How are audit reports affected by disclaimer clauses?

What is the effect of disclaimer clauses in audit reports, particularly in circumstances where a company enters administration? The 2015 High Court ruling in Barclays Bank PLC v Grant Thornton provided some welcome clarification – with the key issue being whether or not the clause was reasonable.

In Barclays Bank PLC v Grant Thornton[i], accountants for Von Essen Hotels Ltd (VEH) prepared audit reports containing disclaimers similar to standard wording produced by the Institute of Chartered Accountants in England & Wales (ICAEW).

The ‘Bannerman Clause’
The disclaimer was in the form of a ‘Bannerman Clause’ and stated: “We do not accept or assume responsibility to anyone other than the company and the company’s director… for our audit work”.

VEH then secured loans from Barclays. Financial audits were forwarded to Barclays by VEH rather than its accountants.

When VEH entered administration, Barclays argued that VEH’s accountants had failed in their duty of care, since their audit reports had not uncovered the fraud of two VEH employees. The accountants denied negligence and sought summary judgment, arguing that the ‘Bannerman Clause’ exempted them from a duty towards Barclays.

Assumption of liability
In his judgment, Cooke J applied the ‘assumption of liability’ test: where a company has explicitly disclaimed responsibility (as with the Bannerman Clause), it cannot then be held to have assumed responsibility. Although it was true that the accountants knew their reports would be presented to Barclays, a formal duty of care between these two parties did not arise.

The question was whether or not the disclaimer clause was unreasonable and therefore if it fell foul of the Unfair Contract Terms Act 1977. In his judgement, Cooke J found that the clause was reasonable, and well understood by Barclays – and found in favour of the accountants.

What can firms learn from the judgment?
The judge was clear that a duty of care could have been owed to the bank if there had not been an explicit disclaimer clause. The decision therefore emphasises the importance of including disclaimer clauses in order to limit liability to third parties.

How can we help?
We advise businesses of all sizes on a wide variety of contractual issues. For strategic advice and representation on any of your commercial arrangements, please contact our commercial team.

Mark Chapman
Partner, Commercial
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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