Esanda Finance Corp Ltd v Peat Marwick Hungerfords

[1995] HCATrans 373

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide   No A34 of 1995

B e t w e e n -

ESANDA FINANCE CORPORATION LIMITED

Appellant

and

PEAT MARWICK HUNGERFORDS (REG)

Respondent

BRENNAN CJ
DAWSON J
TOOHEY J
GAUDRON J
McHUGH J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 14 DECEMBER 1995, AT 10.20 AM

(Continued from 13/12/95)

Copyright in the High Court of Australia

BRENNAN CJ:   Yes, Mr Jackson.

MR JACKSON:   Thank you, your Honours.  Your Honours, may I go back for just a moment to something I said yesterday in response to your Honour Justice Gummow and the United States case of Bily, 834 P 2d and your Honour asked me about page 768 concerning “Negligent Misrepresentation”, what I said was wrong. Your Honours, what seems apparent from the structure of the reasons is that the court at page 768 was treating negligent misrepresentation as being something of the nature with which this Court is dealing, but treating it as being, in the United States classification, a separate tort; that is a tort separate from negligence, but a tort which is something that has its origins, if I could put it that way, in relation to deceit. That appears from the method of classification at page 760 where your Honours will see in the right column under the heading “Analysis” et cetera, about five lines into that it said:

Civil liability for injury to others is imposed based on causes of action in tort, which include, in so far as relevant to this case:  negligence, negligent misrepresentation, and fraud.

One then sees that what is dealt with first is the general heading of “Negligence” and that commences at that same page 760, and then there is a discussion of, in effect, all the features which militate for and against the concept of foreseeability being the sole test.  Then one comes to page 768 which has the heading of “Negligent Misrepresentation”, and if I could pause there for just a moment and go over to page 773, what you will see at the bottom of the left column is it is “Intentional misrepresentation” then discussed.

At page 768, if I could go back to it, what your Honours will see is that it is apparent in the middle of the first paragraph under the heading, “Negligent Misrepresentation”, that as a matter of classification, negligent misrepresentation is treated by their Honours as being a separate tort.  In the next paragraph it is said, in effect, to be a species of the tort of deceit, but no doubt what is contemplated is that it has its origins, or it has some analogies with deceit.  There is really, in a sense, nothing very heterodox, if I could use that expression, by Australian or by Anglo‑Australian standards in deriving assistance in negligent misrepresentation cases from the area of intentional misrepresentation, using that term to be a term equivalent for the action for deceit. 

For example, if I could just go to San Sebastian 162 CLR 371 for a moment, and what one sees is, for example, about the middle of the page, your Honour the Chief Justice saying:

It would be a mistake to impose a duty of care whenever the circumstances would give rise to a duty to be honest.  The doctrine of Hedley Byrne has not made the tort of deceit otiose.

All I am seeking to say about it is that if, indeed, one looks to Hedley Byrne, for example, and MLC v Evatt, and all the cases in this area, what one sees is that there is a derivation of the concept of negligent misrepresentation, to use those United States words, the derivation coming from each of two sources:  one source being the Donoghue v Stevenson view of negligence; the other being the tort of deceit.  The question is where, in fact, the twain meet and what are the occasions on which the two do meet.

Your Honours, the fact that, as a matter of classification, if I could use that expression, the view adopted in the United States or, perhaps, in California, is that the better view is ‑ or the view is ‑ that negligent misrepresentation is a species of deceit whereas in Australia, the view is probably that it is a species of negligence.  It does not really matter very much.  All the considerations and the methods of reasoning of the court in Bily in relation to the need in cases of pure economic loss, for something more than mere foreseeability, are quite consistent with the approaches taken in this Court.

Your Honours, the point I am seeking to make, if I may, in relation to it, is that, whilst there might be some forensic advantage in saying, “In the United States, this is a species of deceit”, to do that is to leave out of account the reasoning that lies behind the conclusion arrived at by the court in that case.  May I finally, in relation to that case, take your Honours to a matter that I think I omitted yesterday and that is at page 772 where the court’s view is really encapsulated in a suggested direction that it gives standard direction that should be given to juries.  Your Honours will see that on page 772 in paragraph 9 and the last three lines of the principal text set out the suggested standard jury instruction in that regard.  Your Honours, I shall not read it out, but your Honours will see the elements that are set out in it.

Yes.  Perhaps I should also say, your Honours, in relation to the question of the appropriateness of dealing with issues of the present kind in a summary way, the Supreme Court of California, at the same page, page 773, in the last paragraph before the heading “Intentional Misrepresentation” referred to the fact that summary adjudication would be appropriate in a number of cases. 

