Esanda Finance Corporation Ltd v Peat Marwick Hungerfords

[1997] HCA 8

HIGH COURT OF AUSTRALIA

BRENNAN CJ, DAWSON, TOOHEY, GAUDRON, McHUGH AND GUMMOW JJ

ESANDA FINANCE CORPORATION LIMITED v PEAT MARWICK HUNGERFORDS (REG); F.C. 97/0006
Negligence

(1997) 188 CLR 241

18 March 1997
Negligence

Negligence—Duty of care—Proximity—Sufficiency of allegations in statement of claim—Alleged failure of auditors to comply with Accounting Standards—Whether duty of care owed to financiers relying on audited accounts—Whether intention to induce reliance required to support a duty owed to third parties—Whether particular purpose of the contractual relationship affects the existence of a duty owed to third parties—Whether assumption of responsibility required to support a duty owed to third parties.

Orders

Appeal dismissed with costs.

Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

Decision

BRENNAN CJ.

1. The issues in this appeal arise on the pleadings in an action in which the appellant ("Esanda") sued the respondent company ("PMH") claiming, inter alia, damages for pure economic loss resulting from the negligence of PMH in connection with its auditing of the accounts of a corporation ("Excel"). In its pleading (called the "Further More Explicit Amended Statement of Claim" and hereafter referred to as "the statement of claim") Esanda alleged that PMH were the auditors of Excel and "furnished to the members of Excel a report stating that it had audited the accounts of Excel for the year ended 30 June 1989 in accordance with Australian Auditing Standards and reporting:

'In our opinion the accounts are properly drawn up in accordance with the provisions of the Companies (South Australia) Code and so as to give a true and fair view of:

(1) the state of affairs of the company as at 30th June 1989 and of the result of the company for the year ended on that date;

(2) the other matters required by Section 269 of that Code to be dealt with in the accounts;

and are in accordance with Australian Accounting Standards and applicable Approved Accounting Standards.'"

2. Esanda was not a member of Excel; it was a financier which entered into a number of transactions involving Excel or corporations associated with Excel. The Full Court of the Supreme Court of South Australia, allowing an appeal from a Judge of that Court, struck out certain paragraphs from the statement of claim on the ground that the statement of claim did not disclose a cause of action in negligence against PMH.

3. The relevant paragraphs read as follows:

"84A 84A.1 At all material times, the members of PMH were members of the Institute of Chartered Accountants in Australia and as such bound by the Australian Accounting Standards published from time to time jointly by the said Institute and the Australian Society of Accountants.

84A.2 The plaintiff will refer to the Statement on conformity with Statements of Accounting Standards APS1 published by the said Institute and Society at the trial of this action which in substance provides that the Australian Accounting Standards above referred to are mandatory and lay down the principles to be followed by members and that failure by an Institute member to observe the provisions of the said statement may be regarded as failure to observe a proper standard of professional care, skill or competence.

84B Australian Accounting Standard AAS5 was and is the statement of accounting standards relating to materiality in financial statements. In substance AAS5 provides that the test of materiality calls for a consideration as to who are likely to be the prime users of financial statements and further provides that in relation to financial statements of a business entity the prime users would have to be regarded as comprising present and potential providers of equity or loan capital, and creditors. The plaintiff will refer to AAS5 at the trial of this action for its full terms and effect.

84C Esanda was at all material times a member of a class or classes of persons, namely creditors and financiers of Excel, whom PMH did foresee or alternatively ought reasonably to have foreseen might reasonably and relevantly rely upon the Excel 30 June 1989 accounts and the report pleaded in paragraph 55 [the paragraph first cited].

85 Further and in the alternative to paragraph 84, PMH owed Esanda, as a member of a class of persons who might reasonably and relevantly rely upon the Excel 30 June 1989 accounts and the report pleaded in paragraph 55 a duty to take reasonable care:

85.1 to ensure that the audited Excel 30 June 1989 accounts were in accordance with the applicable Australian accounting standards;

85.2 to ensure that the opinions expressed in the report pleaded in paragraph 55 were based on reasonable grounds; and

85.3 to carry out sufficient tests to obtain reasonable assurance as to the reliability of the information provided by Excel to PMH and the sufficiency of that information for the preparation of the Excel 30 June 1989 accounts and the expression of the opinions in the report pleaded in paragraph 55.

85A By reason of the matters pleaded in paragraphs 84A to 84C inclusive:-

85A.1 Esanda was so closely and directly affected by the actions or conduct of PMH in furnishing the report pleaded in paragraph 55 that PMH was under a duty of care to Esanda in respect thereof; and

85A.2 PMH accepted or must be taken to have accepted that in furnishing the report pleaded in paragraph 55, the duty of care referred to in paragraph 85 was owed to a class of persons including the plaintiff."

4. Paragraph 86 pleaded a breach of the alleged duty owed by PMH to Esanda and gave particulars of the deficiencies in the preparation and content of both the accounts the subject of the report and of the report itself. Paragraph 87 pleaded, inter alia, that:

" ... by reason of PMH's breach of duty as pleaded in paragraphs 85 and 86, Esanda has suffered the loss and damage pleaded in [specified paragraphs of the statement of claim] in that:
1. Esanda relied on the Excel 30 June 1989 accounts and the report pleaded in paragraph 75 in deciding to enter into [certain specified agreements, purchases and transactions].
Esanda would not have entered into any of the said agreements, purchases or transactions but for the Excel 30 June 1989 accounts and the said report".

5. The Full Court struck out pars 84A, 84B, 84C, 85 and 86 of the statement of claim and ordered that consequential amendments be made to par 87. It is common ground that, to be consistent with the Full Court's order, par 85A ought also be struck out. To determine whether these paragraphs ought to have been struck out as failing to disclose a cause of action, the elements which were pleaded should be identified. Apart from PMH's failure to observe the standards prescribed by AAS5, the statement of claim pleads that Esanda in fact relied on the Excel 30 June 1989 accounts and the auditors' report (par 87.1) and suffered economic loss as the result (pars 86 and 87).

6. Paragraph 84C pleads that PMH foresaw or ought reasonably to have foreseen that Esanda might rely on those accounts. The question is whether in an action for negligence for pure economic loss it is sufficient to plead that it was reasonably foreseeable by an auditor that creditors and financiers of a corporation might rely on the audited accounts of the corporation, along with an unqualified auditor's report upon those accounts, in entering into their respective financial transactions. On those facts, does a duty of care arise which is owed to every member of the class comprising the creditors and financiers of the corporation? The fact that PMH foresaw or ought reasonably to have foreseen that a member of that class might rely on Excel's audited accounts and PMH's report thereon is pleaded in the statement of claim but no other relevant factor is pleaded as a foundation of a duty of care.

7. The statement of claim pleaded that AAS5 prescribed the standard of skill, care and competence which an auditor who purports to be performing a professional duty is required to observe. But a plaintiff who complains of an auditor's failure to observe an auditing standard must plead and prove that the auditor owed to the plaintiff a duty to observe that standard in performance of the duties of auditor. The test of materiality prescribed by AAS5 as pleaded in par 84B does not purport to impose, and, without more, could not impose a duty on an auditor to those "who are likely to be the prime users of financial statements" as pleaded in the statement of claim. AAS5 refers to "users, or likely users, of financial statements"[1] as a reference point for assessing the matters which ought to be covered by financial statements to which AAS5 is directed, but it says nothing as to the persons to whom any duty to observe the standard is owed or the purpose for which the accounts and report are issued.

8. In actions for negligence occasioning economic loss suffered in consequence of a statement made or advice given by a defendant, foresight or reasonable foreseeability that a member of a class including the plaintiff might rely on the statement or advice and thereby suffer loss has never been held sufficient to support recovery. Something more is needed. In Hedley Byrne & Co Ltd v Heller & Partners Ltd[2], Lord Morris of Borth-y-Gest stated the duty of care to arise when:

"in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise." (Emphasis added.)

9. In Mutual Life & Citizens' Assurance Co Ltd v Evatt[3], Barwick CJ identified "the features of the special relationship in which the law will import a duty of care in utterance by way of information or advice". He stated as one of those features that:

"the speaker must realize or the circumstances be such that he ought to have realized that the recipient intends to act upon the information or advice in respect of his property or of himself in connexion with some matter of business or serious consequence." (Emphasis added.)

10. In San Sebastian Pty Ltd v The Minister[4], Gibbs CJ, Mason, Wilson and Dawson JJ said[5]:

"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. The author, though volunteering information or advice, may be known to possess, or profess to possess, skill and competence in the area which is the subject of the communication. He may warrant the correctness of what he says or assume responsibility for its correctness. 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. He may actually have an interest in the recipient so acting."

11. In the same case, following Barwick CJ in Mutual Life, I said[6]:

" Where a representor gives information or advice on a serious or business matter, intending thereby to induce the representee to act on it, the representor is under a duty of care in giving that advice or information if three conditions are satisfied. First ... if the representor realizes or ought to realize that the representee will trust in his especial competence to give that information or advice; second ... if it would be reasonable for the representee to accept and rely on that information or advice; and third ... if it is reasonably foreseeable that the representee is likely to suffer loss should the information turn out to be incorrect or the advice turn out to be unsound." (Emphasis added.)

12. In Caparo Industries Plc v Dickman[7], auditors were sued by plaintiffs who alleged that they had bought shares in reliance on the auditors' report and had lost money as the result. They relied on earlier cases in which the plaintiff had succeeded butLord Bridge of Harwich pointed out[8]:

" The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. The situation is entirely different where a statement is put into more or less general circulation and may foreseeably be relied on by strangers to the maker of the statement for any one of a variety of different purposes which the maker of the statement has no specific reason to anticipate."[9] (Emphasis added.) 13. His Lordship stated the elements of liability in this passage

[10]:

"[L]ooking only at the circumstances of these decided cases where a duty of care in respect of negligent statements has been held to exist, I should expect to find that the 'limit or control mechanism ... imposed upon the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence' rested in the necessity to prove, in this category of the tort of negligence, as an essential ingredient of the 'proximity' between the plaintiff and the defendant, that the defendant knew that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind (e.g. in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon that transaction or upon a transaction of that kind."

14. Lord Roskill said[11]:

"The submission that there is a virtually unlimited and unrestricted duty of care in relation to the performance of an auditor's statutory duty to certify a company's accounts, a duty extending to anyone who may use those accounts for any purpose such as investing in the company or lending the company money, seems to me untenable. No doubt it can be said to be foreseeable that those accounts may find their way into the hands of persons who may use them for such purposes or indeed other purposes and lose money as a result. But to impose a liability in those circumstances is to hold, contrary to all the recent authorities, that foreseeability alone is sufficient, and to ignore the statutory duty which enjoins the preparation of and certification of those accounts."

