Commercial Court clarifies law on audit negligence

Mr Justice Bryan in the Commercial Court has today handed down a wide-ranging judgment in AssetCo plc v Grant Thornton UK LLP [2019] EWHC 150 (Comm). Following a 12 day hearing in June and July 2018, the judgment runs to some 1274 paragraphs.

The claim arose out of the admitted negligence of Grant Thornton in relation to audits of the financial statement of AssetCo plc in 2009 and 2010. AssetCo claimed over £30 million in damages. The judgment considers issues of the scope and standard of duties owed by an auditor; the application of ‘loss of a chance’ principles to counterfactuals in the context of factual causation; the recoverability of different types of loss in audit negligence cases; the application of the doctrine of mitigation, and credit to be given for benefits obtained; contributory fault in audit negligence cases;  and the ability of auditors to rely on Letters of Representation.

The learned judge adopted and applied eleven propositions of Grant Thornton’s Counsel in relation to the scope and standard of Grant Thornton’s duties to AssetCo (at [61]-[83]).

The judge gave lengthy consideration to the principles underlying the ‘loss of a chance’ doctrine in quantifying damages. Upholding the arguments of Grant Thornton, he rejected submissions on behalf of AssetCo that a claimant could elect not to apply ‘loss of a chance’ principles to the hypothetical actions of third parties (at [389]-[415]). He also accepted the submissions of Grant Thornton as to the correct approach to the combination of probabilities for multiple contingencies, rejecting AssetCo’s contrary arguments (at [418]-[449]. The Judge further considered the question whether the application of ‘loss of a chance’ principles was affected by the third party giving evidence, again accepting Grant Thornton’s submissions in this regard (at [456]-[460]).

In the context of intervening acts and the ‘very thing’ doctrine, the judge rejected AssetCo’s submissions regarding the ‘very thing’ doctrine in the context of intervening events breaking the chain of causation, adopting Grant Thornton’s contentions (at [986]-[989]). Accepting Grant Thornton’s case, the judge also rejected AssetCo’s claim to recover dividends on the basis that the declaration and payment of such dividend was the novus actus interveniens of the directors, rather than resulting from Grant Thornton’s audit work (at [1014] and [1035]).

While awarding damages, to be quantified, the Judge found it just and equitable to reduce the damages recoverable by AssetCo by 25% for some heads of loss, and by greater proportions for other heads of loss.

A link to the judgment can be found here.

Grant Thornton was represented by David Wolfson QC, Simon Colton QC and Stephanie Wood.