EXECUTOR TRUSTEE AUST LTD and OTHERS v PEAT MARWICK HUNGERFORDS No. SCGRG 92/1218 Judgment No. 4918 Number of Pages - 9 Audit, Auditors and Accountants (1995) 13 ACLC 201 (1995) Aust Torts Reports 81-318 (1995) 63 SASR 393

[1995] SASC 4918

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA BOLLEN J

CWDS
Audit, auditors and accountants - audit and auditors - Application to strike out allegations of negligence and breach of statutory duty in the Statement of Claim - alleged negligent misstatements in reports submitted by auditors to its client company - that company showed the reports to the plaintiffs who alleged that they acted thereon to their detriment - proximity - inducement not essential assumption of responsibility will suffice in this type of action - application to strike out refused - general comments of discretion. Companies Code (SA) ss 285, 287, 574, 575 and Fair Trading Act. San Sebastian P/L v Minister Administering the Environmental Planning and Assessment Act1979 (NSW) 1986 162 CLR 340; Esanda v Peat Marwick Hungerford (1994) 61 SASR
424; R Lowe Lippmann Figdor and Franck v AGC (Advances) Ltd (1992) 2 VR 671 and Henderson v Merrett Syndicate Ltd (1994) 3 All ER 506, applied. Hedley Byrne and Co v Heller Partners Ltd (1964) AC 465 and Anns v Merton LBC 1978 AC
728, discussed.

HRNG ADELAIDE, 29-30 November 1994 #DATE 12:1:1995 #ADD 13:3:1995

Counsel for applicant:     Mr Bathurst QC with Mr J.P. Keen

Solicitors for applicant:    Finlaysons

Counsel for respondents:     Mr M.F. Blue with
   Mr M.C.J. Hoffmann

Solicitors for respondents: Fisher Jeffries

ORDER
Application refused.

JUDGE1 BOLLEN J This is an application by the defendant made under Rule 46.18 to strike out part of a statement of claim.

2. The plaintiffs seek damages and declaration in circumstances alleged in the seventh edition of the statement of claim. The plaintiffs assert that the defendants were guilty of breach of a duty of care owed by it to them, i.e. raise negligence. They allege that the defendants were in breach of duty owed to the plaintiffs pursuant to statute.

3. The defendant, in seeking to strike out part of the statement of claim, limited the attack to the allegations raised by the second to eighth plaintiffs inclusive, banks and debenture holders. The defendant does not seek to strike out the allegations and claims raised by the first plaintiff. The defendant acknowledges that the statement of claim raises arguable cases on causes of actions in relation to the first plaintiff. Nor does the defendant seek to strike out each allegation raised by the second to eighth plaintiffs. The defendants seek to have (speaking loosely) negligence and one avenue of breach of statutory duty knocked out. But it does not seek to have the claim based on suggested breach of s.285 of the Companies Code knocked out.

4. If, then, the orders sought are all made the action will still proceed. For the first plaintiffs it will proceed on the allegations in the present seventh edition of the statement of claim. That is, if there be no further amendment allowed. Perhaps one can forecast that no such allowing is likely]

5. The claim in the action is made by the plaintiffs. They assert that they suffered loss by relying on reports and written statements of the defendants. The defendants were auditors for, or to, a company called Excel Ltd. It is said that Excel made the reports and statements available to the plaintiffs, that the defendant knew that that would happen and, indeed, supported its happening, that the plaintiffs relied on the information in the reports, that the defendant knew and that he had intended that the plaintiffs would so rely and that the plaintiffs thereby suffered loss.

6. The pleading is lengthy. I have made the roughest of summaries of the barest bones of it.

7. Speaking first to the suggested cause of action in negligence, the defendant says (again speaking loosely) that the statement of claim does not raise an arguable case in negligence for the second to eighth plaintiffs, that there is no disclosure on the face of the statement of claim of a relationship of proximity sufficient to raise a duty of care owed by the defendants to the second to eighth plaintiffs and that, therefore, the orders sought should be made.

8. It is a case of alleged "negligent misstatement".

9. I have had the advantage of thorough arguments and submissions, oral and written, on each side. Many authorities were discussed. Many submissions were made. But although I have attended in varying degrees to all, I think it unnecessary to discuss many cases nor all the submissions here. That does not mean that I regard any submission as being worthy of no consideration. It merely means I think that I can see the way to a solution by one particular road which I will follow.

