84B Australian Accounting Standard AAS5 was and is the statement of accounting standards relating to materiality in financial statements. In substance AAS5 provides that the test of materiality calls for a consideration as to who are likely to be the prime users of financial statements and further provides that in relation to financial statements of a business entity the prime users would have to be regarded as comprising present and potential providers of equity or loan capital, and creditors. The plaintiff will refer to AAS5 at the trial of this action for its full terms and effect.

84C Esanda was at all material times a member of a class or classes of persons, namely creditors and financiers of Excel, whom PMH did foresee or alternatively ought reasonably to have foreseen might reasonably and relevantly rely upon the Excel 30 June 1989 accounts and the report pleaded in paragraph 55.

85 Further and in the alternative to paragraph 84, PMH owed Esanda, as a member of a class of persons who might reasonably and relevantly rely upon the Excel 30 June 1989 accounts and the report pleaded in paragraph 55 a duty to take reasonable care: 85.1 to ensure that the audited Excel 30 June 1989 accounts were in accordance with the applicable Australian accounting standards;

85.2 to ensure that the opinions expressed in the report pleaded in paragraph 55 were based on reasonable grounds; and 85.3 to carry out sufficient tests to obtain reasonable assurance as to the reliability of the information provided by Excel to PMH and the sufficiency of that information for the preparation of the Excel 30 June 1989 accounts and the expression of the opinions in the report pleaded in paragraph 55.

85A By reason of the matters pleaded in paragraphs 84A to 84C inclusive:- 85A.1 Esanda was so closely and directly affected by the actions or conduct of PMH in furnishing the report pleaded in paragraph 55 that PMH was under a duty of care to Esanda in respect thereof; and 85A.2 PMH accepted or must be taken to have accepted that in furnishing the report pleaded in paragraph 55, the duty of care referred to in paragraph 85 was owed to a class of persons including the plaintiff. 86 In breach of the duty pleaded in paragraph 85, PMH: 86.1 allowed the Excel 30 June 1989 accounts to include the sum of $2.5 million pleaded in paragraph 57;

86.2 failed to report that no or no proper or adequate provision had been made in the Excel 30 June 1989 accounts for the bad or doubtful debts pleaded in paragraphs 72 to 78; 86.3 failed to detect or report upon the fact or the extent of the loan freshening pleaded in paragraph 80; 86.4 failed to detect or report the matters pleaded in paragraph 81; 86.5 notwithstanding the matters pleaded in paragraph 79, failed to qualify, the said report."

Ever since the introduction into the law of the concept of legal liability for negligent misstatement in Hedley Byrne v Heller [1963] UKHL 4; (1964) AC 465, there have been difficulties in defining the circumstances giving rise to a duty of care in relation to statements and the class of persons to whom the duty is owed. The concept of reasonable foreseeability of harm which had served adequately in relation to physical acts was found to be no longer adequate, standing alone, by reason of the spectre of, to use the famous words of Cardozo J in Ultramares Corporation v Touche (1931) 174 NE 441, "liability in an indeterminate amount for an indeterminate time to an indeterminate class". This has led to a revival of recognition of the notion of proximity, found in the seminal speech of Lord Atkin in Donaghue v Stevenson (1932) AC 562 at 578 et seq but rather submerged in subsequent cases, as an essential requirement, together with foreseeability of harm, for the imposition of a duty of care. The conditions which give rise to a duty of care in relation to statements are dealt with in a number of cases of which, apart from Hedley Byrne v Heller itself, the most important for present purposes are MLC Assurance Co Ltd v Evatt [1968] HCA 74; (1968) 122 CLR 556 and [1970] UKPC 1; (1971) AC 793 and Shaddock v City of Parramatta [1981] HCA 59; (1981-82) 150 CLR 225. Those cases, however, were concerned with information or advice provided to a particular person or particular persons. There was no question but that the plaintiff was the object of any duty which existed; the question was whether the circumstances were such as to give rise to a duty. The Courts in those cases were concerned with the circumstances which give rise to the duty and not with the class of persons to whom it might be owed.

In England the view has prevailed that the duty of care in relation to statements is confined to information or advice given to a known recipient for a specific purpose of which the maker of the statement was aware; Caparo v Dickman [1990] UKHL 2; (1990) 2 AC 605. In 1986, however, prior to Caparo v Dickman the High Court of Australia had considered the question of the liability of the maker of a statement to persons who relied upon it but who were not persons to whom the statement had been directly addressed.

In San Sebastian Pty Ltd v The Minister [1986] HCA 68; (1986) 162 CLR 340, a developer sought to make the Minister and the Sydney City Council liable for the negligent preparation by the State Planning Authority and publication by the Council of a redevelopment plan and accompanying documents containing representations in reliance upon which the developer had acquired land and sustained a loss. The High Court had to consider whether the Authority and the Council owed a duty of care to the developer in relation to the preparation and publication of the plan and documents. In a joint judgment Gibbs CJ, Mason J, Wilson J and Dawson J noted that Evatt and Shaddock were cases in which the information or advice was furnished in response to a request by the plaintiff. Their Honors commented: "But there is no convincing reason for confining the liability to instances of negligent misstatement made by way of response to a request by the plaintiff for information or advice. The existence of an antecedent request for information or advice certainly assists in demonstrating reliance, which is a cornerstone of liability for negligent misstatement. However, such a request is by no means essential, though it has been suggested that instances of liability for misstatement volunteered negligently will be 'rare': Evatt (1968) 122 CLR, at pp.571-572;

Lambert v. Lewis (1982) AC 225, at p 264. The maker of a statement may come under a duty to take care through a combination of circumstances or in various ways, in the absence of a request by the recipient. The author, though volunteering information or advice, may be known to possess, or profess to possess, skill and competence in the area which is the subject of the communication. He may warrant the correctness of what he says or assume responsibility for its correctness. He may invite the recipient to act on the basis of the information or advice, or intend to induce the recipient to act in a particular way. He may actually have an interest in the recipient so acting."

