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Equitable
Life's claim in negligence against its auditors in relation to bonus
declaration schemes should not have been struck out summarily as it
involved complex issues of law and fact.
The
Court of Appeal substantially reversed the decision of the Commercial
Court, made in February 2003, that a claim for loss of sale or loss
of chance of sale could not be pursued by Equitable against its auditors,
Ernst & Young. That decision was made on the basis that it is not
part of an auditor's duty of care to make provisions in relation to
the fall in value of assets of the organisation it is auditing.
In
July 2000, the House of Lords had held, in Equitable Life Assurance
Society v Hyman, that a director's power under articles to apportion
bonuses was not to be used to devalue guaranteed rates and that differential
bonus rates were contrary to the terms of guaranteed annuity policies.
As is well known, this decision had disastrous consequences for Equitable,
which was exposed to liabilities of £1.5 billion.
In
this action, Equitable claimed that Ernst & Young had been negligent
in the audit of its statutory accounts for the financial years 1997,
1998 and 1999 on the following bases:
·
Ernst & Young failed to ensure that the "technical provisions"
in the accounts complied in each of the three years with the requirements
of company law. Equitable said that had the accounts not been audited
negligently, its directors would have appreciated that the Society's
working capital was much lower than the figure shown in the accounts.
·
Ernst & Young failed to ensure that the 1998 and 1999 accounts contained
a note, prepared in accordance with standard accounting practice, which
would have warned directors of the scale of the untoward financial consequences
that would ensue if Equitable Loss v Hyman litigation were lost, which
of course happened.
Equitable
claimed that, as a result, it suffered:
·
Losses in not selling the business and assets at a higher price by way
of an orderly sale in 1998 or soon after the House of Lords in July
2000 - alternatively, loss of the chance of achieving such sales.
·
Loss by declaring bonuses which would otherwise not have been declared.
The
Court of Appeal held that:
·
The loss of sale claims, which had been struck out in their entirety
at first instance in the Commercial Court, should be restored in principle,
but they had to be formulated in terms of a loss of chance of a sale.
This was a feasible and realistic claim, notwithstanding that it was
not assured that a purchaser would have been found who would have been
able to buy at an acceptable price.
·
The bonus declaration claims should be restored up to a date in January
2001, by which time the Board of Equitable should have been aware of
all matters influencing its decision to cut bonuses (which happened
six months later).
The
Court of Appeal said that when considering whether to grant summary
judgment in favour of a defendant in a claim as complex as this, the
overriding concern was the interests of justice. The Court should not
try cases summarily unless it was confident that all the relevant facts
had been satisfactorily investigated. The issues of this case, including
causation and mitigation, were particularly fact sensitive. This was
also developing field of law and therefore an order to strike out should
not have been made.
Whilst
it had some sympathy for Ernst & Young's complaint that the sheer
size of Equitable's claim represented an unwarranted burden, the Court
of Appeal was unable to reduce or slice individual heads of claim. Even
if the claims were only able to survive for figures smaller than those
pleaded by Equitable, there would still need to be a full trial process
to consider all issues of liability and quantum.
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