10. I think that the application, given these thorough submissions, can be disposed of by an application of two cases wherein other important cases are discussed. Those two cases, which, to my mind, are at the centre of the debate here, are San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (NSW) (1986) 162 CLR 340 and (even more valuable here) the decision of the Full Court in Esanda v Peat Marwick Hungerford (1994) 61 SASR 424. In the latter case King CJ (after speaking of the pleadings) began his consideration of the matter by referring to the seminal decision of Hedley Byrne and Co v Heller Partners Ltd (1964) AC
465. King CJ said:
    "Ever since the introduction into the law of the concept of
    legal liability for negligent misstatement in Hedley Byrne
and Co Ltd v Heller and Partners Ltd (1964) AC 465, there
    have been difficulties in defining the circumstances giving
    rise to a duty of care in relation to statements and the
    class of persons to whom the duty is owed. The concept of
    reasonable foreseeability of harm which had served
    adequately in relation to physical acts was found to be no
    longer adequate, standing alone, by reason of the spectre
    of, to use the famous words of Cardozo J in Ultramares
    Corporation v Touche (1931) 174 NE 441, 'liability in an
    indeterminate amount for an indeterminate time to an
    indeterminate class'. This has led to a revival of
    recognition of the notion of proximity, found in the
    seminal speech of Lord Atkin in Donoghue v Stevenson (1932)
    AC 562 at 578 et seq but rather submerged in subsequent
    cases, as an essential requirement, together with
    foreseeability of harm, for the imposition of a duty of
    care."

11. I note the reference to submerging of the speech of Lord Atkin in Donoghue v Stevenson (supra). With great respect to all other views, I regret the submerging of Lord Atkin in this and other fields of negligence. Perhaps it would not have happened or not have been so deep had the splendid, if I may say so, reasoning and exposition of Lord Wilberforce in Anns v Merton L.B.C. 1978 AC 728 prevailed here as it has in New Zealand. "Who was my neighbour here" the defendants might have asked. The answer might have been "Your neighbour is the relevant plaintiffs whom you knew or could have foreseen would have acted on your report and who did to their loss". Had there been no submerging this might have been sufficient to found an action in negligence. But it is not so now. The learned Chief Justice went on in Esanda to say (pp.428-430):
    "The conditions which give rise to a duty of care in
    relation to statements are dealt with in a number of cases
    of which, apart from Hedley Byrne v Heller itself (supra),
    the most important for present purposes are Mutual Life and
Citizens' Assurance Co Ltd v Evatt (1968) 122 CLR 556 and
    L. Shaddock and Associates Pty Ltd v Parramatta City
Council (1981) 150 CLR 225. Those cases, however, were
    concerned with information or advice provided to a
    particular person or particular persons. There was no
    question but that the plaintiff was the object of any duty
    which existed; the question was whether the circumstances
    were such as to give rise to a duty. The courts in those
    cases were concerned with the circumstances which give rise
    to the duty and not with the class of persons to whom it
    might be owed.

In England the view has prevailed that the duty of care in
    relation to statements is confined to information or advice
    given to a known recipient for a specific purpose of which
    the maker of the statement was aware: Caparo Industries Plc
v Dickman (1990) 2 AC 605. In 1986, however, prior to
    Caparo v Dickman the High Court of Australia had considered
    the question of the liability of the maker of a statement
    to persons who relied upon it but who were not persons to
    whom the statement had been directly addressed.

In San Sebastian Pty Ltd v Minister Administering
Environmental Planning and Assessment Act 1979 (NSW) (1986)
    162 CLR 340, a developer sought to make the Minister and
    the Sydney City Council liable for the negligent
    preparation by the State Planning Authority and publication
    by the Council of a redevelopment plan and accompanying
    documents containing representations in reliance upon which
    the developer had acquired land and sustained a loss. The
    High Court had to consider whether the Authority and the
    Council owed a duty of care to the developer in relation to
    the preparation and publication of the plan and documents.
    In a joint judgment Gibbs CJ, Mason, Wilson and Dawson JJ
    noted that Evatt and Shaddock (supra) were cases in which
    the information or advice was furnished in response to a
    request by the plaintiff. Their Honours commented: 'But
    there is no convincing reason for confining the liability
    to instances of negligent misstatement made by way of
    response to a request by the plaintiff for information or
    advice. The existence of an antecedent request for
    information or advice certainly assists in demonstrating
    reliance, which is a cornerstone of liability for negligent
    misstatement. However, such a request is by no means
    essential, though it has been suggested that instances of
    liability for misstatement volunteered negligently will be
"rare": Evatt (at 571-572); Lambert v Lewis (1982) AC 225
    at 264. 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.'