15. Lord Jauncey of Tullichettle observed[12]:

"Possibility of reliance on a statement for an unspecified purpose will not impose a duty of care on the maker to the addressee. More is required. ... Regard must be had to the transaction or transactions for the purpose of which the statement was made. It is loss arising from such transaction or transactions rather than 'any loss' to which the duty of care extends."

16. The uniform course of authority shows that mere foreseeability of the possibility that a statement made or advice given by A to B might be communicated to a class of which C is a member and that C might enter into some transaction as the result thereof and suffer financial loss in that transaction is not sufficient to impose on A a duty of care owed to C in the making of the statement or the giving of the advice. In some situations, a plaintiff who has suffered pure economic loss by entering into a transaction in reliance on a statement made or advice given by a defendant may be entitled to recover without proving that the plaintiff sought the information and advice[13]. But, in every case, it is necessary for the plaintiff to allege and prove that the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound. If any of these elements be wanting, the plaintiff fails to establish that the defendant owed the plaintiff a duty to use reasonable care in making the statement or giving the advice. The statement of claim does not plead these elements. Accordingly, the Full Court was correct in ordering the striking out of the relevant paragraphs of the statement of claim. To the paragraphs specified in the Full Court's order, par 85A should have been added. However, there is no formal cross-appeal and, as it is unnecessary to vary the order of the Full Court to include par 85A, the appropriate order is simply that the appeal be dismissed.

DAWSON J.

17. The appellant ("Esanda") claims damages for negligence from the respondents ("PMH"). Esanda entered into a number of transactions with a company named Excel Finance Corporation Limited ("Excel") whereby it lent money to companies associated with Excel, accepting a guarantee of repayment from Excel, and purchased debts from Excel upon terms which included an indemnity by Excel against any shortfall on termination. PMH were the auditors who certified Excel's accounts for the year ended 30 June 1989, and Esanda alleges that they were negligent in carrying out their duties, thereby causing it to enter into the transactions and suffer loss. Excel was placed in the hands of a receiver and manager on 15 February 1991.

18. PMH sought to strike out those paragraphs of Esanda's statement of claim which alleged that they were guilty of negligence. That application was made upon the basis that the allegations did not disclose any duty of care on the part of PMH. In that respect, all that was alleged was that PMH owed Esanda, as a member of a class of persons who might reasonably and relevantly rely upon the Excel accounts and the auditors' report, a duty to take care. However, the primary judge allowed Esanda to amend its statement of claim to add new allegations and refused to strike out the statement of claim. The substance of the new allegations was that PMH were, as members of the Institute of Chartered Accountants, bound by the Australian Accounting Standards jointly laid down by the Institute and the Australian Society of Accountants. One of the standards related to the materiality of information in financial statements and called for a consideration of those who are likely to be the prime users of the financial statements. The persons identified as prime users included present and potential providers of equity or loan capital and creditors. It was alleged that Esanda was a member of that class in relation to Excel and that, as a consequence, PMH were, as the auditors of Excel's accounts, under a duty to Esanda to take reasonable care to ensure that the accounts complied with the Australian Accounting Standards. An allegation was also added that Esanda was a member of a class of persons whom PMH did foresee or ought reasonably to have foreseen might reasonably rely upon the Excel accounts and auditors' report.

19. PMH appealed to the Full Court against the decision of the primary judge and the case was conducted upon the basis that it was an appeal against a refusal to strike out the paragraphs of the statement of claim alleging negligence, including the new paragraphs added by leave of the primary judge. As in the proceedings before the primary judge, the question was whether the statement of claim contained allegations disclosing a duty of care on the part of PMH towards Esanda.

20. The Full Court allowed the appeal and ordered that those paragraphs in the statement of claim alleging that PMH had been negligent be struck out. The Full Court was of the view that membership of a professional body which promulgated the accounting standards upon which Esanda relied could not give rise to a duty of care. Moreover, as the Full Court pointed out, the standards were not concerned to create a duty but to develop the concept of materiality for the purpose of indicating what should be included in financial statements. The reference to providers of loan capital and creditors as users of financial statements was in the context of determining what is material for inclusion in such statements. It did not imply, and having regard to its source would not be expected to imply, any assumption of responsibility to such users. The Full Court declined to follow a decision of the Supreme Court of New South Wales in Columbia Coffee & Tea Pty Ltd v Churchill[14] where Rolfe J held that the audit manual of a firm of auditors, which acknowledged that the persons interested in the firm's reports extended beyond those to whom the reports were addressed, involved an assumption of responsibility to a class of persons wider than a company and its shareholders for which an audit was being conducted. In my view, the Full Court was correct in regarding the existence of accounting standards pleaded in this case as not amounting to an assumption of responsibility on the part of PMH and in rejecting the reasoning in Columbia Coffee & Tea Pty Ltd v Churchill.

21. Apart from the accounting standards, no facts are pleaded by Esanda as the basis for alleging a duty of care on the part of PMH towards it. Of course, without a duty of care, there can be no liability in negligence. The plea that Esanda was a member of a class of persons who might reasonably and relevantly rely on the Excel accounts and the auditors' report was no more than a plea that it was foreseeable that carelessness in making the report might cause harm to Esanda. However, mere foreseeability of harm does not, where the only harm is pure economic loss, give rise to a duty of care. The reason for this is that a duty of care imposed by reference to the mere foreseeability of harm in the form of financial loss would extend liability in negligence beyond acceptable bounds. Financial loss occurs as the result of legitimate commercial competition, and commercial activity would be stifled if the law were to impose a duty to take care to avoid that loss. Moreover, if the circumstances in which there was a duty of care to avoid causing purely financial loss were not confined, the extent of the liability imposed would in many cases be virtually without limits, both in terms of persons and amount. Thus, for a duty of care to arise in cases of pure economic loss, the law requires, in addition to the foreseeability of harm, a special relationship between the parties which is described as a relationship of proximity.

22. In cases in which there is an allegation of negligence in the giving of information or advice (which may compendiously be called cases of negligent misstatement) the damages which are sought are ordinarily for pure economic loss. This is such a case. The relationship of proximity which is required before a duty of care can arise may be established in any number of ways, but authority serves to identify certain circumstances which, either alone or in combination, may be sufficient for that purpose.

23. Hedley Byrne & Co Ltd v Heller & Partners[15] established in England that there might be liability in tort for negligent misstatement in circumstances in which information or advice is sought from a person possessing some special skill or judgment where that person knows or ought to know that reliance is being placed upon the information or advice by the person seeking it. In this country liability for negligent misstatement was recognised in Mutual Life & Citizens' Assurance Co Ltd v Evatt[16] and, notwithstanding that the matter went to the Privy Council on appeal[17], the somewhat wider formulation by Barwick CJ of the circumstances in which liability would be imposed has been accepted in subsequent cases[18]. It is useful, therefore, to begin with that formulation, which is that whenever a person gives information or advice to another upon a serious matter (not merely social intercourse) where that person realises, or ought to realise, that he is being trusted to give the best of his information or advice as a basis for action on the part of the other, and it is reasonable for that other to act on the information or advice, the person giving it is under a duty to exercise reasonable care in so doing[19]. In putting it that way, Barwick CJ had in the forefront of his mind information or advice proffered in response to a request, although he recognised that there may be "relatively rare" occasions when information or advice which is volunteered might give rise to a cause of action[20].

24. This case is one in which no allegation is made that the statements made by the auditors, PMH, were made at the request of Esanda. And San Sebastian Pty Ltd v The Minister[21] was a case in which the misstatement relied upon was not made at the request of the plaintiffs. In that case the plaintiffs were developers who sued a municipal council and a planning authority for negligent misstatements contained in documents dealing with a planning scheme which were placed on public display. They failed in their action because they failed to establish the misstatements upon which they relied, but the Court considered what would have been necessary to establish a relationship of proximity between the council and authority on the one hand and the developers on the other.

25. The majority pointed out that there is no convincing reason for confining liability for negligent misstatement to cases where there is a request for information or advice. The existence of an antecedent request for information or advice may assist in demonstrating reasonable reliance on the part of the person making the request. However, a request is not a necessary prerequisite for reasonable reliance. The trust of which Barwick CJ spoke is nowadays more often referred to as reliance and reliance was said in San Sebastian[22] to be "a cornerstone of liability for negligent misstatement". Of course, the person acting, or refraining from acting, on the information or advice must demonstrate reliance in order to prove that any loss which flows therefrom was caused by the negligent misstatement. But that reliance must also be reasonable in all the circumstances and this may be demonstrated in any number of ways. As the majority said in San Sebastian[23]:

"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. The author, though volunteering information or advice, may be known to possess, or profess to possess, skill and competence in the area which is the subject of the communication. He may warrant the correctness of what he says or assume responsibility for its correctness. 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. He may actually have an interest in the recipient so acting."

26. The absence of any request, and the absence of an intention on the part of a firm of auditors to induce a financier to act upon the audited accounts of a company by making finance available to it, led Brooking J (with whom Gobbo and Tadgell JJ agreed) to hold in R Lowe Lippmann Figdor & Franck v AGC Ltd[24] that the auditors owed no duty of care to the financier. He concluded that San Sebastian required this conclusion, saying[25]:

"In the whole of this discussion it is made clear that a duty of care cannot exist in such cases unless the statement was made by the defendant with the intention of inducing the plaintiff, or members of a class including him, to act or refrain from acting in a particular way in reliance on the statement."

27. But an intention to induce a person to whom information or advice is given to act in a particular way is merely one of the various means by which it may be shown that the reliance by that person upon the information or advice is reasonable so that, in combination with other relevant circumstances, it may serve to establish a relationship of proximity which will support a duty of care. It was in this sense, I think, that the majority in San Sebastian[26] commented that in cases where the defendant intends the information or advice to operate as a direct inducement to action, the reasonableness of the reliance will not be a critical factor.