The developer relied upon an alleged intention on the part of the Authority and the Council to cause developers to act in reliance upon the plan. Their Honors expressed the applicable principle by stating "that it is necessary not only that A intends that B or a member of a class of persons should act or refrain from acting in a particular way but also that A makes the statement with the intention of inducing B or members of that class, in reliance on the statement, to act or refrain from acting in a particular way, in circumstances where A should realize that economic loss may be suffered if the statement is not true" (p.358). They held, in consequence, "that if the appellants' case is to succeed they must establish at least, among other things, (1) that the alleged representation was made and (2) that the Authority and the Council made the representation with the intention of inducing members of the class of developers to act in reliance on the representation." Of significance to the present case is the treatment in the joint judgment of the American cases Rusch Factors, Inc v Levin (1968) 284 F. Supp.85 and Rhode Island Hospital Trust National Bank v Swartz, Bresenoff, Yavner and Jacobs [1972] USCA4 26; (1972) 455 F.(2d) 847. Those cases dealt "with the liability of accountants for careless financial misrepresentations in certified financial statements supplied by the accountants to their clients in the knowledge that they were to be used by the clients in support of their application to the plaintiff for funds."

The comment on those cases in the joint judgment is that "the two decisions provide support for the proposition that, where a statement is made for the purpose of inducing the plaintiff, or the members of a limited class including the plaintiff, to commit themselves financially upon the basis that the statement is true, and the plaintiff acts in reliance on the statement, the law will impose a duty of care on the maker of the statement."

Brennan J, who delivered a separate judgment, also accepted that an intention to induce the plaintiff, or a class of persons of which the plaintiff is a member, to act upon the representation, would give rise to a duty of care if certain other conditions were present (p.372). The San Sebastian case was applied by the Full Court of the Supreme Court of Victoria in R Lowe Lippmann Figdor and Franck v AGC (Advances) Limited [1992] VicRp 93; 1992 2 VR 671 in an action by a creditor of a company who claimed to have lent money to the company in reliance upon the financial accounts of the company which had been negligently audited by the defendants. The auditors were aware that the creditor was a major creditor of the company but "the only sense in which the auditors could be said to have made a statement to the respondent was that the auditors signed an audit report knowing that Lyvetta would probably supply a copy of the audited accounts to the respondent for the respondent's review of Lyvetta's loan facility." The Full Court held that "in cases like the present, there being no other combination of circumstances present sufficient to impose a duty of care, the auditor supplying a report on the company's financial accounts to the company in the usual way was not under a duty of care to a third party in respect of a statement in that report unless the auditor's purpose, or one of his purposes, in making the statement in question was to induce the third party, or a class which included the third party, to act on the statement."

What emerges is that in Australian law, the duty of care in relation to statements has been extended beyond statements made to a particular person for a particular purpose and even beyond statements made to a third person for the known purpose of communication to the person who sustains the loss. There are circumstances in which the maker of a statement owes a duty of care to a person who reasonably relies on the statement although the statement was not made to that person either directly or purposely through a third person. The San Sebastian case demonstrates that where the statement is not made to a particular person in response to a request for information or advice, the place of a request in the complex of factors giving rise to a duty may be supplied by other factors such as those enunciated in the joint judgment at p.357. One such factor is an intention to cause the recipient of the information or advice, or a class to which that recipient belongs, to act on the information or advice. Where that intention exists and there are also present the factors discussed in the Evatt and Shaddock cases and in the judgment of Brennan J in San Sebastian, the law imposes a duty of care.

Mr Gray QC, for the appellant, submitted that the effect of San Sebastian is that it is an essential ingredient of liability for negligent misstatement that the defendant intended to induce the plaintiff, or a member of a class of persons to which the plaintiff belongs, by means of the defendant's statement to act or refrain from acting in a particular way, in circumstances where economic loss may be suffered if the statement is not true. I cannot accept that submission as a valid general proposition. To my mind the judgments in San Sebastian indicate that a duty may arise from other circumstances. Nevertheless circumstances, in order to give rise to a duty of care, must demonstrate a relevantly close relationship and will generally, although I think not always, include an intention that the statement be acted upon by the plaintiff. I agree with the reference by Brooking J in the Lowe Lippmann case at p.679, to that intention. His Honor said: "It cannot be said that in cases of negligent misstatement a duty of care will exist only where the defendant made the statement with this intention. But in some cases the duty of care will not arise unless the statement was made with the intention mentioned."

In cases such as the present where the plaintiff is not a member of the company to whom the auditor has a statutory obligation (s.285(1) Companies (South Australia) Code) but has relied upon the audit report in investing in the company or entering into financial dealings with it, it seems to me that, in the absence of some feature indicating an assumption of responsibility to the plaintiff to exercise care in relation to the preparation of the audit certificate, an auditor is not under a duty of care to the plaintiff unless the auditor intended to induce the plaintiff to act in reliance on the audit certificate.

It is necessary to consider whether the Statement of Claim in the case alleges facts which are capable in law of founding a duty of care. There is no allegation that the defendant intended to induce the plaintiff, or a class of which he was a member, to enter into financial transactions with the company. Indeed there is no allegation that the defendant at the relevant times was aware that the plaintiff was engaged in financial transactions with the company or that any were in contemplation. There is no allegation of any act on the part of the defendant which could indicate or involve the assumption of a specific responsibility to the plaintiff to exercise care in the audit. Apart from the allegations with respect to the accounting standards, to which reference will be made shortly, the only relevant allegations are that the defendant certified the financial statements as auditors and that the plaintiff relied upon them. It may be assumed that it was reasonably foreseeable by the defendant that persons contemplating financial transactions with the plaintiff might consult the financial statements and rely upon their accuracy and upon the audit certificate. Those facts, however, fall short of establishing the relationship of proximity which is necessary to give rise to a duty of care.

