Esanda Finance Corp Ltd v Peat Marwick Hungerfords

Esanda Finance Corporation Ltd (Esanda) brought proceedings against Peat Marwick Hungerfords (PMH), a firm of accountants, in the Supreme Court of Western Australia. The dispute concerned allegations of negligence by Esanda against PMH in relation to the auditing of the accounts of a company called Stirling Properties Ltd. Esanda claimed it had suffered loss as a result of relying on the audited accounts prepared by PMH, which it alleged were negligently prepared. The case ultimately proceeded to the High Court of Australia.

The High Court was required to determine whether PMH owed a duty of care to Esanda, a third party who was not the client of PMH, in the preparation of the audit report. Specifically, the court considered the circumstances under which a duty of care could arise in favour of a third party who relies on professional advice or services provided by a professional to their client, particularly in the context of negligent misstatement.

The High Court, in a joint judgment, clarified the principles governing the liability of a professional advisor to a third party for negligent misstatement. Their Honours held that for a duty of care to arise, 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 some direct or indirect relationship or "vulnerability" between the advisor and the third party that makes reliance reasonable. The court found that in this case, there was no sufficient relationship between Esanda and PMH to establish a duty of care.

The High Court allowed the appeal, setting aside the judgment of the Full Court of the Supreme Court of Western Australia and ordering that Esanda's claim be dismissed.