Law Society v KPMG Peat Marwick & Ors [2000] EWCA Civ 5563 (29 June 2000)
Citation:Law Society v KPMG Peat Marwick & Ors [2000] EWCA Civ 5563 (29 June 2000)
Rule of thumb: If an accountant is negligent in the auditing of an organisation’s books, and it causes losses to be made, can the insurer or a Government Regulator sue the auditor for damages? Yes, although the accountant had no direct relationship with the insurer, there is sufficient proximity with the insurer/licensor to ensure that the auditor’s duty of care with their minimum legal standards is extended to them.
Judgment:
The facts of this case were that a law firm were perpetrating fraud. The accountants did not carry out their duties properly in auditing this law firm, the fraud continued for longer than it should have, and the Law Society of Scotland, who insure all the law firms in Scotland, had to pay out to people who had suffered losses because of this. The Court held that the accountants owed a duty to the Law Society of Scotland in addition to just the law firm – this was a wider party in society who there was sufficient proximity with, ‘In view of these features of the Law Society's role, I do not regard the existence of a duty of care in this case as being self-evident in accordance with the argument of Lord Goldsmith. There is a need to become involved in the tests laid down by Caparo. The issue cannot be determined by saying Hedley Byrne obviously applies so as to create a duty of care. While there are similarities between the issues on this appeal and the decision of this court in Andrew v Kounnis Freeman [1999] 2 BCLC 641, caution must be exercised in seeking to apply a decision which in fact decided no more than that a claim should not be struck out as being determinative of a substantive issue. Here we are concerned with whether a duty of case exists not whether it arguably exists.I agree with the Vice-Chancellor that the correct approach is to examine the question of whether the accountants owe a duty of care to the Law Society in relation to its responsibilities to protect the Compensation Fund against the well-established test laid down in Caparo. However it is only to this extent that I am prepared to accept the submissions of Mr Pollock. Mr. Pollock was at pains to distinguish between the Council and the Law Society. Like the Vice-Chancellor I find his arguments based on the distinction between the Council and the Law Society as devoid of any merit. In considering whether a duty of care exists as a matter of private law, no distinction can be drawn between the Council and the Law Society. The Council is no more than the executive arm of the Law Society. The Act gives the Council the responsibility of being satisfied so the Law Society can take action. This is made quite clear by the references to both the Council and the Society in section 36. If the Council is satisfied as to the specified matters "the Society may make a grant out of the Compensation Fund"... Despite Mr. Pollock's persuasive arguments I have come to the same conclusions as the Vice-Chancellor and I would dismiss this appeal’, Lord Woolf, at 20-21 and 29
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.