Mr Wicks QC, for the plaintiff, relied upon the allegations added in the new paragraphs 84A, B and C. Those paragraphs allege that the members of the defendant firm were members of the Institute of Chartered Accountants and that that Institute had adopted an Australian Accounting Standard to be observed by its members. The argument is that by reason of those standards, the defendant assumed a responsibility to the plaintiff which gave rise to a duty of care towards it with respect to the auditing of the company's financial statements.

The standards were placed before us as a document referred to in the Statement of Claim. The document begins as follows: "The National Council of the Institute of Chartered Accountants in Australia and the Australian Society of Accountants issue the following Statement of Accounting Standards relating to 'Materiality in Financial Statements'. The purposes of the statement 'are to define the concept of materiality and to specify how it should be applied in the preparation and presentation of financial statements'."

"6. It is not possible to give a definition of 'material' which would cover all circumstances. In general, however, an item of information is material if its omission, non-disclosure or mis-statement would cause the financial statements to mislead users when making evaluations or decisions. In this context, a necessary assumption is that users will understand the information contained in financial statements and hence may be expected to be influenced by it.

7. It follows that the test of materiality involves consideration of the users, or likely users, of financial statements, the information presented in financial statements may be used by various and often quite different classes of persons each class having its own particular interest in the reporting entity. Users of financial statements of a private sector entity would include the present and potential providers of equity or loan capital, and creditors. Users of financial statements of a public sector entity would also include parliament and other legislative bodies. For further elaboration of the objectives of financial reporting, the likely users of financial reports and their likely information needs, refer to the Statement of Accounting Concepts on objectives of financial reporting."

18. The remainder of the document consists of tests to decide whether an item of information is "material for the purpose of determining whether it should be included in the financial statements."

19. I am unable to see how membership of the body responsible for the promulgation of those standards can give rise to a duty of care to persons to whom a duty would not otherwise be owed. Apart from any other consideration, the Standards themselves do not purport to create such a duty. They are not concerned with legal duty but with the content of financial statements. The concept of materiality is developed for the purpose of determining what should be included in financial statements. The reference to providers of loan capital and creditors as users of financial statements occurs in the context of determining what is material for inclusion in such statements. It does not imply any assumption of legal responsibility to such users to exercise care. Mr Wicks referred us to the decision of Rolfe J in the Supreme Court of New South Wales in Columbia Coffee and Tea Ltd v Churchill (1992) 29 NSWLR 141. In that case, His Honor relied upon an Auditors' Audit Manual which referred to responsibilities "to interested parties who read and rely upon our reports" and acknowledged that "this extends beyond the persons who employ us in the first instance or those to whom the report is addressed initially", as establishing an assumption of responsibility towards a person who purchased shares in reliance upon the audited financial statements.

20. The Audit Manual in the Columbia Coffee case differs from the Accounting Standards in the present case in status purpose and language. It would be possible to distinguish it from the present case on that ground. I feel, however, that I would do less than justice to the reasoning of Rolfe J if I treated it that way. I think that the reasoning underlying the Columbia Coffee decision is inconsistent with the view which I take of the significance of the Accounting Standards and that that should be acknowledged. I have carefully considered the views of Rolfe J, but I am unable to agree with them. It seems to me that in a case of alleged auditor's liability to persons other than the client or members of the client company, the assumption of responsibility necessary to dispense with the need for an intention to induce reliance, will exist only where there is a clear indication of a willingness to be responsible to the particular plaintiff, or to a class of which he is a member, for the careful auditing of the financial statements. I do not think that the mere inclusion in a manual or set of standards of an acknowledgment of a professional responsibility to have the interests of users other than the client in mind in determining what is to be included in the accounts or in carrying out the audit, can have the effect of enlarging the area of legal duty by creating a legal duty of care to persons to whom it would not otherwise be owed.

21. I have reached the conclusion that the facts pleaded are insufficient to found a duty of care by the defendant to the plaintiff and therefore disclose no cause of action in negligence. I acknowledge the validity of the submission of Mr Wicks that the Rule 46.18 procedure is a summary procedure and should be reserved for a plain case. It is not apt for the resolution of difficult questions of law. Perhaps the demurrer type procedure envisaged by Rule 75.02(c) would have been more appropriate. I think, however, that having reached the conclusion which I have reached after full argument and consideration, it would be artificial to dismiss the appeal on the ground that the Rule 75.02 procedure might have been preferable. A conclusion does not necessarily cease to be plain because it has taken argument and consideration to arrive at it. I have reached a clear conclusion that the Statement of Claim does not disclose a cause of action in negligence and I think that the Court should give effect to that view by allowing the appeal.

22. In my opinion the appeal should be allowed, the order appealed from should be set aside. In lieu thereof there should be an order striking out paragraphs 84A, 84B, 84C, 85 and 86 of the Statement of Claim and any other passages consequential upon the plea of negligence.

JUDGE2 MILLHOUSE J I agree. When reading the draft Reasons of the Chief Justice and of my brother Olsson I thought of the words of Omar Khayyam:- "The Moving Finger writes; and, having writ, Moves on: nor all thy Piety and Wit Shall lure it back to cancel half a Line, Nor all thy Tears wash out a Word of it."

2. As does the Chief Justice, so do I refer to the opinion of Cardozo CJ in Ultramares Corporation v Touche et al (1931) 174 NE 441 at 444:- " If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences."

3. It simply is not practicable to make the test of liability for negligent mis-statement as wide as it may be with other kinds of negligence: words may travel so far.

4. As no good would come by writing a third set of Reasons coming to the same conclusion as the other members of the Court all I need say is that the line has to be drawn somewhere. In the circumstances as we know them in this action, it should be drawn as they propose.

5. In so far as there may be a difference between the orders my brothers propose I agree with that proposed by the Chief Justice.

JUDGE3 OLSSON J This is an appeal by a defendant against a refusal of Bollen J to accede to an application to strike out certain portions of the plaintiff's statement of claim, pursuant to SCR 46.18, as disclosing no reasonable cause of action. The appeal is brought by leave and is prosecuted against the background of certain amendments which were allowed by Bollen J and are not, directly, the subject of this appeal.

