Case: Esanda Finance Corporation Ltd v Peat Marwick Hungerfords [1997] HCA 8 ; (1997) 188 CLR 241
Outcome: considered
It was contended by KPMG that a company's auditor does not owe to a third party, such as a shareholder as an individual investor (rather than as a member of the company) or any other investor, a duty of care to avoid pure economic loss save in circumstances where the auditor has specifically and intentionally assumed responsibility for providing the third party with the relevant information for the purpose that it be relied upon by the third party in doing precisely what the third party did. Reference was made to Esanda Finance Corporation Ltd v Peat Marwick Hungerfords [1997] HCA 8 ; (1997) 188 CLR 241 at 252, 258, 266 and 289; D'Orta-Ekenaike v Victoria Legal Aid [2005] HCA 12 ; (2005) 223 CLR 1 at 35 per McHugh J; R Lowe Lippman Figdor &amp; Franck v AGC (Advances) Ltd [1992] 2 VR 671 at 682 and 685; Caparo Industries plc v Dickman [1990] UKHL 2 ; [1990] 2 AC 605 at 629, 654 and 662; Hercules Management Ltd v Ernst &amp; Young [1997] 2 SCR 165 at [37]. 54 It was also contended by KPMG that to the extent the respondents relied upon the concept of "vulnerability", this was misconceived because there was here a potential indeterminate liability and an ability by the investors (including the applicant) to protect themselves. Further, it was contended that the concept of "vulnerability" may not be used to circumvent the historical preconditions to a claim for negligent misstatement against auditors as set forth in such cases as Esanda [1997] HCA 8 ; 188 CLR 241, when these preconditions establish the minimum threshold of "vulnerability" in factual situations in which they apply . 55 In considering these contentions, it is important to appreciate the context in which I am considering the issue of whether a duty of care as alleged by the respondents arises. My task is to determine, on this aspect, whether a duty of care may exist in the context of the principles I have identified previously in these reasons relevant to the application of O 15A r 6. 56 In this context, I have come to the conclusion that the facts and elements relied upon by the respondent may give rise to the alleged duty of care to avoid pure economic loss, such facts and elements being "salient features" which may give rise to the alleged duty. 57 On the basis of the material before me, I have not come to the view that the alleged duty of care is ill-founded or doomed to fail, or that, in adopting the test to be applied in considering an application under s 31A of the Federal Court Act, the potential cause of action could be dismissed or struck out. I do not accept that Esanda [1997] HCA 8 ; 188 CLR 241, and the other cases referred to by KPMG, lay down any preconditions to liability of auditors where we are not dealing with a claim for negligent misstatement and where the concept of vulnerability may become relevant and where all the salient features of the case need to be examined. No one salient feature is decisive, and all the facts and circumstances relied upon need to be considered. It can be accepted that auditors do not owe a duty as alleged merely by virtue of their acting in the capacity as auditors. However, more is relied upon by the respondents namely the facts and elements referred to earlier. 60 The concept of vulnerability is now an important requirement in providing a basis for a duty of care to avoid economic loss. It cannot be said that the decision in Esanda [1997] HCA 8 ; 188 CLR 241 should not be considered in light of the concept of vulnerability. Both these propositions follow from the passage in Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16 ; (2004) 216 CLR 515 at [23] (footnotes omitted): Since Caltex Oil , and most notably in Perre v Apand Pty Ltd , the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. "Vulnerability", in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, "vulnerability" is to be understood as a reference to the plaintiff's inability to protect itself from the consequences of a defendant's want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant. So, in Perre , the plaintiffs could do nothing to protect themselves from the economic consequences to them of the defendant's negligence in sowing a crop which caused the quarantining of the plaintiffs' land. In Hill v Van Erp , the intended beneficiary depended entirely upon the solicitor performing the client's retainer properly and the beneficiary could do nothing to ensure that this was done. But in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords , the financier could itself have made inquiries about the financial position of the company to which it was to lend money, rather than depend upon the auditor's certification of the accounts of the company. 61 As was observed though, in Esanda [1997] HCA 8 ; 188 CLR 241 the financier could itself have made inquiries about the financial position of the company to which it was to lend money, this being relevant to "vulnerability". 62 In Esanda [1997] HCA 8 ; 188 CLR 241 the appellant was a sophisticated investor well able in the circumstances to protect itself. It at least had a capacity to consider the investment, whereas in this proceeding the complaint is that the vulnerability arises after the making of the investment, where the investor arguably has no ability to look after itself. The concept of the ability to protect oneself is always relative and will depend upon many factors and circumstances. These are yet to be fully investigated in this proceeding. 68 Of course, there are other policy considerations that may impact upon whether the court should deny the duty of care alleged here, namely the impact of prolonged and multiple actions against auditors, the availability of other civil and criminal proceedings against auditors, and the public interest in ensuring there are auditors ready and willing to perform their duties at a reasonable cost. These matters were raised in Esanda [1997] HCA 8 ; 188 CLR 241 at 282 to 289 per McHugh J. They are matters which need to be considered, but none in my view are of sufficient weight in the context of my inquiry to conclude that the facts and elements relied upon by the respondents could not give rise to a duty of care as alleged. It is still not possible to identify precisely a line of demarcation between the cases of pure economic loss in which damages are recoverable and those in which they are not recoverable, but I am not satisfied, even adopting the test under s 31A of the Federal Court Act, that this is a case where damages may not be recoverable: see generally Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 70 IPR 146. 69 As I have said, I am considering the question of whether a duty of care may arise in the circumstances contended for by the respondents. Esanda [1997] HCA 8 ; 188 CLR 241 may well be an authority which raises many difficulties for the respondents, but it does not stand in the way of the possibility in the circumstances of this proceeding that a duty of care to avoid pure economic loss exists.