Arrowhead Capital Finance Ltd v KPMG LLP

A professional adviser does not owe a duty of care to an investor merely because the adviser knows that its client will refer to its involvement when seeking finance. The court must assess objectively whether responsibility was assumed, having regard to the whole relationship, including the scope and limitations of the adviser’s engagement. Under the threefold test, foreseeability and proximity may be insufficient where imposing a duty would create extensive or unlimited liability in a high-risk commercial transaction. For limitation purposes, financial loss requires actual measurable damage, but final quantification is unnecessary. A lender’s loss is assessed by comparing the loan with the value of the borrower’s covenant and security. A contingent possibility of loss is insufficient, but objective evidence that the security is worthless may establish damage before formal rejection of an appeal or insolvency.

Arrowhead financed Dragon’s mobile telephone trading business through an intermediate company, Metro. KPMG had been engaged by Dragon to advise on procedures designed to protect VAT repayment claims. Arrowhead alleged that KPMG knew investors would rely on its involvement and negligently failed to identify defects in Dragon’s supply chain and procedures.

KPMG applied under CPR 3.4(2)(a), alternatively CPR 24.2, contending that no duty of care was owed and that the claim was statute-barred. The central questions were whether KPMG assumed responsibility to Arrowhead, or whether a duty was fair, just and reasonable, and when Arrowhead sustained actionable damage.

1. Summary judgment test. The strike-out and summary-judgment applications could be considered together. KPMG had to show that the claim had no realistic prospect of success.
2. Duty of care. The question whether responsibility was assumed was objective. It depended on what could reasonably be inferred from the parties’ conduct against the background of all the circumstances. KPMG assumed responsibility to Dragon under an engagement containing liability limitations, but there was no direct communication with Arrowhead before most loans were made. KPMG’s knowledge that Dragon referred to its involvement did not amount to an assumption of responsibility to a chain of investors. Imposing unlimited liability in those circumstances would conflict with reasonable commercial expectations.
3. The same conclusion followed under the threefold test of foreseeability, proximity, and whether it was fair, just and reasonable to impose a duty. Even assuming foreseeability and proximity, the high-risk nature of the business, the contractual limitations applicable to KPMG’s engagement, and the absence of consent to responsibility towards Arrowhead made such a duty unfair and unreasonable.
4. Damage and limitation. A negligence claim for financial loss requires actual measurable damage. The fact that a loan would not have been made but for negligence may constitute damage, but does not necessarily do so. The relevant comparison is between the amount lent and the value of the rights acquired, including the borrower’s covenant and the true value of the security. These are factual questions, and loss need not be finally quantified.
5. Arrowhead’s loss was not merely contingent. The repayment claims were objectively bound to fail on the assumed facts, and by November 2004 HMCE had rejected them. The 2006 write-down of the loans confirmed that measurable damage had been recognised. The claim, issued on 30 August 2011, was therefore time-barred under section 2 of the Limitation Act 1980. KPMG obtained summary judgment dismissing the claim on both grounds.