The statement of claim in these proceedings is a very lengthy document. However, the essential features of it may be recited in relatively brief terms.

It is asserted that the defendant was, at all material times, the auditor of a company known as Excel Finance Corporation Limited ("Excel").

The statement of claim avers that, following publication of the accounts of Excel for the financial year ended 30 June 1989, which bore an audit certificate issued by the defendant, the plaintiff, in reliance upon the audited accounts:- - made certain loans to companies associated with the directors of Excel, including a transaction as to which Excel gave a guarantee to the defendant. - purchased certain debts from Excel, in consideration of which that company agreed to indemnify the plaintiff against any shortfall on termination. All of the transactions in question post date the publication of the accounts of 30 June 1989 and it is not asserted that the defendant was aware of any proposal to enter into them at the time at which it certified those accounts.

The plaintiff alleges that the accounts of Excel, to which reference has been made, were misleading and did not disclose the true financial position of Excel. It is pleaded that the plaintiff would not have entered into any of the transactions above referred to, but for the publication of the audited accounts. In the alternative it is asserted that the defendant was in breach of a duty to the trustee of a debenture trust deed in favour of lenders, in not ensuring that certain matters in respect of Excel's accounts were disclosed. It is claimed that, had it adequately fulfilled its duty in that regard, the trustee would have been bound to appoint a receiver under the trust deed.

It is pleaded that, as a result of entering into the financial transactions above referred to, the plaintiff was unable to enforce the Excel guarantee or recover the loans in question.

The statement of claim has been amended on several occasions. In its present form the causes of action specifically relied upon are expressed in paragraphs 84A to 87 inclusive. Those paragraphs, together with additional paragraphs numbered 84A, 84B, 84C and 85A which were allowed by the order with leave to amend, read as follow:- "84 By reason of the matters placed in the preceding paragraphs hereof, the action or conduct of PMH in furnishing the

reports referred to in paragraphs 52, 53 and 55 hereof was in each case misleading or deceptive or likely to mislead or deceive and was in contravention of Section 56 of the Fair Trading Act 1987. PARTICULARS The conduct was misleading or deceptive or likely to mislead or deceive in that: 84.1 by reason of the matters alleged in paragraphs 57 to 64, 65 to 71, 79 and 80, the 31 December 1988 accounts: 84.1.1 had not been audited in accordance with Australian Auditing Standards; 84.1.2 were not properly drawn up in accordance with the provisions of the Code;

84.1.3 did not give a true and fair view of: 84.1.3.1 the state of affairs of Excel as at 31st December 1988, or of the result of the company for the six months ended on that date; or 84.1.3.2 the other matters required by Section 269 of the Code to

be dealt with in the accounts; 84.1.4 were not in accordance with Australian Accounting Standards and applicable Approved Accounting Standards. 84.2 by reason of the matters alleged in paragraphs 57 to 64, 72 to 78, 79 and 80, the 30 June 1989 accounts: 84.2.1 had not been audited in accordance with Australian Auditing Standards; 84.2.2 were not drawn up properly in accordance with the provisions of the Code; 84.2.3 did not give a true and fair view of: 84.2.3.1 the state of affairs of Excel as at 30th June 1989, or of the result of the company for the year ended on that date; or 84.2.3.2 the other matters required by Section 269 of the Code to be dealt with in the accounts; 84.2.4 were not in accordance with Australian Accounting Standards and applicable Approved Accounting Standards; 84.3 PMH had become aware of matters prejudicial to the interests of the stockholders and the trustee. 84A 84A.1 At all material times, the members of PMH were members of the Institute of Chartered Accountants in Australia and as such bound by the Australian Accounting Standards published from time to time jointly by the said Institute and the Australian Society of Accountants. 84A.2 The plaintiff will refer to the statement on conformity with Statements of Accounting Standards APS1 published by the said Institute and Society at the trial of this action which in substance provides that the Australian Accounting Standards above referred to are mandatory and lay down the principles to be followed by members and that failure by an Institute member to observe the provisions of the said statement may be regarded as failure to observe a proper standard of professional care, skill or competence. 84B Australian Accounting Standard AAS5 was and is the statement of accounting standards relating to materiality in financial statements. In substance AAS5 provides that the test of materiality calls for a consideration as to who are likely to be the prime users of financial statements and further provides that in relation to financial statements of a business entity the prime users would have to be regarded as comprising present and potential providers of equity or loan capital, and creditors. The plaintiff will refer to AAS5 at the trial of this action for its full terms and effect. 84C Esanda was at all material times a member of a class or

classes of persons, namely creditors and financiers of Excel, whom PMH did foresee or alternatively ought reasonably to have foreseen might reasonably and relevantly rely upon the Excel 30 June 1989 accounts and the report pleaded in paragraph 55. 85 Further and in the alternative to paragraph 84, PMH owed Esanda, as a member of a class of persons who might reasonably and relevantly rely upon the Excel 30 June 1989 accounts and the report pleaded in paragraph 55 a duty to take reasonable care: 85.1 to ensure that the audited Excel 30 June 1989 accounts were in accordance with the applicable Australian accounting standards; 85.2 to ensure that the opinions expressed in the report pleaded in paragraph 55 were based on reasonable grounds; and 85.3 to carry out sufficient tests to obtain reasonable assurance as to the reliability of the information provided by Excel to PMH and

