Esanda Finance Corp Ltd v Peat Marwick Hungerfords
[1995] HCATrans 372
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 WEDNESDAY, 13 DECEMBER 1995, AT 10.19 AM
Copyright in the High Court of Australia
MR M.L. ABBOTT, QC: If the Court pleases, I appear with my learned friend, MR J.S. RODER, for the appellant. (instructed by Grope Hamilton)
MR D.F. JACKSON, QC: If the Court pleases, I appear with my learned friend, MR R.W. WHITE, for the respondent. (instructed by Finlaysons)
BRENNAN CJ: Yes, Mr Abbott?
MR ABBOTT: The appellant in this matter appeals to this Court pursuant to special leave granted in August of this year and the decision appealed from is from the Full Court of the Supreme Court of South Australia which allowed an appeal from a single judge of that Court, Justice Bollen. Justice Bollen, at first instance, dismissed an application to strike out certain parts of the plaintiff’s ‑ in this case, the appellant’s before this Court ‑ statement of claim which concerned, in the context of this appeal, a claim in negligence for certain statements and representations made.
On appeal to the Full Court, the issue for the Court was whether the facts pleaded in the statement of claim were arguably sufficient in law to found the duty of care owed by the defendant to the plaintiff. The facts may be conveniently summarised. The respondent is a firm of auditors who certified the accounts of a public company named Excel Finance Corporation. Excel Finance Corporation was not a publicly listed company, no share trading, but it was a public company and the auditors certified those accounts for the year ending 30 June 1989.
In reliance on those audited accounts, the appellant, Esanda Finance Corporation Limited, entered into certain financial transactions with Excel where, on Excel’s guarantee, it lent money to companies controlled by the directors of Excel or by other means provided funds for the use of Excel, for example, by purchasing receivables on a recourse basis.
As a result of the negligent preparation of the audited accounts and the certification provided by the auditors the appellant alleged, and does allege, that it suffered loss by reason of the fact that the audit reports and the audited accounts did not reflect the true and fair value of the company. And, so, the pleading which was eventually allowed endeavoured to reflect this concept.
TOOHEY J: Can you take us, Mr Abbott, to the pleading in which reliance is asserted?
MR ABBOTT: Yes. Paragraph 87, in appeal book, page 91.
TOOHEY J: Yes, I see, 87.1?
MR ABBOTT: Yes, 87.1, “Esanda relied”. The relevant pleadings are in the appeal book starting at page 87, and we rely upon paragraph 83 at page 87:
In furnishing the reports referred to in paragraphs 52, 53 and 55, PMH was acting in trade or commerce within the meaning of Section 56 of the Fair Trading Act 1987 in that it provided the reports to Excel and to the members of Excel -
and these are the important words -
and for use by persons dealing commercially with Excel as part of professional auditing services which PMH provided to Excel in respect of the financial year ended 30 June 1989 on a commercial basis and for a fee.
GUMMOW J: But was paragraph 83 wrapping up the fair trading pleading and the negligence pleading?
MR ABBOTT: It is referable to fair trading, but it pleads facts on which we rely with reference to the negligence pleading. Paragraph 84 on page 88 of the appeal book and then page 89, paragraph 84A.1, we plead that:
At all material times, the -
respondents -
were members of the Institute of Chartered Accountants.....bound by the Australian Accounting Standards published from time to time -
and in 84A.2 we plead in accordance with the pleading rules of the South Australian Supreme Court. We refer to the document sufficiently to enable us to put it before the Court and we have prepared a book of documents which we say represents the documents which we are entitled to refer to in conjunction with the pleading. We had copies delivered to the Court last week; I do not know whether they are before the Court. It is a book of documents in the front of which we have set out what we assert one can discern from the following documents to be the holding out by the auditors. The first part of that book is five pages of, in effect, summary of what we say can be found in the subsequent pages, and thereafter we have extracted from the relevant accounting standards the relevant documentation, and it will be seen that we plead that as they are a member of the Institute of Chartered Accountants in paragraph 84A.1, we say that brings into account the Australian Accounting Standards - that is the AASs‑ the Statement of Auditing Standards, which is an AUS, the Statement of Auditing Practice, which is an AUP and the Rules of Ethical Conduct which, in this book, are under the initials of REC.
TOOHEY J: Mr Abbott, could you just make clear for us how the pleadings presently stand in relation to what might be taken to be crucial paragraphs? For instance, paragraph 83 remains, does it not?
MR ABBOTT: Yes, paragraph 83 remains.
TOOHEY J: And then paragraph 84A, 84B, 84C, 85 and 86 go.
MR ABBOTT: Yes.
TOOHEY J: Now, the order of the Full Court speaks of consequential amendments to paragraph 87. What is the status of paragraph 87 following the judgment of the Full Court?
MR ABBOTT: It is, as I understand it - the underlined material, from pages 91 and at the top of 92 in the appeal book, are removed in consequence of the order of the Full Court.
TOOHEY J: Yes, thank you.
MR ABBOTT: It will be seen that in the pleadings at paragraphs 84A, 84B, 84C, 85, 85A, 86 and 87, in essence we plead that they are members of the Institute of Chartered Accountants, that as members they were bound by the Australian Accounting Standards, that they were bound by the Accountants’ Professional Statement, that they were bound by the materiality standards in AAS5.
TOOHEY J: But does not 85A remain?
MR ABBOTT: Yes, 85A remains - my learned junior has directed my attention to the order of the Full Court. Your Honour Justice Toohey is correct: 85A in terms of the order remains.
TOOHEY J: But it is in the air, is it not, because it is linked to preceding paragraphs which have been struck out?
MR ABBOTT: Yes. I must say I had assumed - wrongly, now that your Honour has drawn my attention to the exact wording of the order - that 85A had gone out. In fact, as your Honour has observed, 85A remains. We would say without the other pleadings it does nothing. It does hang in the air and ‑ ‑ ‑
TOOHEY J: It has no work to do really.
MR ABBOTT: It has no work to do and has no effect.
BRENNAN CJ: Is there any element in the pleading of those paragraphs that are struck out of an assumption of responsibility by the defendant to the plaintiff.
MR ABBOTT: If your Honour means by those words, assumption of a responsibility to a particular plaintiff, no.
BRENNAN CJ: Or to a class of which the plaintiff is the member.
MR ABBOTT: Yes, we say there is an assumption of responsibility to a class of which the plaintiff is a member.
BRENNAN CJ: Where does one find that alleged?
MR ABBOTT: We rely upon 85A at page 91 of the appeal book.
TOOHEY J: But that is not the problem you just spoke of, is it not? 85A begins,
By reason of the matters pleaded in paragraphs 84A to 84C -
MR ABBOTT: Yes, and without making any concession, I would think that it was obviously within the contemplation of the Full Court that 85A would be struck out, too.
BRENNAN CJ: What I am endeavouring to ascertain is this: where in the paragraph struck out and in paragraphs 85A, putting them all together, is there an allegation of an assumption of responsibility?
MR ABBOTT: The allegation of assumption of responsibility, which we say is fairly identifiable from these pleadings, is that by virtue of the membership of the institute; by virtue of the job undertaken by the auditors; and by virtue of the fact that Esanda was so closely and directly affected, and that our pleading 85A.2 ‑ ‑ ‑
BRENNAN CJ: Just a moment until we get these down one by one. Just give them to me again.
MR ABBOTT: We start at 83 on page 87, which is a plea of facts that not only were the reports which are set out in the statement of claim provided for the purpose of Excel and to the members of Excel, but also the respondent provided the reports for use by persons who dealt commercially with Excel ‑ ‑ ‑
BRENNAN CJ: Is this intended to be an allegation of fact separate from the pleading in relation to Fair Trading Act that the reports were provided in order to inform people dealing commercially with Excel?
MR ABBOTT: Yes.
GUMMOW J: That is not what the paragraph says.
BRENNAN CJ: That is not what it says.
MR ABBOTT: Well, it is an allegation of fact, which in this paragraph is referred to in the context of the Fair Trading Act, but it is an allegation of fact which stands in this pleading as an allegation of fact which can be used for the purposes of the Fair Trading Act and we submit for a negligence plea.
BRENNAN CJ: Are you going to ask the Court and your opponent to pick and choose parts of sentences in various paragraphs in order to spell out this assumption of responsibility?
MR ABBOTT: I am going to ask the Court and my opponents to pick out that section of paragraph 83, but when the Court turns to 84A, we plead the membership; we plead the accounting standards and in 84A.2 we plead that they were mandatory. They lay down principles to be followed by the members, of which the respondent was one. We plead that failure to observe the provisions of the statement is:
a failure to observe a proper standard of professional care, skill or competence.
BRENNAN CJ: There is a failure? What do you say about failure?
MR ABBOTT: We plead that a failure to observe the provisions of the statements, that is, the statements of accounting standards, may be regarded as a failure to observe a proper standard of professional care, skill or competence and, therefore, in essence, in holding themselves out as being members, they represent and warrant they will observe a proper standard of professional skill, care or competence. From that we go to the direct or close connection of Esanda with the conduct, after we pleaded in 84B, materiality. In 84C, we plead foreseeability.
BRENNAN CJ: What do you mean by materiality in terms of assumption of responsibility?
MR ABBOTT: Yes.
BRENNAN CJ: What do you mean?
MR ABBOTT: In terms of assumption of responsibility, in relation to materiality, we say that the materiality provisions, in other words - and I will take the Court to what they say about materiality - that materiality, in essence, assists in determining just what was the true nature and extent of the assumption of responsibility. It does that because the requirement of materiality requires the accountants to have regard to various classes of persons, and if I can take the Court to the issue of materiality.
This was discussed by the Chief Justice, because it was argued before the Full Court. The Chief Justice was of the opinion the test of materiality was not concerned with legal duty, but merely with the content of the statements.
BRENNAN CJ: Mr Abbott, my question initially was to ask you where there is a pleading of assumption of responsibility. Do I take it that your pleading says anything more than that by reason of membership of the association and the standards which the association promulgated, those who dealt with Excel and relied upon the audited accounts were entitled to assume that those standards had been adhered to, and that that is sufficient to establish a cause of action against the defendants?
MR ABBOTT: I agree with the first part of your Honour’s statement but not the second part because assumption of responsibility on its own may not be enough. But, I agree with the first part what you have said about what we say the assumption of responsibility can be demonstrated by.
BRENNAN CJ: I am seeking simply to establish what it is that you say that you have pleaded and which, having been pleaded, allows your pleading to stand. As I understand your first ground of appeal, it is that the Chief Justice wrongly struck it out because of a view that it was necessary to plead an assumption of responsibility. Am I to understand that the argument is we did plead an assumption of responsibility?
MR ABBOTT: Yes.
BRENNAN CJ: Or that the Chief Justice was wrong to strike out, even though we did not plead an assumption of responsibility?
MR ABBOTT: No. We did plead an assumption of responsibility for the task. The Chief Justice struck it out because we apprehend that he decided that assumption of responsibility meant assumption of responsibility in law. We have not pleaded assumption of responsibility in law. The auditors assumed responsibility to conduct the task in accordance with the auditing standards and that they knew, or ought to have known, that we might reasonably and relevantly rely upon the work that they had done for which they had assumed responsibility in accordance with the standards.
BRENNAN CJ: Now, did they assume that responsibility to their client company or to any, and which other persons?
MR ABBOTT: They assumed that responsibility to their client company and to those classes of persons whom they knew or ought to have known, might rely upon the certificate in the accounts.
BRENNAN CJ: And those include all creditors, all persons dealing commercially with the company? Is that right?
MR ABBOTT: No.
BRENNAN CJ: What do you say?
MR ABBOTT: No. I say the class can be confined, and it is not an indeterminate class so broad as your Honour has postulated, but a much more limited class.
BRENNAN CJ: Where is it pleaded that class?
MR ABBOTT: We do not plead the class, we plead that we were persons who, in paragraph 84C on page 90:
Esanda was at all material times a member of a class or classes of persons, namely creditors and financiers ‑
We say that is a plea in the alternative and we would get up on the pleading if we merely showed that the class was restricted to financiers.
BRENNAN CJ: So that there was a pleading here somewhere, is there, that there is an assumption of responsibility to exercise that standard of care? The assumption being of responsibility to this class?
MR ABBOTT: Yes.
BRENNAN CJ: Financiers and creditors.
MR ABBOTT: Financiers and/or creditors.
BRENNAN CJ: So that is what we have to determine?
MR ABBOTT: Yes.
BRENNAN CJ: Right.
MR ABBOTT: And in paragraph 85, as an alternative to 84, we say that they:
owed Esanda, as a member of a class of persons who might reasonably and relevantly rely upon the Excel 30 June 1989 accounts.....to take reasonable care -
I accept that does not, in its own terms of pleading, define the class, leaves it open. But, I say this was an issue on which the evidence, if sufficient, may have adequately restricted the class and it would be wrong to strike out this pleading because the class is not defined with the precision that some of the judgments have said it should be defined.
McHUGH J: I just do not follow what is meant by the words, “and in the alternative to paragraph 84”. It does not seem to me to make any sense.
MR ABBOTT: I think it should be “or in the alternative”.
McHUGH J: Well, it still does not make any sense. It does not seem to be any sort of alternative to paragraph 84. Paragraph 84 is alleging that the reports were misleading or deceptive because they were likely to mislead or in contravention.
MR ABBOTT: Yes.
McHUGH J: Paragraph 85 is dealing with an allegation that:
PMH owed Esanda.....a duty to take reasonable care.
MR ABBOTT: Paragraph 84 pleads fair trading and 85, in the alternative or in addition to the fair trading plea, pleads negligence.
TOOHEY J: Well, that is why 83 remains, I take it, that although it speaks of use by persons dealing commercially with Excel it is only in the context of a plea under the Fair Trading Act, not a plea of negligence?
MR ABBOTT: We would say that it does relate to negligence in so far as a pleading of fact.
McHUGH J: But how?
MR ABBOTT: Paragraph 83, your Honour.
McHUGH J: I know it is there in 83, but 83 does not seem to me to have anything to do with the allegations that start at 84A.
MR ABBOTT: I do not stand here to support this as a model pleading.
BRENNAN CJ: Well, you have got to stand there and support it as a supportable pleading.
MR ABBOTT: I do that. I do not resile from that.
BRENNAN CJ: Well, then, if 83 does not relate to 84A, how do you support 84A by reference to 83?
MR ABBOTT: On what your Honour has just said, taking the assumption in the first part of your Honour’s comment, I cannot, but we say that 83 on a fair reading pleads facts. It also pleads facts referable to a cause of action under the Fair Trading Act but the facts that it pleads, we say there is no good reason why they are not also referable and cannot be taken as referable to the claim for negligence.
McHUGH J: If 83 is part of the negligence claim then, on one view, it might just foreclose the whole action and it might be a reason why we should revoke special leave to appeal.
TOOHEY J: You really cannot give 83 the expansive construction that you seek, I think, Mr Abbott, because it begins by referring to:
PMH was acting in trade or commerce within the meaning of Section 56 of the Fair Trading Act 1987 in that it provided the reports - - -
and so on. It is very clearly linked to the Fair Trading Act.
MR ABBOTT: I agree, your Honour. I am merely trying to, I think, extract what mileage I can from a statement in the statement of claim that the reports were provided for use by persons dealing commercially.
TOOHEY J: Well, that might be had that been an allegation that stood, as it were, independently of the plea under the Fair Trading Act, the plea of negligence, and then one or other of those pleas sought to draw that in but on its face it is very clearly aimed at the Fair Trading Act.
MR ABBOTT: I agree, and it should have been pleaded as a separate fact and then linked in with both fair trading and with negligence.
TOOHEY J: But it is not just a matter of cavilling over the quality of the pleading. It is a very clear restriction on its face of that aspect to the Fair Trading Act claim.
MR ABBOTT: If I cannot draw any comfort from the fact that there is a pleading of a fact in 83 and that that fact may be applicable to a negligence action, then 83 can be put to one side.
BRENNAN CJ: Your real case, as I understood it, that was brought here on a grant of special leave was to argue that by reason of membership of the association and the public ventilation of the standards of that association, that there was necessarily an assumption of responsibility arising from that owed to those who might deal with the company whose accounts were audited. Have I wrongly understood what the point is?
MR ABBOTT: No.
