Barclays Bank Plc v Grant Thornton UK LLp

The defendant (Grant Thornton) seeks summary judgment in relation to the claim by Barclays Bank Plc (Barclays) pursuant to CPR 24.2 and/or an order that it be struck out pursuant to CPR 3.4(2)(a) on the basis that the Particulars of Claim disclose no reasonable cause of action and that the claim therefore has no real prospect of success. There is also said to be no other compelling reason for the case to proceed to trial.

The key issue relates to the effectiveness of a disclaimer of responsibility in an auditors’ report. The underlying claim concerns audit services provided by Grant Thornton to the Von Essen Hotels Limited Group in non-statutory audit reports. Barclays, in its Particulars of Claim, contends that Grant Thornton owed it a duty of care in tort in relation to the contents of those reports and that it was negligent in their production because of their failure to uncover the fraud of two employees of Von Essen Hotels Ltd (“VEH”) who had deliberately caused Grant Thornton to be misled about (inter alia) the true sales and expenses position. One of the two has admitted that he “encouraged a culture of obfuscation and diversion amongst hotel accounts staff in their dealings with Grant Thornton” and acted in concert with the other to “provide misleading explanations to Grant Thornton”.

For the purpose of the application, the allegations set out in the Particulars of Claim must be taken as true. The evidence before the court consists of three witness statements from the solicitors engaged by the parties and documents attached thereto.

The introduction to the Particulars of Claim reads as follows:

“These Particulars of Claim are served in relation to two claims: folio 2014-271 (“the Negligence Claim”) and folio 2014-1053 (“the Fraud Claim”). The Fraud Claim is brought against Ms Stephanie Gibbs and Mr Simon Tate, who used their positions within the Von Essen hotel group (“the Group”) to present untrue representations of the Group’s performance. Those representations caused the Claimant (“Barclays”) to maintain lending facilities and to advance further sums to the Group. Ms Gibbs and Mr Tate acted dishonestly. The Negligence Claim is brought against Grant Thornton UK LLP (“Grant Thornton”), who were the Group’s auditors, because they should have uncovered the dishonesty as part of their audit work. Instead, they signed off the Group’s accounts without qualification. The claim relates to the Group’s accounts for the financial years 2006 and 2007. Barclay’s losses are set out in Annex 9. Barclays will apply to have the two Claims consolidated.”

The audit reports in question for the years ending 2006 and 2007 each consisted of two pages followed by the audited accounts. On the first page the following appeared under the heading “REPORT OF THE INDEPENDENT AUDITOR TO THE COMPANY’S DIRECTOR ON THE NON-STATUTORY FINANCIAL STATEMENTS OF VON ESSEN HOTELS LTD”.

“In accordance with the engagement letter dated 18 December 2006, and in order to assist you to fulfil your duties under the terms of your loan facility, we have audited the non-statutory group financial statements (the “financial statements”) of Von Essen Hotels Limited which comprise the group profit and loss account, the group balance sheet and the related notes. These financial statements have been prepared under the accounting policies set out therein and do not contain comparative information.

This report is made solely to the company’s director. Our audit work has been undertaken so that we might state to the company’s director those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s director as a body, for our audit work, for this report, or for the opinion we have formed.”

(The 2007 Report replaced the word “them” in the second sentence of the second paragraph with the word “him”.)

The rest of the first page of the two reports referred to the respective responsibilities of directors and auditors and the basis of the auditors’ opinion in accordance with International Standards on Auditing (UK and Ireland).

On the second page of each Report under the same capitalised heading as on the first page appeared the Opinion, stating:

“In our opinion the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the group’s affairs as at 31 December [2006/2007] and of the group’s profit for the year then ended.”

The reports were dated 7th June 2007 and 2nd June 2008.

The language of the “disclaimer clause” on the first page follows the standard wording produced by the Institute of Chartered Accountants in England & Wales in respect of statutory audit reports except that the standard wording uses the phrase “the company’s members” as opposed to “the company’s director”. Hence the reference to “as a body” has been retained from the standard wording when it can have no application. A statutory audit is of course essentially directed to the company and its members “as a body” since the accounts require approval in general meeting. Such a clause is often now referred to as a Bannerman clause.

It is said that four issues arise for determination in the present application:

As I have already indicated, the key issue in the present case, given the other facts pleaded by Barclays which must be accepted for the purposes of the application, is whether the disclaimer takes effect to negate a duty of care which could otherwise be owed by Grant Thornton to Barclays and is reasonable in accordance with the 1997 Act. For the purposes of its present application, Grant Thornton was prepared to accept that the 1997 Act did apply to the disclaimer.

I recite the background facts which are largely set out in Grant Thornton’s skeleton argument and about which there is, for the purposes of this application, no dispute.

VEH and its subsidiary companies (together, the “VEH Group”) operated a number of luxury hotels in the UK and one in France. Mr Andrew Davis was the sole director of VEH and each of the companies in the VEH Group and the 100% shareholder of VEH’s parent company, Von Essen Mining & Development Corporation UK Limited (“VEMDC”). Mr Davis was also the sole director of VEMDC. VEMDC held various companies that sat outside the hotels business (including an aviation business).

In July 2006, Barclays and Lloyds Banking Group (“Lloyds”) appointed Grant Thornton to complete a limited scope review of certain of the VEH Group’s financial affairs in connection with the then proposed re-financing of VEH. The project was carried out under the name “Project Barry”.

