Equitable Life Assurance Society v Ernst & Young (a firm)

An auditor’s liability is limited by the scope and purpose of the duty undertaken. A negligent failure to require provisions in accounts may support recovery for payments made in reliance on an overstated surplus, including bonuses, but does not ordinarily make the auditor liable for a subsequent fall in the value of the company’s goodwill or business. A claimant must identify a loss and a causal link beyond but for causation. A loss-of-chance claim is available only where the duty existed to provide the lost opportunity. Claims based on the alleged loss of a sale were unsustainable, while a properly formulated claim concerning excessive bonus declarations had a realistic prospect of success.

Equitable alleged that Ernst & Young negligently audited its statutory accounts for 1997, 1998 and 1999. It claimed that the accounts should have contained substantially larger provisions for guaranteed annuity options or disclosed contingent liabilities concerning the Hyman litigation.

Equitable alleged that the omissions caused losses through failure to sell its business, loss of the chance of a sale, and payment of excessive bonuses. Ernst & Young applied under CPR rules 3.4(2)(a) and 24.2 to strike out the claims or obtain summary judgment. The central issues were scope of duty, causation, recoverable loss and loss of chance.

1. The applications were determined on the assumption that the alleged breaches of audit duty had occurred. Under CPR rule 3.4(2)(a), the court considered whether the pleaded case disclosed reasonable grounds. Under CPR rule 24.2, it considered whether the claims had a real prospect of success.

2. The scope of an adviser’s duty is determined by the obligation undertaken, its purpose and the kind of loss for which the adviser assumed responsibility. Applying South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191, the auditor’s duty did not extend to liability for a later loss in the value of Equitable’s goodwill or business merely because proper provisions might have prompted management to consider a sale.

3. The lost-sale claims were in substance claims for the deterioration in asset value between the alleged sale dates and the later realisations. That was no more than but for causation and did not fall within the scope of the audit duty. The loss-of-chance claims also failed in principle because the audit duty was not intended to provide Equitable with an opportunity to sell.

4. The position differed for bonus declarations. The analogy with dividends, tax and commissions paid by reference to inaccurately stated profits supported the possibility that an auditor might be liable for lawful bonuses declared in reliance on an overstated surplus. Evidence that the statutory accounts and the fund for future appropriations influenced bonus decisions gave that claim a real prospect of success.

5. As pleaded, however, the bonus claims were fanciful in approach and amount, including because Equitable had later adjusted policy values and entered into a compromise scheme. Equitable was given an opportunity, within a defined timescale, to reformulate them. The lost-sale and lost-chance claims were struck out or dismissed, while the bonus claims were not finally disposed of at this stage.

First-instance decision. No appellate history is stated in the judgment.