BRENNAN CJ: Then do we not need to look simply at your pleading in relation to the existence of the standards and to see whether that in itself is sufficient to ground an assumption of responsibility?
MR ABBOTT: Yes, if assumption of responsibility is the only way we can get to a pleading which is valid in law.
BRENNAN CJ: Or some other basis, if you wish to put some other basis.
MR ABBOTT: Yes, that is so. I may have been overstepping the mark in endeavouring to obtain any benefit from paragraph 83 at all. But, as I said, since it alleged a fact, I am prepared to at least make the point that, having alleged a fact, it was potentially referable to the claim in negligence. But your Honour is right. Putting 83 aside, it is essentially paragraphs 84A ‑ ‑ ‑
McHUGH J: I must say, speaking for myself of course only, the fact that this allegation is there in 83 and you seem to want to rely on it does seem to raise some problems because it is hardly appropriate that a case on negligence should go off on paragraphs 84A and the following paragraphs. If you allege that there is this extra additional fact besides those, we would be really deciding an abstract question which does not really deal with your real case.
MR ABBOTT: That may be so, but the real case is as the Chief Justice has said, whether the pleadings in 84A and following raise facts on which an arguable case of negligence is made out.
McHUGH J: What happens if we hold that it does not? Do you then come back and start again, relying on those facts together with the matter alleged in 83?
MR ABBOTT: I suppose, theoretically we could, but we would be hard pressed to have any court allow any additional pleading on the basis of no additional facts recently discovered being available.
McHUGH J: It is a pleading point, is it not, not a new evidence point? I would have thought that if Peat Marwick provided these for use by persons dealing commercially with Excel as part of their professional auditing services, that is a factor of very considerable significance in determining whether they owe a duty of care. At the moment it seems to me it is not pleaded as part of your cause of action, but obviously it is a factor of some importance.
MR ABBOTT: As I said, it was not previously suggested, as I understand it, to the Full Court, that paragraph 83 was referable to the negligence case. It is only on my reading of the paragraph 83 that I discern that it potentially might be. It certainly should have been pleaded on its own - that is, the facts should have been pleaded on their own, not referable to the Fair Trading Act, and if the Court is minded to put aside paragraph 83 on the basis it is not fairly referable to any claim of negligence, then we are left with 84A and following, which is the basis on which we obtained special leave.
GUMMOW J: Are you saying that you would never want to replead your negligence counts so as to bring in what you say is in 83, clearly into the negligence case?
MR ABBOTT: I have no instructions to say that we would never do it.
GUMMOW J: We may be dealing with it on an incomplete basis.
MR ABBOTT: We are here to proceed on the basis that if we do not get up on the case presented under 84A et cetera, then we have no claim of negligence and will not be able to run a negligence case in these proceedings.
TOOHEY J: But consequent upon the order of the Full Court, there was nothing to stop the plaintiff from seeking leave to amend the statement of claim. Whether you would have got it is another matter, but there is no procedural bar to making an application to broaden the case by reference to such facts as you wish to plead; and that is still the position, presumably.
MR ABBOTT: Still the position. If the discovery process on the fair trading side of this case produced new evidence which we were not aware of and were unable to plead so as to raise a further pleading in negligence, there would be no bar for us putting that by way of application for amendment and probably with a greater chance of success than simply regurgitating something that had been the subject of a Full Court decision.
That is one of the reasons why we say this statement of claim should not be struck out in so far as negligence is concerned. It raised fair trading and negligence; it raised an arguable case of negligence; it is not a proper statement of claim to strike out one cause of action when the other goes on on the same facts, and on some similar propositions of law.
BRENNAN CJ: But this was on the basis of an argument that was not put to the Full Court for which you now wish to rely on, namely, that there is an allegation of fact in 83 which, taken in conjunction with the paragraph struck out, establishes a good cause of action. If that is so, should we not revoke special leave?
MR ABBOTT: May I just confer with my junior; I would like to see whether I need to make a relevant concession?
MR JACKSON: Your Honours, may I say one matter before the Court adjourns in relation to what has taken place?
BRENNAN CJ: Yes.
MR JACKSON: It is just this that your Honours will see from pages 121 and 129 that the provisions of the pleading that were relied on in the court below did not include paragraph 83. Your Honour, I do not want to go into the detail of what paragraph 83 means at this point, but your Honours would also see from the transcript of argument, which your Honours do not have, that reliance was not placed on paragraph 83. If reliance is to be placed on it, of course, the case is on a different basis.
BRENNAN CJ: Yes.
MR ABBOTT: We do not seek to rely on paragraph 83 before this Court.
BRENNAN CJ: Before this Court?
MR ABBOTT: Well, we obviously have to rely upon it in relation to Fair Trading Act before the Supreme Court in relation to our fair trading case.
McHUGH J:But that is hardly the point, is it? I mean, you want us to decide a question on certain facts and then, what happens, we give a decision on it and if it does not suit you or even if it does suit you, you then go back and you amend it and we have another cause of action which includes paragraph 83? I think the problem is, you will either have to abandon the allegation in paragraph 83 once and for all or ‑ ‑ ‑
MR ABBOTT: Vis-a-vis negligence.
McHUGH J: ‑ ‑ ‑vis-a-vis negligence, or the only alternative is for us to revoke special leave, otherwise we are really dealing with a case on a fairly abstract basis.
MR ABBOTT: I apologise to the Court. I will need to make a phone call to get instructions on that, but I think I would be able to get those instructions within a matter of five or ten minutes.
BRENNAN CJ: Well then, the Court will adjourn. Perhaps you can let the associate know how long you expect to take to get those instructions once you have made the phone call.
AT 10.57 AM SHORT ADJOURNMENT
UPON RESUMING AT 11.19 AM:
BRENNAN CJ: Yes, Mr Abbott.
MR ABBOTT: Your Honour, I am instructed to give an undertaking to this Court that in relation to the statement of claim, paragraph 83, in pleading facts referable to the Fair Trading Act, that the facts stated therein will not be used as the basis of a claim in negligence.
BRENNAN CJ: So that the sole basis of a claim of negligence is that which is pleaded in the paragraphs which have been struck out?
MR ABBOTT: Yes, absent 85A, which hangs in the air.
McHUGH J: That is an undertaking that relates now and in the future?
MR ABBOTT: Yes. I have spoken to my instructing solicitor in Adelaide. He, in turn, has obtained instructions from Esanda.
BRENNAN CJ: I think we should hear from Mr Jackson to see what he has to say about the state of the pleading in that case, Mr Abbott.
MR JACKSON: Your Honours, it is right to say that the contention that the matters referred to, as we would put it as particulars of paragraph 83, were not relied on in the courts below and we understand the position to be that they will not be relied on in the future. It does, however, still leave the case as a case which, in a sense, is a pleading case and a case which is capable of being changed in the future. Your Honours, a question which further arises is whether it is proposed that if the present proceedings are unsuccessful on the part of the appellant, that there would be any further amendment to the relevant parts of the pleading or the parts of the pleading remaining relevant because, otherwise, the issue may become one which is, in large measure, academic.
BRENNAN CJ: In other words, if Mr Abbott fails on this appeal, then the action is at an end so far as it depends upon the cause of action in negligence?
MR JACKSON: Yes, your Honour. That is the position which we would submit should prevail as a condition of the matter remaining in the Court.
McHUGH J: That was not a condition placed on the special leave.
MR JACKSON: No, your Honour. I appreciate that, but your Honours will appreciate the Court, in a sense, had taken a provisional view about the matter, and our side was called on first ‑ I was not in the matter on that occasion, and your Honour the Chief Justice expressed a view about what the point in the case that was to be argued was; well, of course, your Honour, although one can look at the materials in support of the application for special leave, it does not quite appear from the Court’s decision on the application the matters that moved the Court in granting special leave ‑ Your Honours, I think I have said what I wanted to say about that really.
BRENNAN CJ: Mr Abbott, what do you have to say about the proposition that in order to crystallise the question for determination by this Court arising under the paragraphs that have been struck out, it would be necessary for you to accept that if you failed on this appeal, the cause of action in negligence would be gone beyond the point where it could be resurrected?
MR ABBOTT: I say this, your Honour, that I could not give any such undertaking, nor would I seek instructions to give such an undertaking, because the discovery process in this case has only recently been proceeding ‑ ‑ ‑
BRENNAN CJ: Yes.
MR ABBOTT: ‑ ‑ ‑ so that I personally have no idea what has come out in the way of discovery, but, for example, I know that one of the things that has been discovered under the Fair Trading Act discovery process has been the audit manual.
I have not given any advice on the limited discovery that has been given so far nor, indeed, necessarily because it has not been completed, the full discovery as to whether or not it is possible, on new facts, to fashion a claim for negligence in addition to what is to be ventilated before this Court.
BRENNAN CJ: Yes. So that it may be that you may, as a result of discovery or otherwise, be in a position to amend your statement of claim to plead facts which, in addition to those that have been pleaded in the paragraph struck out, would be sufficient to sustain a claim in negligence?
MR ABBOTT: As a theoretical possibility, that is so.
BRENNAN CJ: And a possibility which you are not prepared, at this stage, to forgo.
MR ABBOTT: No, your Honour, I am not.
TOOHEY J: Or, perhaps not only in addition to but - - -
MR ABBOTT: - - - in conjunction with.
TOOHEY J: In lieu of, almost.
MR ABBOTT: Yes, in lieu of. Might I add that it was not a grant of special leave, your Honour, that we be required to give any such undertaking - - -
BRENNAN CJ: No, I appreciate that.
MR ABBOTT: It has been obvious to all that the discovery process has been ongoing under the Fair Trading Act. This is one of the reasons why we complained about the striking out of negligence cause of action when there was a concurrent cause of action in fair trading.
BRENNAN CJ: Very well, Mr Abbott. We will proceed on the basis that the question for the Court’s determination is simply whether the paragraphs that have been struck out, looking at those paragraphs alone, contain a pleading of an allegation of negligence which is supportable.
MR ABBOTT: May I suggest that we add 85A which I believe has been inadvertently omitted in the order.
BRENNAN CJ: Yes, add 85A. It is understood that 85A is to go with those.
MR ABBOTT: If the Court pleases.
BRENNAN CJ: Perhaps as the first step we might just identify what are the paragraphs, because you did refer to something that appeared, I think, on pages 91 to 92, is that right?
MR ABBOTT: What are the paragraphs ‑ ‑ ‑
BRENNAN CJ: Which have been struck out?
MR ABBOTT: Paragraph 84A on page 89, 84B on page 90, 84C on page 90, 85 on page 90 over to the top of page 91, 85A by necessary implication, and 86 on page 91.
BRENNAN CJ: Is any of 87 struck out?
MR ABBOTT: And consequential amendments to paragraph 87 and the consequential amendments that have been struck out - the amendments that have been made consequentially upon the striking out of those first‑mentioned paragraphs are to be seen at the bottom of page 91 and over on page 92 and are those underlined portions of paragraph 87.
TOOHEY J: Do you rely upon anything in the consequential amendments in support of the cause of action in the preceding paragraph?
MR ABBOTT: We do in so far as in paragraph 87 we say:
by reason of PMH’s breach of duty as pleaded in paragraphs 85 and 86.
But other than that, we do not.
TOOHEY J: Well, I am not sure what you mean by “other than that”, Mr Abbott, because what the added words at the foot of page 91 and the top of page 92 do, as I read them, is to draw in paragraphs 85 and 86, which, admittedly, have been struck out, but then go on to plead a number of matters relating to reliance. In other words reliance which, initially, seemed to have been tied in only to the Fair Trading Act plea by reason of the consequential amendments is tied into the negligence plea, as well, is it not?
MR ABBOTT: That is so, in 87.1 and then into particular aspects of 87.1.3 through to 87.1.9.
TOOHEY J: So in seeking to reinstate the consequential amendments you are relying upon reliance?
MR ABBOTT: Yes, because we say by virtue of actual reliance Esanda decided to enter into these nominated transactions.
BRENNAN CJ: We can then take it that we have to consider whether the paragraphs up to 86 inclusive, when taken in conjunction with certain parts of paragraph 87, plead a cause of action in negligence?
MR ABBOTT: Yes.
BRENNAN CJ: And the parts that we have to consider in relation to paragraph 87 are the words:
by reason of PMH’s breach of duty as pleaded in paragraphs 85 and 86, Esanda has suffered the loss and damage pleaded in paragraphs ‑
nominated, “in that:”, and then one goes to the whole of 87.1, is that right?
MR ABBOTT: Yes, and 87.2, and by reason of the matters - I am sorry, one does not need to go to 87.2.
BRENNAN CJ: No, that is fair trading.
MR ABBOTT: That is surplusage, yes.
BRENNAN CJ: So, our consideration ceases at 87.1?
MR ABBOTT: Yes, that is so. Could I take the Court to the decision of the judge at first instance, very briefly? In our outline of argument we deal with this in paragraph 2. His Honour Justice Bollen - at appeal book page 43 where the relevant portion starts, in the last line, and really at the top of page 44, he said:
The risk of tedium, I repeat again, that the cases and the discussion on the principles of law applicable all depend on their facts. One cannot say in black and white that an auditor is always or is never liable to a third party. I think it appropriate that this case should go forward, “on negligence” to evidence. My “interlocutory conclusion” is that Mr Gray has not quite made good his submission that “intention to induce” must be pleaded to sustain a plea of negligence of the type suggested in this action. I think that proximity is the basis for such a plea in negligence. Sometimes lack of intention will prevent the necessary relationship of proximity arising between the parties. Many combinations of facts varying from case to case are capable of founding an action by a third party against auditors for negligent misstatement. Much, at least, will depend on the evidence. In my opinion, paras 85 and 86 sufficiently plead the case in negligence. Paragraphs 85 and 86 identify the plaintiff as a member of a class of person (or persons) who might rely on the relevant accounts and reports of the defendant. Sections 85 and 86 allege the allegation of a duty owed by the defendant to the plaintiff and the breach. Paragraph 87 alleges a loss. Duty, breach, loss = a plea of negligence. Those pleadings all raise the issue of proximity. Intention, in my opinion, may well be a component of proximity. The pleadings as they stand are adequate to allow the case to go to trial. The proposed amendments would strengthen those pleadings.
He goes on to say:
They raise the questions of assumption of liability by the defendant by reason of the accounting standards numbered APS1 and AAS5, which Mr Wicks proffered to me. They are standards to which the two bodies of accountants in South Australia have decided that they will adhere. The question of assumption of risk in this case will I think loom large in the light of those standards. Of course, I acknowledge that standards cannot state what the law is. But the existence of the standards adhered to by a professional body may assist a judge in determining the relevant law.
We, in particular, rely upon those standards. His Honour also had regard to the authorities that were put to him. He found that R. Lowe LippmannFigdor & Frank v AGC (Advances) Ltd (1992) 2 VR 671, was distinguishable, and that is at appeal book page 40. He held at line 7:
is a case which depends on its facts.
He then referred to the headnote and said at line 20:
There was no other combination of circumstances sufficient to impose a duty of care. Here there is.
And I will return to R. Lowe Lippmann in due course. He held that Caparo v Dickman did not compel a different conclusion. That is on the next page at line 5. He said:
Caparo, of course, imposes limitation on the circumstances in which damages from misstatement can be recovered. It is astute to see that no person is subject to “liability in an indeterminate amount for an indeterminate time to an indeterminate class of persons”.....But the decision does not make intention “critical” -
and so, on that basis, he held that there was an arguable case and the case on negligence should proceed to trial.
His Honour, correctly in our view, noted the many factual issues and was correct in predicting that a lot would depend upon the evidence at trial and, in our submission, if there was any inadequacy on the basic pleadings alleged it could be cured by particulars. The matter then proceeded, as this Court knows, to the Full Court of South Australia and in paragraph 3 of our outline we deal with the decision of the intermediate court. In paragraph 3 of our outline of argument we set out, first of all, the basis of the decision of the former Chief Justice, and if I could take the Court very briefly to the decision and come back to it. It is at appeal book page 121 lines 5 to 7 ‑ ‑ ‑
BRENNAN CJ: The judgments have been read, of course, Mr Abbott.
MR ABBOTT: Yes. He said:
Those facts, however, fall short of establishing the relationship of proximity which is necessary to give rise to a duty of care.