28. Brennan J pointed out in San Sebastian[27] that it is always necessary in cases of negligent misstatement to establish that the statement in question operated as an inducement to the person to whom it was made to act upon it. As I have said, that is just another way of saying that it is necessary to prove reliance in order to show that any loss was caused by reason of the negligence of the maker of the statement and for that purpose it does not matter whether the inducement was intentional or not. And a person who gives information or advice to another intending to induce the other to a course of action does not necessarily undertake to be careful in the information he gives or the advice he offers. The occasion for the advice or information may be of a purely social nature inconsistent with the assumption of any responsibility. Circumstances of the kind identified by Barwick CJ in Evatt[28] must otherwise exist, although an intention to induce a particular course of action may point to their existence. Thus in San Sebastian[29] Brennan J rephrased the words of Barwick CJ for the purposes of that case as follows:

"Where a representor gives information or advice on a serious or business matter, intending thereby to induce the representee to act on it, the representor is under a duty of care in giving that advice or information if three conditions are satisfied. First (corresponding with the first condition expressed by Barwick CJ), if the representor realises or ought to realise that the representee will trust in his especial competence to give that information or advice; second (corresponding with the third condition), if it would be reasonable for the representee to accept and rely on that information or advice; and third (applying the underlying principle of the law of negligence), if it is reasonably foreseeable that the representee is likely to suffer loss should the information turn out to be incorrect or the advice turn out to be unsound."

29. The relevance of an intention on the part of a person giving information or advice to induce another to act in a particular way may be seen in the approach adopted by the House of Lords in Caparo Plc v Dickman[30]. There emphasis was placed upon the purpose for which the statement in question, which was an auditors' report, was made. It was held that the purpose of the report was, in accordance with the English statutory scheme, to provide information to the company and the shareholders so that they might exercise their rights in those respective capacities and not to provide information to those who might be minded to invest in the company. Informing potential investors in the company lay outside the purpose of the report and no duty of care was owed to them. There was the possibility that they might rely upon the report for the purpose of investing in the company but that was not the purpose for which the report was given and the possibility was insufficient to establish their reasonable reliance upon it. That is, of course, another way of saying that the report was not given with the intention of inducing potential investors to act upon it, which in turn pointed to lack of reasonableness in their placing reliance upon it for that purpose.

30. The statutory scheme governing duties which are imposed upon auditors may well be relevant in concluding whether an auditor's report is made with the intention of inducing a particular person, or persons falling within a particular class, to act upon it in a particular way. Or, which is much the same thing, it may indicate the purpose for which the report is made. In the end, those things will have a bearing upon whether any reliance placed upon the report is reasonable. The statutory scheme in this country may or may not be different in relevant respects from that which was examined in Caparo[31]. But in the absence of any reference to that regime in Esanda's pleadings, no useful purpose is to be served by making any comparison here. In particular, the pleadings place no reliance upon the statutory role of auditors, nor do they refer to the public availability of audited accounts. And it is accepted by both parties that the accounting standards referred to in the pleadings have not been approved for the purposes of the Companies (South Australia) Code or the Corporations Law.

31. In its statement of claim Esanda does not allege any circumstance which might serve to establish any relationship of proximity between it and PMH. Mere foreseeability of loss by reason of its reliance upon the audited accounts of Excel is not sufficient for that purpose and that, in effect, is all that Esanda pleaded.

32. For these reasons, I would dismiss the appeal.

TOOHEY AND GAUDRON JJ.

33. The appellant, Esanda Finance Corporation Limited ("Esanda"), is a finance provider. In that capacity it entered into a number of transactions with Excel Finance Corporation Limited ("Excel") and companies associated with Excel. In short, it lent moneys to associated companies, accepting a guarantee from Excel, and purchased debts from Excel upon terms which included an indemnity by Excel against any shortfall. Excel has since gone into liquidation and Esanda claims to have suffered financial loss as a result of the transactions. It brought proceedings in the Supreme Court of South Australia to recover that loss from the respondent company, Peat Marwick Hungerfords (Reg) ("Peat Marwick"). Peat Marwick were Excel's auditors.

34. Esanda pleaded several causes of action against Peat Marwick. This appeal is concerned with Esanda's pleaded claim that Peat Marwick were negligent in their conduct of the audit of Excel's accounts for the financial year ending 30 June 1989 and, more particularly, that they failed to take reasonable care in reporting that Excel's true financial position was as represented in those accounts. The claim was originally pleaded in pars 85, 86 and 87 of Esanda's Statement of Claim, although par 87 is not confined to that claim.

35. When served with Esanda's Statement of Claim, Peat Marwick applied under r 46.18(a) of the Supreme Court Rules 1987 (SA)[32] to have pars 85, 86 and consequential passages in par 87 struck out as disclosing no reasonable cause of action. Esanda brought a cross-application to amend the Statement of Claim by the addition of pars 84A, 84B, 84C and 85A. The cross-application was allowed and Peat Marwick's strike out application was dismissed by Bollen J. Peat Marwick appealed successfully to the Full Court of the Supreme Court of South Australia. Esanda now appeals to this Court with the object of having pars 84A, 84B, 84C, 85, 85A[33], 86 and the passages in par 87 reinstated.
36. The only question in the appeal is whether the facts pleaded in the contested paragraphs are capable of giving rise to a duty of care between Peat Marwick, as Excel's auditors, and Esanda, as a company providing finance to Excel and its associated companies. In essence, the pleaded facts are:

37. Peat Marwick were at all material times members of the Institute of Chartered Accountants in Australia and bound by the Australian Accounting Standards (par 84A).

2. At the relevant time, the Australian Accounting Standards required, in relation to a business entity, the disclosure in its audited accounts of financial information relevant to present and potential providers of equity or loan capital, and creditors (par 84B).

3. Esanda was at all relevant times a member of a class or classes of persons, namely creditors and financiers of Excel, whom Peat Marwick foresaw or ought reasonably to have foreseen might reasonably and relevantly rely on Excel's audited accounts for the year ending 30 June 1989 and the report accompanying those accounts (par 84C).

4. Esanda relied on Excel's audited 1989 accounts and the auditor's report accompanying those accounts in deciding to enter into financial transactions with Excel and its associated companies, those transactions resulting in financial loss (par 87).

38. The question whether the pleaded facts are capable of giving rise to a duty of care falls to be decided in light of the law's insistence that a plaintiff who sues in negligence to recover pure economic loss must establish more than the foreseeability of loss. In this country, the question whether there is a duty of care to take reasonable steps to avoid another's economic loss depends on whether there is a relationship of proximity, it being said that "the categories of case in which the requisite relationship of proximity with respect to mere economic loss is to be found are properly to be seen as special"[34]. In the United Kingdom, the question is to be answered on the basis that the law will develop novel categories of negligence incrementally and by analogy with established categories[35], an approach which Brennan J had earlier advanced in this Court in Sutherland Shire Council v Heyman[36]and to which his Honour has adhered in subsequent cases[37]. On either approach, liability is frequently seen to depend on the plaintiff's reliance on the defendant or on the defendant's assumption of responsibility or both. Esanda relies on both considerations in this case.

39. Before considering Esanda's arguments with respect to reliance and assumption of responsibility, it is relevant to note some matters which are not pleaded. It is not pleaded that Esanda approached Peat Marwick for information or advice; it is not pleaded that Peat Marwick knew that Esanda was proposing to enter into the transactions in question or, indeed, any transaction with Excel or its associated companies; it is not pleaded that Peat Marwick knew that Excel's 1989 accounts or their report on the accounts would be communicated to Esanda or any other finance provider with respect to the obtaining of finance or for any other purpose. Had one or more of those matters been pleaded, Esanda might have brought itself within the duty of care recognised by Barwick CJ in Mutual Life & Citizens' Assurance Co Ltd v Evatt[38] or that recognised by the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd[39].

40. In Evatt, Barwick CJ accepted that there is a duty of care "whenever a person gives information or advice to another ... upon a serious matter ... and the relationship ... arising out of the circumstances is such that on the one hand the speaker realizes or ought to realize that he is being trusted ... to give the best of his information or advice as a basis for action on the part of the other party and it is reasonable in the circumstances for the other party to seek or accept and in either case to act upon that information and advice"[40].

41. The statement by Barwick CJ in Evatt was accepted as correct by Mason and Aickin JJ in Shaddock & Associates Pty Ltd v Parramatta City Council [No 1][41].In that case Mason J pointed out that "the existence of a duty of care does not depend upon knowledge on the part of the speaker of the precise use to which the information will be put". Rather, as his Honour put it, "[i]t is enough if he knows, or ought to know, that the inquirer is requesting it for a serious purpose, that he proposes to act upon it and that he may suffer loss if it proves to be inaccurate"[42].

42. The duty of care identified by Barwick CJ in Evatt and later accepted by Mason and Aickin JJ in Shaddock is concerned with the duty owed in relation to information or advice provided in response to a request[43]. The duty recognised in Hedley Byrne extends to a situation in which advice is communicated to a third party. That duty was subsequently explained by Lord Oliver of Aylmerton in Caparo Industries Plc v Dickman as a duty on the part of a person who gives advice upon which others rely in the ordinary course of business to take reasonable care in the giving of that advice if[44]:

"(1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given; (2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose; (3) it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry, and (4) it is so acted upon by the advisee to his detriment."

43. It is convenient, at this point, to note some other matters which are not pleaded. It is not pleaded that Peat Marwick prepared the accounts and the audit certificate for the purpose of inducing Esanda or others to enter into financial transactions with Excel or its associated companies. Nor is it pleaded that they intended that Esanda or finance providers generally should act upon the accounts or the audit certificate in deciding to enter into financial transactions with Excel or its associated companies. Moreover, it is neither pleaded that Peat Marwick expressly or impliedly invited Esanda or finance providers generally to act on the basis that the accounts were accurate nor that they had an interest in Esanda so acting. Had one or more of these matters been pleaded, Esanda would have found support in this Court's decision in San Sebastian Pty Ltd v The Minister[45].

44. This Court accepted in San Sebastian, as the House of Lords earlier accepted in Hedley Byrne,that liability for negligent statements is not confined to cases involving a request for information or advice. It was said in San Sebastian that[46]:

"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. The author, though volunteering information or advice, may be known to possess, or profess to possess, skill and competence in the area which is the subject of the communication. He may warrant the correctness of what he says or assume responsibility for its correctness. 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. He may actually have an interest in the recipient so acting."

45. The latter part of that statement is reflected in the Full Court's decision in this case. Thus, King CJ (with whom Millhouse J agreed) held 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"[47]. Similarly, Olsson J was of the view that "[i]n absence of a plea of facts amounting to an intention on the part of [Peat Marwick] to induce the plaintiff to act on the faith of the audit certificate or the existence of some other specific type of circumstance adverted to in Sebastian, the claim for negligent misstatement cannot succeed"[48].