Grant Thornton entered into a direct engagement with Barclays, Lloyds and VEH in relation to this work pursuant to an engagement letter dated 24 July 2006 and signed by Barclays on 25 July 2006 (the “Project Barry Engagement Letter”). The Project Barry Engagement Letter:

Grant Thornton engaged in a number of direct discussions with Mr Robert Silk of Barclays during the production of its due diligence report. That work was ultimately completed, and Barclays has made no complaint in relation to it.

On 11 August 2006, the VEH Group entered into a Facility Agreement with Barclays and Lloyds in respect of loan facilities totalling £250 million (the “2006 Facility”). VEH and the individual borrowing companies, as part of the arrangements, gave various financial undertakings including compliance with set ratios (the Fixed Charge Ratio and the Interest Cover Ratio in particular) at the end of the 2007 year.

Pursuant to clause 21.1(a) of the 2006 Facility, the VEH Group was obliged to provide Barclays with audited consolidated financial statements for the VEH Group as soon as they became available, but in any event within 150 days of the end of each financial year, whilst also providing quarterly (unaudited) management reports. Each of these statements and reports was to be certified by an Authorised Signatory of the relevant borrowing or guaranteeing company. Under Clause 24.14, qualification by the auditors of the annual financial statements would constitute an Event of Default under the 2006 Facility.

After the 2006 Facility had been granted, VEMDC offered Grant Thornton the role of statutory auditor of VEMDC and its subsidiaries in place of Mazars, a role which Grant Thornton accepted.

This work was conducted pursuant to an engagement letter between VEMDC and Grant Thornton dated 18 December 2006 (the “VEMDC Engagement Letter”). The VEMDC Engagement Letter:

Grant Thornton undertook statutory audits of VEH and each of the companies in the VEH Group pursuant to the VEMDC Engagement Letter for the years 2006 to 2009, inclusive.

Because VEH was a wholly owned subsidiary of VEMDC, VEH was exempt from the requirement to prepare group accounts. VEH's statutory financial statements therefore related to the financial affairs of VEH only, and not those of the VEH Group as a whole.

VEH also prepared consolidated non-statutory financial statements for the VEH Group. Grant Thornton was engaged by VEMDC to produce audit reports in respect of the consolidated non-statutory financial statements for the VEH Group for the years ended 31 December 2006 and 31 December 2007 (the “Reports”). Grant Thornton accepts that for the purposes of this application it may be assumed that it knew that the reason for this further engagement by VEMDC was that an audit report in respect of the VEH Group was required for the VEH Group to fulfil its reporting obligations under the 2006 Facility (i.e. to provide audited accounts within 150 days of the year end).

An addendum to the VEMDC Engagement Letter was entered into with VEMDC to this end (the “Addendum”). The Addendum:

The Report in respect of the year ending 31 December 2006 was produced on or around 7 June 2007. The Report was addressed to Mr Davis as the sole director of the VEH Group. As explained above, the Report contained, on its first page, the disclaimer clause (“the Disclaimer”).

Barclays was not an addressee of the Engagement Letter, of the Addendum or of the Report and was not otherwise involved in work conducted by Grant Thornton pursuant to those instructions. Barclays accepts that it was not party to the Engagement Letter or Addendum and that there was no communication between Grant Thornton and Barclays in relation to the work conducted or the Report issued. It was VEH which sent the Report to Barclays.

Grant Thornton entered into a further direct engagement with Barclays and Lloyds on 22 December 2006 in connection with the acquisition by Von Essen Hotels 7 Limited (a subsidiary of VEH) of a French hotel (the holding company of which was Brandchart Limited). Pursuant to this direct engagement, Grant Thornton carried out a review of whitewash procedures under the financial assistance requirements of s. 156 of the Companies Act 2006.

This direct retainer with Barclays and Lloyds was entered into pursuant to an engagement letter dated 22 December 2006 (the “Brandchart Engagement Letter”). The Brandchart Engagement Letter:

As part of this work, Grant Thornton produced a non-statutory report which was addressed directly to Barclays and Lloyds. Barclays makes no complaint in relation to this work.

Grant Thornton produced a further non-statutory audit report for VEMDC in relation to the VEH Group in respect of the year ending 31 December 2007 on or around 2 June 2008. This work was conducted pursuant to the Engagement Letter and the Addendum.

The Report was again addressed to Mr Davis as the sole director of the VEH Group. As explained above, the Report contained, on its first page, the Disclaimer. Again, Barclays was not an addressee of the Engagement Letter, of the Addendum or of the Report and was not otherwise involved in work conducted pursuant to those instructions. As noted above, Barclays accepts that it was not party to the Engagement Letter or Addendum and that there was no communication between Grant Thornton and Barclays in relation to the work conducted or the Report issued. It was, once again, VEH that sent the report on to Barclays.

The VEH Group went into administration on 26 April 2011. Mr Alan Bloom, Mr Chris Marsden and Ms Angela Swarbrick of Ernst & Young LLP were appointed as joint administrators.

An investigation into the 2006 and 2007 financial statements of the VEH Group carried out by BDO LLP, subsequent to the appointment of the administrators, uncovered deliberate manipulation of the underlying financial records by VEH’s finance director, Ms Gibbs, and VEH’s financial controller, Mr Tate. The effect of this manipulation is said to have been to substantially improve the apparent performance of the VEH Group such that it appeared to meet its covenants in the 2006 Facility. Barclays contends that the true position was that those covenants were not met.