BRENNAN CJ:   Do you accept, Mr Jackson, the proposition that intention, if intention be a relevant element, is coincident “with substantial certainty that the plaintiff, or the particular class of persons to which the plaintiff belongs will rely”?

MR JACKSON:   I am sorry?  Your Honour is quoting from - - -?

BRENNAN CJ:   I am taking it from the suggested direction at 773, column 1, point 1, “Whenever defendant knows with substantial certainty”.

MR JACKSON:   Your Honour, qualified, I think, to the extent to which the last paragraph under that heading perhaps explains the concept.

DAWSON J:   What does “substantial certainty” mean?

MR JACKSON:   I do not wish to be facetious in saying “substantial certainty” but it seems to be a phrase which - bear in mind, your Honour, if I may say so, with respect, one is talking about a direction to a jury here and what is being sought to be put is a phrase that will convey something that is the meaning of knowing.  When it says “knows with substantial certainty” that is really in the sense of knowing as distinct from suspecting or something of that kind. 

BRENNAN CJ:   This is the equivalent of intention and if one is looking for the notion of voluntary assumption of risk, it is not a question of knowing that somebody will act, it is a question of accepting that if that person acts a responsibility will devolve.  So that there is a substantial conceptual difference, it seems to me, between “intention” meaning thereby a desire to achieve a result or an acceptance of responsibility for a result that is foreseen, on the one hand, and no more than knowledge that a result will transpire on the other.

MR JACKSON:   Your Honour, one does need to read that, in a sense, with what precedes it in the direction because the fundamental part of the draft direction seems to be the proposition at the bottom of the preceding page, that the representation must have been made with the intent to bring about a person to act in reliance.

Now, your Honour, could I just say I do not suggest that this direction is the appropriate direction for every case with which this area is concerned.  What I am seeking to say, though, is that it represents a short version of what the court’s view was in that case.  Now, your Honours, undoubtedly, it may not be appropriate for, as I was saying, every case, but it does simply represent what the court said in that case.

BRENNAN CJ:   What do you say is the element of the tort.

MR JACKSON:   Your Honour, the element of the tort we have tried to put in our outline of submissions, first of all in paragraph 11.  If one leaves aside the other possibilities - and by “the other possibilities”, we seek to say, assuming a responsibility or having a pecuniary interest, that in circumstances of that kind it has to be shown that the report was given for the purpose there specified, that is, for the purpose of inducing people to deal in reliance on the report.  If I could put the obverse of it, in effect what is in paragraph 23 which indicates circumstances in which the duty may arise.

DAWSON J:   Then you do not go as far as the American test where intention is deemed to exist if there is knowledge that people will act on the representation?

MR JACKSON:   Yes, your Honour.

TOOHEY J:   Although you go fairly close to it, do you not, in paragraph 23?

MR JACKSON:   Your Honour will appreciate that what we are seeking to say is that - and, your Honour, I do not mean to evade answering the question - whatever might be the additional requirement, the particular issue arising in the case, namely that of the sufficiency of the pleading, is such that none of the possible requirements is established.  That is the way in which we have sought to put it, your Honour.

TOOHEY J:   You appear to accept that the liability is not confined to proof of intent to induce a particular person to act on the basis, in this case, of the report.

MR JACKSON:   No, your Honour.  If it were the situation that a particular report was given to the company with the knowledge that the purpose of the company in obtaining the report was to give it to, for example, lenders - it might be a particular lender or perhaps a class of lenders - but if one were able to identify, leaving aside cases of difficulty of identification, knowledge that it was to be used for a certain purpose and was provided for that purpose, then, your Honour, that is likely to give rise to liability.

DAWSON J:   Why would it be likely to give rise to liability?

MR JACKSON:   It gives rise, I suppose, your Honour, because we would say that is one of the circumstances in which there is a factor in addition to foreseeability which is sufficient to create, whatever one likes to call it, proximity or something else, sufficient to give rise to the duty of care.

DAWSON J:   Not because the representor is deemed to have intended to influence the persons other than the immediate recipient?

MR JACKSON:   No, your Honour.

DAWSON J:   Not a matter of intent?

MR JACKSON:   Well not in that sense, your Honour, because ‑ ‑ ‑

DAWSON J:   Well, in what sense?

MR JACKSON:   I am sorry, your Honour, I am perhaps putting it badly; what I am seeking to say is that in a case like that the liability would come about because of the - having the combination of factors that it was acquired or provided for a purpose which was a known purpose of being used by a third person for a particular ‑ ‑ ‑

DAWSON J:   So, it is an assumption of responsibility rather than intent?

