In a recent decision, the High Court has awarded a former partner of Ernst & Young (EY) damages exceeding $11 million, broadly equating to past and future earnings for the rest of his career: Rihan v Ernst & Young (Global) Ltd  EWHC 901 (QB). The claimant, Mr Rihan, was a whistle-blower who publicly disclosed suspected irregularities arising out of an audit for a client for whom he was the audit engagement partner, and unilaterally left EY.
While the facts of the case arose in an audit and accounting context, the decision will be of interest to financial services firms more generally. In particular, the duty of care found to have been owed by EY to Mr Rihan was to protect against economic loss (in the form of loss of future employment opportunity), by providing an “ethically safe” work environment, free from professional misconduct. Further, although Mr Rihan was a partner in EY working in Dubai, the court found that this duty was owed (and breached) by four UK-based EY entities.
The decision has a number of unusual features, not least that: Mr Rihan had no contractual relationship with any of the defendant entities; his public disclosure was a criminal offence under local UAE law; the award of damages was the product of an exercise in judicial creativity involving the identification of a novel duty of care, albeit limited in ambit; and finally, the reasoning for the identification of this duty owed a considerable amount to features of UK employment law and yet Mr Rihan was not employed by any EY entity, being a partner.
EY is reported to be seeking permission to appeal. If the decision survives an appeal, it remains to be seen how widespread its effect will be as the court stressed the exceptional nature of the relevant facts which had given rise to the duty.
The complex facts in the case, as found by the trial judge (Kerr J), can be summarised as follows:
- The claimant was a partner in EY working in Dubai. He was the audit engagement partner for a Dubai corporate client, Kaloti Jewellery International (Kaloti), which is Dubai’s biggest gold refiner, and had been tasked with providing an “assurance audit” of Kaloti. This would provide an independent view on the quality and propriety of Kaloti’s business practices. He discovered irregularities in Kaloti’s business concerning the suspected unlawful smuggling of gold bullion coated in silver out of Morocco and into Dubai. Indeed it was common ground that this gave rise to a reasonable suspicion that Kaloti was involved in money laundering.
- The claimant reported his concerns within EY, but EY failed to act on the claimant’s concerns and sanitised the findings of the report. The claimant refused to sign the sanitised report and was replaced by an accountant who “improperly [lent EY’s] name to a flagrantly misleading assurance reporting process”.
- The claimant became concerned for his personal safety and that of his family, and fled to England. Ultimately, the claimant resigned from EY and made public his allegations which subsequently featured in a Panorama programme.
- The claimant brought claims in the High Court – not against the entity of which he was a partner (EY MENA Limited), but against various UK-based entities. The claimant alleged that the UK defendants had acted together in such a way as to breach duties of care owed to him in the conduct of the audit and had failed to protect him as a bona fide whistle-blower.
- Specifically, the claimant alleged that EY owed him two duties of care, both expressed as duties not to cause him financial loss:
- a “safety duty” – a duty to take reasonable steps to prevent the claimant from suffering loss of earnings as a result of his reasonably apprehended concerns for his safety and that of his family if he were to return to Dubai; and
- an “audit duty” – a duty to take reasonable steps to prevent the claimant from suffering loss of earnings by reason of EY’s failure to conduct the Kaloti audit in an ethical and professional manner.
It was common ground that the claimant was not able to seek a remedy under the UK whistle-blower legislation: firstly, because he was not a worker at any of the defendant entities; and secondly, because he lived and worked outside the UK. Yet the court observed that if this had been a “conventional whistle-blower case”, the claimant would have had a strong claim. Although the claimant (as a partner) was not an employee of any EY entity, Kerr J (perhaps because of his employment law background and the fact that he also sits in the Employment Appeal Tribunal) invoked a number of analogies with employees or those in a “quasi-employment relationship”. Indeed there is no discussion in the judgment of the claimant’s rights as a partner of EY.
In deciding whether either duty of care identified by the claimant should be recognised, the court recognised first that there was no general duty to protect an employee against economic loss suffered after the end of his employment.
The court proceeded to consider each of the alleged duties in turn, applying the three classic tests used to determine the existence of a tortious duty of care in respect of economic loss: (1) assumption of responsibility; (2) the three-fold test in Caparo Industries plc v Dickman  2 AC 605 (foreseeability, proximity and whether it is “fair, just and reasonable” to impose a duty); and (3) the incremental test (whether the addition to existing categories of duty would be incremental rather than indefinable).
The court rejected the existence of the safety duty, finding that it would be an illegitimate extension of the law to make the leap from the standard employer’s duty to safeguard its employees against personal injury, to a broad duty to safeguard them against pure economic loss incurred as a result of the claimant’s need to cease working to avoid a threat to his physical safety.
The court held that EY had not assumed responsibility for such a duty and the threefold Caparo test was not met. Even if it was assumed that the claimant’s losses were foreseeable and that a sufficient relationship of proximity existed between the defendants and the claimant, in the court’s view it was not “fair, just and reasonable to impose on the defendants a duty of such width as to go far beyond the conventional duty to safeguard an employee against personal injury and loss of earnings consequent on such injury”.