Barclays’ claim against Grant Thornton is only in relation to the Reports. No allegations are made in respect of Grant Thornton’s work for Barclays, or of the statutory audits of the VEH Group or of any of the firm’s other work.

In summary, Barclays alleges that Grant Thornton owed it a duty of care on the basis that the Reports were issued for the purpose of providing information to Barclays (and Lloyds) as funders of the VEH Group and in respect of borrowings under the 2006 Facility. It contends that Grant Thornton breached that duty of care in failing to uncover the alleged fraud, and that the Reports therefore amounted to negligent misstatements on which the Bank relied in advancing sums to the VEH Group under the 2006 Facility which are said to be irrecoverable. Consequently, Barclays seeks to recover those losses, being the shortfall in loan repayments, from Grant Thornton. The figure claimed is of the order of £45 million.

For current purposes, the key features of the Particulars of Claim which must be assumed to be true are as follows:

At paragraph 55, Barclays sets out the factors upon which it relies in contending that Grant Thornton owed it a duty of care, as follows:

“55.1

The audits were not statutory audits and accordingly were not deemed under the Companies Act to be made for the purpose of reporting to the sole shareholder.

55.2

Instead, the audits were carried out for the express purpose of providing information to Barclays (and Lloyds) as providers of funding pursuant to the Facility Agreement. Grant Thornton’s reports of 7 June 2007 and 2 June 2008 stated that “in order to assist [the Group] to fulfil [its] duties under the terms of [its] loan facility, we have audited the non-statutory group financial accounts …”.

55.3

Grant Thornton had previously advised Barclays in relation to the Group’s finances.

55.4

The Group’s accounts could not be finalised without the expert assistance of Grant Thornton as its auditors.

55.5

There existed between Grant Thornton and Barclays the necessary degree of proximity.

55.6

It was reasonably foreseeable that Barclays would suffer loss in the event that Grant Thornton were negligent in the performance of their audits.

55.7

Grant Thornton knew or ought reasonably to have known that Barclays was relying on them to perform the audits competently.

55.8

It is just and reasonable that Grant Thornton owed a duty to Barclays in relation the audits.

55.9

Grant Thornton voluntarily assumed responsibility towards Barclays.”

The key competing factors therefore in the context of ascertaining whether or not there was a duty of care, can be seen as:

It is Barclays’ case, as set out in its letter of claim, and supported by their solicitor’s witness statement, on information supplied by the individual concerned, that the disclaimer paragraphs in each of the two years’ Reports did not come to the attention of Barclays. Their representative, Mr Silk, checked that the audit certificate was not qualified and then went straight to the accounts to review the numbers.

The second witness statement of Grant Thornton’s solicitors sets out a number of matters which are not controverted and/or are not capable of being controverted.

In my judgment whether or not Mr Silk read the Disclaimer (and no doubt Mr Silk would be subjected to cross-examination on the point at any trial) I cannot see that Barclays has any reasonable prospects of succeeding in its case that Grant Thornton did not take reasonable steps to bring the Disclaimer to its attention, appearing as it did in the first two paragraphs of a two page audit report, which on its face was addressed not to it but to the sole director of VEH, Mr Davis. It is hard to see what else Grant Thornton could be expected to do save for capitalising, underlining or red handing that part of the report, something which would be considered wholly unnecessary when dealing with sophisticated bankers and business people who can be expected to read documents put before them and to be familiar with notices of disclaimer in auditors’ reports. Grant Thornton could not anticipate that any competent banker would fail to read the first two paragraphs of a two page report which consisted of eight paragraphs of no more than five lines each. Whereas the law has sometimes asked for more when ‘boilerplate’ terms in small print are utilised by corporations seeking to exclude liability to unsophisticated individual consumers who cannot be expected to wade through large volumes of text, the individual who dealt with Grant Thornton in relation to each of the audit engagements undertaken with Barclays itself, if he failed to read the relevant paragraphs, has only himself to blame and must be taken to have taken the risk in failing to do so. It would in my judgment be nonsense to expect Grant Thornton to do anything more than it did for any bank to whom it anticipated the report would be shown, or indeed to any other third party of which it was unaware. In the absence of any direct communication with Barclays, a letter to Barclays setting out the same information would appear otiose. Any auditor, when writing a brief report of the kind in question which only just extends to a second page, could justifiably expect the terms of it to be read.

The existence of the duty of care is tied up with the issue of the Disclaimer which would, if effective, negate any such duty. In my judgment, that is the correct analysis of the position as set out by Hobhouse LJ in McCullagh v Lane Fox & Partners Ltd [1996] PNLR 205 where, at paragraphs 223 and 227 he makes the point clear by reference the decision in Hedley Byrne v Heller [1964] AC 465. He disagreed with the first instance judge’s approach to the disclaimer as if it were a contractual exclusion and went on to say:

“On such an approach it would need to be strictly construed and the argument was available that it did not as such cover an oral statement. But that is not, in my judgment, the right approach. It is not an exclusion to be construed. The right approach, as is made clear in Hedley Byrne, is to treat the existence of the disclaimer as one of the facts relevant to answering the question whether there had been an assumption of responsibility by the defendants for the relevant statement. This question must be answered objectively by reference to what a reasonable person in the position of [the plaintiff] would have understood at the time that he finally relied upon the representation.”