MR JACKSON:   Yes, your Honour.  A case where, if I could just add something more perhaps, it would be appreciated that the third party would be likely to rely upon the exercise of skill in preparation of the document.

Your Honours, could I move then to the next aspect with which I wish to deal and that is the decision of the House of Lords in Caparo v Dickman (1990) 2 AC 605. That is a decision which, in our submission, is directly opposed to the submission on behalf of the appellants, that in auditors’ liability cases there is a duty of care based on foreseeability and reliance. Your Honours, the matters for which I go to the decision immediately are those referred to in paragraphs 17 to 19 of our outline of submissions and, your Honours, I also wish to indicate where the discussion, which is referred to in paragraph 7 of the outline, is to be found.

Your Honours, in that case, Lord Ackner, at page 629, agreed with the other members of the House of Lords but each of the other members gave a separate judgment.  As is apparent from the headnote to the case, it involved a takeover, the purchase of the shares being said to have been on the value of the company as certified by the auditor’s report.  Your Honours will see the facts summarised at page 614 by Lord Bridge, commencing at H and could we invite your Honours to note the way in which the issue arose that was, itself, as a preliminary question.  That that is so appears at page 615 about E.

Your Honours, Lord Bridge’s discussion of the duty of care commences at page 616C and it goes through to page 618C.  Your Honours will see, if I could perhaps refer to the starting and concluding parts of that, that at 616 his Lordship refers to the tension between the two different approaches, the differing approaches being, on the one hand, the all‑embracing view of the tort of negligence and on the other hand, the differing categories and differing circumstances in which the issue will arise.  At the bottom of 617, he says that:

What emerges is that, in addition to the foreeseability of damage, necessary ingredients.....are ‑

and your Honours, that is elaborated upon throughout that paragraph.  Your Honours will see at page 618C that the view adopted by his Lordship and, indeed, by the other members of the House of Lords, was that there was a movement:

in the direction of attaching greater significance to the more traditional categorisation of distinct and recognisable situations ‑

et cetera.  Again, his Lordship, as did the other members of the House of Lords, adopted some observations of your Honour the Chief Justice in Sutherland Shire Council.

Then one sees, moving from there, his Lordship turns to the question of pure economic loss.  That commences at page 618E and he draws the traditional, if I might say so, distinction in relation to that.  Then, at page 619, the passage that goes from B to F deals with the position of the professional adviser; proceeds at 619E to preface his discussion of the duty of the professional adviser in relation to economic loss and statements of this kind with the observation that one should look to the decision such as Hedley Byrne v Heller and those following as the starting point.

Your Honours, those cases are then discussed.  His Lordship goes through to page 620H and at the bottom of the page, refers to the salient feature as being that the defendant was fully aware of the nature of the transaction:

knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation.  In these circumstances the defendant could clearly be expected.....specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it.

Your Honours, he then drew a distinction between that situation and the situation referred to at page 621B being:

entirely different where a statement is put into more or less general circulation and may foreseeably be relied on by strangers to the maker of the statement for any one of a variety of different purposes which the maker of the statement has no -

and your Honours will see the words “specific reason to anticipate”.  He then refers to the observations of Chief Justice Cardozo.  After the reference to Ultramares he says at letter D:

it is also to confer on the world at large a quite unwarranted entitlement to appropriate for their own purposes the benefit of the expert knowledge or professional expertise attributed to the maker of the statement.

His Lordship in the part which immediately follows at letter D commencing “Hence”, goes on to say that he would expect to find a limit or control mechanism which rested in the necessity to prove as an ingredient of proximity:

that the defendant knew that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions.....and that the plaintiff would be very likely to rely on it -

in relation to that transaction.  Your Honours will see that again his conclusion is set out at page 623 and, in relation particularly to the position of auditors, could I refer your Honours to letter D.  It is the paragraph commencing “These considerations”.  May I invite your Honours to note particularly there that one sees that there is a specific reference to the position of lenders.  Your Honours will see that he says:

If a duty of care were owed so widely, it is difficult to see any reason why it should not equally extend to all who rely on the accounts.....as lenders or merchants -

Your Honours will see what is said in the remainder of the paragraph, but he accepts the correctness of Al Saudi Banque v Clarke Pixley and refers to the atypical jurisdictions in the United States.

