Barclays Trust Company (Jersey) Ltd v Ernst & Young LLP

A professional adviser’s duty is defined by the agreed scope of the retainer. A duty to review forecasts and provide sensitivities does not generally require the adviser to seek out the latest information beyond that scope. The adviser must, however, consider updated information supplied to it and ensure that it does not undermine the conclusions reported.

In a negligence claim, the claimant must prove on the balance of probabilities that the alleged breach caused the loss. Where the counterfactual depends on a lender changing its position, the claimant must prove that change and also address the availability of alternative finance or funding. A modest difference in a professional judgment will not establish breach where the judgment was within the range of reasonable conclusions.

The claimants acquired the Esporta health and fitness business after exchanging contracts and paying a non-refundable deposit. The defendant had been engaged to provide limited financial and commercial due diligence, including a review of management forecasts and sensitivity analysis.

The claimants alleged that the defendant should have obtained and used later membership data, adopted a more pessimistic revenue sensitivity, and identified concerns arising from management incentive schemes. They claimed that, had the reports been more negative, they would not have completed the acquisition. The issues were whether the defendant breached its duty, whether any breach caused loss, and, alternatively, whether the claimants had suffered recoverable damage.

1. Scope of duty. The defendant’s duties arose from the express engagement letter and the obligation to exercise reasonable skill and care. The agreed work was based on information up to October 2006, subject to an agreed November update. The obligation to review forecasts and sensitivities did not require the defendant to seek out later information. The provision requiring important matters outside scope to be reported did not impose an obligation to search for such matters.
2. Breach. The defendant had considered the relevant membership information supplied to it. December performance was poor, but January performance, the more significant trading period, restored membership broadly to forecast. The alleged volatility did not require the defendant to obtain partial February data. The 0.8% mature-club joiner sensitivity was a reasonable professional judgment within the permissible range. The incentive schemes were ordinary and there was no evidence that they produced an aggressive or unsustainable sales drive.
3. Causation. Applying the ordinary but-for approach, the claimants had to prove that a more negative report would have caused SocGen to withdraw or reduce its lending and that the transaction would then have failed. No direct evidence from SocGen was called. The evidence did not establish that a modest reduction in forecast EBITDA would have materially changed SocGen’s position. Alternative lenders and additional equity were also available. The claimants therefore failed on causation even if breach had been established.
4. Damages. Alternatively, the court valued the business at approximately £468.75 million, using a maintainable EBITDA of £37.5 million and a 12.5 multiplier. After credit for the deposit, the claimants had suffered no recoverable loss. The claim was dismissed.

First-instance judgment in the High Court (Commercial Court). The judgment does not state any prior appellate decision.