The developer relied upon an alleged intention on the part
    of the Authority and the Council to cause developers to act
    in reliance upon the plan. Their Honours expressed the
    applicable principle by stating: 'that it is necessary not
    only that A intends that B or a member 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 a particular
    way, in circumstances where A should realise that economic
    loss may be suffered if the statement is not true' (at
    358).

They held, in consequence, 'that if the appellants' case is
    to succeed they must establish at least, among 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'.

Of significance to the present case is the treatment in the
    joint judgment of the American cases Rusch Factors Inc v
Levin 284 F Supp 85 (1968) and Rhode Island Hospital Trust
    National Bank v Swartz, Bresenoff, Yavner and Jacobs 455 F
    (2d) 847 (1972). Those cases dealt '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
    plaintiff for funds'. The comment on those cases in the
    joint judgment is that 'the two decisions provide support
    for the proposition that, where a statement is made for the
    purpose of inducing the plaintiff, or the members of a
    limited class including the plaintiff, to commit themselves
    financially upon the basis that the statement is true, and
    the plaintiff acts in reliance on the statement, the law
    will impose a duty of care on the maker of the statement'.

Brennan J, who delivered a separate judgment, also accepted
    that an intention to induce the plaintiff, or a class of
    persons of which the plaintiff is a member, to act upon the
    representation, would give rise to a duty of care if
    certain other conditions were present (at 372).

The San Sebastian case (supra) was applied by the Full
    Court of the Supreme Court of Victoria in R Lowe Lippmann
Figdor and Franck v AGC (Advances) Ltd (1992) 2 VR 671 in
    an action by a creditor of a company who claimed to have
    lent money to the company in reliance upon the financial
    accounts of the company which had been negligently audited
    by the defendants. The auditors were aware that the
    creditor was a major creditor of the company but 'the only
    sense in which the auditors could be said to have made a
    statement to the respondent was that the auditors signed an
    audit report knowing that Lyvetta would probably supply a
    copy of the audited accounts to the respondent for the
    respondent's review of Lyvetta's loan facility'.

The Full Court held that 'in cases like the present, there
    being no other combination of circumstances present
    sufficient to impose a duty of care, the auditor supplying
    a report on the company's financial accounts to the company
    in the usual way was not under a duty of care to a third
    party in respect of a statement in that report unless the
    auditor's purpose, or one of his purposes, in making the
    statement in question was to induce the third party, or a
    class which included the third party, to act on the
    statement'.

What emerges is that in Australian law, the duty of care in
    relation to statements has been extended beyond statements
    made to a particular person for a particular purpose and
    even beyond statements made to a third person for the known
    purpose of communication to the person who sustains the
    loss. There are circumstances in which the maker of a
    statement owes a duty of care to a person who reasonably
    relies on the statement although the statement was not made
    to that person either directly or purposely through a third
    person. The San Sebastian case demonstrates that where the
    statement is not made to a particular person in response to
    a request for information or advice, the place of a request
    in the complex of factors giving rise to a duty may be
    supplied by other factors such as those enunciated in the
    joint judgment (at 357). One such factor is an intention
    to cause the recipient of the information or advice, or a
    class to which that recipient belongs, to act on the
    information or advice. Where that intention exists and
    there are also present the factors discussed in the Evatt
    and Shaddock cases and in the judgment of Brennan J in San
    Sebastian, the law imposes a duty of care."

12. His Honour then said something of the utmost importance. He dismissed a submission which, if correct, would have greatly narrowed the area of proximity in these "negligent misstatement" cases.