Your Honours will see also that Lord Bridge, if I can go to page 623H, commences to discuss the New Zealand Court of Appeal decision in Scott Group Ltd v McFarlane, a decision for practical purposes on all fours with Caparo.  The majority in Scott Group had treated foreseeability as sufficient.  The dissenting member of the court, Mr Justice Richmond, had not.  Lord Bridge, as indeed did the other members of the House of Lords, preferred the views of Mr Justice Richmond.  That appears in the passage that goes from page 623H through to page 624G.

Could I invite your Honours to note a couple of things in relation to that.  The first is at the top of page 625 where what your Honours will see is that his Lordship observed that under the relevant New Zealand legislation its accounts were, as in England, accessible to the public.  That is the position here too.  In the quotation from Mr Justice Richmond between letters D and E, what your Honours will see is the observation:

I do not think that such a relationship should be found to exist unless, at least, the maker of the statement was, or ought to have been, aware that his advice or information would in fact be made available to and be relied on by a particular person or class of persons for the purposes of a particular transaction.....some particular and specific purpose for which he was aware that his advice or information would be relied on.....But the annual accounts of a company can be relied on in all sorts of ways and for many purposes.”

At the bottom of page 624 your Honours will see also a specific reference to the position of lenders to the company and to the reliance being foreseeable in the case of lenders to the company.

Your Honours, in the next few pages Lord Bridge deals with JEB Fasteners.  Your Honours have already been taken to the passage at page 625C dealing with that.  May I ask the Court to note, however, the summary of the statutory position of auditors in the United Kingdom which appears at page 625D and going through to the next page at about letter D on page 626.  It is not materially different from the position in Australia at the relevant time.  Your Honours will see his Lordships’s summary of the position in relation to the obligation of the auditors vis-a-vis the shareholders at about letter C going through to letter E.  Finally, his Lordship’s conclusion is at page 62 D where your Honours will see he says:

It is never sufficient to ask simply whether A owes B a duty of care.

And he elaborates upon that proposition, adopting what your Honour the Chief Justice had said in Sutherland Shire Council v Heyman.  Now, I do not intend to go through the other judgments in that detail.  May I indicate where the salient features are to be found.  Lord Roskill at page 628B to F demonstrates the difficulties where there is excessive generality, to put it shortly.  At letter G on the same page makes a particular reference to the position of lenders to the company saying that the view is untenable and that goes over to the top of the next page, noting particularly that foreseeability alone is insufficient.

Lord Oliver at page 630C to page 631F deals with the purpose of auditing and publication of the accounts.  Could I invite your Honours to note particularly what his Lordship says at page 630F, speaking of the auditor’s function and the purposes of the performance of the function to protect the company and to provide shareholders, et cetera and at page 631D to G. 

In the next paragraph at page 631F, he sets out the argument for the wider view and your Honours will note the particular reference to potential lenders and to others and what his Lordship says at the bottom of 631 and the top of 632 indicates the wide scope of the persons to whom, if foreseeability were the only test, the duty might be owed and it concludes, in effect, with the second line on page 632, those who write financial articles about it in the press.

At page 632C, the passage which goes through to 635B, he deals with the fact that foreseeability is not enough, and your Honours will see, particularly, 633A and 633F.  Your Honours, the discussion continues for a number of pages and may I refer your Honours to the bracket of pages 635 to 643, and to indicate a couple of passages.  The first, your Honours, is at 635E, where he refers to the fact that in his view it is:

permissible to regard negligent statements or advice as a separate category displaying common features ‑

et cetera.  Then, your Honours, in the next paragraph, refers to the nature of the damage:

which may be occasioned by the spoken or written word ‑

and that is a passage, your Honours, that goes on to the next page and, I suppose, really down to about letter E.  If I could move to page 637, what your Honours will see is a reference, at the bottom of the page H, to the unanimous approval of Lord Justice Denning’s observations in Candler’s Case, and, having said that, he then goes on to say at page 638 what can be deduced from the Hedley Byrne Case ‑ that is letters C to E.  Could I pause, your Honours, to say just this:  that seems to derive a rather narrower test from Hedley Byrne than was referred to in the Canadian case to which your Honours were taken yesterday, and I will come back to that in just a moment, but may I invite your Honours to note that passage in relation to a comparison between what was said there and what the House of Lords thought that Hedley Byrne had decided.

Now, your Honours, if I could move then to page 642, your Honours will see, between letters F and H, the proposition that was being advanced there set out.  That proposition, of course, was not accepted, but if I could ask your Honours to note at page 643, once again what was said, at letter C was that:

it is almost always foreseeable that someone.....may choose to alter his position upon the faith of the accuracy of a statement ‑

of this kind and, that:

To apply as a test of liability only foreseeability of possible damage.....would be to create a liability wholly indefinite in area, duration and amount and would open up a limitless vista of uninsurable risk for the professional man.

