Esanda Finance Corp Ltd v Peat Marwick Hungerfords

Esanda Finance Corporation Ltd (Esanda) brought proceedings against Peat Marwick Hungerfords (PMH), a firm of accountants, alleging negligence in the auditing of a company called Excel Finance Ltd (Excel). Esanda claimed it suffered loss as a result of relying on the audited accounts of Excel, which had been prepared by PMH. The High Court of Australia considered the appeal from the Supreme Court of Western Australia.

The central legal issue before the High Court was whether PMH owed a duty of care to Esanda, a third party who relied on the audited financial statements prepared by PMH for Excel. Specifically, the court had to determine the circumstances under which a duty of care could arise in favour of a third party who was not a client of the auditor, but who might foreseeably rely on the auditor's work.

The High Court, in a joint judgment, clarified the principles governing the liability of auditors to third parties for negligent misstatement. The court held that for a duty of care to exist, it must be reasonably foreseeable that the third party would rely on the information provided, and that such reliance would be reasonable in the circumstances. This requires more than mere foreseeability of reliance; there must be a sufficient relationship of proximity between the auditor and the third party. The court indicated that such proximity might be established where the auditor knows that the third party is a specific individual or a member of a specific class of persons for whose use the information is intended, and that the third party will likely act on that information. In this instance, the court found that Esanda had not established the necessary proximity to PMH to give rise to a duty of care.

The appeal was allowed, and the judgment of the Supreme Court of Western Australia was set aside.