And held that there was no pleading which established a duty of care. That is at page 124, line 7. He said:
I have reached the conclusion that the facts pleaded are insufficient to found a duty of care by the defendant to the plaintiff and therefore disclose no cause of action -
His Honour Justice Olsson reached a somewhat different conclusion; same result but via a slightly different path. His Honour, in essence, at page 143 said that there was no plea of circumstances that fell within one or any combination of the circumstances set out in the decision of this Court in San Sebastian. He said at line 28:
Here there was, for example, no pecuniary interest of the defendant in the transaction as recognised in Sebastian. Moreover, the “combination of circumstances” referred to are those cited above, as found at page 357 of the report of Sebastian. None of those circumstances are pleaded in the instant case.
We say that that is an error and that there were, and I will turn to that very shortly. So, on that basis, the intermediate court found for the respondent. If I could now turn in a little more detail to the judgment of the former Chief Justice, and I refer the Court back to the appeal book at page 114, where his Honour’s reasoning commences, and it starts at line 19 where he deals with ‑ ‑ ‑
BRENNAN CJ: We have read this, Mr Abbott. What is the proposition you wish to advance?
MR ABBOTT: The proposition I wish to advance is that he wrongly interpreted the concept of assumption of responsibility by, in essence, talking of a concept of assumption of responsibility in law not, as we would suggest is the appropriate way, an assumption of responsibility for the task. As to that, that is, the concept of assumption of responsibility, his Honour dealt with that concept at page 120, and if your Honour does not require me to read the previous pages how he reached this, he concluded at page 120:
In cases such as the present where the plaintiff is not a member of the company to whom the auditor has a statutory obligation but has relied upon the audit report in investing in the company or entering into financial dealings with it, it seems to me that, in the absence of some feature indicating an assumption of responsibility to the plaintiff to exercise care in relation to the preparation of the audit certificate, an auditor is not under a duty of care to the plaintiff unless the auditor intended to induce the plaintiff to act in reliance on the audit certificate.
It is our submission that his Honour is thereby postulating as a test, which we say it is not in accord with San Sebastian, namely, assumption of responsibility in law, whereas he should have been concerned with assumption of responsibility for the task, which is what we have pleaded. It is true that we have not pleaded assumption of responsibility in law.
BRENNAN CJ: But the relevant question is assumption of responsibility to the plaintiff.
MR ABBOTT: There are two questions. What is the assumption of responsibility he is talking about? Is it in law or just for the task? In saying that it has to be to the plaintiff, does he mean to the specific plaintiff - in other words, to a specific person - or is it the law that an assumption of responsibility to carry out a task to a class of persons to whom are within the contemplation of the maker of the statement is sufficient.
BRENNAN CJ: So it leaves it as simply: is there a duty of care owed by the defendant to the plaintiff?
MR ABBOTT: Yes, via an assumption of responsibility, whatever that means.
BRENNAN CJ: Then if the plaintiff is a member of a class and a duty is owed to all of that class, then the duty is owed to the plaintiff.
MR ABBOTT: Yes.
BRENNAN CJ: What his Honour is saying is: is there any feature indicating that there is some assumption of responsibility to the plaintiff, either personally or as a member of a class of which he is one?
MR ABBOTT: We would suggest that what he is saying is that he is talking directly to a plaintiff, that he does not have in mind there to a class.
BRENNAN CJ: Is your case that there is sufficient pleaded to establish an assumption of responsibility to a class of which the plaintiff is one?
MR ABBOTT: Exactly.
BRENNAN CJ: All right.
TOOHEY J: Does the statement on page 121 at line 13 correctly reflect the plaintiff’s argument, namely that by reason of the standards referred to, “the defendant assumed a responsibility to the plaintiff which gave rise to a duty of care”?
MR ABBOTT: I am sorry, what page, your Honour?
TOOHEY J: Page 121, line 13, where the Chief Justice is, on the face of it, reflecting your argument.
MR ABBOTT: Yes, that is a fair reflection with this qualification: the appellant argued:
that by reason of those standards, the defendant assumed a responsibility to the plaintiff -
that is, to a class of which the plaintiff was a member - and assumed a responsibility to carry out the audit - that is, to conduct the task of the audit - in accordance with the standards. That assumption of responsibility for the task to the class of persons of whom the plaintiff was a member gave rise to a duty of care in respect of the auditing.
TOOHEY J: You seem to be eliding two propositions. One is that by reason of the standards proclaimed by the institute, the respondent was under an obligation, as it were, to do its job properly. But you then move very easily from that to a proposition that thereby the respondent owed a duty of care to the appellant.
MR ABBOTT: That is so.
TOOHEY J: Well, is it as easy as that?
MR ABBOTT: No, it is not as easy as that, but that is ‑ ‑ ‑
TOOHEY J: You assert it as a matter of law, do you not?
MR ABBOTT: We assert it as a combination of law and fact. There is a requirement at law for the auditors to conduct the audit in accordance with the accounting standards.
BRENNAN CJ: What law?
MR ABBOTT: The Corporations Law and the Code.
BRENNAN CJ: Yes, I see.
MR ABBOTT: The Code is section 269.
BRENNAN CJ: But we are not concerned with breach of statutory duty, are we?
MR ABBOTT: No.
BRENNAN CJ: What you are saying is that the auditors have a duty to perform their job properly.
MR ABBOTT: Yes.
BRENNAN CJ: Is that a duty which is owed to the plaintiff?
MR ABBOTT: No. We are saying that, by virtue of having to engage in a task, a concomitant of which is to do their job properly to a certain standard laid down by law, that they undertake responsibility to conduct a task and that in undertaking that responsibility ‑ and in view of what subsequently was done with them ‑ they knew, or ought to have known that the appellant might rely upon them.
McHUGH J: But who do they undertake the task to?
MR ABBOTT: They undertake responsibility for the task ‑ ‑ ‑
McHUGH J: But to whom?
MR ABBOTT: We say to us, because they knew, or ought to have known that we would rely on them. There is an assumption of responsibility at two levels: there is an assumption of responsibility for the task to the company and its members; there is an assumption of responsibility for the task to other classes of persons who are reasonably within the contemplation of the auditors and who might rely upon them.
McHUGH J: Classes adds nothing there, does it? You say it is a responsibility to any person who might reasonably act on it.
MR ABBOTT: It is not any person who might reasonably act on them. It is any person within the knowledge, actual or constructive, of the auditors, might reasonably act on them.
BRENNAN CJ: Any person who might foreseeably act in reliance upon the auditor’s certificate?
MR ABBOTT: It depends what your Honour means by “foreseeably”. We have endeavoured to cover this aspect, and it may be appropriate to turn to it straight away rather than go to the judgment of the Chief Justice.
DAWSON J: Just before you do that, Mr Abbott; they were under a duty to have regard to people such as your client, were they not, under the rules of the association?
MR ABBOTT: Yes. Under the rules of the association, the materiality aspects require them to have regard to lenders.
DAWSON J: Now, who was that duty owed to? First of all, is it a legal duty?
MR ABBOTT: That duty was owed by the auditors to the company in the first instance ‑ ‑ ‑
DAWSON J: Is it a legal duty?
MR ABBOTT: A legal duty.
DAWSON J: How does it become a legal duty; because of their membership of the association?
MR ABBOTT: Yes, and because of the Corporations Law importing compliance with the standards as a legal duty.
DAWSON J: It does that, does it?
MR ABBOTT: Yes, it does.
DAWSON J: Can you direct us to that.
MR ABBOTT: That is reference to section 269 of the Code.
GUMMOW J: And of the law?
MR ABBOTT: Of the Code; section 269(9) requires the directors to lay before the annual general meeting a statement in accordance with the resolution:
stating whether the accounts have been made out in accordance with applicable approved accounting standards.
And:
if the accounts have not been made out in accordance with a particular applicable approved accountant standard ‑
then they have to give further details.
DAWSON J: Section 269(8A) imposing an obligation on directors to ensure that accounting standards are met.
MR ABBOTT: Yes, but section 269(9); the statement by the directors about those accounts, is what the auditors, in fact, give their certificate about. And that is made clear by reference to section 285(3)(a):
An auditor shall, in a report under this section, state ‑
(a) whether the accounts.....are.....properly drawn up.....
(iii) in accordance with applicable approved accounting standards.
DAWSON J: And the approved accounting standards include those which are promulgated by the society and the institute.
MR ABBOTT: That is so, yes. They are the same accounting standards within the bundle that we have handed up to the Court.
DAWSON J: So there is a duty to observe accounting standards, a duty owed?
MR ABBOTT: Yes, by auditors who undertake audits to observe the standards that we have set out in our appeal book and which are in that other book of material which we have handed up.
TOOHEY J: But you do not rely upon the Companies Code, do you?
MR ABBOTT: No, we have not pleaded breach of statutory - - -
TOOHEY J: I was not even narrowing it in that sense, but a reading of the Chief Justice’s judgment suggests that the proposition was that by reason of the standards regarded by the institute as appropriate, a duty was owned to the plaintiff. Now, if that was the proposition, it is hard to see what reference to the Companies Code achieves.
MR ABBOTT: Only this, that it might be said, “Well, what has the institute got to do with it, as well?” Membership of the institute and the accounting standards reinforced by the Code and the Corporations Law provide the basis of the audit and it might be said, “Well, the audit stops when you do it with reference to the company and the shareholders”. We are maintaining that the duty owed is wider than that merely to the particular company and to its shareholders.
DAWSON J: Because the accounting standards impose the duty to have regard to the interests of, amongst others, lenders.
MR ABBOTT: Lenders.
DAWSON J: So that you say it cannot be just a duty to the company.
MR ABBOTT: No.
DAWSON J: It must be a duty to these people, otherwise you would not be required to have regard to them.
MR ABBOTT: And, moreover, it assists in overcoming the concerns in the Ultramares Case, because the materiality provisions, in essence, are referable to the content of the audit and they determine what are the relevant classes, or some of the relevant classes, to whom the auditors have to have regard to in making out the audit report, so that we are a referable class under the standards to whom the auditors have to have regard to in making out their audit report. Therefore, we say, that this assists, or is some evidence of an assumption of responsibility to us because they clearly had to have us within their contemplation because we were one of the material classes.
McHUGH J: But it comes very close to owing a duty to the world, does it not? What about investors? They are surely people. The test of the materiality must involve consideration of investors because they are users of financial stakes.
MR ABBOTT: Yes.
DAWSON J: Could you take us to the particular parts of the accounting standards on which you rely to see whether they are confined or not?
MR ABBOTT: Yes, they are in this book.
TOOHEY J: Paragraph 7, is it not, the one on page 122?
MR ABBOTT: Yes, and they are also in the appeal book at page 99, AAS5. I point out that the standard itself is at page 103, line 15, “Accounting Standards”. It says:
The following standards shall be interpreted in the context of paragraphs 1 to 12 of this Statement -
which was the introduction. So that paragraph 13, which is the actual standard itself, imports what precedes it. Paragraph 15:
Subject to compliance with statutory or other requirements binding upon the reporting entity, financial statements shall be prepared and presented having regard to the materiality of the information that could be disclosed.
16. Information shall be deemed to be material if its omission, non‑disclosure or mis‑statement would cause the financial statements to mislead users of the statements when making evaluations or decisions.
It is clearly within the contemplation, we would suggest, to the auditors that in making these statements they have to have regard to the fact that they may be used by other persons in making evaluations or decisions. Who those other persons are - or some of the other persons are - are set out at page 101, line 11:
It follows that the test of materiality involves consideration of the users or likely users, of financial statements, the information needs of those users and, therefore, of the objectives of financial reporting. The information presented in financial statements may be used by various and often quite different classes of persons, each class having its own particular interest in the reporting entity. Users of financial statements of a private sector entity would include the present and potential providers of equity or loan capital, and creditors.
In an attempted answer to some of your Honours’ concerns, the situation in this case is that the class was not indeterminate because, we say, by virtue of our argument that a fortiori it is a class known or which ought to be known to the auditors so it is not an indeterminate class.
McHUGH J: It may not be an indeterminate class but, I mean, there are so many classes if you want to talk about classes. There must be shareholders in a company. They are going to use the statements of a public company. There must be people who invest in the stock market. There must be creditors.
MR ABBOTT: This is not a listed company.
McHUGH J: I appreciate it. I am just talking about the matter, generally.
MR ABBOTT: With reference to this appellant, it is our submission that it does not fall within an indeterminate class by virtue of this particular company.
McHUGH J: No, but you are relying on this paragraph 7 to found a duty.
MR ABBOTT: Yes, we are.
McHUGH J: We have to see where it leads. In the case of the auditor of a public company it seems to me to lead to the view that there is a duty owed to, not only the company, but to shareholders, creditors, bankers, investors, stock market operatives and so on.
MR ABBOTT: We would submit that the class is not indeterminate. It is limited to entities who had trade dealings with Excel in 1989 and 1990.
BRENNAN CJ: Why is it not limited to foreseeable users of the financial statement?
MR ABBOTT: And is also limited by that as well.
BRENNAN CJ: Is there any more significant limitation than that?
MR ABBOTT: Yes, because there is a limitation in time here. This is an annual audit. So it is not making a statement which is deployed to the world at large for ever.
McHUGH J: I do not know about that. I mean, no sensible credit provider or investor would just look at one year’s results. They would probably look at a minimum of five or seven years.
MR ABBOTT: I will endeavour to enlarge on that a little later. So we rely upon the standards at pages 99 to 103. We rely upon the accounting professional statements at page 104.
TOOHEY J: When you say that you rely upon them, Mr Abbott, what do you mean? Do you mean that you rely upon them as creating a duty in the person in the position of the present respondent, vis-a-vis someone in the position of the present appellant, or is there some next step to be taken in the sense that the standards may evidence something?
MR ABBOTT: The standards may evidence something.
TOOHEY J: What is the something that they evidence?
MR ABBOTT: They evidence that the documents that have been prepared must have been prepared, or are likely to have been prepared, by reference to consideration of a class to which we belong, and that there are certain minimum standards on which a reader of those statements can rely.
TOOHEY J: You mean because you belong to a class referred to in the standards themselves or is that essential to your argument?
MR ABBOTT: It is relevant to two factors. Actual reliance, that is, whether there is evidence of actual reliance, and it is relevant with reference to the concept of non-reliance which we set out in our outline of argument, which depends on constructive knowledge, whether they knew or ought to have know, and whether the auditors knew or ought to have known that we would rely. We say ‑ ‑ ‑
BRENNAN CJ: Would or might?
MR ABBOTT: Might, might rely.
TOOHEY J: But might because you fall within one of the descriptions in paragraph 7 on page 122 or some other reason?
MR ABBOTT: No, essentially because we fall within the description. We are within the contemplation of the auditors because we are one of the categories of persons whom they have had to concern themselves with on the issue of materiality.
BRENNAN CJ: That takes it to the stage of saying that, seeing as there are these standards which must be observed, auditors who observe them know, or must be taken to have known, that other persons might use them; that is, that persons other than their client company might use them.
MR ABBOTT: Yes, for relevant purposes.
BRENNAN CJ: For relevant purposes and might, in some way, rely on them in a financial dealing with the company. How does that give rise to a duty to those persons who are foreseeable in the sense that they might be users?
MR ABBOTT: Because there has to be something more than mere foreseeability.
BRENNAN CJ: Well, now, what is it?
MR ABBOTT: It is set out in our outline of argument under the discussion of known or foreseen reliance in paragraph 7 on page 5. We say, at the bottom of page 5 that something more than mere foreseeability is required in cases of negligent misstatement; that actual reliance is a necessary precondition and then we ‑ ‑ ‑
McHUGH J: But that does not add anything, does it? There would never be a case unless there was reliance.
MR ABBOTT: No, it has to be reliance.
McHUGH J: It has to be reliance on causation. That does not add anything.
MR ABBOTT: No, I agree. I was merely uttering those words by way of introduction to what then follows. Page 6, six lines down, we deal with what we say are the relevant concepts, actual reliance which is not a determinant of a duty of care but is merely a determinant of liability. And then the concept of known or foreseen reliance, terminology which we have borrowed from the words that have fallen from this Court because we say that is a determinant of a duty of care and that is what must be present in any case other than mere foreseeability. It is in relation to that issue, that concept, that ‑ ‑ ‑
McHUGH J: But how does that add anything to foreseeability? What do you foresee? You foresee that they are going to rely on it.
