Galoo Ltd & Ors v Bright Grahame Murray (a firm)

Factual and Procedural Background

The first Plaintiff, Company A, formerly trading in animal health products, is now in liquidation. The second Plaintiff, Company B, owned all the shares in Company A. Both Plaintiffs have changed their names from their former designations. The Defendants, a firm of Chartered Accountants, were auditors of Company A's accounts from 1981 to 1991 and of Company B's accounts from 1984 to 1991.

In 1987, the third Plaintiff, Company C, purchased 51% of the shares in Company B and subsequently made loans exceeding £30 million to Company A and Company B. In 1991, Company C acquired a further 44.3% of the shares in Company B.

The Plaintiffs issued a writ in 1992 claiming that the audited accounts of Company A and Company B for the years 1985 to 1989, and draft accounts for 1990, contained substantial inaccuracies. They alleged that the Defendants were negligent in auditing these accounts, breaching contractual and tortious duties, resulting in loss and damage to the Plaintiffs.

The Defendants applied to strike out the Statement of Claim on the basis that it disclosed no reasonable cause of action. The application was heard by a Deputy Judge who struck out the claims of the first and second Plaintiffs entirely and part of the third Plaintiff's claims, ordering the third Plaintiff to amend its Statement of Claim accordingly. Both sides were granted leave to appeal and cross-appeal respectively.

Legal Issues Presented

1. Whether the claims by Company A and Company B for damages for breach of contract or in tort disclose a reasonable cause of action and whether such claims should be struck out.
2. Whether the claims by Company C for loss resulting from the original purchase of shares in Company B disclose a reasonable cause of action and whether they should be struck out.
3. Whether the claims by Company C for loss resulting from making loans to Company B disclose a reasonable cause of action and whether they should be struck out.
4. Whether the claims by Company C for amounts paid under a supplemental agreement for further shares in Company B and related payments disclose a reasonable cause of action and whether they should be struck out.
5. The application of principles concerning duty of care and causation in contract and tort, particularly regarding economic loss and the scope of auditors' liability to third parties.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analyzed the claims by making the assumption that all allegations in the Statement of Claim were true, as required on an application to strike out under Order 18 Rule 19(1)(a) of the Rules of the Supreme Court. The test was whether any claim was bound to fail even if the facts pleaded were true.

Regarding the claims by Company A and Company B for damages for breach of contract or tort, the court agreed with the Deputy Judge that although nominal damages could be claimed for breach, the claims for substantial damages failed because the alleged losses—accepting loans and trading losses—were not properly caused by the Defendants' breach. The court held that the acceptance of loans could not itself amount to damage, as it constituted an obligation to repay money received, which is not loss. Further, the trading losses incurred by continuing to trade were not caused by the breach of duty but merely facilitated by it. The court applied established principles of causation emphasizing that the breach must be the effective or dominant cause of loss, not merely an occasion or opportunity for loss.

In assessing causation, the court relied on English and Australian authorities, concluding that the "but for" test alone is insufficient and that common sense and policy considerations must guide the determination of causation. The court found that the breach allowed the companies to continue trading but did not cause the trading losses, which are influenced by numerous factors unrelated to the breach.

Turning to the claims by Company C, the court examined the duty of care owed by auditors to third parties in economic loss claims. It applied the principles from Caparo Industries and Morgan Crucible, distinguishing between a general foreseeability of reliance and a specific, known reliance by an identified party for a particular transaction. The court held that the duty of care arises only where the auditor knows that a particular identified party will rely on the accounts for a specific purpose and intends that reliance.

The court found that the claim for loss resulting from the original purchase of shares by Company C disclosed a reasonable cause of action because the auditors knew of the acquisition agreement and that the purchase price depended on the audited accounts. It was arguable that the accounts submitted, even if draft, were treated as completion accounts for that purpose. The court refused to strike out this claim, noting that the right of Company C's accountants to review the accounts did not negate the duty of care without evidence.

Conversely, the claims related to loans made by Company C and payments under the supplemental agreement failed to disclose a duty of care because the Statement of Claim did not plead that the auditors knew of reliance by Company C for those purposes nor intended such reliance. These claims were struck out.

Finally, the court refused leave to appeal, concluding that the Deputy Judge's decision was correct and consistent with authoritative case law.

Holding and Implications

The court dismissed the appeals by the first and second Plaintiffs and the appeal and cross-appeal by the third Plaintiff and Defendants respectively.

The direct effect is that the claims by Company A and Company B for damages for breach of contract or tort were struck out for failure to disclose a reasonable cause of action. The claims by Company C for losses related to loans and supplemental share purchases were also struck out. However, the claim relating to loss from the original purchase of shares by Company C was allowed to proceed to trial.

No new precedent was established; the court applied established principles concerning duty of care, causation, and economic loss in tort and contract, emphasizing the necessity of proximity, specific reliance, and intention to rely for auditors' liability to third parties.