natural Life Health Foods Ltd [1998] AC 830 and Phelps v Hillingdon London Borough Council [2001] 2 AC 619 – Lord Bingham observed that, although they yielded many valuable insights, they contained statements which could not easily be reconciled. He declined to embark “on yet another exegesis of these well-known texts”. I think I should exercise the same restraint.

Lord Bingham confined himself to five general observations. First, there were cases in which one party could accurately be said to have assumed responsibility for what was said or done to another. It was, he said, “correct to regard an assumption of responsibility as a sufficient but not a necessary condition of liability, a first test which, if answered positively, may obviate the need for further enquiry”. Second, it was clear that the assumption of responsibility test was to be applied objectively and was not answered by consideration of what the defendant thought or intended. Third, the threefold test itself provided no straightforward answer to “the vexed question” whether or not in a novel situation, a party owes a duty of care. Fourth, the incremental test was of little value as a test in itself, and was only helpful when used in combination with a test or principle which identified the legally significant features of a situation. As he said (ibid [7], 192D-E): “The closer the facts of the case in issue to those of a case in which a duty of care has been held to exist, the readier a court will be, on the approach of Brennan J [in Sutherland Shire Council v Heyman 60 ALR 1, 48] adopted in Caparo v Dickman, to find that there has been an assumption of responsibility or that the proximity and policy conditions of the threefold test are satisfied. The converse is also true”. Fifth (ibid, [8]; 192 E-F):

Lord Hoffmann’s observations in the Barclays Bank case were to same effect. He said this (ibid, [35]; 14D-15B):

We were told that it was common ground that the existence (or otherwise) of a special audit duty in this case could be determined by the application of an assumption of responsibility test. In applying that test we were invited to adopt the approach indicated by Lord Hoffmann in the Barclays Bank case:

Lord Hoffmann’s guidance in the Barclays Bank case as to the approach to the assumption of responsibility test must, I think, be read with the observations of Lord Bridge of Harwich in Caparo Industries Plc v Dickman and others [1990] 2 AC 605, 627D-E in mind:

The importance of that principle was emphasised by Lord Hoffmann in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1996] UKHL 10 (reported sub nom. South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191). He said this (ibid, [14]; 211G-212C):

Lord Hoffmann went on to consider, in the Banque Bruxelles case, how the scope of the duty was to be determined. He observed (ibid, [15]; 212E-F) that:

I am conscious that I have not referred to all – or even most – of the authorities to which we were taken by counsel. I intend no discourtesy to the careful arguments addressed to us when I say that – on the basis that it is common ground that this is a case in which we should adopt an assumption of responsibility test - I do not think that the law is in doubt. We have the advantage, which was not available to the judge, of the guidance given by the House of Lords in the Barclays Bank case. The task, in this case, is to apply that guidance to the facts which the judge found.

I have suggested, earlier in this judgment, that a determinative issue in reaching a decision whether E&Y assumed responsibility to Western Star for liability to MN arising from fraudulent statements made by Mr Ellis in the course of negotiations is that raised as point (4) of the five points of difference which Mr Vos identified in the course of his opening: whether the judge was wrong to hold (as he did, at paragraph [405] of his judgment) that it was not foreseeable by E&Y that the nature of Mr Ellis’ participation in the negotiations would give rise to Western Star incurring a liability to MN for fraudulent misrepresentation.

Freightliner had relied, at trial, on the terms of the audit certificate, which included the following statement:

For my part, I would accept that it was within the scope of E&Y’s general audit duty to protect ERF from the consequences of decisions taken by ERF (or by its shareholders in relation to the affairs of ERF) on the basis that the accounts were free from material misstatement, including misstatement caused by fraud. If it were necessary to decide the point, I would accept that, in the present case, it was within a special audit duty owed by E&Y to Western Star to protect Western Star from the consequences of representations and warranties made in the share purchase agreement, including representations and warranties which, for the purposes of article 12.3(5) of that agreement, had been made fraudulently. But, as I have said, that is not the relevant question in this case. The relevant question is whether E&Y undertook a special audit duty to Western Star in respect of representations made by Mr Ellis to MN as to the accuracy of the ERF accounts to which their audit statements related. To put the point another way: did E&Y assume responsibility to Western Star for the use which Mr Ellis made of the ERF accounts in the context of his dishonest assurance to MN that the information on which those accounts were based was accurate?

In my view the judge was correct to answer that question in the negative. I reach that conclusion for two reasons. First, as it seems to me, there is 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, Mr Ellis 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, as it seems to me, 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. Mr Ellis was an employee of ERF: he was not an officer or employee of Western Star. 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 Mr Ellis.

Second, mere foresight is not enough, as Freightliner accepts. If authority be needed, it may be found in Caparo ([1990] 2 AC 605, 617G-618B, 628H-629A, 633F, 655C). Something more is required. In this case (as Freightliner accepts) that additional element is identified by Lord Hoffmann’s guidance in relation to assumption of responsibility. Even if (contrary to the judge’s finding) 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 Mr Ellis, it is 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, I think, be to impose on them a liability greater than they could reasonably have thought they were undertaking. To adapt and apply the test posed by Lord Hoffmann in the Barclays Bank case, it is impossible to hold that E&Y (rather than Western Star) assumed responsibility for the use by Mr Ellis, on behalf of Western Star, of the information which E&Y had provided to Western Star.

For those reasons I would dismiss this appeal.

I agree.

I also agree.