Establishing Contractual and Common Law Duty of Care: A Recent Case Study

Duty, Breach, Causation and Loss are the fundamental elements required to any professional negligence claim. Corporate and Commercial Disputes Partner Melissa Worth analyses a recent case where the defendants tried to disprove that these elements were met and strike out the claim against them.

The fundamental elements to any claim in professional negligence are:

Duty: the defendant(s) owed a duty of care to the claimants

Breach: the defendant(s) breach that duty

Causation: the claimants would not have suffered loss but for the defendant’s breach, and the loss is not too remote

Loss: the claimant suffered financial loss as a result.

If one of those elements is absent, or not sufficiently proven, then the claim will fail. For that reason, if the claimant’s case looks weak in one of those areas, defendants often seek summary judgment or strike out to put an end to the claim at an early stage.

A recent example is (Amathus Drinks Plc v EAGK LLP & Anor [2023] EWHC 2312 (Ch)) in which the auditors sought to prove that the claim against them could not be sustained.

Brief summary of the relevant facts

Amathus Drinks Plc and Chariton Platon Georgiou (together the ‘buyers’) entered into a Share Purchase Agreement (SPA) to buy the entire share capital of Bablake Wines Limited.

EAGK LLP conducted the due diligence before the sale, prepared completion accounts and prepared the statutory accounts of Bablake Wines.

After the sale, it was alleged that a fraud had taken place which inflated the balance sheet of Bablake Wines. The result was that the buyers allegedly paid around £348K - £480K more than they should have done to purchase the company.

In the substantive claim, the buyers seek to recover their losses from the auditors on the basis that the auditors were negligent in failing to spot the alleged fraud before the completion of the sale.

Grounds for strike out / summary judgment

The defendants sought to strike out the claim against them, or alternatively seek summary judgment, on four grounds. The defendants, EAGK LLP (the auditors) and Mr Christofi (of EAGK), allege that the claimants have no real prospect of establishing:

• Duty: There was a contractual duty of care owed to the claimants

• Duty: there was a common law duty of care owed to the claimants

• Breach: Even if there was a duty, the allegations of breach are not particularised

• Causation and loss: the claimants’ case on causation is incoherent.

In this article we focus on the arguments around establishing a contractual or common law duty of care and what business owners can learn from this case.

Contractual duty: privity of contract is paramount

The key documents that are relevant to the contractual claim were:

  1. the engagement letter dated 7 September 2015, including the alleged retainer
  2. a schedule of engagement, headed ‘Bablake Wines Ltd’
  3. EAGK’s Terms and Conditions of Business (to be read with the schedule of engagement)
  4. the audit report sent by Mr Christofi of EAGK to Mr Georgiou (one of the buyers / claimants) on 26 April 2016, addressed to ‘The Directors, Bablake Wines Limited)

The key question was whether EAGK entered into a retainer with the buyers in September 2015.

None of these documents were found to constitute a contract between EAGK and the buyers. The documents in evidence were addressed to the directors of Bablake Wines Limited. In fact, the judge found that the schedule of engagement was found to be “not at all consistent” with the contract having been entered into with the buyers. It was not addressed to the buyers and it did not deal with the requirements of the SPA in relation to post-completion matters.

There was no privity of contract between the buyers and EAGK, which means that there was no contract to which both parties were signatories. The only document that may evidence a contractual relationship, was the engagement letter of 7 September 2015, which neither party had located.

Master Brightwell surmised that the claimants’ “real” point was that the letter of engagement might turn up before trial and case a different light on the documents available. He found that idea implausible and granted summary judgment to the defendants on the claim in contract.

Common law duty: Did the auditors assume responsibility?

The claimants put forward an alternative argument; even if there was no contractual duty of care, a duty of care arises in tort. They say that the auditors assumed responsibility towards the buyers to exercise reasonable care and skill in preparing the company’s accounts and the completion certificate.

This ‘assumption of responsibility’ under common law can be a knotty issue in negligence claims. It imposes a duty where there otherwise would not have been one. Whether or not the argument succeeds is fact-specific in every case.

One of the issues that points towards the adviser assuming responsibility, is whether or not they had the opportunity to issue a disclaimer. In this case, the auditors did. The audit report included the following disclaimer:

Our report will be made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of CA 2006. Our audit work will be undertaken so that we might state to the company’s members 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 will not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for the audit report or for the opinions we form.

The clause itself is not unusual. Disclaimers are commonplace in auditors’ reports. But under these circumstances, it points to the auditors assuming responsibility under common law.

Another factor that points towards there being an assumption of responsibility is reliance. Did the buyers rely on the auditors’ advice?

In this case, Master Brightwell considered that there were continuing communications between the parties after the date of the audit engagement, such that EAGK knew that the buyers were relying on the figure in the Completion Certificate.

For those reasons he found that the claimants had a realistic prospect of showing that there was an assumption of responsibility by EAGK towards the buyers in relation to the Completion Net Assets figure shown in the Completion Certificate. While it is not a ruling on liability, there are sufficient arguments for the issue to proceed to trial to ascertain disclosure and witness evidence on the issue.

Key takeaways for auditors

In professional negligence claims, the strongest evidence of a duty of care arises from the contractual relationship. If you can point to a contract in which the professional has set out their obligations to you and your business, that is a more robust claim than relying on the common law assumption of responsibility.

As a business owner, be as stringent as possible about getting signed contracts in place and kept safe before you engage the services of a professional.

Legal disclaimer

The matters contained within this article are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions.

Before acting on any of the information contained herein, expert advice should always be sought.

©Melissa Worth, November 2023

To discuss any of the above further, please feel free to contact Melissa Worth:  |  07828 773892