the sufficiency of that information for the preparation of the Excel 30 June 1989 accounts and the expression of the opinions in the report pleaded in paragraph 55. 85A By reason of the matters pleaded in paragraphs 84A to 84C inclusive:- 85A.1 Esanda was so closely and directly affected by the actions or conduct of PMH in furnishing the report pleaded in paragraph 55 that PMH was under a duty of care to Esanda in respect thereof; and 85A.2 PMH accepted or must be taken to have accepted that in furnishing the report pleaded in paragraph 55, the duty of care referred to in paragraph 85 was owed to a class of persons including the plaintiff. 86 In breach of the duty pleaded in paragraph 85, PMH: 86.1 allowed the Excel 30 June 1989 accounts to include the sum of $2.5 million pleaded in paragraph 57; 86.2 failed to report that no or no proper or adequate provision had been made in the Excel 30 June 1989 accounts for the bad or doubtful debts pleaded in paragraphs 72 to 78; 86.3 failed to detect or report upon the fact or the extent of the loan freshening pleaded in paragraph 80; 86.4 failed to detect or report the matters pleaded in paragraph 81; 86.5 notwithstanding the matters pleaded in paragraph 79, failed to qualify, the said report. 87 By reason of PMH's conduct in contravention of Section 56 of the Fair Trading Act 1987 as pleaded in paragraph 84 or, in the alternative, by reason of PMH's breach of duty as pleaded in paragraphs 85 and 86, Esanda has suffered the loss and damage pleaded in paragraphs 14, 19, 24, 25, 31, 36 and 40 in that: 87.1 Esanda relied on the Excel 30 June 1989 accounts and the report pleaded in paragraph 75 in deciding to enter into; 87.1.1 the Skyana Loan Agreement; and 87.1.2 the Champions Loan Agreement; 87.1.3 the first purchase of receivables; 87.1.4 the second purchase of receivables - chattel leases; 87.1.5 the second purchase of receivables - animal leases; 87.1.6 the third purchase of receivables; 87.1.7 the fourth purchase of receivables - animal lease; 87.1.8 the fourth purchase of receivables - chattel leases; and 87.1.9 the revolving line of credit agreement.

Esanda would not have entered into any of the said agreements, purchases or transactions but for the Excel 30 June 1989 accounts and the said report; 87.2 and by reason of the matters pleaded in paragraph 82 if PMH had not contravened Section 56 of the Fair Trading Act, a receiver would have been appointed to Excel in June 1989 and none of the agreements, purchases or transactions pleaded in paragraph 87.1 would have been entered into;"

The specific application made by the defendant to Bollen J was that paragraphs 85 and 86 in particular, as above expressed, of the statement of claim be struck out, together with the consequential pleading in paragraph 87. In other words, what was essentially attacked was the validity of the plea in negligence.

Before embarking upon a consideration of the detailed arguments advanced on the appeal it is first desirable to direct attention to one or two basic principles.

SCR 46.04 prescribes the fundamental requirements of a statement of claim. Inter alia, it requires such a document to contain a statement, in summary form, of the material facts on which the relevant party relies, but not evidence by which the facts are to be proved. It also stipulates that proper particulars of the claim be given, including specific particulars of the type adverted to in SCR 46.04(f).

It is elsewhere provided in SCR 46.18 that the whole or any part of a pleading which discloses no reasonable cause of action may be struck out at any stage of the proceedings.

As appears from the judgment of Barwick CJ in General Steel Industries Inc v Commissioner for Railways (NSW) and Others [1964] HCA 69; (1964) 112 CLR 125 at 129 the test to be applied on such an application has been stated in a variety of forms. (See also Egan v The Commonwealth Minister for Transport (1976) 14 SASR 445.) It is sufficient, for present purposes, merely to say that a pleading in a statement of claim will be struck out if, on the face of it, the alleged cause of action - as pleaded - is so obviously untenable that it cannot possibly succeed. The power to strike out is to be exercised with caution and the mere fact that the cause of action as alleged is weak, or not likely to succeed, is not sufficient to warrant a striking out order. The pleading must be so deficient that it is possible, unequivocally, to say that it does not, on any view, raise a case which is sustainable in the form in which it has been pleaded, even if the factual averments are made good.

On the hearing of the appeal Mr Gray QC, of senior counsel for the defendant, submitted that, not only ought the original paragraphs 85 and 86 to be so characterised, but also that the deficiencies in them had not been cured by the amendments allowed by Bollen J.

The basic submission proffered by Mr Gray QC is that, even assuming an acceptance of the relevant allegations in the statement of claim, they do not constitute a fairly arguable case that the defendant owed the plaintiff an actionable duty of care.

In this regard he stresses these points:- (1) In the statement of claim it is not alleged that, either as at 31 December 1988 or 30 June 1989 (being the balance dates for the two audit reports in respect of which 9 complaints are

made), the defendant had any commercial dealings with Excel, or that the defendant was aware that the plaintiff had any dealings with Excel. (2) It is also not pleaded that the defendant:- (a) intended to induce the plaintiff to act in reliance on the audited accounts of Excel in relation to a transaction; or (b) did actually foresee, or ought reasonably have foreseen that the plaintiff in particular would rely upon the 30 June 1989 accounts, as audited by the defendant; (c) should have realised that the plaintiff may suffer economic loss if the statements in the accounts were not true; (d) assumed any specific responsibility to the plaintiff.

In the course of the appeal the attention of the Full Court was invited to a series of authorities said to bear on the elements of the tort of negligent misstatement. I find it unnecessary to retraverse all of that ground in detail.

The modern law in Australia on this topic has, of course, developed against the background of the decision of their Lordships in Hedley Byrne and Co Ltd v Heller and Partners Ltd [1963] UKHL 4; (1964) AC 465. It is trite to say, as a general statement, that, as in all cases of negligence, foreseeability of injury is never enough, of itself, to give rise to a duty of care. There must also be a relationship of proximity between the parties (Jaensch v Coffey [1984] HCA 52; (1984-85) 155 CLR 549).

For present purposes the authority most in point is the decision of the High Court in Sebastian Properties Proprietary Limited v Minister Administering the Environmental Planning and Assessment Act 1979 and Anor (1986) 162 CLR 341 ("Sebastian").