It is to my mind self-evident that, if the “assumption of responsibility” test for determining the existence of a duty of care is applied, no-one can be taken as assuming responsibility in circumstances where it is specifically negatived by him. The recipient is being told that, if he chooses to rely upon the representation, he must realise that the maker is not accepting responsibility to him for the accuracy of it.

The critical question therefore, in circumstances where, for the purposes of this argument, Grant Thornton is accepting that the terms of the 1977 Act apply, is whether the term satisfies the requirement of reasonableness. In approaching that issue, reference should be made to the terms of the 1977 Act itself. Under s. 2, a person cannot exclude or restrict his liability for negligence except insofar as the term or notice satisfies the requirement of reasonableness and where a contract term or notice purports to exclude or restrict such liability, a person’s agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk. Under s. 11, the requirement of reasonableness is explained as meaning, in relation to a notice, that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen.

It is for the party claiming that a notice satisfies the requirement of reasonableness to show that it does. It is accepted that schedule 2 to the 1977 Act which sets out guidelines for application of the reasonableness test, although expressly directed to particular sections of the 1977 Act which are not relevant for present purposes, does raise matters which are to be taken into account in the context of the question I have to decide, if applicable:

Before examining the various matters relied on by the parties in the context of reasonableness, I should also refer to such further evidence as there is which raises factors that might be relevant for this purpose, above and beyond those already referred to in this judgment.

There is a further relevant feature which emerges out of the Brandchart Engagement Letter. Grant Thornton point out that the terms of ss. 151 and 155 of the Companies Act 1985 allowed a company to give assistance in the purchase of shares in itself or its holding company if a prescribed procedure was followed as set out in ss. 155 and 156. One element of that “whitewashing” procedure was the making of a statutory declaration by the directors before the financial assistance was given. The declaration had to give the details set out in s. 156(1A) and state the directors’ opinion as to the solvency of the company (in the sense of ability to pay its immediate debts) in accordance with s. 156(2). The declaration had also to have annexed to it a report addressed to them by the company’s auditors stating (in essence) that they knew of nothing which vitiated that director’s declaration – see s. 156(4). Both the statutory declaration and the auditor’s report, (like a company’s statutory audited accounts) had to be filed at Companies House. Grant Thornton fulfilled such a function for the company.

Barclays however entered into a separate engagement with Grant Thornton, in the Brandchart Engagement Letter whereby the latter was required to produce a non-statutory report addressed to the directors of Barclays (and Lloyds) to confirm that the conditions set out in s. 155(2) had been satisfied, with a sample wording attached to that letter. Barclays therefore very specifically ensured that Grant Thornton accepted responsibility to it in respect of that matter as well as to the company. Under clause 4, Grant Thornton limited its liability to a maximum aggregate amount of £11.5 million, on the basis set out in the appendix 1 “additional terms and conditions of engagement” and, subject to that cap, to that part of any loss suffered which was proportionate to its responsibility. Such terms appeared as clause 3.1 and 3.4 of the additional terms.

In Customs and Excise Commissioners v Barclays Bank Plc [2006] UKHL 28; [2007] 1 AC 181, Lord Bingham noted that three different tests had been approved for the imposition of duties of care in respect of economic loss where the fact that damage was reasonably foreseeable was not sufficient in itself to give rise to such a duty.

In the same case, Lord Hoffmann considered that the assumption of responsibility test was best suited to the situation where information was provided by a defendant to someone in circumstances where he knew it would be relied upon by someone else. Was there an assumption of responsibility on the part of the person providing information to the person alleged to have relied upon it? Self-evidently, when providing an audit, a duty would be owed by the auditors to the company which engaged them for that purpose – a contractual duty of care in carrying out the audit functions. Would the auditors, however, assume a duty of care to a third party who relied upon the audit, when carrying out the function of auditors and, in particular, was there a duty to safeguard that third party from the type of loss actually suffered?

I consider this matter under the assumption of responsibility framework but it makes no difference to my analysis if the threefold test is utilised and/or the incremental approach adopted. Ultimately the question of duty narrows down to the Disclaimer clause and its reasonableness. Forseeability and proximity are, for the purposes of the argument, effectively accepted by Grant Thornton but, given the Disclaimer, if it is reasonable and effective, it would self-evidently not be fair just and reasonable to impose the very duty it purports to negative. I draw on the relevant authorities in reaching my conclusions.

In Caparo Industries Plc v Dickman [1990] 2 AC 605, the House of Lords considered the position of auditors in relation to duties of care owed to shareholders and potential investors in respect of a statutory audit. The House of Lords applied the threefold test while also considering whether the auditor had assumed responsibility to third parties and the incremental approach. In essence, the House decided that, in order to establish a duty to a third party other than the company and its members, it was necessary to show that the auditor knew that his conclusions would be communicated to a third party in connection with a specific transaction and that the third party would be likely to rely upon those conclusions in relation to it. The auditors had a general duty to shareholders in relation to the exercise of their powers in general meeting but not to them as investors and not to third parties considering future investment.

In Al Saudi Banque v Clark Pixley [1990] Ch 313 Millett J (as he then was) rejected the argument that a duty of care was owed by a company’s auditors to lending banks, a decision which was approved by the House in Caparo. The statutory duty to report to the company and its members did not give rise to a duty of care to the lenders to whom the auditors had not sent the report; nor had they sent copies to the company with the intention or in the knowledge that the company would supply them to those lenders.