46. Esanda has not pleaded that Peat Marwick intended it to act on the basis of the accuracy of Excel's audited accounts. It does, however, seek to bring itself within the passage which has been quoted from San Sebastian in that it claims that Peat Marwick assumed responsibility to finance providers and creditors for the correctness of Excel's 1989 accounts. And as already indicated, it claims that it relied on those accounts. Moreover, it impliedly claims that it was reasonable for it to do so.

47. It is convenient, at this stage, to say something of assumption of responsibility and reliance as indicators of a special relationship of proximity giving rise to a duty to take reasonable care in the provision of information and advice. In that context, neither notion is free of difficulty. Thus, for example, Lord Roskill stated in Caparo Industries, a case also concerned with the liability of auditors,that he "find[s] considerable difficulty in phrases such as 'voluntary assumption of responsibility' unless they are to be explained as meaning no more than the existence of circumstances in which the law will impose a liability upon a person making the allegedly negligent statement to the person to whom that statement is made"[49]. His Lordship added that, on that basis, "the phrase does not help to determine in what circumstances the law will impose that liability or indeed, its scope"[50].

48. Moreover, it is necessary to distinguish between reliance as an indicator of proximity and reliance as an element of a cause of action for the negligent provision of information or advice. As Lord Browne-Wilkinson pointed out in White v Jones[51],"[i]n the case of claims based on negligent statements ... the plaintiff will have no cause of action at all unless he can show damage and he can only have suffered damage if he has relied on the negligent statement". For the purposes of proximity, reliance clearly involves something over and above the fact that the plaintiff relied on the statement in question as the basis for his or her acting or not acting in a particular way.

49. There are parallels between the special relationship of proximity required for the imposition of liability for pure economic loss and that required for the imposition of a non-delegable duty of care or, more precisely, a special responsibility or duty to see that care is taken to protect others from injury or to safeguard their property. The relationship which gives rise to a non-delegable duty was explained by Mason J in Kondis v State Transport Authority in these terms[52]:

"the special duty arises because the person on whom it is imposed has undertaken the care, supervision or control of the person or property of another or is so placed in relation to that person or his property as to assume a particular responsibility for his or its safety, in circumstances where the person affected might reasonably expect that due care will be exercised".

50. His Honour had earlier given illustrations of the situations involving that relationship, including "[t]he hospital undertak[ing] the care, supervision and control of patients ... in special need of care" and "[t]he school authority undertak[ing] ... special responsibilities in relation to the children whom it accepts into its care"[53].

51. The situations giving rise to the special relationship of proximity attracting a non-delegable duty of care were further considered in Burnie Port Authority v General Jones Pty Ltd[54]. It was said in that case that it was convenient to refer to the common element involved in those situations as "the central element of control"[55]. It was also said in that case that when "[v]iewed from the perspective of the person to whom the duty is owed, the relationship of proximity ... is marked by special dependence or vulnerability"[56].

52. In the context of liability for negligent statements, it seems to us that reliance is better expressed in terms similar to those used by Mason J in Kondis. Thus, reliance is to be understood, in the context of the provision of information or advice, as an expectation, which is reasonable in the circumstances, that due care will be exercised in relation to that provision. Similarly, we consider that, in that same context, assumption of responsibility should be understood in the way explained by Barwick CJ in Evatt. More precisely, it should be understood as the assumption of responsibility for providing information or advice in circumstances where it is known, or ought reasonably be known, that it will or may be acted upon for a serious purpose, and loss may be suffered if it proves to be inaccurate.

53. Even if reliance and assumption of responsibility are understood in the manner indicated, they do not, of themselves, reveal the precise nature of the situations or categories of situation which involve a special relationship of proximity marked by one or other of those features and which, thus, result in liability for pure economic loss suffered in consequence of the negligent provision of information or advice. Clearly, such a relationship may exist where the information or advice is provided in the course of a professional relationship or pursuant to contract. And San Sebastian allows that there may be a relationship of that kind where the person providing the information or advice intends or encourages another to act on the basis of its accuracy[57].

54. The decided cases also acknowledge two other situations which may result in liability for economic loss resulting from negligent statements. The law has not yet developed to a point permitting precise definition or description of those situations. However, the cases acknowledge that in some situations there may be liability even though the statement in question is neither made with the intention that it should be acted upon nor pursuant to a professional or contractual obligation[58]. And it seems that, in those situations, or at least some of them, liability may arise whether or not the recipient requested the information or advice[59]. Secondly, the cases allow that there may be liability where, as here and as in Hedley Byrne, the information is conveyed or becomes available to some person other than the person who requested it, whether or not the original request arose out of a professional or contractual relationship. It is convenient to refer to these situations compendiously as situations involving the voluntary provision of information or advice.

55. The decided cases do not identify precisely what it is that results in liability for economic loss suffered in consequence of the voluntary provision of information or advice. However, commonsense requires the conclusion that a special relationship of proximity marked either by reliance or by the assumption of responsibility does not arise unless the person providing the information or advice has some special expertise or knowledge, or some special means of acquiring information which is not available to the recipient. Moreover, ordinary principles require that the relationship does not arise unless it is reasonable for the recipient to act on that information or advice without further inquiry. Similarly, ordinary principles require that it be reasonable for the recipient to act upon it for the purpose for which it is used. That is not to say that a special relationship of proximity exists if these conditions are satisfied. Rather, it is to say that the relationship does not arise unless they are.

56. There are, in our view, only two pleaded facts which are relevant to the existence of a special relationship of proximity between Esanda and Peat Marwick. The first is that Peat Marwick were Excel's auditors and, inferentially, were in a situation of particular advantage to know or ascertain its true financial position. The second is that, by virtue of its membership of the Institute of Chartered Accountants in Australia, Peat Marwick accepted a general professional responsibility to ensure that Excel's audited accounts disclosed information relevant to Excel's present and potential creditors.

57. It was not argued that the facts pleaded are capable of sustaining a suggestion that Peat Marwick intended or encouraged Esanda to rely upon their audit of Excel's accounts. And in our view, they are not. Nor are they capable of giving rise to a relationship of proximity marked either by reliance or the assumption of responsibility for information or advice which is voluntarily provided. It may be accepted that, as Excel's auditors, Peat Marwick were in a particularly advantageous position to know or ascertain Excel's true financial position. However, there is nothing to suggest Esanda was not itself able to have accountants undertake the same task on its behalf as a condition of its entertaining the possibility of entering into financial transactions with Excel. And, which is much the same thing in the circumstances of this case, there is nothing to suggest that it was reasonable for Esanda to act on the audited reports without further inquiry.

58. The appeal should be dismissed.

McHUGH J.

59. The issue in this appeal is whether the facts pleaded in a Statement of Claim are arguably sufficient in law to establish that Peat Marwick Hungerfords (Reg) ("Peat Marwick") owed a duty of care to the appellant, Esanda Finance Corporation Limited ("Esanda") in respect of the publication of an audit report commissioned by Excel Finance Corporation Limited ("Excel"). In my opinion they are not. The facts pleaded amount to no more than a claim of reasonable foreseeability of a risk of harm to Esanda which by itself is insufficient to establish that Peat Marwick owed a duty of care to Esanda.

The basis of the claim of duty

60. Initially, Esanda sued Peat Marwick in the Supreme Court of South Australia for damages under s 84(1) of the Fair Trading Act 1987 (SA) in respect of a contravention of s 56 of that Act. Later, Esanda amended its claim to allege negligence on the part of Peat Marwick.

61. The Statement of Claim alleges the following facts. Esanda is a finance company. Peat Marwick is a firm of chartered accountants. Excel was a borrowing corporation, and a hirer and lessor of motor vehicles. Peat Marwick audited and certified the accounts of Excel for the financial year ending 30 June 1989. Relying on those accounts, Esanda entered into various transactions relating to Excel. It lent money to companies associated with Excel. It accepted a guarantee from Excel and purchased debts from Excel upon terms which included an indemnity from Excel against any shortfall. However, the audited accounts were misleading because they did not disclose the true financial position of Excel. As a result, Esanda suffered losses. It would not have entered into any of the transactions but for its reliance on the audited accounts.
62. The paragraphs of the Statement of Claim relevant to a duty of care are:

"84A 84A.1 At all material times, the members of PMH were members of the Institute of Chartered Accountants in Australia and as such bound by the Australian Accounting Standards published from time to time jointly by the said Institute and the Australian Society of Accountants. 84A.2 The plaintiff will refer to the Statement on conformity with Statements of Accounting Standards APS1 published by the said Institute and Society at the trial of this action which in substance provides that the Australian Accounting Standards above referred to are mandatory and lay down the principles to be followed by members and that failure by an Institute member to observe the provisions of the said statement may be regarded as failure to observe a proper standard of professional care, skill or competence. 84B Australian Accounting Standard AAS5 was and is the statement of accounting standards relating to materiality in financial statements. In substance AAS5 provides that the test of materiality calls for a consideration as to who are likely to be the prime users of financial statements and further provides that in relation to financial statements of a business entity the prime users would have to be regarded as comprising present and potential providers of equity or loan capital, and creditors. The plaintiff will refer to AAS5 at the trial of this action for its full terms and effect. 84C Esanda was at all material times a member of a class or classes of persons, namely creditors and financiers of Excel, whom PMH did foresee or alternatively ought reasonably to have foreseen might reasonably and relevantly rely upon the Excel 30 June 1989 accounts and the report pleaded in paragraph 55. 1. Further and in the alternative to paragraph 84, PMH owed Esanda, as a member of a class of persons who might reasonably and relevantly rely upon the Excel 30 June 1989 accounts and the report pleaded in paragraph 55 a duty to take reasonable care: 2. 85.1 to ensure that the audited Excel 30 June 1989 accounts were in accordance with the applicable Australian accounting standards; 3. to ensure that the opinions expressed in the report pleaded in paragraph 55 were based on reasonable grounds; and 4. to carry out sufficient tests to obtain reasonable assurance as to the reliability of the information provided by Excel to PMH and the sufficiency of that information for the preparation of the Excel 30 June 1989 accounts and the expression of the opinions in the report pleaded in paragraph 55. 85A By reason of the matters pleaded in paragraphs 84A to 84C inclusive:- 5. 85A.1 Esanda was so closely and directly affected by the actions or conduct of PMH in furnishing the report pleaded in paragraph 55 that PMH was under a duty of care to Esanda in respect thereof; and 85A.2 PMH accepted or must be taken to have accepted that in furnishing the report pleaded in paragraph 55, the duty of care referred to in paragraph 85 was owed to a class of persons including the plaintiff. 6. In breach of the duty pleaded in paragraph 85, PMH: 7. allowed the Excel 30 June 1989 accounts to include the sum of $2.5 million pleaded in paragraph 57; 8. 86.2 failed to report that no or no proper or adequate provision had been made in the Excel 30 June 1989 accounts for the bad or doubtful debts pleaded in paragraphs 72 to 78; 9. 86.3 failed to detect or report upon the fact or the extent of the loan freshening pleaded in paragraph 80; 10. 86.4 failed to detect or report the matters pleaded in paragraph 81; 11. notwithstanding the matters pleaded in paragraph 79, failed to qualify, the said report." 63. Relevantly, Australian Accounting Standard 5 ("AAS5") provided:

