Many auditors will welcome the recent ruling of the English Commercial Court in Barclays Bank plc v Grant Thornton UK LLP, which confirmed the efficacy of a 'Bannerman disclaimer' intended to preclude liability to third parties for the content of an audit report.
The claim arose after Grant Thornton (GT) was engaged to perform non-statutory audits of the Von Essen Hotels Limited Group (VEH) and certified that the resulting reports for 2006 and 2007 gave a true and fair view of the group's financial affairs. However, GT was provided with false information about the performance of VEH by two of its key employees. Barclays said the effect of this was to make it appear that VEH was able to meet covenants in a loan facility being provided by Barclays, when it could not.
Barclays said it relied upon the erroneous audit reports in advancing loans to VEH and, as a result, sustained losses of some £45m when VEH went into administration in Apri12011.
Barclays contended in its 'Particulars of Claim' that GT owed it a duty of care in respect of the content of the audit reports on the basis that the auditor knew the bank would place reliance upon them, and that GT's duty of care was breached by its failure to uncover the alleged fraud of the two employees.
Both of the audit reports contained a disclaimer on their first page: a Bannerman clause' stating that the auditor did not accept or assume responsibility in respect of the reports to anyone other than the company and its directors. The disclaimer was largely in the form of the standard wording for 'Bannerman clarification language' recommended by ICAEW for statutory audit reports amended to reflect the fact that the reports were non-statutory.
GT applied for summary judgement on the basis that Barclays' claim had no reasonable prospect of success. To test whether the claim could succeed, the judge proceeded on the basis that the key factual assertions made by Barclays were true. This included an assumption that GT knew Barclays would rely upon the audit reports in deciding whether to continue lending to VEH.
The court considered a number of issues including:
Barclays' awareness of the disclaimer.
The first question to consider was whether the disclaimer had been sufficiently brought to the attention of Barclays. It had -even if the relevant person at Barclays had not read it, as he claimed. Barclays ought reasonably to have been aware of it, since it appeared in the first two paragraphs of a two-page audit report.
The reasonableness of the disclaimer.
The central issue was whether the clause was reasonable by reference to the Unfair Contract Terms Act 1977. The Court found that it was, for a number of specific reasons.
- In a separate engagement, Barclays had specifically ensured that GT accepted responsibility to it, as well as to the audit entity.
- Barclays was not an addressee of the GT engagement letter or the audit reports. It had no contact with GT in relation to the audit or the reports; it was the audit entity VEH which sent the reports to Barclays.
- Although the stated purpose for the non-statutory audit reports related to the loan facility (it was a requirement of the loan facility to VEH that the reports should be produced to Barclays), the bank was not the only party GT could expect to rely on the reports. VEH - to whom the reports were addressed -would rely on them too.
- Barclays was a sophisticated commercial party, used to reading auditors' reports (and therefore used to these sorts of disclaimers, which are commonplace).
- Barclays did not engage or pay GT for these non-statutory reports; it was "seeking a free ride".
- If the disclaimer was struck down, then Barclays might be in a better position than it would have been had it entered into a direct engagement and paid for the reports. On the evidence, GT would, in that case, have obtained a limitation of its liability to Barclays.
- The disclaimer was clear and obvious on the face of the report.
- The disclaimer had a legitimate purpose. GT was entitled to seek to avoid litigation, and to expect that any party wanting to rely on the reports would approach it to negotiate terms for doing so (such as payment of fees and a limitation on liability).
- Given the wider relationship between GT and Barclays, the bank was aware of the possibility of a direct engagement and what the likely terms of that would be.
A key point in finding that GT had effectively negated any duty to Barclays was the visibility of the Bannerman statement. Mr Justice Cooke commented that, under the circumstances, had there been no disclaimer, it would be "clearly arguable" that GT would have owed a duty of care to Barclays. The existence of the disclaimer was therefore critical, in light of which there was "no good reason" why the claim should proceed to a full trial.
The question to be asked was whether a reasonable person in the position of Barclays could properly consider that GT was undertaking responsibility to it. GT could not have 'assumed responsibility' to Barclays in circumstances where such an assumption of responsibility was specifically disavowed.
This decision is comforting for auditors. Since Caparo Industries plc v Dickman (1990), many cases have emphasised the importance of disclaimers and alighted upon the absence of a disclaimer when one could have been sought as a reason for finding that a duty was owed to a third party.
However, this is the first case to fully test, and uphold, the efficacy of the Bannerman clause. Different circumstances can naturally produce different results; but this decision underlines the point that such clauses, when properly drafted, can protect against negligence claims by sophisticated third parties who relied on a report that was not prepared for them.
This article was originally published in the September 2015 edition of Audit & Beyond.