MR ABBOTT: No, not merely that. Could I just state what we suggest are the elements of the concept of known or foreseen reliance? There are three in number: foreseeability of an individual or class in the sense that there must be actual or constructive knowledge.
BRENNAN CJ: Of what?
MR ABBOTT: Of the individual or class.
BRENNAN CJ: That they exist?
MR ABBOTT: No, that they might rely so that the auditor, having actual or constructive knowledge of the class, foreseeing as a reasonable possibility that they might reasonably rely on the statement and foreseeing that they might suffer loss.
McHUGH J: But that seems to me only to restate reasonable foreseeability. In fact, it just transfers to an economic situation the foreseeability test about harm. What else would they foresee other than that somebody is going to rely on it?
MR ABBOTT: We are saying it is essential that they not merely foresee that somebody might rely on them - and if we could call that mere foreseeability, then I am happy with that - but we say they have to foresee in the sense of having actual constructive knowledge of the individual or the class and actual constructive knowledge that the class or individual might rely.
GUMMOW J: What does “constructive knowledge” mean? It is a slippery expression in any area of law really.
MR ABBOTT: Ought reasonably to know.
BRENNAN CJ: Ought to know that a class of persons, namely users of the statements, might rely upon the statements?
MR ABBOTT: Yes.
BRENNAN CJ: What is that other than foreseeability?
MR ABBOTT: We say it is more than mere foreseeability.
BRENNAN CJ: What more is it?
MR ABBOTT: It is actual or constructive knowledge of the individual or the class to which he belongs; it is actual constructive knowledge of the known class an individual might rely, because mere foreseeability is merely foreseeability as a mere possibility.
BRENNAN CJ: That is all it is: a possibility that people in this class might rely on it to their detriment.
MR ABBOTT: We are suggesting there should be more than mere foreseeability in terms of actual or constructive knowledge - knew or ought to have known.
BRENNAN CJ: Say that you put it at your highest - knew: that the auditors knew that users of the statement might rely on it. What does that mean other than that the auditors foresaw that others may rely on it?
MR ABBOTT: Because it is then more than then a mere possibility. If they knew or ought to have known that we might rely on it, we say that elevates it to more than a mere possibility.
BRENNAN CJ: But it does not. “Might” means it is a possibility.
MR ABBOTT: “Might” certainly has a connotation of a possibility, obviously.
BRENNAN CJ: But it means no more than possibility, does it not? That is why I asked you before was it “would” or “might”.
MR ABBOTT: I am conscious of the fact that we pleaded “might”.
McHUGH J: It seems strange to me at least that this “might have relied on it” is a determinant of a duty of care but, if you know they are actually relying on it, it is not a determinant of duty of care, according to your argument.
TOOHEY J: I think you are putting known reliance as an alternative basis to actual reliance, are you not?
MR ABBOTT: Yes, I am because often the two terms have been used under the one rubric of just reliance.
McHUGH J: I am sorry, I must have misunderstood what you mean in paragraph 3(a) when you say:
ACTUAL RELIANCE: in the sense that to establish liability, causation via actual reliance must be shown by a plaintiff, however actual reliance is not a determinant of the existence of a duty of care ‑ ‑ ‑
MR ABBOTT: No, because the duty of care ‑ ‑ ‑
TOOHEY J: What you really mean, I suppose, is it is not conclusive?
MR ABBOTT: Not conclusive.
TOOHEY J: Even that is misleading. It is not the only determinant of the existence of a duty of care.
MR ABBOTT: It is not a determinant of the duty of care; it is a determinant of recovery of loss.
McHUGH J: No, but you say it is not a determinant.
MR ABBOTT: No, it is not. The fact that we actually relied on a document does not determine the existence of the duty of care.
McHUGH J: You mean if that is all that there is in the case?
MR ABBOTT: Yes.
McHUGH J: I understand that.
MR ABBOTT: The duty of care is not determined by someone actually relying on something.
McHUGH J: Yes, I understand that.
MR ABBOTT: The duty of care is determined, we suggest, by known or foreseen reliance.
TOOHEY J: So what I put to you a moment ago was not right when I said they were alternatives?
MR ABBOTT: I am sorry, no, they are not alternatives, your Honour. Could I take up what your Honour the Chief Justice said in San Sebastian 162 CLR 340 because it seems to me that it is in San Sebastian that your Honour may pick up this aspect. In San Sebastian, your Honour in the middle of page 366 said:
A causal relationship between a representation (a term which I shall use to embrace any verbal statement made by one person to another) and economic loss does not exist because of the operation of the laws of nature. It exists because the representation induces the representee to do something which causes the loss or to refrain from doing something which would have avoided the loss.
That is a reference then to actual reliance, as I take it. Your Honour went on to say:
Your Honour went on to say:
It is the operation of the representation on the representee’s mind - the inducement - which links the representation with the conduct which more immediately causes the loss. A representation induces a representee to act or to refrain from acting in a particular manner when he acts or refrains from acting in that manner because he believes that the representation is probably true; in other words, he acts or refrains from acting in that manner in reliance on the truth of the representation. Therefore it is not enough to prove merely that a representee’s conduct which causes loss occurred after the representation was made or that the representation was one among many factors of which the representee was aware when he engaged in that conduct. The representation must be a real inducement or one of the real inducements to engage in the conduct which occasions the loss. That is the test in deceit and there is no reason in principle why a different test should be applied in negligence to ascertain the causal relationship between the representation and the loss for which compensation is sought. If a representation which is untrue induces a representee to act in a manner which causes him loss, the loss is caused by the making of the representation.
Then your Honour said:
It is foreseeable that a representee might, in reliance on a representation, act or refrain from acting in a manner which might cause or avoid loss, the essential foundation for postulating a duty of care in the making of the representation exists.
Now your Honour there, in our submission, is saying that if it is foreseeable to the representor that the appellant in this case might rely and might therefore act in a way which causes loss, the essential foundation is there. Now whether your Honour means by that just mere foreseeability, we would suggest your Honour is saying something more than just mere foreseeability in that ‑ ‑ ‑
BRENNAN CJ: If we turn to page 372 you will see what I mean, because I there deal with the elements of what I regarded as the tort on negligence arising from negligent misstatements, and the third condition I identified as the reasonable foreseeability being the underlying principle of the law of negligence, one of three conditions which must be super-added to the giving of information or advice on a serious and business matter intending thereby to induce the representee to act on it.
McHUGH J:Yes, I was going to put that to you earlier. Everything that his Honour said, and indeed everything in this case, has got to be understood in the sense that the Court held that a representation had to be made with the intention of inducing members of the class to ‑ ‑ ‑
MR ABBOTT: We have endeavoured to avoid the introduction of intention into this concept because we see that if you introduce intention then you are really putting liability for negligent misstatements out of the realm of general negligence and into the realm of nominate tort.
BRENNAN CJ: Well, that is not so, because the question is the question of the existence of a duty of care and it is the relationship which might arise from an intention that a representee should act upon what is said that gives rise to the relationship and imposes the duty of care in relation to the giving of the information.
MR ABBOTT: But, your Honour, if intention is to be the touchstone of the relationship, then would not this Court then be returning to a situation where there is no real difference between negligent misstatement and deceit.
BRENNAN CJ: Not at all. There would be a difference between making a statement, not taking reasonable care in making it, and making a statement knowing it to be wrong, or recklessly not caring whether it is true or false.
MR ABBOTT: Well, all I can say is that if intention is to elevated to that stage, then, just taking your Honour’s words at page 372, Your Honour, in that category of cases that you set out at page 372, is only dealing with one of the many categories which the majority view put forward at page 357, where the majority said, at the bottom of page 356, four lines from the bottom:
But there is no convincing reason for confining the liability to instances of negligent misstatement made by way of response to a request by the plaintiff for information or advice. The existence of an antecedent request for information or advice certainly assists in demonstrating reliance, which is a cornerstone of liability for negligent misstatement. However, such a request is by no means essential.....The maker of a statement may come under a duty to take care through a combination of circumstances or in various ways, in the absence of a request by the recipient.
And then, as I read it, six categories are set out; the categories being the maker of the statement:
may be known to possess, or profess to possess, skill and competence in the area which is the subject of the communication.
The maker of the statement:
may warrant the correctness of what he says or ‑
thirdly ‑
assume responsibility for its correctness.
Fourthly:
He may invite the recipient to act on the basis of the information or advice, or intend to induce the recipient to act in a particular way.
And lastly:
have an interest in the recipient so acting.
Now, it is apparent that in San Sebastian there are only two categories that were put forward by the appellant ‑ two of those six categories, that is categories five and six, namely the intention to induce, or that the representor had an interest in the representee so acting. And that is apparent from the next six lines. But if your Honour’s view is to prevail at page 372, in cases of negligent misstatement, the categories would be reduced from ‑ the combinations of circumstances, in any event, would be reduced from those combinations at 357 down to, in essence, one, because there would be a necessary precondition for intention to induce.
BRENNAN CJ: All I can say is that I think I was dealing with the case that was advanced there which was one of intention that the plaintiff should act upon what was said by the authority. You may be at liberty to develop, if you wish, these arguments that San Sebastian is an intention case. This is not an intention case. It is a different sort of case and it suffices, well and good, but you will not derive it from anything that I said in San Sebastian.
MR ABBOTT: I take your Honour’s point. I do seek to develop that while San Sebastian went off on the issue of intention, what was said, albeit, perhaps obiter, at page 357 is, in fact, correct, that there are a number of categories which, in the absence of a request by a recipient, the maker of a statement may come under a duty to take care to the eventual recipient of the statement. Indeed, that is one of the criticisms we make of the judgment of the Full Court, at least of the Chief Justice, in any event, because he seemed to be holding that there are only two ways in which that could occur.
If I could take the Court to the appeal book, the judgment of the Chief Justice at page 120. I will not read out to the Court the way in which he lead up to page 120. If I could summarise it by observing that at page 116 he sets out the relevant passage of San Sebastian with the various categories at lines 25 to 35. So, his Honour, after dealing with what we say is the correct and the seminal portion of San Sebastian at page 116, and at the bottom of page 116, correctly observes that, really, there are only two categories relied on in San Sebastian by the appellant, an intention to induce reliance or an interest. Then, after dealing with the other cases in the joint judgment, at page 117, line 18, his Honour said:
The comment on those cases -
that is by the majority of the Court in San Sebastian -
in the joint judgment is that “the two decisions provide support for the proposition that, where a statement is made for the purpose of inducing the plaintiff, or the members of a limited class including the plaintiff, to commit themselves financially upon the basis that the statement is true, and the plaintiff acts in reliance on the statement, the law will impose a duty of care on the maker of the statement.”
His Honour the former Chief Justice then deals with your Honour the Chief Justice’s judgment. Then at page 118, line 23, he concludes:
What emerges is that in Australian law, the duty of care in relation to statements has been extended beyond statements made to a particular person for a particular purpose and even beyond statements made to a third person for the known purpose of communication to the person who sustains the loss. There are circumstances in which the maker of a statement owes a duty of care to a person who reasonably relies on the statement although the statement was not made to that person either directly or purposely through a third person. The San Sebastian Case demonstrates that where the statement is not made to a particular person in response to a request for information or advice, the place of a request in the complex of factors giving rise to a duty may be supplied by other factors such as those enunciated in the joint judgment at p 357.
So he is adopting that the joint judgment at 357 lists those six ways of establishing a duty. His Honour the former Chief Justice then said:
One such factor -
and correctly says -
is an intention to cause the recipient of the information or advice, or a class to which that recipient belongs, to act on the information or advice. Where that intention exists and there are also present the factors discussed in the Evatt and Shaddock Cases and in the judgment of Brennan J in San Sebastian, the law imposes a duty of care.
We have no quarrel with his Honour’s setting out of these matters at this stage. He then deals with the submission of counsel for the respondent before this Court and says essentially, that submission was that there must always be pleaded an intention to induce the plaintiff. The former Chief Justice says at line 21:
I cannot accept that submission as a valid general proposition. To my mind the judgments in San Sebastian indicate that a duty may arise from other circumstances.
And we would say there are six in all at least. But then he says ‑ ‑ ‑
McHUGH J: Can I just stop you on that, because those statements at 357 were never intended, I would suggest to you, as an exhaustive statement that give rise to liability. For example, the fact that an author who volunteers informations known to possess particular competence of skill is not, by itself, enough to ground liability, is it?
MR ABBOTT: Not by itself.
McHUGH J: No, of course, and that is one of the categories mentioned.
MR ABBOTT: But the Court makes it clear combinations of categories.
McHUGH J: That is exactly right, but there are not six categories. Those statements were made in answer to an argument that there had to be a request for information to ground a duty of care.
MR ABBOTT: All I am using that for is to rebut the conclusion that his Honour comes to, that in essence, in cases of negligent misstatements there are only essentially two ways of arriving at an existence of a duty of care via an intention to induce or assumption of responsibility and no other ways. That seems to me to be the thrust of what he is saying at the bottom of page 119 at line 14 where, although he qualifies it by the words, “will generally”, he says:
Nevertheless circumstances, in order to give rise to a duty of care, must demonstrate a relevantly close relationship and will generally, although I think not always, include an intention that the statement be acted upon by the plaintiff.
What he says over the page at page 120, line 6:
In cases such as the present where the plaintiff is not a member of the company to whom the auditor has a statutory obligation.....but has relied upon the audit report in investing in the company or entering into financial dealings with it, it seems to me that, in the absence of some feature indicating an assumption of responsibility to the plaintiff to exercise care in relation to the preparation of the audit certificate, an auditor is not under a duty of care to the plaintiff unless the auditor intended to induce the plaintiff to act in reliance on the audit certificate.
We say his Honour fell into error there because ‑ ‑ ‑
McHUGH J: His Honour then goes on to explain why, there being no assumption of responsibility and nothing else, your case fails. I would have thought the argument that you have to meet is the argument from line 20 onwards on page 120. That is what his Honour put against you.
MR ABBOTT: Yes, that is part of the argument we have to meet but part of the argument we also have to meet is what did his Honour mean by the words “assumption of responsibility”, because we say it is clear that he is talking about a concept which we suggest this Court would not adopt, and that is at the bottom of page 122, line 36. In our submission, he is making it clear that when he talks about assumption of responsibility he is not talking about assumption of responsibility for the task but assumption of legal responsibility, that is, responsibility in law.
BRENNAN CJ: What are you speaking about when you speak about “assumption of responsibility for the task”?
MR ABBOTT: The words of Lord Browne‑Wilkinson in White v Jones.
BRENNAN CJ: Whatever Lord Browne‑Wilkinson said, what do you say it means?
MR ABBOTT: That it is nothing more than undertaking to do the job, without undertaking that you will be liable in law. And some of the cases talk about a willingness to be liable in law which, in our submission ‑ ‑ ‑
BRENNAN CJ: Undertaking to whom?
MR ABBOTT: To persons whom you know, or ought to know, might rely on the documents that you proffer.
BRENNAN CJ: That is the question, is it not?
MR ABBOTT: Yes.
McHUGH J: Lord Browne‑Wilkinson used the expression in a quite different context. He was talking about an assumption of the task and the assumption of responsibility for the task was to the testator in White’s Case and he then used that to build up a duty to a potential beneficiary.
MR ABBOTT: But he also said that the concept of assumption of responsibility as stated in Caparo v Dickman ‑ some of the problems that arose in Caparo v Dickman can be resolved if assumption of responsibility is not used as meaning assumption of responsibility in law, but assumption of responsibility for the task. I will take your Honours to those passages shortly. But if I could just deal with ‑ ‑ ‑
GUMMOW J: Is there anything further on this question of assumption of responsibility in the Guardian Assurance Case? It is later than the solicitors’ case; a case about references in the House of Lords, (1995) 2 AC 296.
MR ABBOTT: I do not have the case and I cannot assist you on ‑ ‑ ‑
GUMMOW J: It is (1995) 2 AC 296 and in particular, Lord Goff’s speech at 316.
MR ABBOTT: So that, at page 120, we say his Honour has pitched the issue of assumption of responsibility too high. He has too narrowly confined the ways in which duty of care may be established and then, having fallen into those errors, he tests that narrow class by reference to the statement of claim from lines 18 onwards and he says at line 20:
There is no allegation that the defendant intended to induce the plaintiff.....to enter into financial transactions with the company.
