MAN Nutzfahrzeuge AG v Freightliner Ltd

The Court of Appeal dismissed Freightliner’s appeal against the Commercial Court’s dismissal of its Part 20 claims against Ernst & Young (UK) (“E&Y”). The judge’s central findings were that the losses for which Freightliner sought contribution or indemnity flowed from the fraudulent conduct of ERF’s financial controller, Mr Ellis, and not from the mere inaccuracy of the audited accounts. The court reaffirmed that an auditor’s liability to third parties requires an objective finding that the auditor assumed responsibility for the use made of the audited accounts by the third party — i.e. a special audit duty — and that mere foreseeability that third parties might rely on statutory accounts is insufficient.

Key contract provisions and statutes considered included article 4.1, article 1.6 and article 12 of the share purchase agreement, CPR Pt 20 and sections 1 and 6 of the Civil Liability (Contribution) Act 1978. The court upheld the judge’s factual findings that (i) Mr Ellis falsified ERF’s accounts and VAT returns and alone knew of the fraud, (ii) E&Y failed to verify the purchase ledger reconciliation, and (iii) E&Y did not assume responsibility for extra-contractual representations made by Mr Ellis in the negotiations with MN.

This appeal arose from related commercial proceedings following MN’s acquisition of ERF, a UK truck manufacturer, from Western Star. After the acquisition, massive accounting fraud by ERF’s financial controller, Mr Ellis, was discovered. MN sued Freightliner (successor to Western Star) for losses caused by inducement to purchase on the basis of falsified accounts; Freightliner in turn sought contribution and indemnity under CPR Pt 20 from its auditors, E&Y (UK).

Nature of the claim and relief sought:

• MN sought damages from Freightliner for deceit and fraudulent misrepresentation arising from the false ERF accounts.
• Freightliner brought Part 20 claims against E&Y (UK) for (i) breach of duty in auditing the 1998 and 1999 accounts, (ii) breaches in connection with the due diligence process, and (iii) contribution under the Civil Liability (Contribution) Act 1978 if Freightliner were held liable to MN.

Issues framed by the court:

• Whether E&Y owed a duty of care to Western Star and/or MN to prevent the loss claimed (the existence and scope of any general or special audit duty).
• Whether E&Y had assumed responsibility to Western Star or MN for the particular use of the accounts in the sale negotiations (the assumption of responsibility test).
• Whether any negligence by E&Y caused the loss claimed and, if so, whether contribution under the 1978 Act was available.

Court’s reasoning (concise):

• The judge’s factual findings — that Mr Ellis alone manipulated accounts and knowingly made false representations to MN — were critical. The loss was primarily the consequence of Mr Ellis’s dishonesty rather than the auditors’ failures.
• The court reiterated that auditors owe a recognised general audit duty to the company (and shareholders collectively) but that this duty does not automatically extend to third parties for all losses which third parties may suffer from reliance on the accounts.
• To impose liability in favour of a third party there must be, objectively, an assumption of responsibility by the auditor for the accuracy of the statement for the claimant’s particular purpose. Mere foreseeability that a purchaser might see or rely on audited accounts is not sufficient.
• The judge was entitled to conclude that E&Y did not assume responsibility for representations which Mr Ellis might make on behalf of Western Star to MN, and that the losses claimed were not within the scope of any special audit duty. Accordingly, Freightliner’s claims in negligence, negligent misstatement and contribution failed.

The court therefore dismissed the appeal and upheld the Commercial Court’s dismissal of Freightliner’s Part 20 claims against E&Y (UK).

Appeal dismissed. The Court of Appeal upheld the Commercial Court’s conclusions that E&Y (UK) had not assumed responsibility to Western Star or MN for the extra-contractual representations made by ERF’s financial controller, Mr Ellis; the losses flowed from Ellis’s fraud rather than from the auditors’ certifying inaccurate accounts, and mere foreseeability of third‑party reliance did not establish a special audit duty or an assumption of responsibility.

Appeal from the Commercial Court (Moore-Bick LJ) High Court of Justice, Queen's Bench Division, Commercial Court: [2005] EWHC 2347 (Comm); judgment on appeal handed down in the Court of Appeal (Civil Division) [2007] EWCA Civ 910.