Do contractual disclaimers always stand up in court? The Amathus Drinks case demonstrated that a contractual disclaimer is not an impenetrable barrier against claims of negligent misstatement.
A recent decision by a High Court Master in the case of Amathus Drinks PLC & Ors v EAGK LLP & Anor [2023] EWHC 2312 (Ch) has sent ripples through the professional negligence landscape. The case involved the buyers of a company who alleged that the accountants responsible for preparing completion accounts during the sale failed to detect an underlying fraud. The buyers claimed that this negligence breached the accountants’ duty of care toward them.
What makes this case particularly interesting is the central question of whether a contractual disclaimer in the accountants’ documentation could shield them from the negligence claims. The decision, delivered by the High Court Master, highlights the importance of evaluating disclaimers in their specific context, and it offers valuable insights into the world of professional negligence claims.
Quick Summary:
In the case of Amathus Drinks PLC v EAGK LLP [2023], the High Court rejected an application by an audit firm to strike out a claim in tort, which alleged that the audit firm owed a duty of care to the buyers of a company when preparing a Completion Certificate as part of a Share Purchase Agreement (SPA). The buyers claimed that they overpaid for the company’s shares due to fraudulent activity that the audit firm failed to detect. The audit firm argued that their disclaimer should absolve them from liability, but the court disagreed, finding that a duty of care could still exist in certain circumstances. The court also ordered the audit firm to provide specific disclosure of its files, allowing the claimants to better particularise their claim. This case highlights that disclaimers may not always shield auditors from liability and underscores the importance of considering the specific circumstances when determining the existence of a duty of care.
What is a Contractual Disclaimer?
In English law, a contractual disclaimer is a clause or provision included in a contract that seeks to limit or exclude certain liabilities or obligations that would otherwise be imposed by law. It is a legal mechanism used to define the terms and conditions of a contract and allocate risks between the parties involved. Contractual disclaimers are often used in commercial agreements to protect one or both parties from potential liabilities or losses.
Key elements of a contractual disclaimer include:
- Clear and Unambiguous Language: To be effective, a disclaimer must be clear and unambiguous. It should leave no room for doubt about the parties’ intentions to limit or exclude certain liabilities or obligations.
- Types of Disclaimers: Contractual disclaimers can take various forms, such as:
- Exclusion Clauses: These clauses exclude certain types of liability or obligations. For example, a contract might include a clause that states, “The seller shall not be liable for any indirect or consequential damages.”
- Limitation Clauses: These clauses limit the extent of liability or obligations. For example, a clause might specify a cap on the amount of damages recoverable in case of a breach.
- Statutory Restrictions: English law, particularly the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015, places limitations on the use of disclaimers in certain types of contracts. For example, disclaimers attempting to exclude or limit liability for death or personal injury caused by negligence are generally void.
- Negotiation and Bargaining Power: The enforceability of a disclaimer often depends on the relative bargaining power of the parties. In contracts between commercial entities, the courts may be more inclined to uphold disclaimers than in consumer contracts where there may be an imbalance of power.
- Public Policy: Some disclaimers may be unenforceable if they contravene public policy or fundamental legal principles.
It’s essential for parties entering into contracts to be aware of the presence of disclaimers, carefully review their terms, and seek legal advice if necessary to understand the implications and enforceability of such clauses. Disclaimers are a common feature in commercial contracts, but their effectiveness can vary depending on the circumstances and the specific wording used.
What was the Disclaimer for?
Following the 2005 Scottish case of Royal Bank of Scotland Plc v Bannerman Johnstone Maclay, the Institute of Chartered Accountants in England and Wales (ICAEW) issued guidance recommending the use of a “Bannerman disclaimer” in audit reports. This disclaimer aimed to clarify that auditors did not assume responsibility for anyone other than the company and its members.
In August 2015, the claimants entered into a share and purchase agreement (SPA) to acquire a company. They engaged a prominent accounting firm to conduct due diligence. The SPA outlined that the share price would be adjusted if the completion accounts revealed that the company’s net assets were less than the agreed price. The defendant accounting firm prepared the completion accounts, statutory accounts, and a completion certificate in September 2016.
The claimants later discovered a fraudulent scheme within the company, which inflated its net assets. As a result, they paid more under the SPA than they should have. Subsequently, they initiated a claim against the defendant for alleged breaches of contract and a common law duty of care in relation to the preparation of statutory accounts and the completion certificate.
Why This Case Matters
The Amathus Drinks case is a prime example of how professionals may not always find complete refuge in contractual disclaimers. While these disclaimers play a significant role in setting boundaries, they are not fool proof and must be assessed in the context of each unique case.
The decision emphasises that a disclaimer is a crucial factor in determining whether a professional has assumed responsibility toward a third party. However, it is not the sole determining factor. The specifics of the case, such as the nature and extent of direct communications between the professional and the third party, can influence the outcome. In this case, ongoing communications after the audit engagement played a crucial role in the decision.
What was the view of the High Court?
The defendant conceded that, without the disclaimer in the engagement schedule, they could be seen as assuming responsibility for the accuracy of the accounts and the completion certificate. However, they argued that the disclaimer presented a significant obstacle to the tort claim.
In a critical reference to the judgment in Barclays Bank Plc v Grant Thornton UK LLP [2015] EWHC 320 (Comm), the Master emphasised that a disclaimer is one of the factors relevant to determining whether responsibility was assumed. In Barclays, a clear disclaimer negated any duty of care.
In the present case, the Master highlighted two factors that differentiated it from Barclays. Firstly, the buyers were involved in ongoing communications with the accounting firm, suggesting a continuing and direct commercial relationship. Secondly, emails exchanged between the parties after the audit engagement date indicated that the individual from the accounting firm considered himself as part of or supportive of the buyers’ professional team. This was not the case in Barclays, where there were no such direct communications.
Download Judgement Here
What does the case highlight?
As a business owner or professional services provider, this case underscores the importance of understanding the limits of contractual disclaimers. While these disclaimers serve as an important line of defence, they are not a one-size-fits-all solution. The outcome may hinge on various factors, such as the nature of the parties’ relationship, ongoing communications, and the specific circumstances of the case.
The Amathus Drinks case serves as a reminder that, in the realm of professional negligence claims, disclaimers are a powerful tool, but not an absolute guarantee. The decision emphasises the importance of assessing the unique circumstances surrounding a case, especially when considering the assumption of responsibility by professionals.
If you find yourself in a professional negligence dispute, it’s vital to consult with experienced legal professionals who can help you navigate the complexities of your case and we can do just that. Understanding the subtleties of contractual disclaimers and their role in your situation is key to securing a favourable outcome and we can help you achieve it.
Book an initial consultation with our Professional Negligence Lawyers
If you have a claim against a professional and want expert legal advice, get in touch so we can assess the legal merit of your case. We can often take on such claims on a no win no fee basis (such as a CFA or DBA) once we have discussed the claim with you and then assessed and advised you on the merits of the proposed professional negligence action. Our expert legal team of leading Professional Negligence Solicitors & Barristers can provide urgent help, advice or representation to you. Just call our Professional Negligence Lawyers on 02071830529 or email us now.