That was a negligent misstatement case. It related to the promulgation in 1969, by the Sydney City Council, of a scheme to redevelop Woolloomooloo, which the Council later abandoned in 1972. In reliance on the alleged representations in the published development plan developers purchased land in the area, with a view to its profitable redevelopment. When the scheme was ultimately abandoned the land lost value and was either compulsorily acquired or sold at a loss. The developers claimed damages from the Council and the State Planning Authority alleging, inter alia, negligent misstatements and representations in the original scheme documents as published by them.

The High Court held that no liability had been established in the circumstances. In so doing the members of the Court definitively discussed the elements of the tort of negligence, as arising in relation to negligent misstatement.

In essence they confirmed earlier dicta in Sutherland Shire Council v Heyman and Anor [1985] HCA 41; (1985) 157 CLR 424 at 502-3 to the effect that claims based on negligent misstatement were to be regarded as falling within a special class of case. That point was later reiterated in Hawkins v Clayton and Ors (1988) 164 CLR 539 at 556, 576 and 592. The majority of the members of the court in Sebastian, in the course of a joint judgment had this to say (at page 353):- "Since Hedley Byrne there has been a tendency, discernible in the judgments of the Court of Appeal in this case, to regard liability for negligent misstatement as standing apart from the general principles expressed in Donoghue v Stevenson (1932) AC 562 with respect to the duty of care. There is a special problem in defining the circumstances in which a duty of care arises in the context of statements. One facet of this problem is that it is more difficult to apply the standard of reasonable foreseeability to the consequences which flow from the making of a statement than it is to apply that standard to the consequences which flow from acts. This is because damage flows, not immediately from the defendant's act in making the statement, but from the plaintiff's reliance on the statement and his action or inaction which produces consequential loss. A second facet of the problem arises from the propensity of negligent statements to generate loss which is purely economic. The recovery of economic loss has traditionally excited an apprehension that it will give rise to indeterminate liability. And there is also an apprehension that the application of the standard of reasonable foreseeability may allow recovery of economic loss of such magnitude and in such circumstances as to provoke doubts about the justice of imposing liability for it on the defendant.

(at page 354) Conscious of the factors already mentioned, courts have sometimes dealt with the duty of care in relation to negligent misstatement without relating it to Lord Atkin's exposition in Donoghue v Stevenson. However, the correct view is that, just as liability for negligent misstatement is but an instance of liability for negligent acts and omissions generally, so the treatment of the duty of care in the context of misstatements is but an instance of the application of the principles governing the duty of care in negligence generally. The special complications which arise in connexion with the imposition of a duty of care on the author of a statement can only be unravelled in a variety of factual situations. Decisions such as Hedley Byrne, Mutual Life and Citizens' Assurance Co Ltd v Evatt [1970] UKPC 1; (1971) AC 793 and Shaddock and Associates Pty Ltd v Parramatta City Council (No 1) [1981] HCA 59; (1981) 150 CLR 225 are therefore to be seen as illustrations of the general duty of care in its application to particular instances of negligent misstatement. (at page 355) The relationship of proximity is an integral constituent of the duty of care concept. We refer to that relationship in its broader sense, namely, as embracing a general limitation upon the test of reasonable foreseeability, this being the sense in which it has been discussed and applied in recent judgments in this Court (Caltex (1976) 136 CLR at 574-6; Jaensch v Coffey [1984] HCA 52; (1984) 155 CLR 549 at 552-553; Sutherland Shire Council v Heyman [1985] HCA 41; (1985) 157 CLR 424 at 461-2, 506-7; Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1; (1986) 160 CLR 16. The notion of proximity, because it limits the loss that would otherwise be recoverable if foreseeability were used as an exclusive criterion of the duty of care, is of vital importance when the plaintiff's claim is for pure economic loss. When the economic loss results from negligent misstatement, the element of reliance plays a prominent part in the ascertainment of a relationship of proximity between the plaintiff and the defendant, and therefore in the ascertainment of a duty of care. But when the economic loss results from a negligent act or omission outside the realm of negligent misstatement, the element of reliance may not be present. It is in this sphere that the absence of reliance as a factor creates an additional difficulty in deciding whether a sufficient relationship of proximity exists to enable a plaintiff to recover economic loss. In cases of negligent misstatement, reliance plays an important role, particularly so when the defendant directs his statement to a class of persons with the intention of inducing members of the class to act or refrain from acting, in reliance on the statement, in circumstances where he should realize that they may thereby suffer economic loss if the statement is not true."

Their Honours later went on to make these points (at page 356):- "... there is no convincing reason for confining the liability to instances of negligent misstatement made by way of response to a request by the plaintiff for information or advice. The existence of an antecedent request for information or advice certainly assists in demonstrating reliance, which is a cornerstone of liability for negligent misstatement. However, such a request is by no means essential, though it has been suggested that instances of liability for misstatement volunteered negligently will be 'rare': Evatt (1968) 122 CLR 571-2; Lambert v Lewis (1982) AC 225 at 264. The maker of a statement may come under a duty to take care through a combination of circumstances or in various ways, in the absence of a request by the recipient. The author, though volunteering information or advice, may be known to possess, or profess to possess, skill and competence in the area which is the subject of the communication. He may warrant the correctness of what he says or assume responsibility for its correctness. He may invite the recipient to act on the

basis of the information or advice, or intend to induce the recipient to act in a particular way. He may actually have an

Having discussed certain American authorities the majority accepted the proposition that:- (at page 357) "... where a statement is made for the purpose of inducing the plaintiff, or the members of a limited class including the plaintiff, to commit themselves financially upon the basis that the statement is true, and the plaintiff acts in reliance on the statement, the law will impose a duty of care on the maker of the statement. This proposition is rather different from the appellants' first submission. The deficiency in that submission may be expressed by saying that it is necessary not only that A intends that B or members of a class of persons should act or refrain from acting in a particular way, but also that A makes the statement with the intention of inducing B or members of that class, in reliance on the statement, to act or refrain from acting in the particular way, in circumstances where A should realize that economic loss may be suffered if the statement is not true. In cases where the defendant intends the statement to operate as a direct inducement to action, the reasonableness of the reliance will not be a critical factor, although in other cases the defendant's appreciation of the reasonableness of reliance will be relevant."