One sees then at the bottom of the page, the commencement of the reference to Scott Group Ltd. v McFarlane and, your Honours, that is dealt with for the next few pages and the same view is arrived at by Lord Bridge at page 647E, and then in the remainder of that page and the next page and over to 649E, the two cases from England and Scotland of JEB Fasteners Ltd and Twomax are, in effect, overruled, and your Honours, a particular observation dealing with the approach taken as to foreseeability being sufficient by the New Zealand Court of Appeal appears at page 650 between letters A and C, where your Honours will see a reference to Scott Group Case and His Lordship says:

In particular, I see no reason why any special relationship should be held to arise simply from the circumstance that the affairs of the company are ‑

et cetera.  Similar observations would apply to the position of the plaintiffs in the present case.

Finally, in relation to his Lordship, at page 652, after referring to your Honour the Chief Justice’s observations in Sutherland Shire Council, in the passage which commences at letter C and goes through on to the next page, emphasis is placed on two things:  the first between letters D and E, “in what capacity” was the interest - that is, the interest in obtaining the information:

in what capacity was his interest to be served and from what was he intended to be protected?

Then about letter F, one must:

first ascertain the purpose for which the information is required to be given.

Your Honours will see at letter G that his Lordship adopts the proposition:

that if the conclusion is reached that the very purpose of providing the information is to serve as the basis for making investment decisions or giving investment advice, it is not difficult then to conclude also that the duty imposed upon the adviser extends to protecting the recipient against loss -

et cetera.  The conclusion, your Honours will see at page 654D:

To widen the scope of the duty to include loss caused to an individual by reliance upon the accounts for a purpose for which they were not supplied and were not intended would be to -

in effect, take it too far.

Lord Jauncey, finally, at page 655B to G expressed the view that foreseeability was not sufficient.  He noted at page 655G that it was not disputed that economic loss was foreseeable.  At page 658 ‑ ‑ ‑

BRENNAN CJ:   Does his Lordship add very much to what has gone before?

MR JACKSON:   No, your Honour, except that I should say he refers specifically to knowledge at page 658F.  His summary of the effect of the statutory provisions, at page 660B to E.  I think the answer is, your Honour, no.  The decision in that case, in our submission, is entirely against the appellant in the present case.

Could I move from that to paragraph 21 of our outline of submissions.  That is an aspect of which we have already dealt.  I do not wish to say any more about it.  The reason why I refer to it specifically, however, is just to say there is a slight, perhaps typographical error, or an error in meaning in it.  In the last three lines it speaks of the refusal by the House of Lords in Caparo to adopt the majority decision in Scott Group and one should also say and the refusal to adopt Twomax.

Could I go then, slightly out of order, to paragraph 23.  I have already dealt with the matters that are there referred to.  Could we just seek to say in relation to it that if one looks at the statement of claim to seek to find the additional element, in our submission, the cupboard is relevantly bare.

Your Honours, in relation to paragraph 24, the Court was taken yesterday to Kripps v Touche Ross & Co (1992) 69 BCLR (2d) 62; could I say two things about it:  the first is that the analysis of Hedley Byrne & Co v  Heller & Partners Ltd by the court does not seem to accord either with the view taken of that decision in Caparo or with the view taken in MLC v Evatt in this Court. I have already taken your Honours to Lord Oliver at page 638 in Caparo; I will not go back to that.  Could I refer also to Lord Bridge at page 620.  Your Honours, in Australia the view of Chief Justice Barwick in MLC v Evatt (1968) 122 CLR 556 has been treated as expressing the principle to be derived from Hedley Byrne & Co v Heller & Partners Ltd and that that is so - your Honours, I do not think I need to go to the case itself - appears from San Sebastian (1986) 162 CLR 341 at pages 356 and 371 to 372. That is the first thing we wanted to say.

The second thing is that, if one comes to Kripps, your Honour Justice Gummow asked whether it had been dealt with later in Canada, and the answer is yes.  Could we refer your Honours to a later decision of the British Columbia Court of Appeal in British Columbia Ltd v HBT Agra Ltd (1994) 120 DLR (4th) 726. In that case the Court of Appeal referred without adverse comment to the part of Kripps relied on by the appellant, but then appears to have applied a significantly stricter test.  Your Honours, the nature of the case appears from the headnote, and I do not think I need to take you to it, but may I take your Honours to page 732 under the heading “Opinion”.  Now what had been found, your Honours, as appears from the bottom of page 732, was that the plaintiff had failed on foreseeability; that appears at the bottom of that page and at the top of the next page.  Then, your Honours, on page 733, between letters F and G, it was said that:

the plaintiff was not within a foreseeable class of uses of the report.  To constitute a foreseeable class, either the actual identity of the members of this class must be known, or their nature and identity must be ascertainable and their intended use of the statement must be foreseeable.