"6 It is not possible to give a definition of 'material' which would cover all circumstances. In general, however, an item of information is material if its omission, non-disclosure or mis-statement would cause the financial statements to mislead users when making evaluations or decisions. In this context, a necessary assumption is that users will understand the information contained in financial statements and hence may be expected to be influenced by it. 1. It follows that the test of materiality involves considerations 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. Users of financial statements of a public sector entity would also include parliament and other legislative bodies." 64. Peat Marwick prepared the audit report pursuant to s 285 of the

Companies (South Australia) Code which requires the auditor to report to the members of the company on the accounts that are required to be laid before the company at its annual general meeting[60]. In the report the auditor must state, inter alia, whether the accounts are, in his or her opinion, properly drawn up so as to give a true and fair view of the matters required by s 269 of the Code and whether they are in accordance with applicable approved accounting standards[61]. The accounts, accompanied by the auditor's report, are required to be forwarded to all persons entitled to receive notices of the general meeting of the company and, upon request, to members and debenture holders[62]. Where the corporation is a borrowing corporation, the auditor's report is to be sent to the trustee for debenture holders[63].

The strike out application

65. Under r 46.18 of the South Australia Supreme Court Rules[64], Peat Marwick applied to have pars 85, 86 and any other related paragraphs relating to the action in negligence in Esanda's Statement of Claim struck out on the basis that the facts pleaded were insufficient to found a duty of care owed by Peat Marwick to Esanda.

66. Rule 46.18 states that:

1. "Where a pleading: 2. (a) discloses no reasonable cause of action or defence; 3. ... the Court may at any stage of the proceedings, order that the whole or any part of the pleadings be struck out".

67. Furthermore, in accordance with r 46.04:

"(1) A pleading shall: 1. ... 2. (b) contain a statement in a summary form of the material facts on which the party relies, but not the evidence by which the facts are to be proved and when necessary be divided into paragraphs, numbered consecutively, with each matter, so far as convenient, put in a separate paragraph; 3. ... 4. (f) subject to Rule 46.15 contain sufficient particulars of the claim, defence or other matter pleaded".

68. Bollen J heard the application and held that the Statement of Claim alleged sufficient facts to establish that Peat Marwick owed Esanda a duty of care[65]. Furthermore, he allowed Esanda to amend the Statement of Claim by inserting pars 84A, 84B, 84C and 85A. In those paragraphs, Esanda alleges that the members of Peat Marwick were members of the Institute of Chartered Accountants ("the Institute") and that the Institute had adopted the Australian Accounting Standards ("the Standards") which were to be observed by its members. Esanda contended before Bollen J and before this Court that Peat Marwick adopted those Standards by becoming a member of the Institute and undertook that it would maintain them for the benefit of creditors like Esanda.

The decision of the Full Court of the Supreme Court of South Australia

69. Peat Marwick appealed to the Full Court of the Supreme Court of South Australia which unanimously allowed the appeal[66]. The Full Court struck out pars 84A to 86 and the relevant sections of par 87 of the Statement of Claim.

70. King CJ (with whom Millhouse J agreed) held that, in the absence of evidence indicating an assumption of responsibility to a plaintiff in respect of the preparation of the audit certificate, an auditor is not under a duty of care to that person unless the auditor intended to induce him or her to act in reliance on the audit certificate[67]. His Honour found that the Statement of Claim in the present case did not allege facts which were capable in law of founding a duty of care. He said that it did not allege that Peat Marwick intended to induce Esanda, or a class of which Esanda was a member, to enter into financial transactions with Excel; it did not allege Peat Marwick was aware that Esanda was engaging in financial transactions with Excel or that they were in contemplation of doing so; and it did not plead any act on the part of Peat Marwick which indicated an assumption of specific responsibility to Esanda to exercise care in the audit. King CJ concluded that[68]:

"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. The facts, however, fall short of establishing the relationship of proximity which is necessary to give rise to a duty of care."

71. In respect of the Australian Accounting Standards adopted by Peat Marwick by its membership of the Institute of Chartered Accountants, in particular AAS5, King CJ found that the Standards were merely concerned with the content of financial statements and not the creation of a legal duty of care. Any references in the Standards to providers of loan capital and creditors as potential users of the financial statements occur in the context of determining what is material for inclusion in the statements. It did not imply any assumption of legal responsibility to such users to exercise care[69].
72. Olsson J in a separate judgment agreed.

Application to strike out: the test in General Steel Industries Inc v Commissioner for Railways (NSW)

[70]

73. The power to strike out pleadings under r 46.18 cannot be exercised unless "the case of the plaintiff is so clearly untenable that it cannot possibly succeed."[71] In General Steel, Barwick CJ warned that the power to strike out a pleading must be sparingly exercised; the mere fact that the plaintiff's prospects of success are slim is not enough to strike out a pleading.

74. The central issue therefore is whether Esanda's claim in negligence as pleaded in pars 84A, 84B, 84C, 85, 85A, 86 and the relevant portions of 87 disclose a tenable cause of action. These paragraphs allege that Peat Marwick owed a duty of care to Esanda because Peat Marwick audited the accounts of Excel, prepared a report on those accounts, and:

1. (a) Peat Marwick should reasonably have foreseen that creditors of Excel of whom Esanda was one would rely on the report and accounts; and 2. (b) Peat Marwick was a member of an institute of accountants which required its members, when preparing financial statements for a business entity, to have regard to creditors and potential creditors of that entity as users of those statements.

The law in relation to negligent misstatement

75. Until relatively recently, the common law precluded recovery in a tort action for pure economic loss[72] caused by negligent misstatement. It was not until 1964 in Hedley Byrne & Co Ltd v Heller & Partners Ltd[73] that the common law allowed recovery for such loss. Contrary to a once widely accepted view[74], this Court now accepts that reasonable foreseeability of a risk of harm alone is insufficient to ground a duty of care in negligence[75]. If reasonable foreseeability of a risk of economic harm was sufficient, there would be a real risk in many cases of creating "liability in an indeterminate amount for an indeterminate time to an indeterminate class."[76] Thus, in San Sebastian Pty Ltd v The Minister[77], the Court held that no duty of care was owed to a developer who claimed damages from a council and a planning authority on the basis that it had suffered loss by relying on representations contained in documents adopting a scheme to redevelop a suburban area in Sydney. Because the defendants had done nothing to assume responsibility to the plaintiffs for the representations and had not intended to induce the plaintiffs to rely on the representations, they owed no duty of care to the plaintiffs. In a joint judgment Gibbs CJ, Mason, Wilson and Dawson JJ said[78]:

"[T]here 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, though it has been suggested that instances of liability for misstatement volunteered negligently will be 'rare': Evatt[79]; Lambert v Lewis[80]. 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. The author, though volunteering information or advice, may be known to possess, or profess to possess, skill and competence in the area which is the subject of the communication. He may warrant the correctness of what he says or assume responsibility for its correctness. 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. He may actually have an interest in the recipient so acting."

76. Their Honours then referred to two American cases[81] which "dealt, and were expressed to deal, with the liability of accountants for careless financial misrepresentations in certified financial statements supplied by the accountants to their clients in the knowledge that they were to be used by the clients in support of their application to the plaintiffs for funds"[82]. Their Honours said[83]:

"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."

77. But their Honours went on to say[84]:

"[I]t is necessary not only that A intends that B or members of a class of persons should act or refrain from acting in a particular way, but also that A makes the statement with the intention of inducing B or members of that class, in reliance on the statement, to act or refrain from acting in the particular way, in circumstances where A should realize that economic loss may be suffered if the statement is not true. In cases where the defendant intends the statement to operate as a direct inducement to action, the reasonableness of the reliance will not be a critical factor, although in other cases the defendant's appreciation of the reasonableness of reliance will be relevant."

78. Their Honours concluded that[85]:

"It follows then that if the appellants' case is to succeed they must establish at least, amongst other things, (1) that the alleged representation was made, and (2) that the Authority and the Council made the representation with the intention of inducing members of the class of developers to act in reliance on the representation."

79. Brennan J (as he then was), in a separate judgment, after referring to the judgment of Barwick CJ in Mutual Life & Citizens' Assurance Co Ltd v Evatt[86] stated the relevant principle in the following way[87]:

"Where a representor gives information or advice on a serious or business matter, intending thereby to induce the representee to act on it, the representor is under a duty of care in giving that advice or information if three conditions are satisfied. First, (corresponding with the first condition expressed by Barwick CJ), if the representor realizes or ought to realize that the representee will trust in his especial competence to give that information or advice; second (corresponding with the third condition), if it would be reasonable for the representee to accept and rely on that information or advice; and third (applying the underlying principle of the law of negligence), if it is reasonably foreseeable that the representee is likely to suffer loss should the information turn out to be incorrect or the advice turn out to be unsound."

80. The decision in San Sebastian, which is the leading case in this Court on tortious liability for negligent misstatements,gives no direct support to Esanda's claim that Peat Marwick owed it a duty of care. Indeed, in R Lowe Lippmann Figdor & Franck v AGC (Advances) Ltd[88] the Appeal Division of the Supreme Court of Victoria relied on the reasoning in San Sebastian to find that the auditors of financial accounts which had been improperly audited, and which had allegedly been relied upon by a major creditor of the audited company in advancing further money, did not owe a duty of care to the creditor. The Appeal Division held that the mere act of supplying a signed report stating the company's financial position, knowing that the company would in turn pass the statement on to its major creditor, was not enough to establish a duty of care in the circumstances[89]. No duty was owed even though prior to the audited accounts becoming available, the creditor had telephoned the auditors and told them that it required the accounts for review purposes and had requested confirmation that the company's annual profit would be the figure that the company claimed.

