A damages bill of £65 million and a final High Court judgment debt of £105 million; it happened to Binder Hamlyn and, warns Mark Chapman, it could happen to you
On 6 December last year, the High Court awarded damages of £65 million to security systems company ADT as a result of its claim against BDO Binder Hamlyn. Interest and costs take the final judgment debt to over £105 million, thought to be the highest award ever made by the High Court against a firm of auditors.
The potential impact of this case on the partners, on whom liability may rest, has been well covered by the press. But what about the far reaching implications of the decision itself?
The claim arose out of ADT's acquisition of Britannia Security Group in 1990. In making the acquisition, ADT claimed it had relied on the accuracy of Britannia's latest accounts for the year ended 30 June 1989 which were signed by Binders as joint auditors of Britannia. More importantly, ADT said it had also relied on oral representations made by Binders partner Martyn Bishop to a director of ADT, John Jermine, as to the accuracy of the accounts. Bishop confirmed to Jermine at a meeting on 5 January 1990 that the latest set of accounts showed a true and fair view of Britannia's financial position for the date they were drawn up. ADT announced its decision to bid for Britannia on 9 January, with the public offer document issued a week later.
ADT's case was that the representations made at the 5 January meeting were wrong and that Binders, through Bishop, had been negligent in making them. Further, ADT said it had relied on the direct affirmation of the accuracy of the accounts in deciding to proceed with the offer. The price paid by ADT for Britannia was around £105 million ('paper rather than cash'). The £65 million damages figure represented the court's assessment of the difference between this price and Britannia's real value when the offer went unconditional.
The House of Lords decision in Caparo Industries v Dickman & ors (1990) established that, in giving an audit certificate, the auditors assume a duty only to the company to whom it is given, not to individual shareholders or – more relevant in this case – third parties who may buy the company's shares on the strength of the accounts.
However, Caparo (and the cases decided since, including Morgan Crucible, James McNaughton and Henderson as well as Peach Publishing v Slater 12/4/95 unreported) clearly envisage that such a duty may arise in specific circumstances, where it could be shown there had been an assumption of responsibility on the part of the auditors to the third party in question.
The key question for Mr Justice May was whether, in providing specific assurances to ADT about the accuracy of the accounts, Binders had assumed a responsibility to ADT for the accuracy of the statements it made, such that a duty of care arose in law.
ADT argued that:
Binders possessed a special skill and knowledge as auditors of Britannia;
the firm made statements and provided advice directly to ADT at a serious business meeting convened solely for that purpose;
Binders knew that its audit work, statements and any advice and information it gave would be relied upon by ADT and that ADT would have no opportunity to independently verify those statements;
Binders knew the above would be relied upon for the purpose of a specific transaction, namely ADT's proposed acquisition of Britannia;
Binders did not suggest any disclaimer of responsibility.
Critical to Mr Justice May's judgment was the serious business nature of the meeting, Bishop's knowledge of ADT's reasons for requesting it be held and the imminence of a possible bid. However, most striking was the fact that Bishop did not have to attend the meeting or answer the specific question put and it was open to him to disclaim any liability of his firm to ADT.
Mr Justice May said: “He did not have to say yes. He could have declined to answer. He could have given a disclaimer. He could have said that, if ADT were to rely on his answers, he would need to take advice…Rather than doing any of these, he undertook to answer the question posed.”
Mr Justice May found when making the representations to ADT, that Binders owed ADT a duty of care for the accuracy of the representations. He found the representations to have been false and negligently made (founded upon Binders' seriously negligent performance of the Britannia audit for the year ended 30 June 1989) and that ADT relied upon the representations in deciding to proceed with the deal.
At a practical level, Mr Justice May was not prepared to accept that either the size of the potential liability or the difficulty of obtaining adequate insurance cover should affect this finding. He said: “If for commercial reasons those who give advice do not want to give disclaimers or otherwise limit their liability, then I see no reason why they should not have to live with the consequences.
“It is not, in my view, sensible that the law should say that Mr Bishop is not to be taken to have assumed responsibility in this case because the potential liability was enormous and difficult to insure against…That could only, in my view, be a tenable legal result if the law, as a matter of policy, were to decide that certain classes of advisers (or all advisers for whom it could be proved or suggested that insurance was difficult) should be accorded a degree of legal immunity or limitation of liability. Such a policy would, I think, need legislation.'
Freshfields represented ADT, with Peter Goldsmith QC and Philip Brook Smith as Counsel and Price Waterhouse as expert accountants. Binders was represented by Herbert Smith, with Jonathan Sumption QC, David Unwin QC and Edmund Cullen as Counsel and Touche Ross (now Deloitte & Touche) as expert accountants.
Binders has recently lodged an appeal to the ruling.
The case has lessons for all professional advisers asked to confirm advice previously given, possibly in different circumstances, either to their client or a third party.
The status of the confirmation should be made absolutely clear, in particular whether or not the recipient is to rely on it. Where this is the case, the adviser providing the confirmation should ensure the extent to which it will be liable to the recipient is understood by both sides. Regardless of the recipient's insistence, the adviser should not comply with an unqualified confirmation until it has had a chance to consider whether any extra work is required or has agreed an indemnity with its own client, where the confirmation is to be given to a third party.