That is correct; there is no allegation. Further he says:
Indeed there is no allegation that the defendant at the relevant times was aware that the plaintiff was engaged in financial transactions with the company or that any were in contemplation.
That is true; there is no direct allegation. However, we would suggest the concept of materiality goes some way towards covering his concerns in that regard. He then says:
There is no allegation of any act on the part of the defendant which could indicate or involve the assumption of a specific responsibility to the plaintiff to exercise care in the audit.
We say that that is not correct in that in paragraph 85A we plead exactly that. Paragraph 85A is, as the Court knows, at page 91 and we do allege, by virtue of that pleading, that the acts of the defendant which are set out in paragraphs 84A to 84C do involve an assumption of responsibility to users, although we put it not in those words, “assumption of responsibility”; we put it in terms of a duty of care. But it is the same thing as assumption of responsibility because assumption of responsibility comes under the umbrella of duty of care. In essence we say that we have alleged in paragraphs 84A to 84C acts which, taken at their highest, at least provide an arguable case of an assumption of a specific responsibility to the appellant to exercise care in the audit.
McHUGH J:But in that paragraph, you were the one that seems to be alleging that there was an assumption of responsibility in point of law because the paragraph commences, “By reason of the matters pleaded”.
MR ABBOTT: Yes.
McHUGH J:They accepted or must be taken as accepted.
MR ABBOTT: No, not just to plead it as a matter of law. It is also a pleading that because of the legal requirement of the standards that, in turn, meant as a matter of fact that they would have to have regard to us and members of the class to which we belong in preparing their report. So his Honour went on to say, at the top of page 121:
It may be assumed that it was reasonably foreseeable by the defendant that persons contemplating financial transactions with the plaintiff might consult the financial statements and rely upon their accuracy and upon the audit certificate. Those facts, however, fall short of establishing the relationship of proximity which is necessary to give rise to a duty of care.
We meet that head on and say that those facts do fall short of establishing the relationship of proximity because it was reasonable for the auditors to foresee that loss might be caused to us, so there is foreseeability of loss, and it was reasonable for the auditors to foresee that we might rely on the accounts, so there was foreseeability of reliance.
McHUGH J:But your argument, is it not, that that statement of fact in that sentence gave rise to a duty of care?
MR ABBOTT: Yes, the statement of fact in that sentence.
McHUGH J: Yes. If you found those facts a duty of care arose?
MR ABBOTT: Yes, taking in their expanded meaning, foreseeability of loss, foreseeability of reliance, actual reliance and actual loss. That would, at least, salvage an arguable case of a duty of care. If this Court says that foreseeability of reliance in the sense of constructive knowledge of a particular class, and that constructive knowledge that they might rely, adds nothing to the concept of mere foreseeability, then, obviously, the Court would hold that we pleaded nothing more than mere foreseeability, actual reliance and loss, and that we have not pleaded an additional element of proximity of whatever label you like to give it. We do say we have pleaded more than mere foreseeability.
His Honour went on to deal with the argument of the appellant at line 13 about the standards and he said at page 122, line 25:
I am unable to see how membership of the body responsible of the promulgation of those standards can give rise to a duty of care to persons to whom a duty would not otherwise be owed. Apart from any other consideration, the Standards themselves do not purport to create such a duty.
That is true in one sense, but what he then said, we suggest, is not strictly correct. He said:
They are not concerned with legal duty but with the content of financial statements.
That is only correct if the content can never result in affecting the duty. In our submission, whilst it is true that the standards are referable to the content of the financial statements, the content itself is referable to duty, or may be referable to duty or, to put it at its worst, from our point of view, is at least arguable that it is referable to duty. He said:
The concept of materiality is developed for the purpose of determining what should be included in the financial statements.
And he concludes by saying, in essence, just because it has been developed for what should be included, at line 36:
It does not imply any assumption of legal responsibility to such users to exercise care.
Well, it may not imply, but in some cases it might imply, because if the standards, as they do, require that, for the purposes of determining what is material, you shall have regard to categories of classes such as that which my client falls into, namely, lenders, and you do, in fact, have regard to that category for the purpose of determining what is material in the certificate and the accounts, then you may, in turn, assume the responsibility. And so, the content and what delineates the content may at least impinge upon, and we put it higher than that, may result in, or at least contain or have some part of the content, of the legal duty.
But, in any event, we say that if the Chief Justice is proposing there that legal responsibility is the same as assumption of responsibility for the task, then assumption of responsibility for the task should not, in any sense, be read as legal responsibility. His Honour then went on to deal with the decision of Justice Rolfe in the Columbia Coffee and Tea Case and he observed, in line 3:
In that case, His Honor relied upon an Auditors’ Audit Manual which referred to responsibilities.
He observed at line 11:
The Audit Manual in the Columbia Coffee case differs from the Accounting Standards in the present case in status purpose and language.
It is our submission that, on a fair reading, the accounting standards impose a higher onus and is certainly no worse for us than the auditors’ manual, and it is our submission that the Columbia Coffee and Tea Case represents the correct way and that the decision of his Honour the former Chief Justice is wrong, and the decision of Justice Rolfe in Columbia Coffee and Tea should prevail.
BRENNAN CJ: You can develop that further at 2.15, Mr Abbott. The Court will adjourn until 2.15 pm.
AT 12.45 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.20 PM:
BRENNAN CJ: Yes, Mr Abbott.
MR ABBOTT: I was dealing with the appeal book at page 123, where his Honour the former Chief Justice dealt with the Columbia Coffee and Tea Ltd v Churchill (1992) 29 NSWLR 141, and his Honour referred to, essentially, page 167 of the judgment in Columbia Coffee and Tea by referring to the auditor’s audit manual which was the document which was pleaded in Columbia Coffee and Tea. At line 10 of page 123 of the appeal book, his Honour said:
The Audit Manual in the Columbia Coffee Case differs from the Accounting Standards in the present case in status purpose and language.
I will not read out what is at page 167 of the report in Columbia Coffee and Tea, except to observe that the accounting standards on which we rely are, in our submission, higher, and certainly no worse for us, than the auditor’s manual and what is contained at page 167 of the report.
TOOHEY J: Mr Abbott, is the manual in this case an internal document or an external one?
MR ABBOTT: Yes, it is an internal document of the auditors in the Columbia Coffee and Tea Case, page 167B of the judgment, says:
Section 2.2 of Auditor’s Audit Manual, states:
“It is the policy of the firm” -
et cetera. So it is an internal document. The relevant words are italicised:
It acknowledges that there will be interested parties who read and rely upon our reports. And this extends beyond the persons who employ us in the first instance or those to whom the report is addressed initially.”
We say similar sentiments, and certainly no lesser sentiments, are found in the standards but, additionally, for the case at bar, the auditors have to certify that the standards have been complied with. In the Columbia Coffee and Tea Case, they need give no written promise that they complied with the audit manual. The Corporations Law requires that the audit certificate certify that the audit has been carried out in accordance with these standards and there is no required in relation to any auditor’s audit manual.
I suppose the third distinction is that the internal auditor’s audit manual in Columbia Coffee and Tea leads to no professional misconduct or disciplinary procedures which are the potential sequelae of failing to comply with the accounting standards which we plead.
We do say that the former Chief Justice of South Australia’s attempt to distinguish the Columbia Coffee and Tea Case on the basis of - in the Columbia Coffee and Tea Case there was a manual which had different status, purpose and language, really is beside the point, because the accounting standards on which we rely are higher, more onerous or, at worst, no worse for us than the auditor’s manual.
GUMMOW J: Justice Rolfe’s decision, which you took us to at 167, has to be understood in a way with what his Honour later said at 171E as to intention, of course.
MR ABBOTT: Yes. I have some difficulty with those words.
GUMMOW J: He seems to be treating “intention to induce” as not an essential element.
MR ABBOTT: Not an essential element, yes.
GUMMOW J: That may have eased him in reaching the conclusion he did at 167 as to the nature of the manuals.
MR ABBOTT: Yes, and that was certainly the way in which his Honour the former Chief Justice of South Australia understood it, because his Honour goes on to say at page 123 of the appeal book at line 16:
I think that the reasoning underlying the Columbia Coffee decision is inconsistent with the view which I take of the significance of the Accounting Standards and that that should be acknowledged. I have carefully considered the views of Rolfe J, but I am unable to agree with them.
Then, importantly, he says this:
It seems to me that in a case of alleged auditor’s liability to persons other than the client or members of the client company, the assumption of responsibility necessary to dispense with the need for an intention to induce reliance, will exist only where there is a clear indication of a willingness to be responsible to the particular plaintiff, or to a class of which he is a member, for the careful auditing of the financial statements.
Now, in our submission, that is not the law. His Honour seems to be saying that the mere assumption of responsibility, without a willingness to be responsible to a particular plaintiff, is not enough, absent an intention to induce reliance. In our submission, that test is too high, because really, when you look at it, “a willingness to be responsible” is nothing more, or at least is much the same as, an intention to induce reliance. If you are willing to be liable then it would follow that, consistent with that willingness to be liable, you have an intention to induce reliance by deploying the statement. If you deploy a statement with a willingness to be liable to a particular person, then we would say you necessarily have an intention to induce reliance, or at least a recklessness as to whether reliance is induced by your actions or not.
In any event, in the Chief Justice saying you have got to have an assumption of responsibility together with a willingness to be responsible to a particular plaintiff, in our submission is importing an essentially subjective element into the test, whereas it ought to remain objective, and that you should not be able to avoid the consequences of your actions, that is the imposition of a duty of care, by saying, I was not willing to be responsible, when objectively the reasonable man would say you should have been.
We submit that the test which his Honour proposes from lines 21 to 30 at page 123 of the appeal book is too high a test and it should be read down by this Court and his Honour erred in imposing that test, and that if he imposed the right test, which could be an assumption of responsibility for the task to us or to a class of which the appellant was a member, together with known or foreseen reliance in the sense in which I have already addressed the Court, in our submission that is enough to establish a duty of care in these circumstances. And then if there is actual reliance, that would establish liability for loss.
So, in essence, what we say is that his Honour is advocating a test which approaches, or nearly approaches, privity along the lines of the discussion which is apparent in some of the authorities my learned friend will no doubt be referring the Court to and we say it is too high a test. But, his Honour, after proposing that high test, comes to the view:
I do not think that the mere inclusion in a manual or set of standards of an acknowledgment of a professional responsibility to have the interests of users other than the client in mind in determining what is to be included in the accounts.....can have the effect of enlarging the area of legal duty by creating a legal duty of care -
I have already dealt with that because it is true in one sense; it may not but it can. We submit that reasoning, at page 124, is erroneous for three reasons. The first is that a correct starting point is not the conclusion that the only duty is owed by the auditor to the client company. The correct starting point is that the duty may be owed to the client and to third party users and that the undertaking of a statutory task in accordance with the law and the professional standards, may result in legal liability for breaches of that duty.
Secondly, his Honour, in our submission, is addressing the wrong question. The issue is not whether the statements in the standards have created a duty but whether the conduct of the auditor in deploying the document has created the duty.
Thirdly, we say that in a real sense it operates in the reverse way that a disclaimer operates, because an acknowledgement of a professional responsibility concerning the relevance of the interests of a third party may have the effect of enlarging a legal duty and may possibly create a duty of care to persons to whom it might not otherwise be owed because it may be clear and unequivocal evidence of an assumption of responsibility. It may also be evidence of an intention that such third parties should rely on the document or it may establish that the maker of the document should have foreseen that such third parties might rely.
So, the acknowledgement of this professional responsibility to have the interests of users other than the client in mind and the content of those statements leads in this sense to the nature of a reverse effect of a disclaimer in that it forces the auditor to take into account as a precondition to compliance with their statutory duty the interests of other parties whom they think or ought to consider might rely on them. The test of materiality thus requires the auditors to turn their mind to those persons whom might be misled if they do not include a material item in their report.
His Honour also dealt, in our submission erroneously, with the issue of intention to induce. I have said some of what I wanted to say on that aspect already but, in addition, as we say in our outline, he placed undue emphasis and elevated that concept to one of only two possible bases for the establishment of a relationship of proximity.
In essence he applied Caparo v Dickman and, in our submission, failed to properly apply San Sebastian. I need to take the Court to San Sebastian at pages 354 to 358 because it is our submission that the touchstone is not intention, with due respect to your Honour the Chief Justice, but reliance. The Court said at page 355, line 4:
The relationship of proximity is an integral constituent of the duty of care concept. We refer to that relationship in its broader sense, namely, as embracing a general limitation upon the test of reasonable foreseeability, this being the sense in which it has been discussed and applied in recent judgments in this Court -
citing Caltex, Jaensch v Coffey, Sutherland Shire Council and Stevens v Brodribb Sawmilling Co -
The notion of proximity, because it limits the loss that would otherwise be recoverable if foreseeability were used as an exclusive criterion of the duty of care, is of vital importance when the plaintiff’s claim is for pure economic loss. When the economic loss results from negligent misstatement, the element of reliance plays a prominent part in the ascertainment of a relationship of proximity between the plaintiff and the defendant, and therefore in the ascertainment of a duty of care.
In our submission, that must be a reference not to actual reliance but to known reliance; that is, knew or ought to have known that you might rely or perhaps would rely. The Court went on to say a few lines further down:
In cases of negligent misstatement, reliance plays an important role, particularly so when the defendant directs his statement to a class of persons with the intention of inducing members of the class to act or refrain from acting, in reliance on the statement -
The important words are “particularly so”. They are not only “when the defendant directs his statement”. I accept of course that where there is the intention, then that is an additional and, in our case, a very helpful factor but its absence should not mean that we have no cause of action in negligence.
Then the Court went through the decisions of Evatt and Shaddock and I will not read out again what the Court said at page 357 but, looked at from the point of view of the Chief Justice of South Australia, his Honour said at page 120, line 15 of the appeal book that absent assumption of responsibility, or however he might have defined it:
an auditor is not under a duty of care to the plaintiff unless the auditor intended to induce the plaintiff to act in reliance ‑
In our submission, this must be wrong. We say this with great respect to your Honour the Chief Justice, because if it correctly represents the law it means that the recipient must prove something akin to deceit, although I recognise the distinction your Honour drew, but I approach it from a different way. This is really not a test of proximity at all. If you intend that another person act in a particular way and you intend to induce someone to act in reliance, then really this is not a test of proximity because proximity is a priori by virtue of the intention to induce, and it really seems to me, with respect, that when you import intention at the touchstone, you are, in effect, getting away from the concept of proximity and approaching the concept of privity.
Now, this Court may want to do that but it is, in my respectful submission, inconsistent with the views espoused by the majority of this Court in San Sebastian where not intention is the touchstone, but reliance is the touchstone, and reliance is related to foreseeability, whereas intention is, in my submission, a different kettle of fish altogether. It is, in essence, not a test of proximity at all because the parties are so closely related by virtue of one party intending that the other would rely. You intend that someone shall act. You intend to induce them to act and, in my submission, that comes within the categories where you, in effect, assume proximity, or is getting very close to it, and it is our submission that this is, in a real sense, getting towards what the House of Lords was doing in Caparo v Dickman because that case held that there will be no proximity between the maker of the statement and the third party relying on that statement, where that person is not the person to whom the statement is made unless the person who makes the statement does so with the intention of inducing the specific third party to act.
This issue of intention, and the need for the statement intended to be directed to a specific known individual is, in our submission, inconsistent with the majority view in San Sebastian, and should be downgraded to but one factor, and we rely upon what fell from this Court in San Sebastian at page 356, and two‑thirds of the way down:
In Evatt and Shaddock the misstatement on which the plaintiff relied was made in response to a request ‑
and the Court went on to way
But there is no convincing reason for confining the liability to instances of.....information or advice ‑
made by way of response. Without reading it, I refer the Court to the emphasis placed on the element of reliance at pages 355 to 358.
In our submission, there is more than one possible basis for the establishment of proximity in the absence of a direct and special relationship. Intention is but one of the many possible alternatives and, as I have said before, the proposition which we seek to establish is that where the maker of the statement knew or ought to have known that a person other than the person to whom the statement was made might rely upon that statement and such person does, in fact, rely upon it, then that concept of known reliance or foreseen reliance when coupled with the fact of actual reliance, adds an additional element to the concept of mere foreseeability. And whether you call that additional element proximity or not, we are not concerned about but we would submit a pleading to that effect gets us over the hurdle which this Court has consistently enunciated of “mere foreseeability is not enough”.
