The Silver Bullet that missed: Disclaimers revisited in Amathus Drinks Plc & Ors. v EAGK LLP & Ors
Market Insight 06 October 2023 06 October 2023
UK & Europe
In the recent case of Amathus Drinks Plc & Ors. v EAGK LLP & Ors, on the defendants’ application for summary judgment, the High Court considered questions of assumption of responsibility and the effectiveness of disclaimers of liability by an accountant to third parties.
The Defendant firm of accountants sought to rely on a disclaimer of liability in order to rebut the claim that they had assumed responsibility to purchasers of a company, in relation to the preparation of Completion Accounts and the issue of a Completion Certificate.
The Defendants were unsuccessful in having the claim dismissed. While the judgment does not seem to us to give rise to any wider concern about the use of disclaimer clauses, not least as the fact pattern was relatively unusual and the decision very fact specific, it does provide a useful opportunity to recap the position in relation to the use of disclaimer clauses, and perhaps a timely reminder that even a well drafted disclaimer will not necessarily be determinative of whether a duty of care is owed.
Background and facts
- On 28 August 2015, the first two claimants, Amathus Drinks Plc and Chariton Platon Georgiou (“the Buyers”) acquired the third claimant, Bablake Wines Limited (“the Company”). The relevant defendants, EAGK LLP, a firm of accountants, and Mr Christofi, the partner who led the engagement, had been retained by the Buyers to conduct due diligence and to assist in negotiations in relation to the proposed purchase.
- Under the terms of the Share Purchase Agreement (“SPA”), the purchase price to be paid was subject to adjustment if the net assets at the date of completion (“Completion Net Assets”) fell below a certain level. The Defendants were instructed to prepare the Completion Accounts (for the period 31 March 2014 to 28 August 2015) and to issue the Completion Certificate confirming the Completion Net Assets. It appears that there was no engagement letter for this work.
- The Defendant was also engaged (in September 2015) as the statutory auditor for the Company. The audit report on the financial statements for the period 1 April 2014 to 31 July 2015 was issued on 26 April 2016. Neither party was able to locate and produce a copy of the engagement letter for the statutory audit engagement, although a schedule which ought to have been attached to the engagement letter was available and relied on by the Defendant. This schedule included a disclaimer of responsibility to anyone other than the company and the company's members as a body, for the audit work and audit report. The letter sent to the directors of the company enclosing the audit report also contained a disclaimer which read “this report has been prepared for the sole use of [the Company]. It must not be disclosed to third parties, quoted or referred to, without our prior written consent. No responsibility is assumed by us to any other person”. The audit report contained the usual “Bannerman” disclaimer of liability, in terms almost identical to the disclaimer in the engagement schedule.
- The Completion Certificate was issued on 22 September 2016, addressed to the Buyers and to the sellers.1
- The Buyers subsequently announced that they had identified a fraud committed on the Company in the period before the SPA, which they said had resulted in them overpaying for the Company.
- The Buyers issued proceedings against the Defendants, alleging negligence in failing to identify the fraud through their work in relation to the Completion Accounts and Certificate, and the audit. The claim was brought both in contract, in reliance on the letter of engagement for the statutory audit2, and in tort, on the grounds that the Defendants had assumed responsibility to the Buyers in respect of the work on the Completion Accounts.
The Court’s decision
Claim in contract
The claim in contract was struck out. The court rejected the claimants’ case on several grounds, including that the engagement schedule they sought to rely on clearly related to the statutory audit and matters related to the Company, not to the completion accounts or anything related to the sale and purchase of the Company. It was clearly an engagement with the Company as a whole, represented by the members in general meeting, not an engagement performed for the claimants as buyers.
Claim in tort
As noted above, it appears that there was no separate engagement letter between the Buyers and the Defendants in respect of the preparation of the Completion Accounts. The Buyers therefore had to rely on a claim in tort, alleging that the Defendants owed them a duty of care in respect of the preparation of the Completion Accounts and the issue of the Completion Certificate, as a result of an assumption of responsibility, or because it was fair, just and reasonable in the circumstances to impose such a duty. The Buyers relied on various factors in seeking to establish that there had been an assumption of responsibility, including the existing business relationship between the Buyers and Defendants, the Defendants’ involvement in negotiating the SPA, the fact that the Defendants knew and intended that the Buyers would use the figures in the Completion Certificate to calculate the final price to be paid under the SPA and that the Completion Certificate was addressed to the Buyers (and sellers), not to the Company.
The Defendants sought to rely on the various disclaimers which appeared in the engagement schedule for the statutory audit, the communication accompanying the audited accounts, and in the audit report itself. It was accepted by the Defendants’ counsel that, absent the disclaimers, there was a reasonable argument that the Defendants had assumed responsibility to the Buyers for the accuracy of the figures in the accounts and in the Completion Certificate.
As this was an application for summary judgment, the court only had to be satisfied that the Claimants had a realistic as opposed to fanciful prospect of establishing at trial that the Defendant had assumed responsibility to them in relation to the calculation of the Completion Net Assets figure in the Completion Certificate. The court concluded that the Claimants had an “entirely realistic prospect” of doing so, and dismissed the Defendant’s application.
