Galoo Ltd v Bright Grahame Murray

A breach of contractual or analogous tortious duty must be an effective or dominant cause of the claimed loss. Factual dependence under the “but for” test is insufficient. Legal causation is determined by applying common sense and distinguishing a cause from an opportunity or occasion for loss.

Accepting a loan does not itself cause loss to the borrower. Loss may arise from the use of the money, but that loss must be pleaded and causally attributable to the defendant.

For economic loss caused by an auditor’s statement, foreseeability of reliance alone does not establish proximity. A duty may arise where the auditor knows that an identified person will probably rely on the statement for a particular transaction and intends that reliance. On a strike-out application, an arguable claim requiring evidence must proceed to trial.

Galoo Ltd v Bright Grahame Murray concerned claims against auditors arising from allegedly inaccurate accounts which concealed substantial stock overstatements. Galoo and its parent, Gamine, alleged that proper audits would have caused them to cease trading earlier. Hillsdown alleged that it relied on the accounts when purchasing shares, lending more than £30 million and later acquiring further shares.

A deputy judge struck out all claims by Galoo and Gamine under Order 18 rule 19 of the Rules of the Supreme Court. He also struck out Hillsdown’s lending and later-purchase claims, but permitted its claim concerning the original purchase of 51 per cent of Gamine to proceed.

The companies and Hillsdown appealed against the respective strike-outs. The auditors cross-appealed against the survival of the original-purchase claim. The principal questions concerned legal causation, the existence of recoverable loss and the proximity required for an auditor to owe a duty concerning pure economic loss.

Held, unanimously, dismissing both the appeal and the cross-appeal:

1. Per Glidewell LJ, with Evans LJ agreeing entirely and Waite LJ agreeing with both judgments, an application under Order 18 rule 19(1)(a) of the Rules of the Supreme Court proceeds on the assumption that the pleaded allegations are true. A claim should be struck out only where it is nevertheless bound to fail. If the issue depends on evidence or permissible factual inferences, the claim should proceed to trial.

2. Per Glidewell LJ, accepting a loan and incurring an equivalent repayment obligation does not itself constitute damage. The borrower receives the corresponding money and ordinarily obtains a benefit. Loss may result from the use of the money, but no such loss was pleaded by Galoo or Gamine.

3. Per Glidewell LJ, a breach of contractual or analogous tortious duty must be an effective or dominant cause of the loss. The “but for” test establishes no more than factual dependence and is not conclusive. The court must apply common sense and distinguish a breach which causes loss from one which merely supplies the occasion or opportunity for it. The alleged auditing breaches allowed Galoo and Gamine to continue trading, but did not legally cause their subsequent trading losses or dividend payment. Their appeals were therefore dismissed.

4. Per Glidewell LJ, applying Caparo Industries Plc v Dickman (1990) 2 AC 605 and Morgan Crucible Co Plc v Hill Samuel & Co Ltd (1991) Ch 295, mere foreseeability that a person may rely on audited accounts does not create a duty concerning economic loss. Proximity may exist where the auditor knows that an identified person will rely on the accounts for a particular transaction and intends that reliance. Whether an available independent review negatives reliance or responsibility may require evidence.

5. Per Glidewell LJ, the original-purchase claim was arguable because the pleaded acquisition agreement required the completion accounts to be audited and used to calculate the purchase price, and the auditors allegedly knew those facts. The purchaser’s right to review the accounts could not be assessed without evidence. Evans LJ added that identification of the purchaser alone would not suffice; the purpose, intended reliance and possible intermediate examination remained material. The auditors’ cross-appeal was therefore dismissed.

6. Per Glidewell LJ, Hillsdown’s lending claim disclosed no duty because the pleading alleged only knowledge that loans were being made or might be made. It did not allege knowledge and intention that Hillsdown would rely on particular accounts when making particular advances. The later share purchase and loss-of-office payment arose under a new agreement, and the necessary knowledge and intended reliance were likewise absent. Hillsdown’s appeal was dismissed. Leave to appeal was refused.

1. Court of Appeal: In Galoo Ltd v Bright Grahame Murray [1993] EWCA Civ 3, the court unanimously dismissed the plaintiffs’ appeal and the auditors’ cross-appeal. The deputy judge’s orders were affirmed.
2. High Court of Justice: Ronald Walker QC, sitting as a deputy judge, struck out all claims by Galoo and Gamine and Hillsdown’s lending and later-purchase claims. He permitted Hillsdown’s claim concerning its original purchase of 51 per cent of Gamine to proceed.