Reliance is then placed upon the decision of the Supreme Court of Canada.  The relevant part, in Haig v Bamford, is in fact extracted in the reasons and your Honours will see from the top of page 734, what was said in that case was that:

The accountants were aware that the Company intended to supply the statements to members of a very limited class.  Haig was a member of the class.  It is true the accountants did not know his name -

But they knew he was a member of the class.  Your Honours, it was a case, they said:

in which the information is handed to the employer who, to the knowledge of the accountant, passes it to members of a limited class.....in furtherance of a transaction the nature of which is known to the accountant.

Your Honours, that is the test that was sought to be applied.  Your Honours will see that at about letter e on page 734, they held that the judge had erred in holding that the test of foreeseability had not been met.  But then, in relation to proximity, accepted as your Honours will see, that foreseeability was not sufficient in itself to support the imposition of liability.  What was said, however, to be the “something more”, as your Honours will see at page 735e, was what had been said in Kripps and the passage is then quoted.  But what your Honours will see after that is on page 736 in the paragraph commencing between f and g, the proposition on which the court based itself was that:

In every case in which liability has been imposed in respect of a loss suffered by a third person, the professional advisor has been aware that his statements would be presented to and used by the third person for a particular purpose which was known to the professional advisor at the time the statement was made.

Then Caparo is referred to at the top of the next page.  So that, your Honours, the decision refers to Kripps, that the approach taken is one which seems to be simply in accordance with Caparo.  We note, also, the reference in that case to Haig v Bamford to which we have referred in paragraph 26 of our submissions.

Could I come back, your Honours, to paragraph 20 of our submissions for a moment.  Your Honours will see that we refer there to the fact that one of the things that motivated the decision of Justice Woodhouse in Scott Group was that the auditor could insure against liability.  I will not take your Honours to the detail of the references which we have there set out, but may we just add one further reference:  that is a reference to what was said by Lord Oliver in Caparo (1990) 2 AC 643D where he made the observation that to extend the liability might well be to make professional people uninsurable.

Could I come then, your Honours, to paragraph 22 of our submissions which is the paragraph which deals with the statutory framework under which the accounts are prepared.  If I could take your Honours first to the Companies Code ‑ ‑ ‑

BRENNAN CJ:   Do we need to go through this, Mr Jackson?

MR JACKSON:   Your Honour, I was just going to add something to what is contained in here, if I may.  Your Honours will see in section 285 which provides that the audit report is to be prepared, is to be a report to the members and your Honours will see from subsection (2) that it is to be furnished to the directors.  Your Honours will see that we make a number of submissions in paragraph 22 about the terms dealing with those aspects particularly.  But the obligation which the auditors are to perform is an obligation which is in relation to the true and fair view of the accounts prepared by the company. 

That that is so, your Honours, appears from section 269 and may I take your Honours to that for just a moment.  By virtue of section 269(1), it is the directors who are to prepare the profit and loss account which is to give the true and fair view of the profit and loss; the same section 269(2) with the balance sheet.  Then, 269(5), the directors are to attach to that the auditor’s report relating to those accounts.

If one goes to section 269(8), it is one of three provisions, (8), (8A) and (8B), dealing with how the true and fair view is to be arrived at.  (8) says that the principal requirement is to prepare the accounts, to ensure that the accounts comply with the prescribed requirements but, where those requirements would not otherwise give a true a fair view, the directors shall add such information and explanations as will do so.  (8A) is the provision that says:

Without affecting the generality of -

in effect, (8) -

the group accounts are -

to be prepared -

in accordance with applicable approved accounting standards.

But (8B) says that where they would not if so prepared give a true a fair view, then they are to be dealt with in a way which would.  The directors’ statement as to the accounts, as your Honours will see in subsection (9)(b), has to say whether they have been prepared:

in accordance with applicable approved accounting standards -

and then in (c), if not, to put it shortly, why and in what respects.