BRENNAN CJ: Mr Abbott, in a case where a statement is made and a plaintiff relies upon that statement and acts to the plaintiff’s detriment and, thereby, suffers loss, what is the element of “mere foreseeability”? Foreseeability of what? I am not asking for anything additional, I just want the “mere foreseeability”.
MR ABBOTT: Of loss.
BRENNAN CJ: Foreseeability of loss?
MR ABBOTT: Foreseeability that someone may suffer a loss in acting on the statement.
BRENNAN CJ: Right. That is what “mere foreseeability” is?
MR ABBOTT: Yes.
BRENNAN CJ: Now, what is it additional to that, that you offer in this case?
MR ABBOTT: The concept of knowledge ‑ ‑ ‑
BRENNAN CJ: Of what?
MR ABBOTT: Knowledge of the class.
BRENNAN CJ: That is foreseeability that someone may act in reliance?
MR ABBOTT: Yes, but it is not foreseeability of a known or identifiable class. It is foreseeability of the world at large.
BRENNAN CJ: That is “mere foreseeability”.
MR ABBOTT: Mere foreseeability is foreseeability that anyone might rely.
BRENNAN CJ: And the difference here is that it is foreseeability of a class?
MR ABBOTT: I am suggesting that the additional elements that need to be shown to get this case away from “mere foreseeability” actual or constructive knowledge of the individual class ‑ ‑ ‑
BRENNAN CJ: I know you have used the words; I am trying to identify the state of mind. What is it?
MR ABBOTT: That the defendant knows, or a reasonable person in the defendant’s position ought reasonably to know, that this class or this individual might rely, or might reasonably and relevantly rely upon the statement.
BRENNAN CJ: So, the difference is between “mere foreseeability” which is knowing that somebody might rely to his detriment and, knowing that, a class might rely?
MR ABBOTT: Mere foreseeability may not be knowing, in the sense know or ought to know.
BRENNAN CJ: Well, put it however you like, what is it?
MR ABBOTT: The difference is as you have expressed it.
DAWSON J: But you really have to say that the person or the class of person, as opposed to the world at large, is likely to rely, to make a difference, do you not?
MR ABBOTT: That is where we come back to a debate as to whether “might” is enough and whether “would” makes a difference, and whether you would need to go to ‑ ‑ ‑
DAWSON J: Likely is no difference, I mean, as his Honour points out, and I think you really are trying to say that it is much more likely in the case of the class or a particular person that you designate, that reliance will be placed on the statement than it is with people at large.
MR ABBOTT: Yes.
DAWSON J: That is what you are saying, is it not?
MR ABBOTT: That is what I am saying, yes, your Honour.
TOOHEY J: And are you identifying the class by reference to paragraph 7 of the standards or by reference to some other criteria?
MR ABBOTT: I am identifying the class by reference to a reasonable person criteria.
TOOHEY J: But the reasonable person is ‑ ‑ ‑
MR ABBOTT: It is the foreseeability of the individual or class. If a reasonable person, in the defendant’s position, ought reasonably to know that this class or individual, to use Justice Dawson’s word, was likely to suffer damage, in our submission, that is the added ingredient to mere foreseeability.
TOOHEY J: Yes, but in marking out the class, do you rely upon the standards and the categories of persons referred to in paragraph 7 or do you rely upon some broader principle?
MR ABBOTT: We rely upon both, but specifically we rely upon the standards because we say that that goes to the test of reasonable foreseeability, the reasonable person test, because the standards required the auditors to have regard to this class, so in asking the question, is it reasonable or unreasonable, then you would be more likely to answer it as being reasonable because the auditor had to have regard to us as a class.
TOOHEY J: You mean it serves some evidentiary purpose?
MR ABBOTT: Serves some evidentiary purpose, yes.
McHUGH J:I must say, I am having some difficulty, Mr Abbott, in understanding this distinction you make between foreseeing any person in the world at large and foreseeing any class of persons. Can you give me an illustration of a case where the auditor could foresee somebody in the world at large, but would not be under any liability to them, but, on the other hand, would be liable to a class of persons. Could you give me the individual first, the person in the world at large, that they could foresee would act on it.
MR ABBOTT: Yes, the lender in this case, Esanda.
McHUGH J: No, but I want somebody at the world at large to whom you say there is no responsibility, even though you can foresee that person, because I will tell you frankly my problem. I do not see how you can identify anybody who will rely on it without, in some way, introducing something that will designate those people.
MR ABBOTT: In essence you are saying that a suggestion that constructive knowledge of an individual or class adds nothing to the concept of mere foreseeability.
McHUGH J: That is the difficulty I have in understanding it, but can you give me an illustration. For somebody, you say, well the auditor may have foreseen this person would act on it but nevertheless there is no liability to that person because they do not fall within a class.
MR ABBOTT: I am just trying to think of an individual or class that fits in with this particular case. My learned junior has proffered one example, and that is a third party recipient of the accounts who has given them some years later and it is foreseeable that they might rely on them in the sense that they might read them, but there is no foreseeability of that class - you would not foresee that the accounts might be handed on some considerable time hereafter.
McHUGH J: They are not a class of persons - people who might read them?
MR ABBOTT: People who might read them at that point in time are not a class of persons by that example. I should emphasise that in my exposition of this concept, I was not merely hanging my hat on actual or constructive knowledge of an individual or class. I added to that foreseeability of reliance.
TOOHEY J: What about the printer? The person who prints the report. I suppose you could foresee that that person might, in the course of reading it, think, “Here’s a go, I will perhaps put some money into this”.
MR ABBOTT: Or extend his credit, perhaps.
TOOHEY J: But, in the sense that Justice McHugh was just putting to you, hardly forms part of a class.
MR ABBOTT: No.
TOOHEY J: I am not suggesting you take up that example, but is that the sort of thing that you are talking about?
MR ABBOTT: Yes, it is, your Honour, because I was endeavouring to employ, as an aid to my argument, the categories that were in the standards as being ‑ ‑ ‑
BRENNAN CJ: As the users.
MR ABBOTT: As being the likely ‑ ‑ ‑
BRENNAN CJ: That category is the users.
MR ABBOTT: Yes.
BRENNAN CJ: How could anybody who did not rely on it be other than a user. I put that the wrong way around. Users are all those who rely on it for the purposes of financial dealings, are they not?
MR ABBOTT: They have to be.
BRENNAN CJ: They have to be? What is the limitation on the class?
MR ABBOTT: Because you may not foresee all the users. It may not be reasonable for you to know or have constructive knowledge of all who use it.
BRENNAN CJ: Then there is no duty owed.
MR ABBOTT: If there is foreseeability that anyone might use and suffer loss, that is one concept.
BRENNAN CJ: But that is just mere foreseeability.
MR ABBOTT: That is mere foreseeability. Foreseeability, to which you turn your mind to and know or ought to know that these people in the standards could well use these documents ‑ ‑ ‑
BRENNAN CJ: But the people in the standards are the users of them.
MR ABBOTT: Yes, still the users, I agree.
BRENNAN CJ: But how do the standards confine that class more narrowly than users?
MR ABBOTT: Only by imputing to you knowledge that you must know or to be taken to know that these people are more likely than others to use them.
McHUGH J: Which people; users or some other category?
MR ABBOTT: These specific users, these lenders, et cetera, whom you have in mind when you prepare the documents.
BRENNAN CJ: You must have in mind the users of the documents and you must know that the users are more likely to use them than people who are not users. It does not make sense, Mr Abbott.
MR ABBOTT: No, your Honour, I do not think I was saying that. If I was, it does not make sense, but I did not think I was actually saying that.
BRENNAN CJ: Then please explain.
TOOHEY J: You are really driven into some sort of a corner, perhaps, because you say that actual reliance is not enough, do you not?
MR ABBOTT: I say actual reliance is not a determinant of a duty of care.
TOOHEY J: Yes. So, therefore, you are then forced to identify some other criterion which you identified by reference to foreseeability, and then you seek to limit that by reference to an identifiable person, persons or class, by which stage, in a sense, you have left users behind.
MR ABBOTT: Yes. What I have endeavoured to do is get away from the concept of assumption responsibility, because wherever that pops up, it is linked with intention, and I have, instead, tried to focus on providing a test which is better related to foreseeability because it is foreseeability which has been regarded, as I read the judgments of this Court, as being the relevant concept. So I have tried to link in a concept of reliance with foreseeability rather than intention and an assumption of responsibility.
McHUGH J: It is a very difficult conceptual argument because, after all, the class of all the classes is itself a class and, therefore, every individual member of every individual class is, in one sense, a member of the class of all the classes.
MR ABBOTT: Everyone is a subset of everything else. Can I just take the Court to two examples where similar, if not, identical reasoning to that which I have employed has been used, at least I suggest has been used? The two examples are Kripps v Touche Ross & Co 69 BCLR (2d) 62. We have copies of that report available for members of the Court.
BRENNAN CJ: We have copies of it, thank you.
MR ABBOTT: At page 69 - may I add before I go to page 69 that there are a number of claims put forward - this was a strike-out action not dissimilar to the one at bar - the Court refused to strike out the claims based upon actual reliance and dismissed the accountant’s appeal. At page 69, paragraph 14, the court said:
There appear to be four distinct principles under which recover might be possible for pure economic loss simpliciter: (a) the “reliance” principle in Hedley Byrne & Co.....(b) the public authority liability principle in Anns.....(c) the “prima facie duty of care” rule in Anns.....and (d) the “third party beneficiary” principle in Ross v Caunters.
I am only concerned with “The Hedley Byrne ‘Reliance’ Principle” and what follows at notes 15 and 16. At note 16 the Court said:
In these cases the ingredient additional to foreseeability that loss might be suffered by the plaintiff as a result of the defendant’s carelessness is found in circumstances of reliance on the basis of which the court is able to infer an “undertaking” on the part of the defendant to exercise care for the plaintiff’s economic interests. These circumstances arise when it can be said the defendant ought to have known that persons in the position of the plaintiff might rely on the defendant to exercise care for their economic interests, that the plaintiff did in fact so rely on the defendant, and that such reliance was reasonable in the circumstances.
GAUDRON J: You see that last bit, “reliance was reasonable in the circumstances”?
MR ABBOTT: Yes.
GAUDRON J: That is precisely what you do not have pleaded, is it not?
MR ABBOTT: No, we would submit we do have that and that we have pleaded specifically that it was reasonable for us to rely in the circumstances, with respect.
GAUDRON J: In the circumstances of the manual? Do you go beyond the fact of the manual?
MR ABBOTT: Yes, we do. The evidence may disclose that our reliance was unreasonable, but I am saying - - -
GAUDRON J: But by reason of the manual or by reason of something else?
MR ABBOTT: We have not nailed our colours to any mast or to either mast. At appeal book page 90, paragraph 84C, we have said that:
Esanda was at all material times a member of a class or classes of persons, namely creditors and financiers of Excel, whom -
the respondent -
did foresee or alternatively ought reasonably to have foreseen might reasonably and relevantly rely upon the.....accounts.
The Court said at note 18:
While the Hedley Byrne principle is not the only basis on which recovery is thought to be possible for pure economic loss simpliciter, it is the only basis which can be said now to be clearly defined and generally accepted.
GAUDRON J: Could I take you back to that statement, Mr Abbott? Why would it be that the defendant - if you take that statement there formulated, why should it not be that the defendant ought to have known that persons in the position of the plaintiff might reasonably rely? Why do you leave the “reasonable reliance” at the other end as a separate ingredient or what, as you apparently do in your pleadings?
MR ABBOTT: I do not think you do. I think it has to be reasonable reliance and it has to be - it is nothing more than saying the reliance was reasonable.
GAUDRON J: No, but you should foresee ‑ ‑ ‑
MR ABBOTT: It is foreseeability of reasonable reliance.
GAUDRON J: Yes.
MR ABBOTT: The other authority ‑ ‑ ‑
McHUGH J: But does that accurately state what Hedley Byrne decides? If it does, why are you taking us to this case instead of Hedley Byrne? It purports to summarise Hedley Byrne, does it not?
MR ABBOTT: I do not think it ‑ ‑ ‑
McHUGH J: The first paragraph which you did not read to us says “is founded on Hedley Byrne”.
MR ABBOTT: Yes, I think the operative word is “founded”. Can I just put then what our case is in terms of Hedley Byrne v Heller. I think it is this, that the “so close and direct” element of relationship between the Act and its effect on a particular plaintiff, which is in essence proximity, is supplied by the application of our concept of “known reliance”. In other words, that the maker of the statement ought to have thought of the plaintiff when making the negligent statement because, to the knowledge of the maker, it was likely that the plaintiff might rely on it and it was foreseeable that the plaintiff might suffer loss because he relied on it. So that the known or foreseen reliance which is in our outline at page 6 as we define it means that the loss was not only foreseeable, but that it follows so closely and directly from the defendant’s conduct - that is, the conduct in making the statement - so that the law would impose a duty of care because of the reliance factor.
The other case to which I refer, which I do not have copies of but which I merely direct the Court to, is the case of Twomax Ltd v Dickson (1983) SLT 98 at page 104.
McHUGH J: But that was overruled in Caparo, was it not?
MR ABBOTT: It was overruled in Caparo because it fell within the Anns line of cases. But at page 104 - and we say this is not part of what was overruled in Caparo - column 1, two‑thirds of the way down, the Lord Ordinary said:
My attention was also drawn to two recent single judge decisions in England, namely Ross v Caunters and JEB Fasteners Ltd v Marks, Bloom & Co. In the latter case, which raised the question of the liability of an auditor to someone taking over a company on the faith of the audited accounts, Woolf J, after discussing the authorities says this: “Without laying down any principle which is intended to be of general application, on the basis of the authorities which I have cited, the appropriate test for establishing whether a duty of care exists appears in this case to be whether the defendants knew or reasonably should have foreseen at the time the accounts were audited that a person might rely on those accounts for the purpose of deciding whether or not to take over the company and therefore could suffer loss if the accounts were inaccurate. Such an approach does place a limitation on those entitled to contend that there has been a breach of duty owed to them. First of all, they must have relied on the accounts and, second, they must have done so in circumstances where the auditors either knew that they would or ought to have known that they might. If the situation is one where it would not be reasonable for the accounts to be relied on, then, in the absence of express knowledge, the auditor would be under no duty. This places a limit on the circumstances in which the audited accounts can be relied on. The longer the period which elapses prior to the accounts being relied on, from the date on which the auditor gave his certificate, the more difficult it will be to establish that the auditor ought to have foreseen that his certificate would, in those circumstances, be relied on.” The approach of Woolf J commends itself to me. If I may respectfully say so, it appears to combine the simplicity of the proximity or neighbour principle with a limitation which has regard to the warning against exposing accountants -
to the Ultramares principle -
and also to Lord Wilberforce’s second question in.....Anns.
In our submission, that proposition from JEB Fasteners of Justice Woolf as endorsed in Twomax does not fall foul of the Anns principle. Whilst other portions of the judgment do, that portion does not.
BRENNAN CJ: What Lord Bridge of Harwich said in relation to JEB was, at page 625 of Caparo, that:
Woolf J held that the auditors owed the plaintiffs a duty of care in the preparation of the accounts. He relied on both the Anns case and Scott Group Ltd v McFarlane in reaching the conclusion that the duty could be derived from foreseeability alone. For the reasons already indicated, I do not agree with this.
MR ABBOTT: The next passage is important, I suggest.
BRENNAN CJ: I see, you are putting it on the basis of:
It may well be, however, that the particular facts in the JEB case were sufficient to establish a basis on which the necessary ingredient of proximity to found a duty of care could be derived from the actual knowledge on the part of the auditors of the specific purpose for which the plaintiffs intended to use the accounts.
Is that the passage?
MR ABBOTT: Yes, and we say that ‑ ‑ ‑
BRENNAN CJ: Well, now that is “actual knowledge of the specific purpose”.
MR ABBOTT: Yes, and that is the Caparo test which we say is too high, so there is the distinction.