It is accepted by Grant Thornton that an auditor may owe duties to third parties other than the members in general meeting, in certain circumstances, as other authorities make clear. In MAN Nutzfahrzeuge AG v Freightliner Ltd [2007] EWCA Civ 910, the Court of Appeal considered the question of the purpose for which any statement was made or report communicated. Chadwick LJ, with whom the other Lords Justices agreed, stated that there was no question of distinguishing between “the defendant’s purpose” and “the claimant’s purpose”. The purpose for which a statement was made or communicated was to be judged objectively and the question was whether a reasonable person in the position of the claimant would conclude from the circumstances in which the statement was made or communicated to him that the purposes for which the statement was made or communicated to him included protecting him from a type of loss which he suffered in reliance on the statement (paragraphs 35 and 37).

There is no doubt that Grant Thornton anticipated that the non-statutory reports which they produced to VEH would be forwarded to Barclays, as the opening words of the reports themselves indicate. On the assumption set out in the Particulars of Claim, they would have anticipated that Barclays would rely upon these reports in the context of the 2006 Facility. They were aware of the material terms of it and that the bank would therefore be looking for compliance with the relevant ratios set out in clause 20.

In the absence of any disclaimer, it is clearly arguable, in my judgment, that a duty of care would exist as between Grant Thornton and Barclays, with the necessary forseeability and proximity, if the threefold approach is adopted.

As no point is being taken for present purposes about the application of the 1977 Act, I move on to the question of reasonableness. This is of course a fact sensitive issue but as I can see no basis upon which any significant new factors could emerge at trial above and beyond what is currently known, I consider that I am in as good a position to resolve the matter now as any trial judge would be.

In Omega Trust v Wright, Son & Pepper [1997] PNLR 424, the Court of Appeal considered a disclaimer in a valuation report which stated that it was for the private and confidential use of the client for whom the report was undertaken and should not be reproduced or relied on by third parties at all “without the express written authority of the surveyors”. Henry LJ, with whom the other two Lords Justices agreed, said that it was important to distinguish the commercial setting, where a valuation was in issue as between commercial bodies, from the domestic setting of valuations of the kind considered in Smith v Bush [1990] 1 AC 831. In a commercial context both parties were well able to look after themselves and did not need statutory protection. He also pointed out the purpose of the disclaimer and stated that the valuer was entitled to do all that could be done to prevent himself having to fight a difficult lawsuit as to whether or not he owed a duty to an unknown lender and to refuse to assume liability to any known lender to whom he had not agreed to be responsible (pp. 429-431). If he had been asked for consent, the valuer could have assumed additional responsibilities but charged for it.

Barclays placed reliance upon George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 and to the finding of the House of Lords that, notwithstanding the standard use of the relevant contracts in the trade, with their limitation of liability, it was not reasonable to allow reliance upon the limitation because there was evidence that claims were habitually settled, where genuine and justified, at levels above that limit. That demonstrated that reliance upon the limit would not be fair or reasonable.

There is a fundamental point which arises in relation to Barclays’ submission that a duty of care was owed to it by Grant Thornton – namely whether that duty would be subject to any limitation of liability. It is clear that, under the terms of the Addendum to the Engagement Letter dated 18th December 2006 between VEMDC and Grant Thornton, which set out the basis upon which the non-statutory audit of the 31st December 2006 financial statements would be conducted, Grant Thornton’s liability was to be limited to the company and its directors to a maximum £25 million and, subject to that cap, to that part of any loss suffered which was proportional to their responsibility. The point is made by Grant Thornton that, if Barclays’ submission is correct, it is almost certainly better off in consequence of not having approached Grant Thornton and agreed terms of engagement with it since as all the history shows, where letters of engagement were concluded by Grant Thornton with either Barclays or VEMDC, there were agreed express limitations on liability. Absent any contact at all between Barclays and Grant Thornton and any agreed terms, any duty of care imposed at law would, on its face, be open-ended. Barclays would not know of the limit expressed in the Addendum to the VEMDC Engagement Letter although it might have expected some limit to apply, namely one which would in the ordinary course of business be negotiated. There is no easy route in law to imposing a limit on liability at common law where none has been agreed.

In Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600 the Court of Appeal decided that the effect of s. 11(1) and the reasonableness test there set out was to give rise to the need to determine whether the term as a whole could be seen as fair and reasonable. The clause could not in any way be severed so that a reasonable part could be enforced whilst an unreasonable part could be struck down (Lord Donaldson MR at p. 607 A-C and Stuart-Smith LJ at pp 608-609.) A blue pencil test cannot be applied. The same point applies to a notice under s. 11(3) as it does to a contract term under s. 11(2) and the point is not negated by the wording of s. 2(2) since it is still the term as a whole which must satisfy the requirement of reasonableness. The words “except insofar as the terms or notice satisfies the requirement of reasonableness” relate to the ability to exclude or restrict liability by reference to a term or notice in its entirety and do not allow for the term or notice being read down to the extent that it might be considered reasonable. In the context of a financial limitation it is hard to see how a court could read down unlimited liability to any specific figure, even when set against the extent of liability accepted to VEMDC who had of course, unlike Barclays, paid for the services in question.

