Supreme Court of SA|1995-01-12|Before: Mr J, Bollen J

EXECUTOR TRUSTEE AUST LTD AND OTHERS v PEAT MARWICK HUNGERFORDS No. SCGRG 92/1218 Judgment No. 4918 Number of pages - 9 Audit, auditors and accountants (1995) 13 ACLC 201 (1995) Aust Torts Reports 81-318 (1995) 63 SASR 393 [1995] SASC 4918 (12 January 1995)

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA BOLLEN J

CWDS Audit, auditors and accountants - audit and auditors - Application to strike out allegations of negligence and breach of statutory duty in the Statement of Claim - alleged negligent misstatements in reports submitted by auditors to its client company - that company showed the reports to the plaintiffs who alleged that they acted thereon to their detriment - proximity - inducement not essential assumption of responsibility will suffice in this type of action

HRNG ADELAIDE, 29-30 November 1994 #DATE 12:1:1995 #ADD 13:3:1995

Counsel for applicant: Mr Bathurst QC with Mr J.P. Keen

JUDGE1 BOLLEN J This is an application by the defendant made under Rule 46.18 to strike out part of a statement of claim.

The plaintiffs seek damages and declaration in circumstances alleged in the seventh edition of the statement of claim. The plaintiffs assert that the defendants were guilty of breach of a duty of care owed by it to them, i.e. raise negligence. They allege that the defendants were in breach of duty owed to the plaintiffs pursuant to statute.

The defendant, in seeking to strike out part of the statement of claim, limited the attack to the allegations raised by the second to eighth plaintiffs inclusive, banks and debenture holders. The defendant does not seek to strike out the allegations and claims raised by the first plaintiff. The defendant acknowledges that the statement of claim raises arguable cases on causes of actions in relation to the first plaintiff. Nor does the defendant seek to strike out each allegation raised by the second to eighth plaintiffs. The defendants seek to have (speaking loosely) negligence and one avenue of breach of statutory duty knocked out. But it does not seek to have the claim based on suggested breach of s.285 of the Companies Code knocked out.

If, then, the orders sought are all made the action will still proceed. For the first plaintiffs it will proceed on the allegations in the present seventh edition of the statement of claim. That is, if there be no further amendment allowed. Perhaps one can forecast that no such allowing is likely]

The claim in the action is made by the plaintiffs. They assert that they suffered loss by relying on reports and written statements of the defendants. The defendants were auditors for, or to, a company called Excel Ltd. It is said that Excel made the reports and statements available to the plaintiffs, that the defendant knew that that would happen and, indeed, supported its happening, that the plaintiffs relied on the information in the reports, that the defendant knew and that he had intended that the plaintiffs would so rely and that the plaintiffs thereby suffered loss.

The pleading is lengthy. I have made the roughest of summaries of the barest bones of it.

Speaking first to the suggested cause of action in negligence, the defendant says (again speaking loosely) that the statement of claim does not raise an arguable case in negligence for the second to eighth plaintiffs, that there is no disclosure on the face of the statement of claim of a relationship of proximity sufficient to raise a duty of care owed by the defendants to the second to eighth plaintiffs and that, therefore, the orders sought should be made.

It is a case of alleged "negligent misstatement".

I have had the advantage of thorough arguments and submissions, oral and written, on each side. Many authorities were discussed. Many submissions were made. But although I have attended in varying degrees to all, I think it unnecessary to discuss many cases nor all the submissions here. That does not mean that I regard any submission as being worthy of no consideration. It merely means I think that I can see the way to a solution by one particular road which I will follow.

I think that the application, given these thorough submissions, can be disposed of by an application of two cases wherein other important cases are discussed. Those two cases, which, to my mind, are at the centre of the debate here, are San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (NSW) [1986] HCA 68; (1986) 162 CLR 340 and (even more valuable here) the decision of the Full Court in Esanda v Peat Marwick Hungerford [1994] SASC 4402; (1994) 61 SASR 424. In the latter case King CJ (after speaking of the pleadings) began his consideration of the matter by referring to the seminal decision of Hedley Byrne and Co v Heller Partners Ltd [1963] UKHL 4; (1964) AC 465. King CJ said: "Ever since the introduction into the law of the concept of legal liability for negligent misstatement in Hedley Byrne and Co Ltd v Heller and Partners Ltd [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 Donoghue 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."

