The English Court of Appeal has held that, where an auditor negligently failed to detect management’s dishonest concealment of the claimant’s insolvency, it was liable for the losses suffered by the claimant in continuing to conduct its loss-making business: Assetco Plc v Grant Thornton UK LLP  EWCA Civ 1151.
While the decision recognises that a negligent auditor will not be liable for losses suffered simply because a business continues to trade, in the circumstances of this case the claimant’s business was ostensibly sustainable only on the basis of management’s dishonest representations representations to the auditors in the course of the audits. By negligently issuing unqualified audit reports, the business appeared to be sustainable when in truth it was insolvent, and this deprived the claimant’s shareholders or non-executive directors of the opportunity to call the senior management to account. The English Court of Appeal found that the claimant’s losses from continuing that business fell within the scope of the defendant’s duty: the negligence was not merely the occasion for the losses but was a substantial cause of them.
The judgment is of particular interest for the English Court of Appeal’s discussion of the so-called SAAMCO principle, which was established in South Australia Asset Management Corpn v York Montague Ltd  AC 191 (SAAMCO) and expanded upon in Hughes-Holland v BPE Solicitors  UKSC 21. Essentially, this says that where a professional is responsible only for providing information on which a decision will be taken, rather than advising on the merits of a transaction overall, the professional will be responsible only for the consequences of the information being wrong – not all the financial consequences of the transaction. This means that the claimant must establish that its loss would not have been suffered if the information had in fact been correct.
In the present case, the English Court of Appeal confirmed that the SAAMCO principle applies to general audit cases, even though the purpose of an audit is not to enable a decision to be taken in respect of a particular transaction. However, the decision emphasises that the SAAMCO principle may not need to be addressed in all cases, and in any event is not to be applied mechanistically. It is merely a tool the court may employ for determining which losses fall within the scope of the defendant’s duty, and it may be subject to exceptions.
As a result, it was not fatal to the claimant’s case that it had not asked the judge to determine whether the losses it claimed would have been suffered if the information in the audit reports had been correct, and the judge had not done so. However, in cases where the provision of negligent advice or information is alleged, it would be prudent for the parties to consider the application of the SAAMCO principle and be ready to persuade the court, if necessary, why it should not be applied.
The SAAMCO principle is due to be considered by the UK Supreme Court in an appeal against the decision in Manchester Building Society v Grant Thornton UK LLP  EWCA Civ 40 (considered here), in which the English Court of Appeal applied the principle to conclude that an auditor was not liable for losses suffered following negligent advice regarding the accounting treatment of interest rate swaps. That decision was also considered by the English Court of Appeal in the present case.
The present decision is also of interest for the English Court of Appeal’s discussion of the correct approach to assessing damages in “loss of a chance” cases, where the claimant’s loss depends on the hypothetical acts of third parties. The decision illustrates in particular that, in some cases, it may be appropriate to treat the lost chance as a certainty.
For a full discussion of the case, please click here.