Law Society v KPMG Peat Marwick

An accountant instructed to prepare a solicitor’s statutory accounts report may owe the Law Society, as trustee of the Compensation Fund, a duty to exercise reasonable care. The ordinary threefold test applies: loss must be reasonably foreseeable, the relationship must be sufficiently proximate, and liability must be fair, just and reasonable.

The duty may arise although accurate reporting would prompt the Society to exercise public regulatory powers. A private person may owe a private law duty whose performance assists a public body in discharging a public function. The Council’s reliance is the Society’s reliance because the Council is its governing and executive organ.

KPMG prepared statutory accountants’ reports concerning a firm of solicitors. After dishonesty by two partners was discovered, the Law Society paid about £8.5 million from its Compensation Fund to affected clients. The Society alleged that stronger qualification of the reports would have prompted earlier intervention and reduced the losses.

The Vice-Chancellor determined a preliminary issue in the Society’s favour and declared that the reporting accountants owed the pleaded duty of care: [2000] 1 All ER 515. KPMG appealed. The central issue was whether the accountants owed a private law duty to the Society as trustee of the Fund, notwithstanding that reliance on the reports would lead to the exercise of statutory regulatory powers.

1. Appeal dismissed unanimously. Lord Woolf CJ delivered the judgment, with which Ward and Clarke LJJ agreed. The existence of a duty was not self-evident under the principle associated with Hedley Byrne. The Society performed distinct public and private functions. The issue therefore required application of the three criteria stated in Caparo: foreseeability, proximity, and whether liability was fair, just and reasonable.

2. The criteria were satisfied. The statutory reports were supplied to the Society so that it could identify non-compliance and take protective action. An inadequate report could foreseeably prevent intervention and expose the Compensation Fund to further claims. The fact that the responsive action would be regulatory did not prevent the accountants from owing the Society a private law duty. A private duty may assist a public body in performing a public function.

3. No material distinction existed between the Law Society and its Council. The Council was the Society’s governing and executive organ. Its reliance on the reports was therefore reliance by the Society. The duty was owed to the Society in its capacity as trustee of the Compensation Fund, and damages recovered in that capacity would replenish the Fund.

4. The duty was sufficiently controlled. Liability was confined to losses connected with client money misappropriated from client accounts. Ordinarily, the causal effect of a deficient annual report would be spent when the next report was received. The defendants could nevertheless contend at trial that an exceptional scale of loss was unforeseeable or that causation had been broken.

5. It was fair, just and reasonable to impose the duty. The statutory scheme did not require losses caused by accountants’ negligence to remain with the solicitors’ profession. Litigation costs were not a reason to deny an otherwise valid claim. Any fault by the Society in failing to protect the Fund could reduce the accountants’ liability. The Compensation Fund, as a fund of last resort receiving the reports, was materially different from the Solicitors’ Indemnity Fund acting as an insurer.

1. Court of Appeal: The accountants’ appeal was dismissed unanimously. The declaration that they owed the pleaded duty of care was upheld.
2. Vice-Chancellor: Sir Richard Scott determined the preliminary issue in the Law Society’s favour and granted a declaration that the reporting accountants owed the pleaded duty of care: [2000] 1 All ER 515.