I note the reference to submerging of the speech of Lord Atkin in Donoghue v Stevenson (supra). With great respect to all other views, I regret the submerging of Lord Atkin in this and other fields of negligence. Perhaps it would not have happened or not have been so deep had the splendid, if I may say so, reasoning and exposition of Lord Wilberforce in Anns v Merton L.B.C. [1977] UKHL 4; 1978 AC 728 prevailed here as it has in New Zealand. "Who was my neighbour here" the defendants might have asked. The answer might have been "Your neighbour is the relevant plaintiffs whom you knew or could have foreseen would have acted on your report and who did to their loss". Had there been no submerging this might have been sufficient to found an action in negligence. But it is not so now. The learned Chief Justice went on in Esanda to say (pp.428-430): "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 (supra), the most important for present purposes are Mutual Life and Citizens' Assurance Co Ltd v Evatt [1968] HCA 74; (1968) 122 CLR 556 and L. Shaddock and Associates Pty Ltd v Parramatta City Council [1981] HCA 59; (1981) 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 Industries Plc 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 Minister Administering Environmental Planning and Assessment Act 1979 (NSW) [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, Wilson and Dawson JJ noted that Evatt and Shaddock (supra) were cases in which the information or advice was furnished in response to a request by the plaintiff. Their Honours 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 (at 571-572); 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 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 Honours 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 realise that economic loss may be suffered if the statement is not true' (at 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 284 F Supp 85 (1968) and Rhode Island Hospital Trust National Bank v Swartz, Bresenoff, Yavner and Jacobs [1972] USCA4 26; 455 F (2d) 847 (1972). 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 (at 372).

The San Sebastian case (supra) was applied by the Full Court of the Supreme Court of Victoria in R Lowe Lippmann Figdor and Franck v AGC (Advances) Ltd [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 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."

His Honour then said something of the utmost importance. He dismissed a submission which, if correct, would have greatly narrowed the area of proximity in these "negligent misstatement" cases.

His Honour said: "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 (supra) (at 679), to that intention. His Honour 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 (s285(1) of the 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."

In the opinion of the Chief Justice it was not "intention to induce" and that alone which could, in the end, found liability. It could be if there was no "assumption of responsibility" by the maker of the statement. If there is "a feature" indicating an assumption of responsibility to the plaintiff then the statement of claim should not be struck out. I say "in the end" because no doubt the other elements such as foreseeability must be pleaded and proved. They are pleaded here.

Millhouse J agreed with the Chief Justice. Olsson J seemed to take a stricter approach. His Honour says: "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."

But the view of the Chief Justices seems to me, if I may say so, to be entirely consistent with the remarks of the majority in San Sebastian. I refer to the passage which the Chief Justice quoted from the reasons of the majority, which quotation I have in turn quoted (see pp.4-6 (supra)). I extract from that quotation a sentence "He may warrant the correctness of what he says or assume responsibility for its correctness". I refer to the, as I see it, supporting authority of Henderson v Merrett Syndicate Ltd [1994] UKHL 5; (1994) 3 All ER 506.

I think that the statement of claim adequately raises the issue of assumption of responsibility by the defendant to the relevant plaintiffs. All other elements of negligence are raised.

The issue of assumption of liability is raised by paragraphs 23C, 23D and 23E. Paragraph 23C is: "At all material times, PMH knew, expected and intended that the audited financial statements of Excel would be provided by Excel to each of second to eighth plaintiffs, being debenture stock holders."

Particulars, and very detailed particulars, follow.

Paragraph 23D of the Statement of Claim is: "At all material times PMH knew, expected and intended that the second to eighth plaintiffs would rely on the audited financial statements of Excel and PMH's report thereon in considering:

23D.1 their continued provision of funds to Excel secured by the Excel Trust Deed;

23D.2 whether to advance further funds to Excel as particularised in paragraph 16 above; and

23D.3 whether, in respect of the negative pledge agreements, Excel had complied with the restrictive covenants contained therein."

Paragraph 23E of the Statement of Claim is: "By reason of: 23E.1 their appointment as auditors of Excel as particularised in paragraph 5 above;

23E.2 PMH's knowledge of the terms of the Excel Trust Deed particularised in paragraphs 21 to 22 above, which sought to protect the second to eighth plaintiffs' interests, as set out in paragraph 23B above;

23E.3 PMH's knowledge that its audit of the Excel six monthly accounts to 31 December of each year was performed, and the auditor's report on those accounts was prepared, for no other purpose than for the protection of the interests of the debenture holders of Excel pursuant to the Excel Trust Deed and Section 158 of the Code;