It is a vexed question whether or not an auditor whose liability is capped to its client by reason of contract can rely on such a limitation against a third party to whom a duty of care is found to exist. The matter has been discussed in a number of authorities and specifically left undecided in the more recent of them. I need only refer to Moore-Bick LJ in Man v Freightliner (ibid.) at paragraphs 407-411 and Neuberger J (as he then was) in Killick v PricewaterhouseCoopers [2001] PNLR 1 at paragraphs 24-39. Suffice it to say that, it would be wholly unjust if the non-contractual entity could rely on statements made primarily to a client with a contractual limitation and assert responsibility on behalf of the auditor to it without any such limitation. Whether there is any justification in law by reference to decisions such as White v Jones [1995] 2 AC 207 or Ross v Caunters [1980] Ch 297 remains to be seen. I am not going to decide this point but the fact that it is such an uncertain area of law lends force to Grant Thornton’s argument that one of the purposes of a disclaimer is to avoid any such issue ever arising.

I was referred to a number of authorities in relation to disclaimers, starting with Hedley Byrne (ibid.) but most of them (other than those to which I have already referred) set out no fresh statements of principle and/or are merely decisions on their own facts. Whilst Barclays placed reliance on the authorities which distinguished between “basis” clauses in the true sense and exclusion provisions often found in “entire agreement” clauses, the issue still ultimately depends on the reasonableness or otherwise of the disclaimer in all the circumstances of the case. If reasonable, it will have the effect of negating liability. If not, it will not.

As Mr Salzedo QC submitted, when determining the question of duty, the issue is not whether Grant Thornton realised that Barclays wanted audited accounts upon which it could rely and whether Grant Thornton realised it would rely on them but whether a reasonable person in the position of Barclays could properly consider that Grant Thornton was undertaking responsibility to it. Alternatively the point might be expressed as what a reasonable person would think Grant Thornton was doing. It is true to say that it is not unusual in the world of finance for commercial parties to rely upon the work of others for which they have not paid without having any enforceable rights in respect of that work. Reliance on such statements is then placed at their own risk. Whether Grant Thornton expected Barclays to rely upon the documents produced is therefore not determinative. An expectation of reliance, whilst disclaiming any responsibility should the person choose to so rely, cannot create a duty. The absence of a disclaimer may help, as a number of authorities say, to establish the existence of a duty but if a disclaimer is an expected part of auditors’ business, why should it not be effective?

The presence of disclaimers in auditors’ statutory reports is now well known and it is clear on the facts of this case that Barclays was well aware of this. It was also well aware from the Project Barry Engagement Letter that Grant Thornton imposed limits on non-statutory audit work, including as to the use to which their reports could be put – see clause 4 (the Confidentiality Clause) of the Letter of Engagement of 24th July 2006. It was further aware that Grant Thornton sought to limit its liability both financially and proportionately from the terms and conditions attached to both the Project Barry Engagement Letter and the Brandchart Engagement Letter. The Brandchart report also specifically stated what its purpose was and that it was not intended to be used, quoted or referred to for any other purpose.

I am left in no doubt that Barclays was not only aware that auditors did not like undertaking responsibility to persons other than their clients and often sought to avoid it but that Grant Thornton, in particular, sought to negate or restrict its liability in different ways both for statutory and non-statutory reports.

I turn to the particular factors upon which Grant Thornton and Barclays rely in their submissions relating to the reasonableness or unreasonableness of the Disclaimer. Grant Thornton rely on ten factors and Barclays rely on nine. I begin with those relied on by Grant Thornton.

The first factor is that Barclays is and was a sophisticated commercial party. Commercial parties of equal bargaining strength should be able to protect their own interests in contract and, if asserting a duty of care, must assert a relationship somewhat akin to contract. Barclays is self-evidently used to reading auditors’ accounts and auditors’ reports, had expertise in the area and legal advice readily available to it.

Second, Barclays did not engage or pay Grant Thornton for these two non-statutory reports. Barclays was, in one sense, therefore, seeking a free ride.

Third, it is said that if the Disclaimer is struck down as void, it would place Barclays in a better position than if it had entered into a direct engagement and paid for the services in question. This raises the point which I have just discussed as to whether any liability imposed at common law could be subject to any financial cap such as the £25 million in the Project Barry Engagement Letter or the £11.5 million in the Brandchart Engagement Letter. Each of those letters also stated that Grant Thornton would only be liable for the proportion of any loss for which it was responsible. The addendum to the VEMDC Engagement Letter also limited liability to £25 million with a proportionate responsibility clause.

Fourth, it is said that the Disclaimer was clear and obvious on the face of the report. This point speaks for itself. It is to my mind obvious that Barclays ought reasonably to have been aware of the existence of the Disclaimer even if it failed to read it at the time. Any businessman or banker would be expected to read a two page report in its entirety.

Fifth, it is said that the Disclaimer had a legitimate purpose. It is here that Grant Thornton rely upon the dicta of Henry LJ in Omega Trust (ibid.) at p. 430 where he stated that the obvious purpose of the Disclaimer in question was to limit the assumption of responsibility to Omega and to no-one else. The purpose was to ensure clarity, transparency and certainty and to avoid litigation of the very kind in question here where arguments arise as to potential duties of care. As in Omega, Grant Thornton was entitled to seek to avoid litigation and, regardless of the absence of any wording referring to non-use of the report without consent, to expect that any third party who wished to rely on it, including in particular Barclays to whose attention it would inevitably come, would approach it to negotiate terms on which it would be entitled to rely on the report, including potentially the payment of fees and the agreement to some cap or limitation on liability.

