Equitable Life Assurance Society v Ernst & Young

On a summary judgment or strike-out application concerning a complex professional negligence claim, the court should not resolve disputed, fact-sensitive questions unless it can confidently do so without disclosure, oral evidence or cross-examination. A claimant alleging the loss of a transaction dependent on a third party must prove that it would have sought the transaction. It must then show a real or substantial chance of obtaining the third party’s agreement, rather than success on the balance of probabilities.

An auditor’s responsibility for consequential loss depends on the contractual scope of the audit, the harm against which the duty protected the client, breach and causation. A client need not have requested specific commercial advice where negligent auditing arguably deprived it of information required for fundamental corporate decisions.

Equitable Life Assurance Society claimed damages from its former auditors, Ernst & Young, for alleged negligence in auditing its statutory accounts for 1997–1999. For these interlocutory applications, negligence was assumed. Equitable alleged that the accounts omitted material technical provisions for guaranteed annuity liabilities and, in 1998 and 1999, an appropriate note about the possible consequences of losing related litigation.

Equitable contended that accurate accounts would have led its directors to reduce bonuses and seek an orderly sale. Langley J struck out the lost-sale and loss-of-chance claims. He permitted restricted bonus-declaration claims, capped at £500 million, to proceed: [2002] EWHC 112 (Comm).

Equitable appealed against those restrictions. Ernst & Young appealed and cross-appealed, seeking the dismissal of the remaining claims. The central questions were whether the claims had a real prospect of factual success and whether the alleged losses fell within the auditors’ contractual duty and were arguably caused by its breach.

1. Equitable’s appeal was allowed in part; Ernst & Young’s appeal and cross-appeal were dismissed. The claims could not properly be curtailed on the available documentary material. The case involved complex, disputed and changing circumstances. The uncontradicted evidence of experienced witnesses could not be rejected as fanciful without disclosure, oral evidence and cross-examination. The court could not summarily impose a monetary ceiling on a single head of claim merely because it doubted the amount claimed.

2. The direct lost-sale claims had to be reformulated as claims for loss of a chance. Equitable had an arguable case that its directors would have attempted a sale. Because success then depended on a prospective purchaser, Equitable had to prove a real or substantial chance of an acceptable sale, rather than establish the purchaser’s agreement on the balance of probabilities. A merely speculative or fanciful chance would attract no recovery. A substantial chance would be valued according to its probability.

3. The full bonus-declaration claims could proceed, subject to an end date around January 2001. The lawful payment or commitment of bonuses did not necessarily mean that the Society suffered no loss. Nor did later reductions in policy values necessarily extinguish or mitigate earlier irrecoverable overpayments. Those questions required determination on established facts.

4. The court identified five questions governing professional responsibility: whether a duty existed; its scope; the kind of harm against which it protected the claimant; breach; and causation. The contractual documents arguably required the auditors to report material error, examine technical reserves and key financial risks, and address the Society’s thin solvency margin. It was realistically arguable that this duty protected Equitable against ill-informed decisions about bonus distribution and its capital base, including a possible sale. The absence of a specific request for advice on selling the business was not decisive.

5. The scope-of-duty and causation questions were fact-sensitive and arose in a developing area of law. If the loss-of-chance claim fell within the auditors’ duty, its value was a factual issue. Possible contributions from market movements or interest rates did not justify summary dismissal. The case was to continue under ordinary case-management procedures, including any suitable preliminary issues.

1. Court of Appeal (Civil Division): Equitable’s appeal was allowed in part. Its lost-sale claims were restored only as loss-of-chance claims, and its bonus-declaration claims were restored subject to the temporal qualification stated by the court. Ernst & Young’s appeal and cross-appeal were dismissed: [2003] EWCA Civ 1114.

2. Commercial Court: Langley J struck out the lost-sale and loss-of-chance claims and required the bonus-declaration claims to be reformulated. In a later order he permitted amended bonus-declaration claims limited to £500 million: [2002] EWHC 112 (Comm).