Your Honours, if I could pause at that point, those provisions make it apparent that the use of the approved accounting standards is not absolutely required in every circumstance.  That is the first thing.  The second thing is - and this appears from the provisions to which I will next come - that the auditor’s function is not to prepare accounts in accordance with the standards but to report on their preparation.  That that is so appears from section 285.  I have taken your Honours to subsection (1) which speaks of the auditor reporting on the accounts and also to subsection (2), but what has to be in the report appears first from subsection (3).

Your Honours will see that by virtue of section 285(3)(a)(i) the auditor has to report whether the accounts are drawn up so as to give a true and fair view.  Then in (aa), whether they have been drawn up in accordance with the particular applicable approved standard.  Then that is dealt with in subparagraphs (i), (ii), (iii) and (iv) and they cover the matters that one has seen in section 269(8), (8A) and (8B).  Finally in this regard, if I could go to section 285(11), the auditor’s obligation, if he is not satisfied they have been drawn up in accordance with the appropriate standards, et cetera, the auditor then has an obligation to send by post to the board his report under the section on the accounts, et cetera.

So that, your Honours, is the first thing.  It is not right to say that in auditing the accounts as such, what the auditor is doing is applying in the accounts the accounting standards, or the accounting standards relate to his auditing of accounts prepared by others.  If I could move then to the next feature, that is the effect of membership of the Institute of Chartered Accountants.  Could I say two things about that.  The first is that we submitted yesterday that if reliance is to be placed on the proposition that there was a requirement to comply by statute with the terms of AAS5, although that had not been pleaded, we wished to contest that proposition.  We said we would give your Honours a written submission in relation to that, and may I proceed to do that now.  Your Honours will see the document under the heading “Supplementary Submission” which deals with that issue in a few paragraphs.

I do not propose to say anything about it orally and we have given that to our learned friends before Court this morning, no objection if they wish to put something in response to it, to do so in writing after the case concludes, if that is satisfactory to the Court. 

Could I come then, your Honours, to the second aspect with which we wish to deal and it is this; that it is central to the argument on the statement of accounting standards that they are concerned with bringing about a duty.  What we would submit is that what they are intended to do is made clear enough by the standard itself which appears relevantly at page 99.  Paragraph 1 of the standard at the top of page 100 says really nothing about a duty.  It is speaking of the approach to be taken for specified purposes.  If one looks at the paragraph 2 it speaks of materiality as being:

An overriding concept which governs not only preparation and presentation of “financial statements”, but also the applicability of -

et cetera.  If one looks at what is meant by “financial statements” paragraph 3(a) defines it in the widest possible fashion.  It really could not be more widely defined.  If one then goes from that to paragraph 7 it recognises, as is the fact, that it is foreseeable that all kinds of people may use for all sorts of purposes the “financial statements”.  But, your Honours, it does not really, in our submission, do any more than that.  It does no more than give instances of the range of reasonably foreseeable users.  No doubt to fail to follow an accounting standard may be evidence of negligence. 

Failure to follow a standard that is applicable often is, but, your Honours, it does not, in our submission, give rise to any duty.

Reliance was placed by my learned friends on the views of Mr Justice Rolfe in the Supreme Court of New South Wales in Columbia Coffee 29 NSWLR 141 to the effect that there was an assumption of liability to a wide class by the terms of an internal audit manual. In our submission, that decision is simply wrong. Could we take your Honours to the provision of the audit manual at page 167B of his Honour’s reasons. The two passages quoted seem simply to indicate, as is obvious enough, that the work of a professional person may be relied upon by persons other than the client and, therefore, one should apply proper professional standards in doing it. One bears in mind this is a document addressed to the members of a firm by those running the firm. The second thing is this: if one moves from that to page 172, the paragraph at the bottom of the page, his Honour comes to the conclusion:

There was an assumption of responsibility by the auditors flowing, in particular, from the statements in s 2.2 of the Audit Manual. 

And, his Honour goes on to say that:

Whatever may otherwise have been the restriction on the duty owed or.....those to whom the duty was owed, the auditors accepted that it was owed to a class of persons wider than the company for which the audit was being conducted and its shareholders.

That simply seems to equate, in our submission, foreseeability with the existence of the duty and knowledge of foreseeability, perhaps, with the existence of the duty.  Any professional person who gives an opinion knows that it may be used by others but that does not mean one assumes liability to all who may use it.  If, for example, one gave an opinion about the validity of some enactment; about whether it was or was not or might or might not be declared by this Court to be an excise, for example, may be used by quite a number of people.  One would not assume liability to all of the ones who might possibly ever see it.

Could we refer again to what was said by Lord Oliver in Caparo (1990) 2 AC at pages 631 to 632 where he gave instances of the wide range of persons down to financial journalists who might rely on statements of this kind. Your Honours, those are our submissions.