Sixthly, it is said that the disclaimer was industry standard. It is true that there is effectively an industry standard clause used in statutory reports, in a form published by the ICAEW. This was not however a statutory report and the wording of the form was changed so as to refer to the company’s director, as opposed to the members, whilst failing to delete the words “as a body”. Although industry standard clauses may be more likely to represent a fair balance between competing interests and therefore to satisfy the reasonableness test as some authorities indicate, this clause was modified and was being used in a different context and the observations of Lord Bridge in George Mitchell show that the point only goes a certain distance in any event.

Seventh, Grant Thornton submit that Barclays was well aware of the possibility of a direct engagement and of terms which would apply to such a direct engagement. Here, Grant Thornton relies upon both the Project Barry and Brandchart Letters of Engagement which were entered into prior to the production of any of the reports now complained of. I have made reference already to Mr Silk’s email exchanges with Grant Thornton in which the question of a duty of care arising in relation to the Project Barry work, and limitation of liability for Grant Thornton were discussed. As already mentioned, in my judgment, it should indeed have been obvious to Barclays that Grant Thornton would be likely to take steps to define the scope of the services it was providing and would seek to limit its liability in a letter of engagement, with the strong possibility of a disclaimer to classes of persons not encompassed by such Letter of Engagement.

Eighth, it is said that there was no “bespoke arrangement” with Barclays. Both the Project Barry services and the Brandchart services were bespoke arrangements with Barclays. The requirement for the non-statutory audits was bespoke, in the sense that it fell outside the ambit of the ordinary statutory audits for VEMDC. So far as VEMDC was concerned it was certainly bespoke as revealed by the first sentence of the reports. It was also clear to Grant Thornton that the report would be provided to Barclays. The issue which arises here overlaps with the question of the purpose and the nature of what was being done by Grant Thornton vis-à-vis VEMDC and Barclays and the points made by Barclays (see below).

Ninth, Barclays could have taken steps to protect its position. It is said that Barclays did protect its position by taking security for its lending but that it could also have obtained its own report. It could have requested that Grant Thornton enter into a direct engagement with it but chose not to do so.

Tenth, Barclays could have taken out insurance. This may be so but I am not sure that it takes the matter any further. Barclays might well have insurance or might be self-insured. Grant Thornton might be expected to have professional indemnity insurance in any event.

To my mind, these points all have force, save to the extent that I have indicated otherwise.

Barclays relies on the following factors in submitting that the Disclaimer was unreasonable.

First, Barclays did, as set out in the Particulars of Claim, rely upon the Reports.

Second, Grant Thornton expected that Barclays would so rely. The importance of the audit report to Barclays was obvious to Grant Thornton from the outset of its work with the group prior to the loan facility and was expressly in its contemplation when preparing the audit report as appears from the opening words “in order to assist you to fulfil your duties under the terms of your loan facility”. Grant Thornton was well aware of the financial covenants and the use to which Barclays might put the report.

Third, the very purpose of the audit was for Barclays to ascertain the financial state of the VEH Group. In real terms, there was no other purpose for it. It was a requirement of clause 21 of the 2006 Facility that these Reports should be produced to Barclays. The fact that the wording in the Reports was framed by reference to VEH’s obligation to produce them, rather than by reference to Barclays’ requirements is neither here nor there. Whilst it cannot be said that the reports might serve no other purpose since Mr Davis might have found it useful to see how the hotel business was doing, as opposed to the other elements of VEMDC’s business and it is not hard to conceive of circumstances in which he might want to show these reports to potential investors or the like, there can be no doubt that the primary objective was for these reports to be made available to Barclays under the terms of the 2006 Facility.

Fourth, Barclays submits that the Disclaimer does not on its face make sense. The words “the company’s director as a body” are meaningless. In such circumstances the words should be given no meaning or effect. This is in my judgment a wholly unreal submission, since the language used, however ineptly expressed, is susceptible of only one meaning, namely that liability is excluded to everybody other than the company and the individual director Mr Davis.

Fifth, Barclays submit that there is no evidence as to the way in which Grant Thornton would have redrafted the clause if the point had been raised. It is suggested that what had been done was an error and that if the point had been raised, in the context of Grant Thornton’s expectation of reliance by Barclays on the audit, factual issues arise as to whether Grant Thornton would have corrected the error by the inclusion of Barclays as an entity to whom responsibility was also assumed. Again, I consider that this submission departs from reality. Bearing in mind that Grant Thornton were well aware of the purpose for which the Report was to be used, the alteration of the standard form used in statutory audits was deliberate and the exclusion of Barclays as an entity to whom Grant Thornton was to be responsible can only have been the result of a conscious decision. The wording, as I have said, however cack-handed, is clear in its effect.

Sixth, it is said that the absence of direct communication between Grant Thornton and Barclays is of no assistance to Grant Thornton. It is said that the statement of opinion, when viewed alongside the auditor’s description of its responsibilities, explains the task that has been carried out, the standards applied and the results together, with the purpose of complying with clause 21 of the 2006 Facility. In my judgment this point comes back to the argument about purpose and does not avoid the difficulty that there was no letter of engagement and no contract which could give rise to the assumption of responsibility above and beyond the known purpose for which the reports were required.

