In April 2001, after Price Waterhouse successfully defended Sir Elton John’s £20m audit negligence claim against it, we wrote the following comments in The Lawyer: “It still seems to be the assumption of many claimants and their legal advisers that it is sensible practice to embark upon litigation against their professional advisers. They assume that the defendant professional will wish to dispose of the litigation prior to trial at some cost, irrespective of the merit of the allegations made… If nothing else, one lesson to be learnt from this case is that speculative actions aimed at ‘deep-pocket’ defendants do not guarantee success and are an expensive risk.”
This was before Equitable Life launched its claim against Ernst & Young (E&Y). It clearly fell on deaf ears. When will the business and legal worlds realise that it takes more to succeed in establishing a claim for audit negligence than just pointing to the fact of the auditor’s involvement in a less than successful business venture and shaking a collection box?
With hindsight it is all too easy for a claimant to find fault with the work of any professional and find at least one expert who will criticise the defendant. Often, such criticism is born of confusion between ‘best practice’, which is not the test, and the question of what it was open to a reasonable professional to do in the circumstances, which is. It is a truism that the answers which you get from an expert depend on how you ask the questions. Ultimately, if the expert opinion is built on sand, it will not withstand the rigours of cross-examination.
Even assuming the claimant can find a favourable (and credible) expert opinion, constructing an arguable case that there has been negligence is not enough. The fault must actually have caused some loss which the law recognises as the fault of the professional involved. Too often claimants either overlook or downplay the importance of this element. Many claimants simply assume that, once an arguable fault has been identified, defendants can be bullied into a quick settlement. Alternatively, the received wisdom appears to be that the professional and their advisers will not be comfortable relying on causation arguments if they think there is a risk of losing the argument on negligence. This dangerously underestimates the average professional defendant.
In Equitable, there was, predictably, no agreement between the experts on the central issue of whether the provisions in the accounts were appropriate and consistent with the accounts presenting a ‘true and fair’ view. But Equitable still had a mountain to climb in proving that any alleged misjudgement about the provisions would have caused its board of directors to do anything different. Difficulty in discharging this burden was the reason cited for the abandonment of the claim. The directors’ evidence came as no surprise to E&Y. The witness statements from Equitable’s former directors (also being sued) had been available for more than a year before trial.
One cannot help feeling that E&Y was expected to crumble under the pressure of the huge claims, the press campaign and the very public trial. Perhaps some defendants would, but large professional service firms are becoming increasingly sophisticated, not only in risk management to avoid claims, but in focusing, when claims are made, on the merits to inform their approach. They will not be intimidated by huge damages figures if the claim is flawed. Perhaps Equitable will represent the high watermark of speculative litigation against professionals with perceived ‘deep pockets’ – but we doubt it.
Clare Canning was assisted on this article by partners Matthew Lawson and Simon Willis
She is head of commercial litigation, Barlow Lyde & Gilbert