13. His Honour said:
    "Mr Gray QC, for the appellant, submitted that the effect
    of San Sebastian is that it is an essential ingredient of
    liability for negligent misstatement that the defendant
    intended to induce the plaintiff, or a member of a class of
    persons to which the plaintiff belongs, by means of the
    defendant's statement to act or refrain from acting in a
    particular way, in circumstances where economic loss may be
    suffered if the statement is not true. I cannot accept
    that submission as a valid general proposition. To my mind
    the judgments in San Sebastian indicate that a duty may
    arise from other circumstances. Nevertheless
    circumstances, in order to give rise to a duty of care,
    must demonstrate a relevantly close relationship and will
    generally, although I think not always, include an
    intention that the statement be acted upon by the
    plaintiff. I agree with the reference by Brooking J in the
    Lowe Lippmann case (supra) (at 679), to that intention.
    His Honour said: 'It cannot be said that in cases of
    negligent misstatement a duty of care will exist only where
    the defendant made the statement with this intention. But
    in some cases the duty of care will not arise unless the
    statement was made with the intention mentioned.'

In cases such as the present where the plaintiff is not a
    member of the company to whom the auditor has a statutory
    obligation (s285(1) of the Companies (South Australia)
    Code) but has relied upon the audit report in investing in
    the company or entering into financial dealings with it, it
    seems to me that, in the absence of some feature indicating
    an assumption of responsibility to the plaintiff to
    exercise care in relation to the preparation of the audit
    certificate, an auditor is not under a duty of care to the
    plaintiff unless the auditor intended to induce the
    plaintiff to act in reliance on the audit certificate."

14. In the opinion of the Chief Justice it was not "intention to induce" and that alone which could, in the end, found liability. It could be if there was no "assumption of responsibility" by the maker of the statement. If there is "a feature" indicating an assumption of responsibility to the plaintiff then the statement of claim should not be struck out. I say "in the end" because no doubt the other elements such as foreseeability must be pleaded and proved. They are pleaded here.

15. Millhouse J agreed with the Chief Justice. Olsson J seemed to take a stricter approach. His Honour says:
    "I consider that the validity of the pleading in the
    statement of claim falls solely to be tested against the
    criteria in Sebastian, as re-affirmed in Hawkins v Clayton.
    The mere plea of assumption of responsibility (based on
    general audit standards) is simply not enough. In absence
    of a plea of facts amounting to an intention on the part of
    the defendant 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."

16. But the view of the Chief Justices seems to me, if I may say so, to be entirely consistent with the remarks of the majority in San Sebastian. I refer to the passage which the Chief Justice quoted from the reasons of the majority, which quotation I have in turn quoted (see pp.4-6 (supra)). I extract from that quotation a sentence "He may warrant the correctness of what he says or assume responsibility for its correctness". I refer to the, as I see it, supporting authority of Henderson v Merrett Syndicate Ltd (1994) 3 All ER 506.

17. I think that the statement of claim adequately raises the issue of assumption of responsibility by the defendant to the relevant plaintiffs. All other elements of negligence are raised.

18. The issue of assumption of liability is raised by paragraphs 23C, 23D and 23E. Paragraph 23C is:
    "At all material times, PMH knew, expected and intended
    that the audited financial statements of Excel would be

    provided by Excel to each of second to eighth plaintiffs,
    being debenture stock holders."

19. Particulars, and very detailed particulars, follow.

20. Paragraph 23D of the Statement of Claim is:
    "At all material times PMH knew, expected and intended that
    the second to eighth plaintiffs would rely on the audited
    financial statements of Excel and PMH's report thereon in
    considering:

23D.1 their continued provision of funds to Excel secured
    by the Excel Trust Deed;

23D.2 whether to advance further funds to Excel as
    particularised in paragraph 16 above; and

23D.3 whether, in respect of the negative pledge
    agreements, Excel had complied with the restrictive
    covenants contained therein."

21. Again, detailed particulars follow.

22. Paragraph 23E of the Statement of Claim is:
    "By reason of:
    23E.1 their appointment as auditors of Excel as
    particularised in paragraph 5 above;

23E.2 PMH's knowledge of the terms of the Excel Trust Deed
    particularised in paragraphs 21 to 22 above, which sought to protect
    the second to eighth plaintiffs' interests, as set out in paragraph
    23B above;

23E.3 PMH's knowledge that its audit of the Excel six monthly
    accounts to 31 December of each year was performed, and the
    auditor's report on those accounts was prepared, for no other
    purpose than for the protection of the interests of the debenture
    holders of Excel pursuant to the Excel Trust Deed and Section 158 of
    the Code;