BRENNAN CJ: But you cannot derive much from JEB Fasteners, can you, in the light of what Lord Bridge said in Caparo?
MR ABBOTT: Not in England, anyway.
BRENNAN CJ: Yes.
MR ABBOTT: The third basis on which we make complaint of the judgment of the Chief Justice was his limiting of his consideration of the pleading to two factors only: the intention to induce and the assumption of responsibility. And in our outline, which I will not read, we refer to other concepts which we say should have been had regard to and which, either alone or cumulatively, would have been sufficient to hold the statement of claim as pleaded. We have set out, at page 3 of our outline from subparagraphs (a) to (g) matters which we submit are categories and which, to a greater or lesser extent, arise on the pleadings.
The judgment of Justice Olsson is the next matter I deal with. His Honour applied Caparo v Dickman, applied Lowe Lippman and said that what had fallen from Justice Bollen was inconsistent with those judgments. But, in our submission, his Honour missed the point. It was not to the point to suggest that Justice Bollen’s judgment could not be reconciled with Caparo. The point was whether it could be reconciled with San Sebastian and that his Honour Justice Olsson erred in attempting to reconcile Justice Bollen’s judgment with the English authority when it clearly could not be since his Honour had followed San Sebastian.
I refer to page 140 of the appeal book. At line 5, Justice Bollen accepted:
it was fairly arguable that intention and inducement are not exclusive tests to determine proximity and that a plea of assumption of liability, as set out in the amended statement of claim, based on the existence of published accounting standards binding on the defendant, by reason of membership of the relevant professional association, may well be sufficient. He considered that such a proposition fell with ‑ or was at least consistent with ‑ the concept espoused by Millett J in Al Saudi Banque & Ors v Clark Pixley as later approved by the House of Lords in Caparo Industries Plc v Dickman & Ors.
His Honour said:
I am unable either to reconcile what has fallen from Bollen J with the reasoning articulated by Lord Bridge of Harwick in Caparo -
in essence, “I reject his conclusions”. In our submission, his Honour was hardly fair to Justice Bollen. In the appeal book at pages 32 and 33 Justice Bollen, in our submission, did not go as far as his Honour said. Indeed, at page 32 from line 5 to the bottom of the page, his Honour dealt with Al Saudi Banque v Clark Pixley and Caparo v Dickman and at page 33 set out Caparo v Dickman, but he did not say that the propositions that are set out at page 140 of the appeal book, lines 5 to 10, fell within Al Saudi or Caparo. He referred to those two cases to distinguish them ‑ ‑ ‑
BRENNAN CJ: We have read these judgments, Mr Abbott. We are trying to get to a principle by which we can resolve the issue and we would be assisted, I think, chiefly, by an address on that topic.
MR ABBOTT: I am grateful to your Honour. I merely wanted to refer the Court to what we say is the identifiable error in the judgments. May I conclude this aspect then, by saying at page 145 of the appeal book, the top two lines and, in fact, the last three lines at page 144, in our submission, are not correct. It appears that Justice Olsson thought that Justice Rolfe thought that your Honour Justice Brennan was saying that you could have liability without intention to induce and Justice Olsson’s view ‑ ‑ ‑
GUMMOW J: We cannot sift around with all this material, Mr Abbott. You will have to try and restate what - - -
MR ABBOTT: All I am saying is that the reasoning on page 145, in my submission, demonstrates error and that the conclusions at lines 7 through to 15 are a readily identifiable error and his assertion that the mere plea of assumption of responsibility based on general audit standards being simply not enough, is not a principle, in our submission, which can be derived from at least a majority judgment in San Sebastian.
GUMMOW J: If we can raise our attention for a minute. That decision in Kripps v Touche Ross from the British Columbia Court of Appeal, is that the last Canadian word on the matter of auditors’ negligence that you know of?
MR ABBOTT: No, it is not the last Canadian ‑ ‑ ‑
GUMMOW J: I just wondered if it has been further treated in other Canadian cases, that is all.
MR ABBOTT: I am not aware that it has been treated.
GUMMOW J: All right.
MR ABBOTT: I will not reiterate the approaches of the court, and the issues that we have endeavoured to ventilate on the concept of known reliance, except to acknowledge that it is a difficult jurisprudential concept. We offer that as one possible solution. On the other hand, it is not the only solution and assumption of responsibility, under the umbrella of proximity, is another way out, and if the Court is not prepared to accept the concept of known or foreseen reliance, which we set out at page 6 of our outline, as being anything more than mere foreseeability, then we would pray in aid of our argument assumption of responsibility and submit that in terms of San Sebastian, in the majority judgment of San Sebastian in terms of assumption of responsibility of reliance, the pleading at least makes out an arguable case ‑ I put it no higher than that ‑ of assumption of responsibility and reliance.
The final matters that I wish to deal with are the policy considerations in our outline, and I recognise it is necessary to deal with those because if this is a new class ‑ a novel or new class ‑ then the incremental extension of duty of care to it may well be confined by policy considerations. In our submission, the class is not indeterminant, as I have briefly outlined before. It is limited, in relation to the case at bar, to lenders, or at its widest, to persons who had trade dealings with Excel Finance, that is the trade creditors and the lenders, in 1989/90. These persons can be ascertained from the accounts. I emphasise that Excel was not a listed company and it is not a matter of any member of the public being able to rely upon an act on the basis of the audited accounts and report. Excel Finance did not invite investment from the public at large in a way in which a publicly listed company would. It obtained investment by actively seeking out investment, and was limited by the details of its trust deed which we pleaded.
The restriction on Excel, in relation to the trust deed, is at page 69 of the appeal book, paragraph 43, at page 70 paragraph 50 and page 71 paragraph 51 and following. So that that is relevant when you consider the claim of indeterminant amount. In our submission this is not a case of indeterminant amount at all. Excel was obliged, by reason of its debenture stock trust deed, to restrict both its issued debenture stock and its liabilities
to certain specified amounts, and they can be seen at page 71 of the appeal book, paragraph 50.3.1, where the debenture stock is set out, and 50.3.2.:
not to permit Total External Liabilities to exceed an amount equal to 15 times Shareholders’ Funds.
So the amount in the case of this particular company was not indeterminant. In the first instance it was fixed by the debenture trust deed, and if it exceeded that amount, it did so because of the actions of the company and, in that event, we would submit that the auditors were negligent in not detecting those actions and, if they did detect them, in not reporting them.
In essence, it was within the auditor’s power and, indeed, a component of their duty, to ensure that indeterminate liability was in fact determined and that the liability did not exceed the determined liability which is set out by virtue of the trust deed. They should have done their work properly. If the liability has become larger than that which is imposed on the corporation by its trust deed, it has become larger by virtue of the actions of the corporation, on the one hand, and the negligence of the auditor, on the other.
BRENNAN CJ: What does the trust deed have to say about the class of persons?
MR ABBOTT: It does not say anything about the class of persons. It talks about ‑ ‑ ‑
BRENNAN CJ: The class of persons to whom a duty is owed, I mean.
MR ABBOTT: It does not say anything about the class of persons to whom the duty is owed. What it does is put a cap on the liability and so, we say that ‑ ‑ ‑
BRENNAN CJ: What is the relevance of that then to your argument?
MR ABBOTT: As a matter of policy.
GUMMOW J: Well there were only five debenture holders, is that right, from paragraph 45? Five banks.
MR ABBOTT: Yes, paragraph 45.
GUMMOW J: Yes. That is all we know about the class of debenture holders?
MR ABBOTT: Yes, that is all we know. I am only putting this forward because it might be said, for policy reasons, none of the considerations that I have put forward previously should apply because I have not overcome the Ultramares barrier and all I am endeavouring to show is that, in this particular case, there are considerations as a result of which one can say there is no risk of indeterminate liability flying from a finding that the auditors owed a duty of care to Esanda. We have referred to what we would suggest is another assessment of this well-quoted sentence from Ultramares, in the context of what his Honour then Justice Mason said in Shaddock v Parramatta City Council at paragraph 8.4 of our written outline.
Finally, we deal with the public role of the auditor and we set out there the references to the public position and responsibilities under the Corporations Law and the task that they undertake is set out in paragraph 8.6 and in paragraph 8.7 we acknowledge that the duty is not owed to all persons, that certainly it is owed to the corporation and to the shareholders, although Caparo would suggest that not in every circumstance it is even owed to the shareholders, and we say at page 8 that in addition those who in fact rely and in respect of whom either it was within the reasonable expectation of the auditor that such persons might rely or the auditor knew or ought to have known. And the expression “reasonable expectation” we have borrowed from your Honour Justice Gaudron in Hawkins v Clayton, at page 596, where your Honour said ‑ ‑ ‑
GAUDRON J: I used it in conjunction with a legal right though, did I not?
MR ABBOTT: Yes.
GAUDRON J: It was not at large.
MR ABBOTT: No, it was not at large. At the bottom of page 595, the last four lines, your Honour said:
A more approximate formulation, in the context of economic loss, may be that of a person whom the injured party might reasonably expect would have his interests and the likelihood of injury to those interests in contemplation when directing attention to the acts or omissions called in question.
And at page 596, half‑way down, your Honour spoke of reliance and you said, two‑thirds of the way down in the middle of a line:
If the duty is so identified then it seems to me that the relevant factor of proximity in the circumstances identified in the passage quoted from San Sebastian may be stated in terms of reasonable expectation -
So it was in terms of identifying the duty. Your Honour said “of reasonable expectation”, that that was:
a concept which is more readily applicable to omissions than is the concept of reliance. Thus a relationship of proximity may be constituted by the reasonable expectation of a person (including a reasonable expectation that would arise if he turned his mind to the subject) that the other person will provide relevant information or give reliable information, if that expectation is known or ought reasonably to be known by the person against whom the duty is asserted.
We say that that is not greatly different from the concept of known reliance which I have been endeavouring to put forward to the Court today.
Our conclusion at paragraph 9 of our outline is that this is not a novel case. We are within San Sebastian and the statement of claim should not have been struck out. If the Court pleases.
BRENNAN CJ: Thank you, Mr Abbott. Mr Jackson. I think we will need a moment or two to read your submissions.
MR JACKSON: Your Honours, we have taken the liberty of giving a fuller outline of submissions under the main outline with a view to endeavouring to abbreviate what we would say. May I mention one matter, your Honours, and that is that in the first line of paragraph 1 a word is missing. The word “further” should appear before “more”.
BRENNAN CJ: Yes, Mr Jackson.
MR JACKSON: Your Honours, may I say one thing before starting to follow through those submissions, and it is this. Could I just say that there is no pleading that the provisions of AAS5 were to apply as a matter of law and, indeed, the reasons of the courts below do not suggest that that matter was relied on. We wish to say two further things about it. The first is that if it is germane whether the accounting standard is one which was required to be applied as a matter of law, we do not, with respect, accept the correctness of the proposition that our learned friends put to your Honours this morning, namely that AAS5 was the relevant standard.
No doubt that would be a matter of defence but the Court should not, in our submission, work on an assumption which is of doubtful validity. Your Honours, I could go on at the moment to indicate in a little more detail why we would suggest that it is not the correct standard and that other standards were appropriate and were expressed in different terms, but it may be convenient if I seek to put that perhaps in a short written note to your Honours rather than endeavour to go through a somewhat complicated thing where your Honours do not have the base papers now.
BRENNAN CJ: Provided your opponent has an opportunity to respond to it, Mr Jackson.
MR JACKSON: Of course, your Honour. The short point I would seek to mention is that it does not, in our submission, represent the case first of all as a matter of pleading but, secondly, if one goes beyond the pleading, then to a matter of fact that it was the appropriate standard that had been prescribed.
Your Honours, could I move then to our outline of submissions. The first few paragraphs of it deal with matters that I do not need to go to detail about. We accept in relation to paragraph 1 that the missing paragraph, paragraph 85A, should probably also have been ordered to have been struck out consequentially. Going first to paragraph 2, what we submit of course is that the central allegation is that which is to be seen in paragraph 84C, and that is, if one leaves aside the question of the accounting standards to which I will come, purely an allegation of foreseeability. Your Honours, that is elaborated upon in paragraph 3 where we seek to indicate, as in a sense the Chief Justice did in his reasons in the court below, that nothing else was alleged; no other factor which might give rise to something more than foreseeability in order to establish the existence of the duty of care.
If I could move then to paragraph 5, what we would submit is that this is really a very clear case where the nature of the allegation is one of pure economic loss. One could not really find a clearer case. We refer your Honours to the various paragraphs which allege the nature of the loss. What flows from that is what is set out in our submission in paragraph 6, namely that the Court has consistently rejected foreseeability simpliciter as the sufficient criterion for the existence of the duty of care in respect of economic loss. May I take your Honours now to one only of the references set out there, and that is to Bryan v Maloney 182 CLR 609 at pages 617 to 619.
Your Honours, the passage commences relevantly at about point 7 on the page 617, the new paragraph commencing “The cases in this Court”. Your Honours, I shall not read out the passage but we invite your Honours to read from there through to the end of the first paragraph at the top of page 619 where there is the reference to the:
identified element of known reliance (or dependence).....or a combination of the two.
Your Honours, well-known phrases can sometimes become a little tired with the passage of time but, as your Honours will see at page 618, at about point 6 or 7 on the page, Chief Justice Cardozo’s observation about the imposition of liability, et cetera, remains, if I may say so, with respect, as a matter of current usage.
Your Honours, might I move then to paragraph 7 on page 3 of our submissions and what your Honours will see is that the prospect of such indeterminate liability, to use the expression loosely, is one which, in our submission, has always been a factor particularly in cases of this kind, of which Ultramares itself was one - an auditor’s negligence case - has always been a factor militating against foreseeability of loss alone being the criterion for the imposition of the duty of care.
Your Honours, we would seek to go, in a little detail, I am afraid, to two of the relatively recent decisions to which we refer in paragraph 7, first to the decision of the Supreme Court of California in Bily v Arthur Young & Co (1992) 834 P 2d 745 and, your Honours, I am sorry it will take a few minutes to deal with this because the case is a substantial one and the judgment of the majority in the case deals at considerable length with the various considerations open and the various possibilities available to a court in a situation similar to the present.
Your Honours will see at page 745 in the first of the notes in the summary of the case the proposition that the case decides the auditor owes no general duty of care regarding the conduct of the audit to persons other than the client. And then in note 4 your Honours will see that expanded a little, and the reasons of the majority delivered by Chief Justice Lucas. They commence in the right column on page 746. Your Honours will see the nature of the issue clearly indicated in the first paragraph of his Honour’s reasons and then, your Honours, at page 747, a summary of the conclusions arrived at in the paragraph numbered [1-3], and your Honours will see from that paragraph that fundamentally what was adopted was section 552 of the Restatement Second of Torts and, then, of course, at the conclusion of that paragraph there is a reference to the possibility of fraud.
Your Honours at page 747 in the right-hand column, your Honours will see the nature of the case elaborated throughout that column and your Honours, if I could just say, to put it shortly, that it is a case where, as your Honours will see in the first new paragraph on page 748, the claim was that investments had been made on the basis of the auditor’s opinion.
Could I move then to page 749 and your Honours will see the heading, “11. The Audit Function and Public Accounting” and your Honours, there is there set out on that page, and for several following pages, what basically is involved in the auditing of companies and, not surprisingly, it is not very different in the United States from the position in Australia, but could I pass over, your Honours, to page 751, in the left column in the second new paragraph their Honours recognise that audits:
are very frequently.....used by businesses -
Looking at about point 5 -
to establish the financial credibility of their enterprises in the perceptions of outside.....investors -
and so on. And that goes on throughout that paragraph, referring to the position of the “Big Six”, as it was called.
Your Honours, if I could move then to page 752, there commences the discussion of the possible “Approaches to the Problem of Auditor Liability to Third Persons” and in the part that goes through the left column to the top of the next page, the three possible views are set out, or the three main possible themes. The first, your Honours will see at about point 5 in the left column, following “Ultramares”:
denying recovery to third parties for auditor negligence in the absence of a third party relationship to the auditor that is “akin to privity.”
The second follows immediately, and that is foreseeability simpliciter, and the third refers to the restatement section 552.