BRENNAN CJ:   Thank you, Mr Jackson.  Mr Abbott.

MR ABBOTT:   In our submission, the respondent’s submissions really amount to attempting to deploy the doctrine in the American case of Bily whilst urging as a fall‑back position, the decision in Caparo.  My learned friend seems to be suggesting that if this Court was to be uncomfortable with the notion of negligent misrepresentation being a species of deceit, then this Court should embrace Caparo. The greatest concession that the respondent seems to be willing to make is that contained in my learned friend’s outline at paragraph 11, and to suggest that it is necessary for there to be pleaded an intention to induce a particular plaintiff or class to act on the statement for a known purpose. I have made the point in the course of my submissions that general negligence is not about intention, and negligent misstatement has been clearly said as a tort to be an example of general negligence, and that is in San Sebatian at page 354.  In our submission, knowledge, actual or constructive of the class, reliance and assumption of responsibility are the key factors of foreseeability.

Indeed, the majority in San Sebastian spoke of reliance being the cornerstone, but in any event, assumption of responsibility for the task is the only other factor suggested by the majority in the absence of intention.            If intention is to be the touchstone of negligent misstatement then, in our submission, there is a danger that negligent misstatement as a category runs the risk of being removed from the category of general negligence and runs the risk of becoming, in essence, a nominate tort, lying somewhere between deceit and the discredited doctrine of Beaudesert.

I emphasise that general negligence is not about intention.  Trespass, deceit and the other nominate torts are, as is the American approach.  Accordingly, if San Sebastian is a correct statement of the law, and negligent misstatement is part of the general law of negligence, intention, in our submission, cannot and should not be the touchstone.

The real issue between both ends of the Bar table is whether this Court should narrow the field, my learned friend inviting a consideration of privity and quasi deceit or restore and revive and affirm the majority approach in San Sebastian.  In our submission, it is that approach that should be preferred and the comment of the former Chief Justice Mason and Justice Deane and Justice Gaudron in Bryan v Maloney at page 619 where the members of the Court spoke of:

an identified element of known reliance (or dependence) or the assumption of responsibility or a combination of the two -

as being the common features is the appropriate approach.  On the issue of policy, our submissions are as in our outline but we also invite attention to two cases on our B list.  The first is the case of United States v Arthur Young (1984) 465 US 805, which is No 29 on our B list, and in particular at pages 817 to 818 there is a discussion on the public responsibility assumed by the auditor. I do not read it. I ask the Court in due course to read it.

McHUGH J:   One matter of policy that is not dealt with in Bily’s Case and which seems to tell against the existence of a duty is that the company has a right of action against the auditor and, as experience in this country has indicated over the last 30 years, even when the company goes into liquidation such actions are frequently brought by the liquidator, so that in so far as a creditor has not been paid then if the company recovers against the auditor it goes at least part of the way to meeting the needs of the creditors and other people.

MR ABBOTT:   Yes, I think you are parlaying the paradox that could exist where the company suffers no loss but has a cause of action but the lender who suffers the loss has no cause of action.

McHUGH J:   But that would be a fairly rare case, would it not?

MR ABBOTT:   Yes.

McHUGH J:   The other factor is that the auditor can often plead contributory negligence against the company in that situation, particularly where the company has been in some way responsible, but if you have a case situation where the company owes no duty to, say, the creditor or investor, then there is no way that the auditor, if he is sued by the outsider, can get contribution.

MR ABBOTT:   I think there are some examples where they attempted to cover that very situation by third party proceedings.

McHUGH J:   I am sure there can be situations where the company owes a duty to the outsider, but that may not always be the case.

MR ABBOTT:   I accept that is an aspect of policy but I can only offer the solution of third party proceedings as a means to deal with that problem. 

Finally, on the issue of public policy, I also invite the Court’s attention to case No 25 on our B list.  It is the case of Australian Securities Commission and Companies Auditors and Liquidators Disciplinary Tribunal and it merely again emphasises the public nature of the auditors’ work and the processes that may be brought to bear on them should they fail in the standards which they are obliged to maintain.

Lastly, we would like the opportunity of putting in a written submission to the supplementary submission and we will undertake to do so by, say, Monday if that is convenient to the Court.

BRENNAN CJ:   Yes, thank you, Mr Abbott.

The Court will consider its decision in this matter and will adjourn to Sydney to 9.30 am tomorrow morning.

AT 11.30 AM THE MATTER WAS ADJOURNED