The court found that, on the facts of the present case, the audit duty of care did not fit the “assumption of responsibility” analysis favoured in the paradigm cases where a person provides services or advice to another in circumstances where there is no contract but the provider knows or should know that the other will rely on the professional care, skill and judgment.
Having found that the proposed audit duty was novel, the court proceeded to consider whether the duty should exist by adopting an incremental approach to development of the law, by analogy with decided cases (see Lord Mance in Robinson v Chief Constable of West Yorkshire  2 WLR 595). On the other hand, however, the court also invoked the dictum of Lord Steyn in Williams v Natural Life Health Foods Ltd [ 1988] 1 WLR 830 that “the law of tort, as the general law, has to fulfil an essentially gap filling role”.
The court set out nine legally significant features drawn from analogous cases to decide whether they provided a sufficient basis to recognise the duty of care identified by the claimant, applying the threefold test set out in Caparo.
In the court’s view, it was readily foreseeable that the claimant would suffer financial loss if the audit was conducted and concluded in a manner the claimant considered unethical and unacceptable.
As to whether the loss was foreseeable by the four EY defendants specifically, the court was “not especially concerned with the precise contractual position of the claimant within the EY organisation”. Although the claimant had what the court described as “a partnership contract” with EY MENA Limited, he owed duties to the EY organisation far beyond those owed to EY MENA Limited. Similarly, the claimant regarded the EY organisation as “acting in concert with and through its various subordinate associated bodies” which all dealt closely with each other. The court regarded the knowledge and perceptions of EY global and regional leaders as attributable to all four defendants.
The court found that the requirement of proximity was met in relation to the audit of Kaloti and rejected arguments against this on the basis of EY’s corporate structure. It took comfort in this regard from recent appellate decisions including Vedanta Resources plc v Lungowe  UKSC 20 and Chandler v Cape plc  EWCA Civ 525 in which parent companies had (on an arguable basis only in the case of Vedanta, which arose in the context of a jurisdiction challenge) been found to owe duties to third parties/employees of their subsidiaries in circumstances where they exercised a high degree of influence in the business of the latter. This step in his reasoning was important because it enabled him to circumvent the fact that the claimant had no contractual relationship with any of the defendant entities.
Fair, just and reasonable
Turning to the final “policy” element in the test, the court found that it was fair, just and reasonable for the law to impose the audit duty on EY. In reaching this conclusion, the court highlighted the following points in particular:
- The court felt that the claimant, who had otherwise been denied a remedy as a “conventional whistle-blower”, should have a remedy: “professionals like accountants should not be pressured to act unethically”.
- In the court’s judgment, conceptually it was not a huge leap from imposing a duty of care to protect against physical injury and consequent financial loss by providing a physically safe work environment, to imposing a duty of care to protect against economic loss (in the form of loss of future employment opportunity) by providing an ethically safe work environment, free from professional misconduct.
- The court reviewed a number of previous authorities including Scally v Southern Health Board  1 AC 294 and Spring v Guardian Assurance  2 AC 296, in which the courts had held that employers were obliged to take reasonable steps to protect the post-employment economic interests of their employees, but found that “the cases do not differentiate sharply” between those featuring employees/former employees and what the court termed “quasi employees”. Interesting in this connection are the references throughout the judgment to employment law analogies and references which the court applied in relation to the facts of this case (eg the rights of whistle-blowers, the implied duty of trust and confidence and the concept of constructive dismissal). However, it must be doubtful whether a partnership relationship can really be termed one of “quasi employment”. Further, while members of limited liability partnerships (and possibly partners) are now recognised as falling within the ambit of the UK whistle-blowing legislation, the other two concepts do not apply to a partnership relationship under UK law.
- On policy grounds, the court said it would not have recognised the audit duty had it cut across any UK statutory rights of the claimant (in a nod to the decision in Johnson v Unisys Ltd  1 AC 518). Here, the court found that the duty sat alongside the UK whistle-blower legislation and, duly fulfilling its “gap filling” role, the court did not engage with the question of whether Parliament deliberately decided that these rights should not be available to those living and working abroad.
Finding in favour of the audit duty, the court was clear that the scope of the duty would have limited application. Specifically, it imposes a new duty of care on employers – and other quasi employers including partnerships and LLPs – to protect against economic loss to an employee/quasi employee’s loss of future job opportunity by providing an ethically safe work environment, free from professional misconduct in a professional setting. However, the court said the ambit of the duty would extend only to the team members in the Kaloti audit in the present case. More generally, the decision would apply only to “a small class of exceptional cases” and was “an outlier with a factual basis that will rarely if ever recur”.
Having found that the audit duty was owed by EY, the court was satisfied that it had been breached and awarded the claimant damages for loss of past and future earnings.