In reaching his decision, Master Brightwell considered the decision in Barclays Bank plc v Grant Thornton UK LLP  1 CLC 180, also a summary judgment decision, in which Grant Thornton successfully relied on disclaimers (which were in substantially the same form as those in issue in this case) contained in non-statutory audit reports provided to Barclays Bank. However he distinguished that case on the basis that one of the considerations which in his view "weighed heavily" in the Barclays decision was that "there was no direct communication between the parties, and thus nothing beyond the known purpose for which the reports were required which could give rise to an assumption of responsibility". Conversely, in the present case there was an existing and continuing commercial relationship between the parties which involved direct communications between the Defendants and the Buyers. As Master Brightwell also noted at paragraph 36, the decision in the Barclays Bank case was not that a disclaimer is a bar to a finding of assumption of responsibility in all cases, but that it was a bar in the circumstances of that specific case.
Clyde & Co comment
As noted in the introduction, this decision involves a relatively unusual fact pattern. While not discussed in the judgment, surely one of most significant difficulties for the Defendants in seeking to rely on the disclaimers is that, at least on the face of it, the work on the Completion Accounts and Certificate do not come within the scope of the disclaimers, which relate to the engagement as statutory auditors. Had the Defendant firm ensured that a proper engagement letter was in place for the work on the Completion Accounts, it is perhaps unlikely that this case would have been litigated.
The decision nevertheless demonstrates that the existence of a well-drafted disclaimer will not necessarily be determinative of whether a duty of care is owed to a third party. The factual context, will also be important, as will matters such as the commercial sophistication of the third party, and the intentions of the parties. In the High Court decision in Galliford Try v Mott MacDonald  EWHC 1570 (TCC), the existence of a disclaimer was held to be just one factor in the question of whether there had been an assumption of responsibility to the third party capable of giving rise to a duty of care. In that case, disclaimers of responsibility towards parties other than those that had commissioned the relevant reports were characterised by the judge as “as a kind of warning…not to rely upon material”. In the Barclays Bank case, Clarke J commented that the right approach “is to treat the existence of the disclaimer as one of the facts relevant to answering the question whether there has been an assumption of responsibility by the defendants for the relevant statement”.
Where, as here, a defendant engages in substantial communications directly with the third party, or where there is a potential issue as to whether work being performed is covered by a previous disclaimer, it is clear that the issue of whether a duty of care exists will be less straightforward, and much less amenable to summary judgment, notwithstanding the existence of a disclaimer.
The significance of the surrounding factual context was also demonstrated recently in a failed summary judgment/strike out application in Avantage (Cheshire) Ltd v GB Building Solutions Ltd (In Liquidation)  EWHC 171 (TCC). In that case, a fire consultant had included disclaimers of responsibility to third parties in its fire safety reports issued in connection with building works which it had been provided pursuant to its contract with the main design and build contractor (which was a co-defendant). The claimants were the local authority (which owned the freehold), and two parties who had entered into a PFI contract with it to build and operate a “supported living facility”. The judge ruled that there was a triable issue as to whether the fire consultant had assumed a duty of care to the claimants, commenting that the PFI contract context could raise triable issues as to whether it was intended that they might rely on the fire consultant’s work.
It is also of interest that in Amathus, the Buyers did not suggest that the disclaimer was subject to Unfair Contract Terms Act 1977 (“UCTA”) and failed the test of reasonableness. In the Barclays case, both parties agreed that UCTA did apply to the disclaimer but there is some judicial uncertainty as to whether the statutory test of reasonableness under UCTA is relevant to a disclaimer of responsibility to a third party. Standard textbooks on negligence continue to maintain that UCTA applies to disclaimers. However the court in Galliford Try v Mott MacDonald  EWHC 1570 (TCC) held that disclaimers “are simply aspects of the factual background form which the Court determines whether a duty of care arises. If a duty of care arises, then the disclaimer would not exclude; the reverse of this applies also: if there is no duty of care at all, there is nothing upon which UCTA can bite”.
Practical advice for professionals
Finally, what can we take away from this decision in terms of practical tips for professionals. It seems to us that there are two key points:
- It may be helpful to remind engagement teams that a clause disclaiming liability to third parties is not an absolute bar to a finding of assumption of responsibility. Most situations in which such a disclaimer is used are likely to be much closer to the scenario in the Barclays Bank case, with limited to no direct engagement with the third party. Nevertheless, engagement teams should be aware that to the extent that their conduct arguably contradicts the disclaimer of liability, for example substantial communications with the third party, a court could ultimately find that there has been an assumption of responsibility.
- It is a further reminder of the importance of carefully defining the scope of each engagement in a retainer letter, which also makes clear to whom you owe a duty of care.
1The judgment does not make clear whether, and if so when, separate Completion Accounts were issued. There are a number of points in the judgment where it seems to be implied that the Claimants’ case is that the statutory accounts are to be regarded as the completion accounts.
2No allegation appears to have been made that the Defendants owed the Buyers a duty of care in respect of the statutory audit.