81. Brooking J, with whom Gobbo and Tadgell JJ agreed, said that an intention to induce the plaintiff, or a class of persons to whom the plaintiff belongs, to rely on the report need not always be present in order to establish a duty of care in cases of negligent misstatement. But his Honour said that, in a case such as the one before the Court, "there being no other combination of circumstances present sufficient to impose a duty of care, that duty will not arise unless the defendant made the statement with the intention mentioned."[90] Brooking J concluded that[91]:

"The only intention on the auditors' part in making their report established in this case ... is an intention to discharge their statutory and contractual duties as Lyvetta's auditors by making the report required by the Companies Act. I am prepared to accept that they knew or believed that AGC would probably rely on the report in deciding what to do as regards Lyvetta's facility, but this knowledge or belief cannot be equated with an intention to induce AGC to act in reliance on the report."

82. The reasoning in San Sebastian was also applied in Columbia Coffee & Tea Pty Ltd v Churchill[92]but with a different result. Rolfe J, sitting in the Commercial Division of the New South Wales Supreme Court, held that a statement in an Auditor's Audit Manual which explicitly acknowledged 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"[93], was sufficient to impose a duty of care for carelessly certified accounts in favour of a purchaser of shares who claimed to have relied on the report and suffered economic loss[94]. His Honour found that the statement in the manual amounted to an assumption of responsibility by the auditors to a class of persons wider than the company for which the audit was being conducted[95].

83. Thus, the position in Australia to date with respect to liability for pure economic loss caused by negligent misstatement is that, absent a statement to a particular person in response to a particular request for information or advice or an assumption of responsibility to the plaintiff for that statement, it will be difficult to establish the requisite duty of care unless there is an intention to induce the recipient of the information or advice, or a class to which the recipient belongs, to act or refrain from acting on it. Mere knowledge by a defendant that the information or advice will be communicated to the plaintiff is not enough. With the exception of Columbia Coffee & Tea[96]no Australian decision supports Esanda's claim, and R Lowe Lippmann[97] is squarely against it. Nevertheless, the decisions have all emphasised that a lack of an intention to induce the plaintiff to act or refrain from acting is not necessarily fatal to a plaintiff's claim because other factors may be present that obviate the need for such an intention[98].

84. In its Statement of Claim, Esanda does not allege an intention to induce it to rely on the audit. The question that arises therefore is whether the facts pleaded nonetheless give rise to a duty of care owed by Peat Marwick to Esanda. That is to say, does the duty of care owed by an auditor extend to members of a class such as creditors or investors whom the auditor knows or ought reasonably to know will rely on the audit report. Alternatively, does the duty extend to members of such a class when the auditor belongs to a professional body which requires its members to consider the members of a class to be users of the audited accounts and report?

The overseas decisions

85. Significantly, the majority of courts that have considered the issue of auditor liability for negligent misstatement in England, Canada, New Zealand and the United States of America would hold that no duty was owed in the present case. It is therefore useful to examine the course of authority in those jurisdictions before examining whether in Australia auditors are or should be liable to third parties in factual situations like those pleaded in the present case.

The position in England

86. In England, the leading case on auditor liability for negligent misstatement is Caparo Industries Plc v Dickman[99] which concerned a claim of negligence against the auditors of a company which had been taken over by the plaintiff. The plaintiff alleged that the auditors had negligently carried out their audit and negligently prepared their statutory report. It alleged that it had suffered a loss when it was later revealed that the company's profits had been overstated causing the share price to fall. The House of Lords held that the auditors owed no duty of care to the plaintiff.

87. Their Lordships said that liability for economic loss caused by negligent misstatement was confined to cases where the statement or advice had been given to a known recipient for a specific purpose of which the maker was aware and the recipient had relied and acted upon the statement or advice to its detriment. Their Lordships held that these conditions were not satisfied in the case before them. The purpose of the statutory requirement for an audit was the making of a report to enable shareholders to exercise their class rights in general meetings. It was no part of that purpose to assist shareholders in the making of decisions as to future investment in the company. Furthermore, there was no reason in principle or policy to treat auditors as having a special relationship with non-shareholders who contemplated investment in the company in reliance upon the published accounts, even when the affairs of the company were such as to render it susceptible to a takeover. To find otherwise would be to stretch the concept of duty of care so widely it would be "difficult to see any reason why it should not equally extend to all who rely on the accounts in relation to other dealings with a company as lenders or merchants extending credit to the company."[100] This proposition had been, as their Lordships noted, expressly rejected in Al Saudi Banque v Clarke Pixley[101].

88. In England, therefore, liability for economic loss caused by negligent misstatement is confined to cases in which the relevant statement is given to a known recipient for a specific purpose and the recipient relies on the advice or information to its detriment.

The position in Canada

89. In Canada, the courts appear to have moved to the position that the auditor is not liable unless he or she knew that the audit report would be presented to the plaintiff or a class of persons including the plaintiff for a particular purpose. In 327973 British Columbia Ltd v HBT Agra Ltd[102], the plaintiff sued an engineer over a report prepared by the engineer for an owner of land. The report stated that the property was "essentially free of risk of subsidence associated with abandoned mines". The land was subdivided, sold and then resold to the plaintiff who relied on the defendant engineer's report in purchasing the land. The plaintiff later incurred expense in repairing an area which was subject to subsidence.

90. The British Columbia Court of Appeal found for the defendant because it was not aware that the report was to be supplied to the plaintiff or a person in the plaintiff's position. The plaintiff was therefore not within a foreseeable class of users of the report. To constitute such a class, the Court said "either the actual identity of the members of this class must be known, or their nature and identity must be ascertainable and their intended use of the statement must be foreseeable."[103] The Court relied on, inter alia, Caparo and the leading Canadian case on negligent misstatement, Haig v Bamford[104] - which dealt with financial statements prepared by accountants - in concluding that[105]:

"In every case in which liability has been imposed in respect of a loss suffered by a third person, the professional advisor has been aware that his statements would be presented to and used by the third person for a particular purpose which was known to the professional advisor at the time the statement was made". 91. The Court adopted the criteria laid down by the House of Lords in

Caparo in determining when liability for negligent misstatements is to be imposed[106].

197. The paragraphs which plead the claim in negligence are pars 84A, 84B, 84C, 85, 85A and 86. Paragraphs 84A and 84B plead the AAS as binding the auditors, par 84C pleads membership by Esanda of a class or classes of persons, creditors and financiers of Excel, which the auditors foresaw or ought reasonably to have foreseen might reasonably rely upon the 30 June 1989 accounts and the auditors' report thereon. Paragraph 85 is pleaded further and in the alternative to par 84. It asserts that the auditors owed Esanda, as a member of a class of persons who might reasonably and relevantly rely upon the accounts and report, a duty to take reasonable care to ensure (i) that the accounts were in accordance with "the applicable Australian accounting standards" and (ii) that the opinions expressed in the auditors' report were based on reasonable grounds. Also pleaded in par 85 was a duty to take reasonable care to carry out sufficient tests to obtain reasonable assurance as to the reliability of the information provided by Excel to the auditors and the sufficiency thereof for the preparation of the accounts and the expression of opinions in the auditors' report.

198. The duty of care is pleaded in par 85A and breach in par 86. Paragraph 85A is in the following terms:

"By reason of the matters pleaded in paragraphs 84A to 84C inclusive:- 85A.1 Esanda was so closely and directly affected by the actions or conduct of [the auditors] in furnishing [the auditors' report] that [the auditors were] under a duty of care to Esanda in respect thereof; and 85A.2 [The auditors] accepted or must be taken to have accepted that in furnishing [the auditors' report], the duty of care referred to in paragraph 85 was owed to a class of persons including [Esanda]."

199. In so far as the pleading rests, for the allegation of a duty of care, merely upon forseeability on the part of the auditors and actual reliance by Esanda, then the pleading is bad for the reasons given earlier in these reasons under the heading "Foreseeability and reliance". The matter is not advanced by reference in the pleading to the AAS. I agree, with respect, with what King CJ said[240] as to the effect of the AAS. Moreover, the relevant paragraphs in the pleading, 84A and 84B, which refer to accounting standards are not linked in any fashion immediately apparent with what follows save that it is said in par 85A that, by reason of matters pleaded in those paragraphs, the auditors accepted or must be taken to have accepted that in furnishing their report they owed to Esanda the duty of care pleaded in par 85. The duty of care pleaded in par 85 was to take reasonable care, inter alia, to ensure that the audited accounts were in accordance with the applicable AAS.

200. The pleading does not grapple with the difficulty that the mere statement in the text of the relevant standards does not of itself carry the auditors into a sufficiently close relationship with creditors or financiers of Excel as to found the element, otherwise lacking, necessary to constitute a duty of care to Esanda.