Their Honours then concluded by saying:- (at page 358) "It follows then that if the appellants' case is to succeed they must establish at least, amongst other things, (1) that the alleged representation was made, and (2) that the Authority and the Council made the representation with the intention of inducing members of the class of developers to act in reliance on the representation. The conclusion which we have reached is that the appellants have failed to establish the first matter and therefore the second matter cannot arise."

In the same case Brennan J preferred to express the overall concept in these terms:- (at page 372) "Where a representor gives information or

advice on a serious or business matter, intending thereby to induce the representee to act on it, the representor is under a duty of care in giving that advice or information if three conditions are satisfied. First (corresponding with the first condition expressed by Barwick CJ), if the representor realizes or ought to realize that the representee will trust in his especial competence to give that information or advice; second (corresponding with the third condition), if it would be

reasonable for the representee to accept and rely on that information or advice; and third (applying the underlying principle of the law of negligence), if it is reasonably foreseeable that the representee is likely to suffer loss should the information turn out to be incorrect or the advice turn out to be unsound."

It is therefore necessary that the statement of claim here sought to be impugned be tested against the foregoing statements of principle.

In this case the defendant argues that there is a fundamental legal flaw in the formulation of the statement of claim, in that it nowhere pleads the existence of any intention on the part of the defendant to induce the plaintiff (or a class of which the plaintiff was a member) to act in reliance on the alleged negligent representation or misstatement in the audit certificates appended to the 1989 accounts of Excel, or any other specific relationship between the parties which could give rise to legal liability.

As appears from his reasons for decision, Bollen J recognised the existence of the reasoning of the High Court in Sebastian, but was of the view that it was not intended as an exclusive statement of the only basis on which an action in negligent misstatement could succeed. He accepted the argument of Mr Wicks QC, of senior counsel for the plaintiff, that other combinations of circumstances could also give rise to a duty of care, breach of which would sound in damages against the defendant; and that the concept of proximity remained the relevant touchstone of liability.

Bollen J accepted that it was fairly arguable that intention and inducement are not exclusive tests to determine proximity and that a plea of assumption of liability, as set out in the amended statement of claim, based on the existence of published accounting standards binding on the defendant, by reason of membership of the relevant professional association, may well be sufficient. He considered that such a proposition fell within - or was at least consistent with - the concept espoused by Millett J in Al Saudi Banque and Ors v Clark Pixley (1989) 3 All ER 361, as later approved by the House of Lords in Caparo Industries Plc v Dickman and Ors [1990] UKHL 2; (1990) 2 AC 605 ("Caparo").

With all due respect I am unable either to reconcile what has fallen from Bollen J with the reasoning articulated by Lord Bridge of Harwick in Caparo at 620-621 and 624 or the reasoning adopted by the Full Court in R Lowe Lippmann Figdor and Franck v AGC (Advances) Ltd [1992] VicRp 93; (1992) 2 VR 671 ("Lowe Lippmann").

A critical element in Caparo was the discussion by Lord Bridge of the judgment of Richmond P in Scott Group Ltd v McFarlane [1977] NZCA 8; (1978) 1 NZLR 553.

Having made the preliminary point at 623:- "In his speech in Smith v Eric S Bush [1990] UKHL 1; (1990) 1 AC 831, 862, Lord Griffiths emphatically rejected the view that this was the true ground of liability and concluded that: 'The phrase "assumption of responsibility" can only have any real meaning if it is understood as referring to the circumstances in which the law will deem the maker of the statement to have assumed responsibility to the person who acts upon the advice.' I do not think that in the context of the present appeal anything turns upon the difference between these two approaches. These considerations amply justify the conclusion that auditors of a public company's accounts owe no duty of care to members of the public at large who rely upon the accounts in deciding to buy shares in the company."

His Lordship went on to say:- "The case which gives most assistance to Caparo in support of this submission is Scott Group Ltd v McFarlane [1977] NZCA 8; (1978) 1 NZLR 553. The audited consolidated accounts of a New Zealand public company and its subsidiaries overstated the assets of the group

because of an admitted accounting error. Under the relevant New Zealand legislation its accounts were, as in England, accessible to the public. The circumstances of the group's affairs were such as to make it highly probable that it would attract a take-over bid. The plaintiffs made such a bid successfully and when the accounting error was discovered claimed from the auditors in respect of the shortfall in the assets. Quilliam J held that the auditors owed the plaintiffs no duty of care. The majority of the New Zealand Court of Appeal (Woodhouse and Cooke JJ) held that the duty of care arose from the probability that the company would attract a take-over bid and the bidder would rely on the audited accounts, although Cooke J held that the shortfall in the assets below that erroneously shown in the accounts did not amount to a loss recoverable in tort. Richmond P held that no duty of care was owed. He said, at p.566: 'All the speeches in Hedley Byrne seem to me to recognise the need for a "special" relationship: a relationship which can properly be treated as giving rise to a special duty to use care in statement. The question in any given case is whether the nature of the relationship is such that one party can fairly be held to have assumed a responsibility to the other as regards the reliability of the advice or information. I do not think that such a relationship should be found to exist unless, at least, the maker of the statement was, or ought to have

been, aware that his advice or information would in fact be made available to and be relied on by a particular person or class of persons for the purposes of a particular transaction or type of transaction. I would especially emphasise that to my mind it does not seem reasonable to attribute an assumption of responsibility unless the maker of the statement ought in all the circumstances, both in preparing himself for what he said and in saying it, to have directed his mind, and to have been able to direct his mind, to some particular and specific purpose for which he was aware that his advice or information would be relied on. In many situations that purpose will be obvious. But the annual accounts of a company can be relied on in all sorts of ways and for many purposes."

