Barings PLC (in liquidation) & Anor v Coopers & Lybrand (A Firm) & Ors (2001)
The claimant, in an action for negligent misstatement, had to plead the circumstances on the basis of which it alleged that the defendant knew of the intended transaction of the claimant and its reliance on the defendant for that purpose. A subsidiary auditor was not to be treated as subject to the same duties to a parent company as those to which the group auditor would be subject as a result of its contractual relationship with that parent.
Application by Deloitte & Touche (Singapore) ('DT') to strike out the claims for negligent misstatement brought against them by Barings plc ('PLC') and Bishopscourt (BS) Ltd, formerly Barings Securities Ltd ('BSL') in the combined action against the auditors resulting from the collapse of the Barings group in 1995. DT were the auditors of Barings Futures Singapore Pte Ltd ('BFS') in 1992 and 1993 and were replaced by Coopers & Lybrand Singapore ('CLS') in 1994. Coopers & Lybrand in London ('CLL') audited PLC, BSL and the Barings group in all three years. A preliminary issue was to be held in the BFS action as to whether DT had a complete defence based on circuity of action and/or set-off and/or estoppel, arising from director's representation letters signed during the audits, such as to bar BFS' claim. The trial of the combined action began on 2 October 2001 and during its second week it was announced that the claimants had signed settlement agreements with the Coopers firms. There were three categories of claim brought by PLC and BSL and which DT sought to have struck out. (i) BSL claimed, consequent upon the 1992 audit, the sums which it advanced to BFS by way of "dollar funding". DT argued that this claim failed, both because this was loss which would be made good if BFS were to recover it (the Johnson v Gore Wood (2001) 2 WLR 72 ground) and because on the pleadings, the claim failed the purpose or transaction test in Caparo v Dickman (1990) 2 AC 605. (ii) PLC and BSL both claimed the value of their respective groups, which became insolvent following the collapse. Both claims would lapse if the settlement with the Coopers firms became operative. DT argued that, on the pleading, the loss of value claims failed the purpose or transaction test. (iii) PLC claimed (consequent upon the 1993 audit) in relation to bonuses which it paid out in 1994, the calculation of which relied on the apparent 1993 profits shown in the 1993 accounts. The profits were overstated in that they failed to take account of Nick Leeson's losses on the 88888 account. DT applied to strike it out on the facts and on the Johnson v Gore-Wood ground.
(1) To perfect his cause of action for negligent misstatement a claimant must establish that the defendant had in contemplation the transaction by which the claimant suffered loss in order for the defendant to have assumed a duty to exercise due care and skill to protect the claimant from the loss resulting from it. To have in contemplation might mean either to be directly informed that the claimant either would or was likely to embark on the transaction in reliance on his advice or other statement or that, from the surrounding circumstances of the case, it could be inferred that he knew of the transaction and the reliance (Caparo (supra)). (2) It was clear that the claimant must plead the circumstances on the basis of which he alleged that the defendant knew of the intended transaction of the claimant and his reliance on the defendant for the purpose of it (Caparo (supra) and Galoo Ltd v Bright Grahame Murray (1994) 1 WLR 1360). (3) The dollar funding loans started some 15 months after DT's consolidation schedules were sent to CLL and the transactions which brought down the Barings Group occurred approximately two years later. It was hard to see how BSL could allege the necessary reliance on DT's 1992 audit to comply with the purpose test in respect of the dollar funding loans. (4) DT could not be treated as if it had a contractual relationship with BSL at the material time of the audit, because of Barings' company structure at the time, thereby rendering it liable to all the consequences of failing to discover the Leeson frauds in the course of the 1992 audit, without the limitation arising as a result of the application of the purpose test. BCCI v Price Waterhouse (1998) Lloyd's Rep 85 was not authority for the proposition that a subsidiary auditor was to be treated as subject to the same duties to a parent company as those to which the group auditor would be subject as a result of his contractual relationship with that parent. (5) DT was not bound by the results of earlier proceedings in this litigation concerning the Coopers firms. (6) Both the dollar funding claims and the loss of value claims failed the purpose test in that the statement of claim did not adequately plead them. (6) The Johnson v Gore-Wood defence did not therefore arise but the judge held that DT's entitlement to set off its claim for deceit against BFS' claim against them for negligence was not a circumstance which permitted BSL as a shareholder of BFS to sue for reflective loss. BSL's claim for its dollar funding was reflective. For this reason also, the dollar funding claim disclosed no reasonable cause of action and should be struck out. (7) No decision could be given on the applicability of the Johnson v Gore-Wood defence to the overpaid bonuses before the trial. As pleaded, in the light of the undisputed facts, the claim had no prospect of success and the current pleading would be struck out under the court's inherent jurisdiction.
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23 Nov 2001
LTL 28/11/2001 :  PNLR 16
James Aldridge QC