Seventh, it is said that Disclaimer is only one element in the factual matrix which must be explored fully in order to ascertain the existence of the duty. In circumstances where, on the basis of the Particulars of Claim it must currently be assumed that Grant Thornton expected Barclays to rely on the audits, that Barclays did rely on the audits, that Grant Thornton knew that Barclays did not have and would not be likely to obtain separate advice on VEH’s accounts and Grant Thornton knew that the audited consolidated non-statutory financial statements served no purpose other than to satisfy Barclays’ requirements as set out in the 2006 Facility, the Disclaimer can only be seen as one element in the overall picture. The facts require exploration. In my judgment this point does not assist Barclays because, for the purposes of the argument, all these points are assumed in its favour. There are no further facts to which it can draw the court’s attention which could influence the court’s decision.

Eighth, reference is made by Barclays to the factors set out in schedule 2 of the 1977 Act. In this context Barclays refers to the strength of the parties’ bargaining positions. Whilst Barclays of course accepts that it is a large bank, it submits that the court should take into account the absence of alternative means by which Barclays requirements could have been met. There was no practical way in which Barclays could have obtained an audit of the VEH Group other than by use of Grant Thornton. VEMDC would have been unlikely to allow it and Barclays had no contractual right under the 2006 Facility to require either another set of accountants or another audit. This point, it appears to me, is met entirely by Grant Thornton’s submission that Barclays was free to engage Grant Thornton itself as it had done in the case of the Brandchart Engagement Letter, when Grant Thornton was already carrying out the same functions for the company. Barclays also rely upon the practical lack of opportunity of entering into a similar contract with other persons without having to accept such a disclaimer, but the point is met by the same answer.

Barclays also submits that there is no reason why it ought reasonably to have known of the existence and extent of the terms which is, to my mind, a bold submission. It is said that Grant Thornton should have ensured that the Disclaimer appeared on the same page as the audit opinion. I regard that submission as unsustainable.

Last, in relation to the schedule 2 points, Barclays submits that the audit was done specifically for Barclays (and Lloyds) in the context of the Facilities Agreement but, as already mentioned earlier, although the task was a bespoke task, this does not answer the question as to whom responsibility was owed.

Ninth, Barclays submits that there is no risk here of an indeterminate liability to an indeterminate class of the Ultramares kind. Barclays says that there were only two potential readers of the Reports other than the company and the director to whom they were addressed, namely Barclays and Lloyds, the very banks to whom the Reports (as was known) were to be sent under clause 21 of the 2006 Facility. Furthermore, Barclays accepts that it may reasonably be argued by Grant Thornton that there is a £25 million limit of liability in respect of the 2006 and 2007 audits and that there might be room for the imposition of such a limit in accordance with dicta in some of the authorities to which I have earlier referred in the context of this particularly difficult area of the law.

I have come to the clear conclusion that Grant Thornton’s submissions should be accepted. The disclaimer of responsibility was clear on its face and would have been read and understood by anyone at Barclays who had read the two page Reports for the years ending 2006 and 2007. These reports should have been read and the terms of the Disclaimer observed. The Disclaimer could not have been misunderstood. Furthermore, Barclays, having in other circumstances deliberately engaged Grant Thornton to provide services to it so that it would be responsible to it for them, even when it was fulfilling the self-same functions for the company (the Brandchart engagement) did not seek such an engagement or assumption of responsibility in relation to these particular reports. In the face of an express disclaimer it is not enough to say that both Grant Thornton and Barclays expected Barclays to rely upon the terms of the report in the context of the 2006 Facility. Barclays was being told expressly that it relied on the reports at its own risk.

Grant Thornton made it clear that it was not prepared to assume responsibility to Barclays in respect of these Reports. There was nothing unreasonable in that stance, as between two sophisticated commercial parties, where the approach of auditors limiting their responsibilities is well known and, in the statutory context, is the subject of a standard form ICAEW clause. Barclays should have anticipated the existence of such a clause and, in my view, must have expected some such clause to be present.

Earlier in this judgment at paragraph 37 I set out the key competing factors in the context of determining the existence of a duty of care. In the face of a clear disclaimer, the absence of any Letter of Engagement or any fee paid by Barclays to Grant Thornton, the factors upon which Barclays relies both in that paragraph and as set out elsewhere in this judgment cannot outweigh the points that negate the existence of such a duty. The court here can be confident of its answer in circumstances where sophisticated business parties are able to protect their own interests and do not require the protection of the 1977 Act in the same way as small companies or consumers.

Whilst I am conscious that questions of duty and reasonableness raise fact sensitive issues, as I have already indicated, the parties have not been able to draw to my attention any areas of fact which are likely to emerge but which are unknown at the present time. Where points of law of the kind in question arise, it is clearly sensible for the court to grapple with them and not put the parties to the trouble and expense of an auditors’ negligence trial which is almost invariably time consuming and expensive from the parties’ perspective.

In these circumstances, Grant Thornton are entitled to summary judgment on the basis that Barclays have no realistic prospect of success in the action in the face of the Disclaimer and there is no good reason why the action should go to trial.

Costs must, in the absence of any special factors unknown to me, follow the event.

The parties should therefore be able to agree the order I should make, but if not, I will make any necessary determination on the hand down of this judgment.