Triumph of the Disclaimer - a case study
A lesson has been set down for banks and financial institutions by the High Court in Barclays Bank Plc v Grant Thornton UK LLP EWHC320 (Comm) – beware relying on audited accounts prepared for the purpose of financial covenant testing.
On 12 February 2015, the High Court granted summary judgment in favour of Grant Thornton UK LLP ("Grant Thornton"), dismissing a claim against it by Barclays Bank plc ("Barclays")for damages in connection with losses suffered by Barclays from the collapse of hotel giant Von Essen Hotel Group ("VEH").
On 11 August 2006, VEH Group entered into a Facility Agreement with Barclays and Lloyds for loans in an aggregate amount of £250 million. Under that agreement, VEH made a number of covenants about its financial condition to be verified, at particular times during the course of the facility through the provision of periodic financial information and certificates.
In 2006 and 2007, VEH engaged Grant Thornton to audit its non-statutory financials for the purpose of providing such information to Barclays to verify financial covenant compliance.
It was subsequently discovered that the audits conducted by Grant Thornton were made on the basis of fraudulent representations made by certain of VEH's employees in relation to VEH's accounts.
Of relevance to the case was that the audited reports were addressed to a Mr Davis as the sole director of VEH and the front page of such reports contained a disclaimer ("Disclaimer") that Grant Thornton would not accept or assume responsibility to anyone (other than VEH) in relation to the reports or its audit work.
3. Basis of the claim
VEH Group subsequently collapsed and Barclays made a claim against Grant Thornton in respect of the 2006 and 2007 audited accounts on the basis that:
(a) Grant Thornton owed a duty of care to Barclays as:
(i) Barclays relied on the reports in calculating financial covenant compliance
(ii) Grant Thornton would have known that Barclays was relying on the reports to ascertain the financial condition of VEH Group and that Barclays would not obtain separate advice in respect of the accounts
(b) The Disclaimer did not apply to the duty of care owed to Barclays as it was not brought to the attention of Barclays.
Justice Cooke decided that Grant Thornton was entitled to summary judgment on the basis that:
(a) Grant Thornton did not owe Barclays a duty of care – there was no letter of engagement or any other arrangement directly between Barclays and Grant Thornton in respect of preparation of the accounts and similarly, there was no fee paid by Barclays to Grant Thornton for any such services – Barclays claim, according to Justice Cooke was "in one sense, therefore, seeking a free ride"; and
(b) there was a clear disclaimer on the front page of the audited accounts (the argument that the disclaimer was not brought to the attention of Barclays was rejected by Justice Cooke on the basis that Barclays were "sophisticated business parties … able to protect their own interests").
5. Implications for banks and other financial institutions
Banks and other financial institutions seeking to rely on reports prepared by third parties (and have direct recourse to such third parties for loss) should be careful to ensure that:
(a) such reports are specifically addressed to them and to any parties that the Bank intends should have reliance on such reports;
(b) disclaimers/ limitations on liability in third party reports should be considered carefully and negotiated where appropriate; and
(c) to the extent that industry dictates the level of limitation on liability, banks and other financial institutions should ensure that arrangements are otherwise in place to recover indebtedness and losses associated with such indebtedness – eg. through taking appropriate security.
We frequently review these arrangements for our clients, so if you would like to discuss this case or anything arising from it, please get in touch.