23E.4 PMH's knowledge that the Excel audited accounts were provided to, and relied upon by, the second to eighth plaintiffs and that those plaintiffs provided funding to Excel on that basis, as set out in paragraphs 23C and 23D above;

23E.5 PMH's knowledge as set out in paragraph 34 below, that the negative pledge agreements set out in paragraph 24 below, required the provision of audited financial statements to each of the second to eighth plaintiffs;

23E.6 the fact that PMH provided to the second to eighth plaintiffs Finance and Banking Letters on a regular basis, which stated that lenders ought to rely on audited financial statements;

23E.7 the fact that notwithstanding its knowledge of the matters set out in paragraphs 23E.2 to 23E.6 above, at no time did PMH advise each of the plaintiffs that they ought not rely upon the Excel audited accounts, PMH's audit reports on those accounts or PMH's reports pursuant to the Excel Trust Deed;

PMH assumed a responsibility to the second to eighth plaintiffs to furnish accurate opinions and reports in relation to Excel."

These pleadings raise allegations of knowledge of use proposed for the reports, intention that the plaintiff would rely on the reports and statements and the details of why assumption of liability is pleaded.

In the circumstances, without dealing with more, I think that the Statement of Claim raises an arguable case in negligence based on "assumption of responsibility". I do not think it necessary to deal with other grounds which Mr Blue suggested supported the contention that the pleading of proximity was adequate. I do not mean that no other argument is worthy of consideration. I merely travel along the avenue which I mention to this decision.

Only a formal submission about the claim under the Fair Trading Act was made by the defendant. I say nothing about it. As Mr Blue said "... The matter will be proceeding to trial on duty of care for the trustee and under the Fair Trading Act for both sets of plaintiffs".

The plaintiff seeks relief under s.285 and 287 of the Companies Code. I think it arguable that these sections "give civil rights". Perhaps s.574 and 575 do, too. I think that the Statement of Claim fairly raises these issues. I do not think it appropriate to embark on a close examination of statutory obligation and relief for breach thereof in this matter at this stage. That will become important at trial. Suffice it to say that I accept the submission of Mr Blue as to the pleading of these issues and the existence of an arguable case which should go to trial. Certainly it is not a case where it is clear that the matter is groundless and that no cause of action exists.

I agree with the submission which Mr Blue made that the matter was not appropriate to be dealt by way of an application to strike out. He suggested that the duty of care to the plaintiffs arose in one or all of three ways. I have not needed to investigate that. But, founding on the remarks of the Chief Justice in Esanda (supra), Mr Blue suggested that the application should be dismissed at the outset.

In Esanda the Chief Justice said (p.433): "I acknowledge the validity of the submission of Mr Wicks that the r 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 r 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 r 75.02 procedure might have been preferable."

Nor do I think that I should dismiss the application on the mere ground that I think a better procedure could have been followed. But I vigorously support the suggestion that an application to strike out should be reserved for the plainest of cases. I think that a strike out application should, in general, not be granted unless the action on its face is so manifestly groundless that it does not admit of argument. Moreover, I think that where there are, or could be, complex questions of law to be determined it is well if the matter go to full trial for one can never be sure but that some piece of evidence might be of great significance in interpreting the facts to which the law is to be applied. The question of whether or not to strike out a statement of claim is one of discretion. In this case, with other causes of action proceeding to trial, and with the interweaving of the interests of all parties I would refuse the application in the exercise of discretion. I would exercise my discretion by saying that I think the whole issue as pleaded should go to trial. The Statement of Claim, not counting schedules, runs for 227 pages. Length is not necessarily productive of clarity. But I think this Statement of Claim, as drawn, tells the defendants the complaints which the plaintiffs have, the reasons for those complaints, the legal basis on which complaint is offered and all other matters necessary for the action to be capable of thorough and fair trial on this Statement of Claim.

Planning and Assessment Act 1979

EXECUTOR TRUSTEE AUST LTD AND OTHERS v PEAT MARWICK HUNGERFORDS No. SCGRG 92/1218 Judgment No. 4918 Number of pages - 9 Audit, auditors and accountants

At a glance

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Judgment (56 paragraphs)

EXECUTOR TRUSTEE AUST LTD AND OTHERS v PEAT MARWICK HUNGERFORDS No. SCGRG 92/1218 Judgment No. 4918 Number of pages - 9 Audit, auditors and accountants (1995) 13 ACLC 201 (1995) Aust Torts Reports 81-318 (1995) 63 SASR 393 [1995] SASC 4918 (12 January 1995)

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Legislation Cited (2)

Cases Cited (8)