I agree with this reasoning, which seems to me to be entirely in line with the principles to be derived from the authorities to which I have earlier referred and not to require modification in

any respect which is relevant for present purposes by reference to anything said in this House in Smith v Eric S Bush [1990] UKHL 1; (1990) 1 AC 831. I should in any event be extremely reluctant to hold that the question whether or not an auditor owes a duty of care to an

investor buying shares in a public company depends on the degree of probability that the shares will prove attractive either en bloc to a take-over bidder or piecemeal to individual investors. It would be equally wrong, in my opinion, to hold an auditor under a duty of care to anyone who might lend money to a company by reason only that it was foreseeable as highly probable that the company would borrow money at some time in the year following publication of its audited accounts and that lenders might rely on those accounts in deciding to lend. I am content to assume the high probability of a take-over bid in reliance on the accounts which the proposed amendment of the statement of claim would assert but I do not think it assists Caparo's case."

By way of contrast Lowe Lippmann concerned an admittedly careless audit, upon the basis of which an existing creditor of a company made further advances to that company to its eventual detriment. It was found that the only sense in which the auditors could be said to have made any statement to the 18 creditor was that the auditors signed an audit report appreciating that the company concerned would probably supply a copy of the audited accounts to the respondent, for the respondent's review of the company's loan facility.

On those facts the Full Court held:- - First, there being no other combination of circumstances present sufficient to impose a duty of care, the auditor supplying a report on a company's financial accounts to the company in the usual way was not under a duty of care to a third party in respect of a statement in that report unless the auditor's purpose, or one of its purposes, in making the statement in question was to induce the third party, or a class which included the third party, to act on the statement; - Second, knowledge or belief that the third party would probably rely on the report could not be equated with an intention to induce the third party to act in reliance on the report. The only intention on the auditors' part established in the case at bar (and that only by inference) in making their report was an intention to discharge statutory and contractual duties as auditors for the company. In the course of his judgment in that case Brooking J, applying the reasoning in Sebastian said:- "... It cannot be said that in cases of negligent misstatement a duty of care will exist only where the defendant made the statement with this intention. But in some cases the duty of care will not

arise unless the statement was made with the intention mentioned. One of the things the plaintiff had to prove in order to succeed in this case was that the defendant made the statement complained of with the intention that it be acted upon by the plaintiff or by a class which would include the plaintiff. This is not because, as regards negligent misstatements, the tort of negligence has the intention mentioned as an essential ingredient in common with the tort of deceit. It is because in a case like the present, there being no other combination of circumstances present sufficient to impose a duty of care, that duty will not arise unless the defendant made the statement with the intention mentioned."

Mr Wicks QC sought to derive some comfort from the phrase "there being no other combination of circumstances present sufficient to impose a duty of care". However, I do not read it as implying that there are residual circumstances, inconsistent with Sebastian, which can nevertheless give rise to liability. Here there was, for example, no pecuniary interest of the defendant in the transaction as recognised in Sebastian. Moreover, the "combination of circumstances" referred to are those cited above, as found at page 357 of the report of Sebastian. None of those circumstances are pleaded in the instant case.

It seems to me that the so called "assumption of responsibility" cases are no more than specific examples of fact situations which do fall within the Sebastian concept. For example, cases such as Morgan Crucible Co Plc v Hill Samuel Bank Ltd and Ors (1991) 1 All ER 148 and the reasoning of Lord Denning in Candler v Crane, Christmas and Co (1951) 2 KB 164 (later approved by the House of Lords in Caparo) proceed upon the explicit footing that the accounts in question were prepared and/or certified with the express knowledge and to the intent that they would be used by certain parties for known, discrete purposes, in a manner not remotely suggested in the case at bar. By way of contrast, Hawkins v Clayton was an 20 assumption of responsibility case which had nothing whatsoever to do with negligent misstatement.

From the plaintiff's viewpoint, the case which accords it greatest comfort is the decision of Rolfe J in Columbia Coffee and Tea Pty Ltd and Ors v Churchill and Ors (1992) 29 NSWLR 141. He there held that, because the "in-house" audit manual used by the auditor, inter alia, stated that:- "S2.2 It is the policy of the firm that any audit which we undertake will be conducted in such a way as will fulfil our responsibilities properly. This will involve a competent examination of the accounts and records to the extent required by the appointment, followed by a clear and forthright report as to the results of the audit. The use of the word 'responsibilities' in this statement rather than the word 'contracts' is deliberate. It acknowledges that there will be interested parties who read and rely upon our reports, and this extends beyond the persons who employ us in the first instance or those to whom the report is addressed initially. S2.28 Many readers of a company's accounts rely upon them as a basis for assessing the company's prospects. It is important, therefore, that any inherent trends in a company's profitability should be shown in the accounting statements."

such a situation evidenced a voluntary assumption of responsibility to all parties of the classes referred to, of whom the plaintiff - a purchaser of shares in the audited company - was one.

The essential basis of the reasoning of Rolfe J, which led him to such a conclusion, was his understanding of what fell from Brennan J in Sebastian as indicating a formulation which "excludes the concept of an intention to induce, which, of course, may fall within it, but which is not an essential and discrete element".

With respect to Rolfe J I do not see how that proposition can fairly be distilled from what fell from Brennan J, nor is it compatible with the reasoning to be found in the majority judgment.

It follows that I am unable to accept the reasoning of Bollen J in the judgment here appealed from. I consider that the validity of the pleading in the statement of claim falls solely to be tested against the criteria in Sebastian, as re-affirmed in Hawkins v Clayton. The mere plea of assumption of responsibility (based on general audit standards) is simply not enough. In absence of a plea of facts amounting to an intention on the part of the defendant to induce the plaintiff to act on the faith of the audit certificate or the existence of some other specific type of circumstance adverted to in Sebastian, the claim for negligent misstatement cannot succeed. It is patently untenable. That being so the defendant was entitled to succeed on its application. The amendments allowed by Bollen J do not negate such a situation.

I would allow the appeal and substitute for the orders made an order that paragraphs 84A to 86 respectively of the statement of claim be struck out. There will also need to be some consequential adjustments to the verbiage of paragraph 87.