201. The appeal should be dismissed with costs.

[1] Australian Society of Accountants and The Institute of Chartered Accountants in Australia, "Statement of Accounting Standards: Materiality in Financial Statements", AAS5 (as reissued November 1986) at 1047.
[2] [1964] AC 465 at 503.
[3] (1968) 122 CLR 556 at 571.
[4] (1986) 162 CLR 341.
[5] (1986) 162 CLR 341 at 357.
[6] (1986) 162 CLR 341 at 372.
[7] [1990] 2 AC 605.
[8] [1990] 2 AC 605 at 620-621.
[9] Applied in James McNaughton Paper Group Ltd v Hicks Anderson & Co [1991] 2 QB 113 at 124-128 per Neill LJ.
[10] [1990] 2 AC 605 at 621. See also at 642 per Lord Oliver of Aylmerton.
[11] [1990] 2 AC 605 at 628-629; see also at 635-636 per Lord Oliver of Aylmerton.
[12] [1990] 2 AC 605 at 661.
[13] San Sebastian Pty Ltd v The Minister (1986) 162 CLR 341 at 356-357.
[14] (1992) 29 NSWLR 141.
[15] [1964] AC 465.
[16] (1968) 122 CLR 556.
[17] (1970) 122 CLR 628.
[18] See Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] (1981) 150 CLR 225 at 251, 256; San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340 at 355-356, 371-372.
[19] (1968) 122 CLR 556 at 572-573.
[20] (1968) 122 CLR 556 at 572.
[21] (1986) 162 CLR 340.
[22] (1986) 162 CLR 340 at 357.
[23] (1986) 162 CLR 340 at 357.
[24] [1992] 2 VR 671.
[25] [1992] 2 VR 671 at 681.
[26] (1986) 162 CLR 340 at 358.
[27] (1986) 162 CLR 340 at 366.
[28] (1968) 122 CLR 556 at 572-573.
[29] (1986) 162 CLR 340 at 372.
[30] [1990] 2 AC 605.
[31] [1990] 2 AC 605.
[32] Rule 46.18 relevantly reads: "Where a pleading:
(a) discloses no reasonable cause of action or defence;
...
the Court may at any stage of the proceedings, order that the whole or any part of the pleadings be struck out, on such terms as it thinks just".
[33] Note that although the order of the Full Court did not specifically strike out par 85A, it was agreed at the hearing in this Court that par 85A was to be considered together with pars 84A, 84B, 84C, 85 and 86.
[34] Bryan v Maloney (1995) 182 CLR 609 at 619. See also Hawkins v Clayton (1988) 164 CLR 539 at 576.
[35] Caparo Industries Plc v Dickman [1990] 2 AC 605 at 618; Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 182; White v Jones [1995] 2 AC 207 at 275.
[36] (1985) 157 CLR 424 at 481.
[37] See for example, Hawkins v Clayton (1988) 164 CLR 539 at 556; Gala v Preston (1991) 172 CLR 243 at 259-260; Bryan v Maloney (1995) 182 CLR 609 at 653.
[38] (1968) 122 CLR 556 at 572-573. Note that the decision was overturned by the Privy Council in Mutual Life & Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 628, but the holdings of Barwick CJ have subsequently been held to be correct: see Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] (1981) 150 CLR 225 at 251, 255-256.
[39] [1964] AC 465 at 497.
[40] (1968) 122 CLR 556 at 572.
[41] (1981) 150 CLR 225 at 251 per Mason J, 256 Aickin J agreeing. See also at 255-256 per Murphy J. See further San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340 at 355-356.
[42] (1981) 150 CLR 225 at 253.
[43] Note however that Barwick CJ in Evatt spoke in terms of a duty of care "whether that information is actively sought or merely accepted by that other upon a serious matter" (1968) 122 CLR 556 at 572.
[44] [1990] 2 AC 605 at 638.
[45] (1986) 162 CLR 340 at 357. See also at 372 per Brennan J.
[46] (1986) 162 CLR 340 at 357.
[47] Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (1994) 61 SASR 424 at 431.
[48] Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (1994) 61 SASR 424 at 445-446.
[49] [1990] 2 AC 605 at 628. See also Smith v Bush [1990] 1 AC 831 at 862 per Lord Griffiths.
[50] [1990] 2 AC 605 at 628.
[51] [1995] 2 AC 207 at 272.
[52] (1984) 154 CLR 672 at 687. See also The Commonwealth v Introvigne (1982) 150 CLR 258; Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 at 44-46.
[53] (1984) 154 CLR 672 at 687.
[54] (1994) 179 CLR 520.
[55] (1994) 179 CLR 520 at 551.
[56] (1994) 179 CLR 520 at 551.
[57] (1986) 162 CLR 340 at 357.
[58] San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340 at 357.
[59] San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340 at 356-357. See also Mutual Life & Citizens' Assurance Co Ltd v Evatt (1968) 122 CLR 556 at 572-573 per Barwick CJ; Lambert v Lewis [1982] AC 225 at 264.
[60] s 285(1) of the Code.
[61] s 285(3) of the Code. Section 269 regulates the profit and loss account, balance sheet and group accounts of companies to which the Act applies. It requires, inter alia, that directors ensure that accounts of the company are made out in accordance with applicable approved accounting standards (s 269(8A)) and that there be a statement furnished by the directors stating whether, amongst other things, the accounts have been made out in accordance with applicable approved accounting standards (s 269(9)(b)). Furthermore, it is the duty of the auditor to form an opinion as to each of the matters set out in sub-s 285(4).
[62] s 274 of the Code.
[63] s 287 of the Code.
[64] The application was based on the ground that the paragraphs disclosed no reasonable cause of action.
[65] Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1993) 11 ACLC 908.
[66] Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (1994) 61 SASR 424.
[67] Esanda Finance (1994) 61 SASR 424 at 431.
[68] Esanda Finance (1994) 61 SASR 424 at 431.
[69] Esanda Finance (1994) 61 SASR 424 at 432.
[70] (1964) 112 CLR 125.
[71] General Steel (1964) 112 CLR 125 at 130.
[72] That is loss not occasioned upon damage to person or property.
[73] [1964] AC 465.
[74] See, for example, Stone, Precedent and the Law, (1985) at 254-255; Trindade and Cane, The Law of Torts in Australia, 1st ed (1985) at 279.
[75] Jaensch v Coffey (1984) 155 CLR 549 at 552-554, 575, 582-587; Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 441, 467, 477, 495; San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340 at 355, 367-370; Hawkins v Clayton (1988) 164 CLR 539 at 579; Gala v Preston (1991) 172 CLR 243 at 254-255; Bryan v Maloney (1995) 182 CLR 609 at 617-619.
[76] Ultramares Corporation v Touche 174 NE 441 at 444 (1931) per Cardozo CJ.
[77] (1986) 162 CLR 340.
[78] San Sebastian (1986) 162 CLR 340 at 356-357.
[79] Mutual Life & Citizens' Assurance Co Ltd v Evatt (1968) 122 CLR 556 at 571-572.
[80] [1982] AC 225 at 264.
[81] Rusch Factors, Inc v Levin 284 F Supp 85 (1968); Rhode Island Hospital Trust National Bank v Swartz, Bresenoff, Yavner & Jacobs 455 F 2d 847 (1972).
[82] San Sebastian (1986) 162 CLR 340 at 357.
[83] San Sebastian (1986) 162 CLR 340 at 357.
[84] San Sebastian (1986) 162 CLR 340 at 358.
[85] San Sebastian (1986) 162 CLR 340 at 358.
[86] (1968) 122 CLR 556.
[87] San Sebastian (1986) 162 CLR 340 at 372.
[88] [1992] 2 VR 671.
[89] R Lowe Lippmann [1992] 2 VR 671 at 682-683.
[90] R Lowe Lippmann [1992] 2 VR 671 at 679.
[91] R Lowe Lippmann [1992] 2 VR 671 at 682.
[92] (1992) 29 NSWLR 141.
[93] Columbia Coffee & Tea (1992) 29 NSWLR 141 at 167.
[94] Rolfe J held that on the facts the plaintiff had not relied on the audited accounts when purchasing the shares: (1992) 29 NSWLR 141 at 173-175.
[95] Columbia Coffee & Tea (1992) 29 NSWLR 141 at 172-173.
[96] (1992) 29 NSWLR 141.
[97] [1992] 2 VR 671.
[98] As Brennan J observed in San Sebastian (1986) 162 CLR 340 at 371, to hold otherwise would be to render "the tort of deceit otiose"; cf R Lowe Lippmann [1992] 2 VR 671 at 679 per Brooking J.
[99] [1990] 2 AC 605. See also Morgan Crucible Co Plc v Hill Samuel & Co [1991] Ch 295; Henderson v Merrett Syndicates Ltd [1995] 2 AC 145; Galoo Ltd v Bright Grahame Murray [1995] 1 All ER 16; Spring v Guardian Assurance Plc [1995] 2 AC 296. cf Possfund Custodian Trustee Ltd v Diamond [1996] 1 WLR 1351; 2 All ER 774, where on an action to strike out a plea of negligence, Lightman J held that it was arguable that persons responsible for the issue of a company's share prospectus owed a duty of care, and could be liable in damages, to subsequent purchasers of shares on the unlisted securities market in that company, provided that the purchaser could establish that he had reasonably relied on representations made in the prospectus and reasonably believed that the representor intended him to act on them, and that there existed a sufficient direct connection between the purchaser and the representor to render the imposition of such a duty fair, just and reasonable. Accordingly, the plaintiffs' claim was not struck out.
[100] Caparo Industries [1990] 2 AC 605 at 623.
[101] [1990] Ch 313.
[102] (1994) 120 DLR (4th) 726.
[103] British Columbia (1994) 120 DLR (4th) 726 at 733.
[104] [1977] 1 SCR 466; (1976) 72 DLR (3d) 68. See also Edgeworth Construction Ltd v ND Lea & Associates Ltd [1993] 3 SCR 206; (1993) 107 DLR (4th) 169.
[105] British Columbia (1994) 120 DLR (4th) 726 at 736.
[106] British Columbia (1994) 120 DLR (4th) 726 at 736-737.
[107] [1978] 1 NZLR 553.
[108] Scott [1978] 1 NZLR 553 at 573 per Woodhouse J; at 583 per Cooke J.
[109] [1981] 3 All ER 289.
[110] [1981] 3 All ER 289 at 296.
[111] 1983 SLT 98.
[112] [1978] AC 728 at 751-752: "[T]he position has now been reached that in order to establish that a duty of care arises in a particular situation, it is not necessary to bring the facts of that situation within those of previous situations in which a duty of care has been held to exist. Rather the question has to be approached in two stages. First one has to ask whether, as between the alleged wrongdoer and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter - in which case a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise". The Anns two-stage approach as a determinant of duty of care continues to command respect in New Zealand: Brown v Heathcote County Council [1986] 1 NZLR 76; South Pacific Manufacturing Co Ltd v New Zealand SecurityConsultants & Investigations Ltd [1992] 2 NZLR 282; Invercargill City Council v Hamlin [1994] 3 NZLR 513 (NZCA); [1996] 2 WLR 367; 1 All ER 756 (PC).
[113] In Australia, Anns was emphatically rejected in Sutherland Shire Council (1985) 157 CLR 424; in England it was recently overturned in Murphy v Brentwood District Council [1991] 1 AC 398.
[114] [1990] 2 AC 605 at 625, 647-648.
[115] Lord Bridge was, however, prepared to take a more critical view of JEB Fasteners stating, in response to the conclusion in JEB Fasteners that duty could be derived from foreseeability alone, "I do not agree with this": Caparo [1990] 2 AC 605 at 625.
[116] Caparo [1990] 2 AC 605 at 627, 629, 649.
[117] Caparo [1990] 2 AC 605 at 624, 627, 629, 650.
[118] (1992) 6 NZCLC 68,040 at 68,058-68,060.
[119] [1978] 1 NZLR 553 at 566.
[120] 284 F Supp 85 (1968).
[121] 455 F 2d 847 (1972).
[122] The three approaches are summarised in Bily v Arthur Young and Co 834 P 2d 745 at 752-759 (1992).
[123] The "privity rule" as described in Bily 834 P 2d 745 at 754 (1992) citing Credit Alliance v Arthur Andersen & Co 65 NY 2d 536 (1985).
[124] Bily 834 P 2d 745 at 754-755 (1992).
[125] Rosenblum v Adler 461 A 2d 138 at 153 (1983).
[126] Bily 834 P 2d 745 at 758 (1992).
[127] 834 P 2d 745 (1992).
[128] Bily 834 P 2d 745 at 773-774 (1992).
[129] This trend is apparent even in New Zealand: see Jagwar Holdings Ltd v Julian (1992) 6 NZCLC 68,040.
[130] [1992] 2 VR 671.
[131] 461 A 2d 138 at 153 (1983).
[132] These incentives to produce high standard work are of course also applicable to auditors carrying out audits that are required by law.
[133] cf Rusch Factors 284 F Supp 85 at 91 (1968); Rosenblum 461 A 2d 138 at 151-152 (1983).
[134] [1990] 2 AC 605 at 643.
[135] See Siliciano, "Negligent Accounting and the Limits of Instrumental Tort Reform", 86 Michigan Law Review 1929 at 1971 (1988).
[136] 834 P 2d 745 at 766 (1992).
[137] Even claims in respect of proprietary companies or unincorporated businesses are likely to be reasonably lengthy.
[138] 834 P 2d 745 at 763 (1992).
[139] March v E & M H Stramare Pty Ltd (1991) 171 CLR 506.
[140] 834 P 2d 745 at 765 (1992).
[141] Citizens State Bank v Timm, Schmidt & Co 335 NW 2d 361 at 365 (1983).
[142] "Negligent Accounting and the Limits of Instrumental Tort Reform", 86 Michigan Law Review 1929 at 1972-1973 (1988). Many points in his article were adopted and acknowledged in Bily 834 P 2d 745 (1992).
[143] In a footnote at 1972, Professor Siliciano notes that "the actual ability of an actor to pass on cost increases will depend on the elasticity of demand for the actor's product and the competitiveness of the market in which the actor operates."
[144] Bily 834 P 2d 745 at 762 (1992).
[145] Bily 834 P 2d 745 at 763 (1992).
[146] Bily 834 P 2d 745 at 765 (1992).
[147] (1994) 182 CLR 104 at 185.
[148] 421 US 723 (1975).
[149] Blue Chip Stamps 421 US 723 at 742-743 (1975).
[150] Esanda Finance (1994) 61 SASR 424 at 431.
[151] Under s 266B(1) of the Code the Accounting Standards Review Board can approve accounting standards. Once approved, accounts are required to conform to that standard: ss 266B, 269.
[152] (1992) 29 NSWLR 141.
[153] (1964) 112 CLR 125. The test has been satisfied in similar, if not identical, factual situations. See Possfund Custodian Trustee [1996] 1 WLR 1351; 2 All ER 774; Galoo [1995] 1 All ER 16; Al Saudi Banque [1990] Ch 313.
[154] King CJ, Millhouse and Olsson JJ, (1994) 61 SASR 424.
[155] (1964) 112 CLR 125.
[156] (1994) 61 SASR 424 at 433.
[157] [1990] 2 AC 605.
[158] (1994) 61 SASR 424 at 431. Judgments to the same effect were delivered by Millhouse J and Olsson J.
[159] (1994) 61 SASR 424 at 431.
[160] [1992] 2 VR 671.
[161] (1994) 61 SASR 424 at 432.
[162] (1994) 61 SASR 424 at 433.
[163] (1992) 29 NSWLR 141.
[164] Coldman v Hill [1919] 1 KB 443 at 449.
[165] Winfield, "The History of Negligence in the Law of Torts", (1926) 42 Law Quarterly Review 184 at 197-198; Maitland, The Forms of Action at Common Law, Chaytor and Whittaker (eds), (1976) at 53-55; Malone, "The Role of Fault in the History of Negligence" in Essays on Torts, (1986) 1 at 24-30.
[166] [1988] AC 1013 at 1059.
[167] [1978] AC 728.
[168] Steele, "Scepticism and the Law of Negligence", (1993) 52 Cambridge Law Journal 437 at 466.
[169] "Concerning Judicial Method", (1956) 29 Australian Law Journal 468 at 472, 475. See also as to "the time-honoured methodology of the common law" the remarks of McLachlin J in R v Van der Peet (1996) 137 DLR (4th) 289 at 377.
[170] [1964] AC 465.
[171] (1968) 122 CLR 556; rev [1971] AC 793.
[172] (1981) 150 CLR 225.
[173] (1986) 162 CLR 340 at 371.
[174] See China and South Sea Bank Ltd v Tan [1990] 1 AC 536 at 543-544.
[175] China and South Sea Bank Ltd v Tan [1990] 1 AC 536; see also Coroneo v Australian Provincial Assurance Association Ltd (1935) 35 SR (NSW) 391 at 394-395.
[176] The Law of Torts, 1st ed (1887) at 448-449.
[177] (1842) 10 M & W 109 [152 ER 402].
[178] [1983] 1 AC 520 at 551-552.
[179] [1995] 2 AC 207 at 251, 281-282.
[180] (1995) 182 CLR 609 at 639-640, 648.
181 [1964] AC 465 at 528-529.
[182] [1995] 2 AC 296 at 317-320, 344-345.
[183] [1995] 2 AC 145 at 178-181.
[184] Unreported, High Court of Australia, 18 March 1997 at 79-82 of pamphlet.
[185] (1988) 164 CLR 387 at 400-406, 426-429, 449, 458-459.
[186] Prosser and Keeton on Torts, 5th ed (1984), SS96.
187 [1964] AC 465 at 524.
[188] 111 NE 1050 (1916).
[189] [1932] AC 562.
[190] [1932] AC 562 at 598-599.
[191] 111 NE 1050 at 1054 (1916).
[192] Posner, Law and Legal Theory in England and America, (1996) at 45.
[193] 174 NE 441 (1931).
[194] See, for example, First National Bank of Commerce v Monco Agency Inc 911 F 2d 1053 at 1058 (1990).
[195] See San Sebastian (1986) 162 CLR 340 at 353, 356-357; Bily v Arthur Young and Co 834 P 2d 745 at 772 (1992).
[196] [1995] 2 AC 296 at 318.
[197] [1978] 1 NZLR 553.
[198] South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd [1992] 2 NZLR 282; Invercargill City Council v Hamlin [1994] 3 NZLR 513 at 520, 530; affd [1996] AC 624 (PC).
[199] [1978] AC 728.
[200] [1990] 2 AC 605.
[201] For example, San Sebastian (1986) 162 CLR 340 at 354-355, 367 and Bryan v Maloney (1995) 182 CLR 609 at 617-618, 652-653.
[202] [1990] Ch 313 at 330.
[203] 174 NE 441 (1931).
[204] 174 NE 441 at 444 (1931).
[205] Rosenblum v Adler 461 A 2d 138 at 151 (1983); see also as to the significance attached to the availability of insurance against the risk of liability under expansive tort doctrine Scott Group Ltd v McFarlane [1978] 1 NZLR 553 at 572; Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] (1981) 150 CLR 225 at 252; Canadian National Railway Co vNorsk Pacific Steamship Co [1992] 1 SCR 1021 at 1123-1125.

