James McNaughton Paper Group Ltd v Hicks Anderson & Co

A duty of care for a negligent statement causing pure economic loss depends on foreseeability, proximity, and whether imposing the proposed duty is fair, just and reasonable. Novel duties should develop incrementally by analogy with established categories.

The court must examine all the circumstances. Important matters include the purposes for which the statement was made and communicated, the parties’ relationships, the size of the intended class, the adviser’s knowledge, and whether reliance without independent inquiry was reasonably contemplated. In an arm’s-length commercial acquisition, a target company’s accountant does not ordinarily owe the purchaser a duty concerning draft accounts or general answers where the purchaser is experienced, has its own advisers, and the accountant cannot reasonably anticipate reliance without further inquiry.

A company acquired a paper group after receiving draft accounts prepared by the target group’s accountants. Its chairman also met one of the accountants, who agreed in general terms that the target was breaking even or doing marginally worse. Errors were later found in the accounts.

The acquiring company recovered £75,000 in negligence before His Honour Judge Lipfriend, sitting as an additional judge of the High Court. The accountants appealed. The central question was whether they owed the purchaser a duty of care concerning either the draft accounts or the answer given at the meeting.

1. Appeal allowed unanimously. Neill LJ delivered the leading judgment. Nourse and Balcombe LJJ agreed. The purchaser had not established that the accountants owed it a duty of care concerning either the draft accounts or the oral answer.

2. Per Neill LJ, foreseeability alone does not establish a duty for a negligent statement causing economic loss. The relationship must possess sufficient proximity, and it must be fair, just and reasonable to impose a duty of the proposed scope. No single general principle supplies a practical test for every situation. The law should develop incrementally by analogy with established categories.

3. The court should examine all the circumstances. Matters likely to be important include the purpose for which the statement was made; the purpose and circumstances of its communication; the relationships among the adviser, recipient and any third party; the size of the recipient class; the adviser’s actual or attributed knowledge; and the nature and reasonableness of the recipient’s reliance. Particular attention is required where the adviser originally prepared the statement for another person.

4. The conditions distilled in Caparo Industries plc v Dickman [1990] 2 W.L.R. 358 were important but neither conclusive nor exclusive. The adviser will typically need to know the relevant purpose, that the information will reach an identified recipient or ascertainable class for that purpose, and that it will probably be acted upon without independent inquiry. The information must then be so acted upon to the recipient’s detriment.

5. The accounts had been prepared for the target company’s chairman and were expressly drafts requiring further work. The purchaser therefore could not treat them as final, nor could the accountants reasonably anticipate that it would do so. The accountants took no wider part in the takeover negotiations. The transaction was between experienced business people, and the purchaser could be expected to consult its own accountants.

6. The oral answer was general and did not alter the figures in accounts which disclosed a substantial annual loss. The accountant could not be attributed with knowledge that the purchaser would rely upon that answer, without further inquiry or advice, when concluding the acquisition. Balcombe LJ added that the circumstances could not validly be distinguished from Caparo.

7. The order awarding £75,000 damages was set aside. The appeal was allowed with costs in the Court of Appeal and below. Leave to appeal to the House of Lords was refused.

1. Court of Appeal: The accountants’ appeal was allowed unanimously. The High Court’s damages award was set aside, with costs here and below. Leave to appeal to the House of Lords was refused.

2. High Court, Queen’s Bench Division: His Honour Judge Lipfriend, sitting as an additional judge, held that the accountants owed the purchaser a duty of care and had negligently prepared the accounts and answered the purchaser’s question. He awarded £75,000 damages.