23E.4 PMH's knowledge that the Excel audited accounts were provided
    to, and relied upon by, the second to eighth plaintiffs and that
    those plaintiffs provided funding to Excel on that basis, as set out
    in paragraphs 23C and 23D above;

23E.5 PMH's knowledge as set out in paragraph 34 below, that the
    negative pledge agreements set out in paragraph 24 below, required
    the provision of audited financial statements to each of the second
    to eighth plaintiffs;

23E.6 the fact that PMH provided to the second to eighth plaintiffs
    Finance and Banking Letters on a regular basis, which stated that
    lenders ought to rely on audited financial statements;

23E.7 the fact that notwithstanding its knowledge of the matters set
    out in paragraphs 23E.2 to 23E.6 above, at no time did PMH advise
    each of the plaintiffs that they ought not rely upon the Excel
    audited accounts, PMH's audit reports on those accounts or PMH's
    reports pursuant to the Excel Trust Deed;

PMH assumed a responsibility to the second to eighth plaintiffs to
    furnish accurate opinions and reports in relation to Excel."

23. These pleadings raise allegations of knowledge of use proposed for the reports, intention that the plaintiff would rely on the reports and statements and the details of why assumption of liability is pleaded.

24. In the circumstances, without dealing with more, I think that the Statement of Claim raises an arguable case in negligence based on "assumption of responsibility". I do not think it necessary to deal with other grounds which Mr Blue suggested supported the contention that the pleading of proximity was adequate. I do not mean that no other argument is worthy of consideration. I merely travel along the avenue which I mention to this decision.

25. Only a formal submission about the claim under the Fair Trading Act was made by the defendant. I say nothing about it. As Mr Blue said "... The matter will be proceeding to trial on duty of care for the trustee and under the Fair Trading Act for both sets of plaintiffs".

26. The plaintiff seeks relief under s.285 and 287 of the Companies Code. I think it arguable that these sections "give civil rights". Perhaps s.574 and 575 do, too. I think that the Statement of Claim fairly raises these issues. I do not think it appropriate to embark on a close examination of statutory obligation and relief for breach thereof in this matter at this stage. That will become important at trial. Suffice it to say that I accept the submission of Mr Blue as to the pleading of these issues and the existence of an arguable case which should go to trial. Certainly it is not a case where it is clear that the matter is groundless and that no cause of action exists.

27. I agree with the submission which Mr Blue made that the matter was not appropriate to be dealt by way of an application to strike out. He suggested that the duty of care to the plaintiffs arose in one or all of three ways. I have not needed to investigate that. But, founding on the remarks of the Chief Justice in Esanda (supra), Mr Blue suggested that the application should be dismissed at the outset.

28. In Esanda the Chief Justice said (p.433):
    "I acknowledge the validity of the submission of Mr Wicks
    that the r 46.18 procedure is a summary procedure and
    should be reserved for a plain case. It is not apt for the
    resolution of difficult questions of law. Perhaps the
    demurrer type procedure envisaged by r 75.02(c) would have
    been more appropriate. I think, however, that having
    reached the conclusion which I have reached after full
    argument and consideration, it would be artificial to
    dismiss the appeal on the ground that the r 75.02 procedure
    might have been preferable."

29. Nor do I think that I should dismiss the application on the mere ground that I think a better procedure could have been followed. But I vigorously support the suggestion that an application to strike out should be reserved for the plainest of cases. I think that a strike out application should, in general, not be granted unless the action on its face is so manifestly groundless that it does not admit of argument. Moreover, I think that where there are, or could be, complex questions of law to be determined it is well if the matter go to full trial for one can never be sure but that some piece of evidence might be of great significance in interpreting the facts to which the law is to be applied. The question of whether or not to strike out a statement of claim is one of discretion. In this case, with other causes of action proceeding to trial, and with the interweaving of the interests of all parties I would refuse the application in the exercise of discretion. I would exercise my discretion by saying that I think the whole issue as pleaded should go to trial. The Statement of Claim, not counting schedules, runs for 227 pages. Length is not necessarily productive of clarity. But I think this Statement of Claim, as drawn, tells the defendants the complaints which the plaintiffs have, the reasons for those complaints, the legal basis on which complaint is offered and all other matters necessary for the action to be capable of thorough and fair trial on this Statement of Claim.

30. I refuse to strike out anything.