Man Nutzfahrzeuge Ag & Ors v Freightliner Ltd.

An employer or principal is vicariously liable for an agent’s fraudulent representation where the agent was held out as authorised to speak on the relevant matter and the fraud was closely connected with that function.

A purchaser induced by deceit may recover all loss directly flowing from the transaction, including consequential trading and restructuring losses. Foreseeability does not limit recovery, but causation, credit for benefits and reasonable mitigation do. Later dishonesty forming a continuation of the original fraud need not break the chain of causation.

Statutory auditors assume responsibility to a shareholder or purchaser only where the accounts or advice were communicated for a sufficiently identified purpose and transaction. Foreseeability of reliance alone is insufficient. Liability is confined to loss within the purpose and scope of that responsibility.

The claim arose from the purchase of the ERF truck-manufacturing group by the first claimant from Western Star, whose liabilities passed to Freightliner. ERF’s financial controller had dishonestly manipulated its accounts and made fraudulent VAT repayment claims. During the sale negotiations he represented that ERF’s accounts had been honestly prepared and gave a true and fair view.

The purchasers claimed damages in deceit and under representations and warranties in the Share Purchase Agreement. Freightliner brought Part 20 claims against the United Kingdom and Canadian Ernst & Young firms, alleging negligent audit and due-diligence work and seeking indemnities or contribution under the Civil Liability (Contribution) Act 1978.

The central issues were Freightliner’s vicarious liability, contractual attribution of knowledge, the scope and causation of recoverable loss, and whether either accounting firm owed a duty covering Freightliner’s liability or the purchasers’ acquisition loss.

1. Liability in deceit. The financial controller made knowingly false representations that ERF’s accounts had been honestly prepared and gave a true and fair view. Western Star had put him forward to address ERF’s financial affairs during the negotiation meetings. His representations were closely connected with that authorised function, making Western Star, and therefore Freightliner, vicariously liable. His statements during the separate due-diligence exercise were made for ERF rather than Western Star. Freightliner was not liable for any implied representation by him about his own character: paras [78]–[83], [108]–[117], [130].

2. Inducement and contractual provisions. The fraudulent representations materially induced the purchase. Reliance on audited accounts, due diligence and contractual warranties did not displace that inducement. The entire-agreement clause preserved liability for fraud: paras [118]–[128]. The financial controller’s knowledge was not attributable to Western Star when determining whether the contractual representations were fraudulent. He did not embody Western Star’s directing mind for entry into the agreement, and the contractual knowledge clause applied only to expressly qualified representations: paras [142]–[170].

3. Contractual indemnity. The tax representations were materially false and remained actionable within their six-year contractual period. The disclosure schedule did not treat the VAT fraud as disclosed merely because investigation of accounting records might have revealed it: paras [171]–[180]. Article 12 covered losses flowing from the inaccuracy of the particular non-fraudulent representation, including VAT arrears, penalties and related expenses. It did not cover every consequence of entering the transaction: paras [182]–[197], [210]–[212].

4. Damages for deceit. Freightliner was liable for all loss directly flowing from the purchase. The financial controller’s continuing dishonesty was a continuation of the original fraud and a latent defect in the acquired business. It did not break the chain of causation. Nor was the purchaser’s management commercially irrational or an independent cause of loss. The purchaser acted reasonably after discovering the fraud: paras [213]–[311], [322]. Credit was required for ERF’s value after restructuring and for any net benefit from disposing of the associated Australian business. Compound interest was available on money obtained and retained through the fraud: paras [312]–[321].

5. Part 20 claims. The United Kingdom auditors had been negligent in material respects, including failures to verify the purchase-ledger reconciliation and investigate VAT. Nevertheless, neither their general audit duty nor any special assumed responsibility extended to Freightliner’s liability for the financial controller’s fraud. They had not assumed responsibility to the purchaser for the acquisition loss merely by knowing that audited accounts would be supplied. The contribution claim therefore failed: paras [324]–[360], [395]–[405], [469]–[487]. The claims against the Canadian auditors also failed because no actionable breach causing the loss was established: paras [488]–[523].

not stated in the judgment.