[206] Siliciano, "Negligent Accounting and the Limits of Instrumental Tort Reform", (1988) 86 Michigan Law Review 1929 at 1948-1950, 1976-1977. See also Feldthusen and Palmer, "Economic Loss and the Supreme Court of Canada: An Economic Critique of Norsk Steamship and Bird Construction", (1995) 74 Canadian Bar Review 427 at 443-445.
[207] Siliciano, "Negligent Accounting and the Limits of Instrumental Tort Reform", (1988) 86 Michigan Law Review 1929 at 1950.
[208] Marc Rich & Co v Bishop Rock Ltd [1996] 1 AC 211 at 228-229, 239-240.
[209] Fleming, "Tort in a Contractual Matrix", (1995) 33 Osgoode Hall Law Journal 661 at 672.
[210] (1994) 120 DLR (4th) 726.
[211] (1994) 120 DLR (4th) 726 at 734.
[212] (1994) 120 DLR (4th) 726 at 736.
[213] [1990] 2 AC 605.
[214] 461 A 2d 138 (1983). The New Jersey legislature has since limited the liability of accountants to third parties for their negligent acts: Petrillo v Bachenberg 655 A 2d 1354 at 1360 (1995). See also the provision now made in New South Wales by the Professional Standards Act 1994 (NSW) for the approval of schemes limiting the civil liability of professionals.
[215] [1978] 1 NZLR 553.
[216] 461 A 2d 138 at 153 (1983); Rosenblum was followed in Touche Ross v Commercial Union Insurance 514 So 2d 315 at 322-323 (1987).
[217] In Virginia, there is a general doctrine that privity of contract is an essential element of an action to recover for economic loss resulting from negligent performance of a contractual commitment: Ward v Ernst & Young 435 SE 2d 628 at 630-634 (1993).
[218] 493 NYS 2d 435 (1985).
219 493 NYS 2d 435 at 445 (1985).
[220] 493 NYS 2d 435 at 443 (1985).
[221] First National Bank of Commerce v Monco Agency Inc 911 F 2d 1053 at 1058-1059 (1990).
[222] 461 A 2d 138 (1983).
[223] Restatement Second of Torts, Tentative Draft No 11, April 15, 1965, SS552 at 56.
[224] The Scottish Heritable Trust Plc v Peat Marwick Main & Co 81 F 3d 606 at 612 (1996).
[225] 834 P 2d 745 (1992).
[226] In San Sebastian (1986) 162 CLR 340 at 358, this Court held that the general interest which a local authority has in promoting or encouraging the development of its area would not ordinarily be classified as a "pecuniary interest", so as to support the existence of a duty of care on its part in relation to statements in its development plans.
[227] 834 P 2d 745 at 772-773 (1992).
[228] (1970) 122 CLR 49 at 65-67.
[229] [1992] 2 VR 671.
[230] (1986) 162 CLR 340.
[231] (1986) 162 CLR 340 at 358.
[232] (1986) 162 CLR 340 at 357-358.
[233] (1986) 162 CLR 340 at 367.
[234] (1986) 162 CLR 340 at 355.
[235] (1968) 122 CLR 556.
[236] (1981) 150 CLR 225.
[237] (1986) 162 CLR 340 at 356-357.
[238] (1986) 162 CLR 340 at 357.
[239] (1986) 162 CLR 340 at 357.
[240] (1994) 61 SASR 424 at 432.