In an important decision on the scope of auditors’ duties and the loss of a chance principle, the Court of Appeal has handed down its judgment in AssetCo plc v Grant Thornton UK LLP.
At first instance Bryan J found that Grant Thornton was liable to pay AssetCo damages of around £22 million (plus interest) for losses which were sustained “through AssetCo’s (continued) trading in a fundamentally dishonest manner in reliance on the negligent audit” (). The judge rejected GT’s argument that such trading losses fell outside the scope of an auditor’s duty.
Grant Thornton appealed on three bases: (1) that the judge had erred in his approach to scope of duty and legal causation, and had failed to apply the ‘SAAMCO cap’ when deciding whether AssetCo’s trading losses fell within the scope of its duty; (2) that the judge impermissibly performed a rounding up exercise when assessing loss of a chance and (3) that the judge had erred in holding that AssetCo did not have to give credit for certain benefits.
The Court of Appeal (David Richards LJ, Phillips LJ and Sir Stephen Richards) held that there was “substance in” Grant Thornton’s criticisms of the Judge’s approach to the issue of scope of duty. The Court considered the applicability of the SAAMCO cap, which limits a defendant’s liability in some cases to losses caused by the incorrectness of information provided by the defendant, rather than the full consequences of the claimant entering into a transaction in reliance on that information. The Court of Appeal held that, while the SAAMCO cap generally applies to audit negligence cases, it is “not a rigid rule of law” but “simply a tool” for determining the loss flowing from the negligently wrong information (). On the facts, applying the SAAMCO cap to AssetCo’s trading losses led to the same outcome as the first-instance judgment ([107-9]), but also to the conclusion that a misappropriation of £1.5 million was outside the scope of the duty () and not recoverable.
The Court of Appeal dismissed Grant Thornton’s appeal on the judge’s approach to assessing loss of a chance, holding that the Judge was entitled to treat as series of lost chances as being sufficiently certain to be assessed at 100%. On the third ground of appeal, the Court of Appeal considered that the judge had identified the correct principles, but had erred in not requiring AssetCo to give credit for approximately £7.5 million of proceeds from a share placing that the Court considered was “part and parcel” of AssetCo’s dishonest business. In the result, the Court of Appeal reduced the damages award around £6.75 million (taking into account the Judge’s finding of 25% contributory fault).
The judgment is here.
Richard Blakeley and Tom Pascoe acted for AssetCo, instructed by Mishcon de Reya LLP.
Simon Salzedo QC acted for Grant Thornton, instructed by Clyde & Co LLP.