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AHR Auditors

This leads to the faulty reports published by AHR Auditors, regarding the accounts of Total Investments Company. These papers were prepared for a private client, inviting the question as to who did the auditors owe a duty of care? It is therefore important to note that when an auditor, upon a contract with a private client, constructs such reports, they are not written to an identified person (i. e. the private client interested in taking over TIC), but to a class of persons[13].

JEB Fasteners v Marks Bloom & Co[14] saw a similar situation, whereby the plaintiff took over a company having seen the accounts made by the defendants, which were, in fact, constructed negligently. The court found that the defendants owed the plaintiffs a duty of care, however the case failed on the grounds of causation: the plaintiff had taken over the company in order to acquire the expertise of the directors, and not due to the negligently written accounts. In this scenario, Jessica had decided to buy shares in TIC having seen the audit, and if she had not read the audits, she would not have made such decision.

This was further explored in the case of Caparo v Dickman[15],

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in which the defendants had negligently audited the accounts of a company, which were relied upon by the claimants, causing them losses. Insufficient proximity was of particular importance in deciding this case. [16]

Lord Bridge noticed that in situations where a stranger, such as Jessica, may come across audits negligently prepared, a duty of care might be owed to that stranger[17] if the defendant: ‘Knew that his statement would be communicated to the plaintiff, …as a member of an identifiable class, specifically in connection… with transactions of a particular kind (e. g. in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon … a transaction of that kind[18]’

Therefore, it seems clear that AHR Auditors would be deemed to owe a duty of care to Jessica, as she would fall into a member of an identifiable class (i. e. investors), in connection with ‘a prospectus inviting investment’ (e. g. to buy shares), and that it was foreseeable that Jessica would rely on the audit – as it was prepared for a client to decide whether or not to invest, or to take over TIC.

It could therefore be submitted that AHR Auditors owed a duty of care to Jessica. In respect of a builder’s negligence, it is unlikely that Jessica will be able to recover full damages for the faulty building. Such a situation was dealt with in the case of Murphy v Brentwood[19], in which the House of Lords overruled their own precedent made in Anns v Merton[20], using the practice statement[21], in favour of a decision that the damage to the building in question was not physical damage, rather it was pure economic loss[22], which is not recoverable unless it resulted from physical damage to person or property[23].

This decision was qualified in the case of Muirhead[24], who also agreed with Lord Oliver’s decision that there was not sufficient proximity[25] to impose a duty of care in such situations. D and F estates v Church Commissioners[26] is the presiding case for situations such as these, in which the House of Lords dismissed the claim by the plaintiffs in that the damage amounted to irrecoverable economic loss falling outside the ambit of Donoghue v Stevenson.

[27] [28] On the basis of these decisions, it would be appropriate to assume that there was not enough proximity between the builder, and Jessica, and with the damage being latent; the builders would not be held liable for the damage to the building. According to the aforementioned case of Muirhead, the only damage that Jessica could recover in this instance is that of the clothing destroyed as a result of the collapsed roof.

In regards to recovering damages from the surveyor (Stephen), contracted by Creditwise Mortgage Company, the case of Smith v Eric Bush[29] is the most relevant, where the defendant was a surveyor on behalf of a mortgage company, who gave a report containing a disclaimer. It was held that the relationship between the plaintiff and the appellants was ‘akin to contract’[30], and therefore, according to Lord Templeman, the valuer ‘assumes responsibility… to the purchaser… knowing that the valuation [would] … be relied upon’.

In application, by agreeing to survey on the building Jessica wished to purchase, he assumed responsibility to her, knowing that it would be the basis on which Jessica would be accepted for a mortgage. Therefore Jessica would be able to claim for the damages lost as a result of the negligent report made by the surveyor. In terms of recovering the losses caused by the Southern Water Company, the case of Spartan Steel v Martin[31] deals with this issue.

The defendants in this case negligently severed an electricity cable, causing the power at the plaintiff’s factory to fail[32]. The loss suffered was held to be relational economic loss[33], which, for policy reasons, could not be fully recovered[34]. The loss for which Jessica can therefore recover is for sewing that Jessica was working on at the time, which was unable to be completed, however Southern Water Company would not be held liable for any other losses, as the loss would be ‘independent of the physical damage’[35].

In conclusion, therefore, Jessica will be able to recover losses suffered as a result of the negligent words and acts of the respective parties. DEF Bank, AHR Auditors and Stephen would be held liable for the loss caused as a result of their negligence. On the other hand, due to policy reasons and otherwise, Southern Water Company is likely to be held liable for very little of the loss of profit Jessica suffered, and the builder of the premises she bought is also unlikely to be held liable for the loss he caused.

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