Your Honours, each of those possibilities is then discussed at some length and under the heading, “A. Privity of Relationship” in the right column on page 752, your Honours will see first a discussion of Ultramares and then, commencing in the third new paragraph in that column under that heading, your Honours will see that:
The auditor in Ultramares knew the company was in need of capital and that its audit opinion would be displayed to third parties “as the basis of financial dealings.”
And that is elaborated upon a little. Now, your Honours, that case is discussed throughout the left column on the next page and if I could take your Honours to the bottom of the left column on page 753, what is then said, because of course it is some time since Ultramares was decided, his Honour goes on to say:
In cases following Ultramares, the New York Court of Appeals has not required privity of contract as a universal prerequisite to third party suits against auditors; rather, on occasion, it has found an equivalent privity of relationship between the auditor and the plaintiff.
Your Honours, that is then discussed throughout the remainder of that page and there is a reference in particular towards the bottom of the page, to a case Credit Alliance v Arthur Anderson, where the New York Court of Appeal’s position is summarised, and it is summarised by reference, your Honours, to two cases where the facts, in effect, fell either side of the line. Your Honours, will see a reference about point 8 in the right column on 753 to:
Credit Alliance subsumed two cases with different factual postures: in the first case, plaintiff alleged it loaned funds to the auditor’s client in reliance on audited financial statements ‑
et cetera. In the second there was also alleged, in effect, knowledge, et cetera. And, as your Honours will see at the top of page 754, the first case failed, the second succeeded. And, in the next paragraph, your Honours will see what was said to be the current New York position, and the three requirements there set out.
Now, your Honours, I do not want to take an undue time taking your Honours through this, but your Honours will see, if one goes then through that page and the remainder of the material under that heading, going to the top of the right column on page 755, Your Honours will see at the bottom of the left column on page 755 a summary of the current position:
at least nine states purport to follow privity or near privity rules restricting the liability of auditors to parties with whom they have a contractual or similar relationship.
And then that is elaborated upon at the top of the next page. Your Honours, the next category dealt with is foreseeability, page 755. That goes through to page 757. It is discussed and your Honours will see that the summary is arrived at at page 757 in the bottom of the left column, where Chief Justice says:
In the nearly 10 years since it was formally proposed, the foreseeability approach has not attracted a substantial following ‑
which he goes on to elaborate upon, and then discuss further in the next paragraph.
Your Honours, what is then discussed is the heading, “The Restatement: Intent to Benefit Third Persons”. The general principle is set out in the right column at page 757, with the qualifications contained in the remainder of that column, and at the top of the next page. Your Honours, I should say that the view adopted, in this part of the restatement, was the one that was adopted by the Court of Appeals in that case. I wonder if I could take your Honours, as briefly as I can, to a number of passages dealing with matters germane to the present case so that I do not have to take your Honours to them a little later when dealing with the other aspects of the case.
The first thing is this, at page 758, your Honours will see, in the left column about half-way down the page, the part in italics, referring to the comment immediately above and what your Honours will see then is said:
To offer a simple illustration of comment (h) to subdivision (2) of section 552, Restatement Second of Torts, an auditor engaged to perform an audit and render a report to a third person whom the auditor knows is considering a $10 million investment in the client’s business is on notice of a specific potential liability. It may then act to encounter, limit or avoid the risk.
And the obverse situation is then referred to. Your Honours will see in the right column on the same page the observation, at about point 4 on the page:
Under the Restatement rule, an auditor.....generally undertakes no duty to third parties.
At the bottom of the same page:
a review of the cases reveals the rule has somewhat more support than the privity of relationship rule and much more support than the foreseeability rule. At least 17 state and federal decisions have endorsed the rule in this and related contexts.
Then, it is said, your Honours, it is:
a satisfactory compromise between their discomfort with the traditional privity approach and the “specter of unlimited liability.”
Your Honours, there is a reference in the following paragraph of the difficulty of formulating a rule and the observation of the person who is the reporter saying:
if anyone can do better, it will be most welcome.
At page 760, there commences in the right column, an analysis of the auditor’s liability for audit opinions. Your Honours will see the heading “Negligence” and then the last paragraph on the page:
The threshold element.....is the existence of a duty to use due care ‑
et cetera. Then, on page 761 in the first new paragraph, there are some quotations including the fact that:
A judicial conclusion that a duty is present or absent is merely “‘a shorthand statement...rather than an aid to analysis... “[D]uty,” is not sacrosanct in itself, but only an expression of the sum total ‑
et cetera. Your Honours, there is a reference to an earlier decision, still in the left column at about point 6 on the page and then the quotation from it appears at about point 8:
The determination whether in a specific case the defendant will be held liable ‑
et cetera and that lists the factors, going to the top of the next page. When the principle is sought to be applied to the particular case, or the particular type of liability, your Honours, will see at page 761 in the right column, the paragraph commencing:
Viewing the problem before us in light of the factors set forth above, we decline to permit all merely foreseeable third party users of audit reports to sue the auditor on a theory of professional negligence.
And they refer to three separate concerns which are set out on that page: the first immediately follows; the secondary “watchdog” role of the auditor, which is then elaborated upon; the second is the fact that the plaintiffs tend to be of a more sophisticated class and one notes the well‑known identity of the appellant in the present case. Thirdly, your Honours, the asserted advantages of more accurate auditing and more efficient loss spreading are said to be unlikely to occur and observations are made about that. Your Honours, at the bottom of the page, what is said is that:
economic injury to lenders, investors, and others who may read and rely on audit reports is certainly “foreseeable.”
That is but one factor. There is a reference at the top of the next page to there being several occasions when the court had declined to allow recovery on a negligence basis when liability was:
out of proportion to fault or to promote virtually unlimited responsibility for intangible injury.
There is a discussion of foreseeability in the remainder of that column, and then in the first new paragraph in the right column it said that foreseeability is not enough.
One sees a number of headings following; a number of factors leading to the conclusion, first of all, that the liability is out of proportion to the fault. Your Honours, it starts with a well‑known phrase of the auditor being the watchdog, not the bloodhound. That is then elaborated upon throughout that page and the next page, the theme of it being essentially, that the auditor is someone who is not the person who is doing the first work on the accounts, for example. They are accounts that the auditor is checking and so on, but the initial responsibility for them and the ability to conceal or to prepare accounts that do not show the right things lies really with the company, rather than the auditor personally. Your Honours will see that, for example, at the bottom of 762, the top of 763, and then the paragraph commencing half-way down the left column on page 763.
TOOHEY J: Is this a part that any of the English or Australian decisions take - the concept of what the functions of the auditor are?
MR JACKSON: To a degree, your Honour. One sees it referred to in the ‑ ‑ ‑
TOOHEY J: I do not want to divert you from taking us through this.
MR JACKSON: I am sorry it is taking so long but it is a lengthy discussion that is germane to the present topic. Could I just say about it, in answer to what your Honour has put to me, in the decision of the House of Lords in Caparo, whilst considerations of this kind of the auditor’s function are not dealt with so fully, they are certainly dealt with.
Could I just take your Honours to page 763, the paragraph commencing on the middle of the page and then the reference in the last paragraph in that column to the uncertainties. In the first paragraph on the right column, to the fact that investment and credit decisions are complex and multi‑faceted and, if your Honours look at the paragraph commencing half-way down the right column, “The facts of this case”, through to the end of the paragraph half‑way down the left column on page 764, it reflects, in a sense, the common experience of what happens in relation to actions against auditors.
Your Honours, the majority then summarised the view on that aspect in the column commencing half-way down page 764 on the left, “In view of the factors” et cetera, and the next paragraph. Your Honours, the next heading dealt with the prospect of private ordering is one in which, relatively shortly, their Honours take account of the fact that the person who is using the auditor’s report will, very often, have the means available to do some checking or to take some precautions in relation to its use, and we would refer your Honours particularly as well to note 13 on page 765.
Your Honours, then one comes to the third aspect at page 765 under the heading, “The effect on auditors of negligence liability to third persons”, and, your Honours, the view fundamentally taken is that it was not demonstrated that to have an unlimited liability in respect of auditors would be necessarily a good thing and that, to put it the other way, no particularly significant advantage is to be seen from doing so.
Your Honours, that brings one to the conclusion that was arrived at at page 767 under the heading (4), and your Honours will see, first of all, the privity situation under paragraph (4) and then, secondly, in the next paragraph:
a further narrow class of persons who, although not clients, may reasonably come to receive and rely on an audit report -
et cetera, and that:
Such persons are specifically intended beneficiaries of the audit report who are known to the auditor and for whose benefit it renders the audit report.
Your Honours, essentially what was adopted was the paragraph of the restatement to which I have referred.
GUMMOW J: I am not sure how what they call “negligent misrepresentation” fits in with this. It is not.....on 768, or how does it fit in with our law, to be more to the point. The second paragraph on the left column at 768.
MR JACKSON: Your Honour, what seems to be the case is that negligent misrepresentation as there used seems to be a description of what we would call part of fraud, and your Honour will see that what is said is that negligent misrepresentation is a separate and distinct tort, a species of deceit, but what is being spoken of, it is clear, your Honours, from reading the earlier parts of the judgment, that ‑ ‑ ‑
GUMMOW J: They seem to replace what we would call recklessness by reasonable ground.
MR JACKSON: Yes, your Honour, I think that is right - without reasonable ground for such a belief. That is certainly dealing with a different aspect of the case. I am sorry to have taken some time on that, but the case is one which does demonstrate the various aspects of the considerations involved. I will return to it briefly a little later.
Your Honours, to the same effect of course is the decision of the House of Lords in Caparo v Dickman (1990) 2 AC 697. I wonder if I could take your Honours to that for a moment. That was a case where persons who bought shares said they were entitled to damages because they bought them on the basis of the auditor’s report and the auditor’s report misled them. The issue which arose in the first place was whether foreseeability was sufficient. It was held that it was not.
Your Honours, I am conscious there was a case your Honours heard yesterday that involved foreseeability in which your Honours may have been referred to this case at some length. I do not want to take your Honours unduly to it if your Honours are familiar with it, but may I say this, your Honours, in the first place that it is a case which seems to reject the proposition advanced by our learned friends that foreseeability and reliance are sufficient in cases of this kind. What has to be demonstrated is something more and the something more, whilst it will depend on the particular circumstances, is something that does involve some narrowing of a situation that otherwise would obtain.
Now, your Honours, I will perhaps return to it in a few moments, but it is a decision which, in our submission, is quite opposed to our learned friend’s contentions. Could I move then, your Honours, to paragraph 8 of our outline of submissions. What we submit is that in the present case the statement of claim seeks really to do no more than add together foreseeability of reliance and reliance as being sufficient to take the case out of being mere foreseeability. If we could refer to what is in paragraph 9 there is a considerable difficulty which arises in cases where “foreseeable reliance” is sought to be treated as the additional factor. And the problem arises because there has to be reliance for there to be a cause of action, in any event, and it will always be necessary to establish that.
If “foreseeable reliance”, rather than the fact that it is known that a person will rely, is the additional factor, then one is really back, as we submit in paragraph 9, to foreseeability simpliciter because that is an element of foreseeability. What we would submit then is what we set out in paragraph 10, namely, that the allegation is not materially different from an allegation of a duty of care arising from foreseeability. Any person may become a creditor of a company. I will take your Honours in just a moment to paragraph 7 of the accounting standards that were relied on. What your Honours will see from that is it simply refers to anyone, in effect, who may rely upon the accounts.
What we would submit is fundamentally what is set out in paragraph 11, that the better view is that if one has not got any form of assumption of responsibility, if one has not got the person giving the information having a pecuniary interest in the other person acting in reliance on it in a particular way, if there is no prior request for information or advice, then in the ordinary course of events it has to be shown that the report was given for the purpose of inducing members of the classes to which the appellant belonged, or the appellant personally, to deal with the company in reliance on the report.
Now, your Honours have been taken to San Sebastian at pages 357 and 358 and I shall not go back to them. Your Honours will have seen, I think, also, in the reasons of the members of the Full Court in the present case, the passages from the Victorian Full Court decision in R. Lowe Lippman Figdor and Franck v AGC (Advances) Ltd, to which reference is there made, and what we would submit is that that is the position in the absence of some other method of establishing something in addition to foreseeability.
TOOHEY J: In what sense, Mr Jackson, are you using “assumption of responsibility” in the first two lines of paragraph 11, since there has been a lot of discussion about that expression?
MR JACKSON: Your Honour, it is probably right to say that the Chief Justice in the Full Court was perhaps speaking loosely in saying “an assumption of legal liability”, if that be the exact expression, but it is an assumption or an undertaking, perhaps, to do the thing in question; to do the thing in question in a way which is to have some effect upon the appellant - Your Honour, I am sorry, I am putting it badly - some dealing, either with the appellant or some dealing which it is understood is to, or may, affect persons in the position of the appellant. Now when a person undertakes the responsibility to do that, but undertakes the responsibility to the person who he is going to sue.
Your Honour, the expression xxx that was used in Spring v Guardian Assurance Plc (1995) 2 AC 318, as your Honour Justice Gummow observed this morning. Now, your Honour, it may well be that what His Lordship is doing there is to do no more than use the expression in a number of different ways. But, your Honours will see, about letter D, he speaks of Hedley Byrne, speaking:
in terms of the principle resting upon an assumption or undertaking of responsibility by the defendant towards the plaintiff, coupled with reliance by the plaintiff on the exercise by the defendant of due care and skill.
Your Honour, it really seems to be, in a sense, a kind of composite expression to assume the responsibility to do something, to give some advice or, perhaps, not to do something, but I do not know that really one take it beyond that, in a sense, with respect, because, your Honour ‑ I will just say one other thing ‑ usually an assumption of responsibility, without one adding something more, saying, responsibility for what, or to do what, is really a meaningless expression.
TOOHEY J: That is right and I suppose, looking at it in its broadest operation, it tends to include the other matters that you have referred to in what follows in paragraph 11.
MR JACKSON: Yes, your Honour.
TOOHEY J: In other words, issuing a report for the purpose of inducing the members of the class to deal with Excel might well be thought to be an assumption of responsibility anyhow.
MR JACKSON: Yes. Well, your Honour, we later mention, for example, that it may well be that the auditor would have a liability to debenture holders because of particular circumstances but what we would submit is that unless one can identify some reason for saying class A or class B or class C, or persons A, B and C are persons in relation to whom there is some assumption of responsibility, then it does not follow, then one needs to have something more than just foreseeability
Your Honours, moving to paragraph 10, it is perhaps a matter I can pass over a little. Those are the two cases referred to in San Sebastian and what your Honours will see at page 357 of San Sebastian is that the Court certainly does not give to them any broad operation. In paragraph 13 we refer to the situation in the United States. I have taken your Honours to that already by going to the decision in Bily. Your Honours will see also in paragraph 14 that the principle acknowledges that the risk is affected by the number and character of the persons who might rely on the report, et cetera. The two propositions that we set out in the remaining sentences of that paragraph, I have already taken your Honours to the passages in that case.
We endeavour to summarise in paragraph 15 what the position is in the United States. Your Honours will see a reference to an article at the top of page 6. That is Arnold’s “Accountants Liability 1994, Privity Update” and that is a document which seeks to set out the position as at the present time. I had not proposed to take your Honours to the detail of it, but your Honours will see that it contains a summary which makes out the propositions that we have set out in paragraph 15.
Your Honours, could we refer also, in support of the proposition that there needs to be more than mere foreseeability, to the decision of the Court of Appeal in the United Kingdom in Galoo Limited v Bright Grahame Murray (1994) 1 WLR 1360. If I could take your Honours to that very briefly. Your Honours will see at page 1382, between letters C and D, Lord Justice Glidewell said:
Mere foreseeability that a potential bidder may rely on the audited accounts does not impose on the auditor a duty of care to the bidder, but if the auditor is expressly made aware that a particular identified bidder will rely on the audited accounts or other statements approved by the auditor, and intends that the bidder should so rely, the auditor will be under a duty of care -
et cetera and, your Honours, at page 1388E, around there, and also, your Honours, the top of the next page 1389A in the passage going down to “The ‘indeterminate class’ of persons” just after B. Your Honours, I note the time. I will probably be half an hour.
BRENNAN CJ: Yes, thank you, Mr Jackson. We will adjourn in that event until 10.15 tomorrow morning.
AT 4.16 PM THE MATTER WAS ADJOURNED
UNTIL THURSDAY, 14 DECEMBER 1995
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